How does Treasury evolve? Just one evolutionary path or multiple?


Judging from readily available information, cash management apparently seems to mature across the board in a rather generic way. Leading practices clearly indicate building-block-style improvements set against a timeline. Linear graphs show how sophistication and value creation increase (vertically go up along the y axis) with each step in time (horizontally, x axis). I’m sure you can visualize the graphs I’m referring to. Well, seemingly, one strives to be in the upper right quadrant of these kinds of visual representations. Those that recognize themselves in the lower left quadrant, know to which tier in cash management evolution they have evolved. Or rather, to which tier they have not evolved (yet). More importantly, the graphs also seem to indicate as to which step to take in order to advance, improve if you like. But is it really this straight forward? How does such a generic model address the very specific and diverse needs if MNC’s? Consultants’ presentations as well as textbooks don’t seem to provide an answer here.

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By Norbert Braspenning

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Just one evolutionary path or multiple?

Biological evolution can be described as “change in the heritable traits of populations over successive generations”. Like Charles Darwin formulated the scientific theory of evolution by natural selection, published in his book On the Origin of Species (1859), evolutionary processes give rise to diversity at every level. In other words, there is more than one way forward.

This diversity leads to at least two observations that can also be projected on cash management. Firstly, there may be more than one way to face a challenge. Secondly, not everyone is facing the same challenge. Hence, the responses vary.

An in-house Bank (IHB) whereby legal entities will only utilize shadow or internal accounts rather than external accounts for transaction processing as well as collect and pay on behalf of group subsidiaries may be the holy grail for some, but full-fletched centralization may not necessarily be the best strategy for all.  Each business will find itself in a unique situation based on its size and scale, geographic footprint, organisational culture, technological sophistication and more.

But why evolve in the first place?

According to Darwin we need to evolve in order to survive. For treasuries, oddly enough, it is not that much different. Prudent organizations react and respond to the environments in which they operate. They take advantage of opportunities that arise, and they work to manage the risk associated with threats as these emerge. But in order to do so, does this mean that centralization is a must?

Centralization, as practiced today, is mainly aimed at achieving cost efficiencies. Increased Treasury centralization apparently increases the added value. As a consequence, opposed to acting as the top of the pyramid, where all information from the business gets reported into, treasuries have become “business operations” themselves. Cashless settlements on internal accounts as well as Payments-on-behalf may have significantly lowered cost associated with payments/transactions, but the added complexity lies in how to deal with the tax, legal and regulatory elements to this setup.

Take for example the OECD’s (Organisation for Economic Co-operation and Development) recent action plan on Base Erosion and profit Shifting (BEPS). 15 points outline how to validate that related party debt is treated the same as unrelated party debt. In my view, most relevant points in this action plan are the ones about substance (#3, 4 and 5),  treaty benefits (#6), permanent establishment (#7) , transfer pricing (#8, 9 and 10). This will force MNC’s to develop rules regarding transfer pricing documentation to enhance transparency for tax administration, taking into consideration the compliance costs for business.

Payments-on-behalf is not possible for all payment types. Tax payments, for example, usually must be made locally. In some countries payments-on-behalf are even prohibited by law, whilst in others they are highly complicated due to legal and tax restrictions. Again added complexity, again a cost consideration.

But has Treasury really evolved?

Yes and no, it depends on how you look at it. In many ways, the continued development of technology is the biggest factor in the changing treasury environment. The core activities of Treasury have remained more or less the same over the years. In essence managing financial risks (responsible for the company’s liquidity—ensures that a company has enough cash available at all times to meet the needs of its primary business operations). It is the way Treasury performs these activities, that has changed. Technology has made it possible to interchange information real-time, which has led to new tools, not necessarily new techniques. This easy access to information enables/supports MNC’s that wish to eliminate duplication of efforts across the firm, and consolidate into one physical/virtual location.

Evolution also depends on the continuously changing landscape in which Treasury operates. This includes new interpretations of accounting standards (IFRIC) as well as changes in the MNC’s internal organization and compliance. But it also entails regulatory and tax changes. Nowadays we see B3, OECD’s BEPS and Common Reporting Standard (CRS), US Section 385 regulations. In the past we saw developments as it pertains to the reforms of the Irish International Financial Services Centres, Belgian Shared Service Centres etc.

Forcing this into the linear graphs as referred to in the introduction, doesn’t seem to be such a good idea after all. It is far more important to have the right (capable) people, in the right place, doing the right things.

In the past Treasury was an instigator, as it managed the company’s liquidity. Nowadays it is Tax that determines exactly how much liquidity Treasury can manage, otherwise the company runs into tax difficulties. For example entering into ICL’s is not as simple as it was before. It could trigger a cascade of issues (transfer pricing for example).

In Conclusion

It is fair to say that centralization should serve a purpose. Based on the MNC’s DNA the right (re)balance between centralized and decentralized needs to be found. This can entail an IHB, but does not necessarily mean that all activities need to be insourced. Besides the initial cost, the cost of keeping up with the aforementioned changing landscape can be significant. Hybrid approaches seem more friendly, cost effective and allow the MNC’s to plug and play. For example, short term cash is managed using cash pools, whilst long term financing is arranged through the IHB. A netting system allows the choice to settle intercompany payments cashless in the IHB or over cash pool accounts. Exposures on local level are reported and offset, allowing Treasury the choice to hedge the residue with a panel of banks etc.

As stated, each business will find itself in a unique situation based on its size and scale, geographic footprint, organisational culture, technological sophistication and more. Combined with the continuously changing landscape in which Treasury operates (regulatory, tax, accounting standards etc.), each MNC’s will have its own unique response. Its own individual evolution if you like.

And as evolution, according to Darwin, is key to survival, sound evolutionary advice could boil down to something simple as; (i) understand and accept that what is best practices for one, might not be such a good idea for another (ii) invest in the right (capable) people, in the right place, doing the right things (determining how to evolve). Which leads to (iii), do your homework, your own research, don’t copy or have others tell you what to do, unless you’re absolutely certain the specific context applies to you too.

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