Chapter Twenty Six

Centralisation

EARLIER IN THE BOOK WE introduced the concept and features of centralisation in Part One. We now look at the rationale, framework, and broad executional elements of centralisation.

RATIONALE FOR CENTRALISATION

In Part One, we mentioned that the key objectives for centralisation are to increase efficiency, increase control, and reduce cost related to Treasury activities. All three elements directly impact treasury’s performance. Elements of centralisation and various models were discussed in Chapter 2 (centralisation) and Chapter 5 (account structure). Here we provide the context for the centralisation decision, the process for decision making, and the criteria for evaluation.

Figure 26.1 presents various models of centralisation, which also were covered in Part One. Figure 26.2 shows some of the determinants of the centralisation decision. These determinants are discussed in more detail next.

FIGURE 26.1 Different Models of Centralisation

FIGURE 26.2 Determinants of the Centralisation Decision

• Treasury processes. Change or process improvement and implementation of new systems can be one of the drivers of the decision to centralise Treasury processes and controls. As cash visibility, process efficiency, and control systems become critical to the functioning of Treasury, centralisation will become increasingly important.
• Volume of transactions. Scales of operations and increasing transaction volume will drive the need for achieving economies of scale and uniformity of processes.
• Current geography. Operations across many countries, time zones and markets might create the need for central coordination and consistent support.
• Complexity of transactions. As the complexity of businesses and models grow, the need to have more involved support from the Treasury side will increase. Along with this will come the need to develop more expertise and standardisation in order to transfer successful solutions across areas.
• Financial and nonfinancial impact. Cost/benefit over time and turnaround times and quality of service internally and from external service providers will be large determinants of centralising Treasury functions.
• Location environment and benefits. Relative attractiveness of a location (discussed in detail under “Basic Design Model” later in the chapter) can be another driver for moving operations there.
• Employee impact and cultural background. The success of a centralisation exercise is determined by one of the most sensitive areas and impacts of centralisation: employee acceptance, resistance, redeployment ability, involvement, and empowerment, in addition to company culture centralisation. Some company cultures enable such process improvements; others are not conducive to centralisation. For the latter, it is important to institute the process of change slowly and build processes of change and transition well before the actual project commences. In some cases, if the culture does not change, leaving operations distributed and the way they are might be less detrimental than forcing centralisation. In others, the centralisation itself might force a cultural change. This is an area in which the chief executive officer (CEO), senior management, and human resources must be actively involved.

Figure 26.3 shows a possible structural framework of the centralisation decision.

FIGURE 26.3 Structural Framework of the Centralisation Decision

BASIC MODEL DESIGN

The initial inputs that go into the basic model design involve process inputs, location inputs, and infrastructure inputs.

Process inputs involve process changes, current issues with process, human resource capabilities and skill inventory, complexity of envisioned inputs, and volumes.

Location inputs involve deciding the attractiveness of a location and the current geographical spread and location of operations. Table 26.1 and online Appendix E provide some of the themes of deciding on a location along with some indicative weights.

TABLE 26.1 Broad Themes of Location Identification

Infrastructure inputs involve system inputs, resource inputs, and inputs and review of the accounting, tax, and legal environment.

POST-MODEL DESIGN STAGE

Once the basic model has been designed, the cost and time estimate of the project is complete. Synergies and saves are quantified, and benefits and turnaround aspects are estimated. Potential service providers are identified, and approximate cost estimates are obtained from them.

Once the decision to go ahead has been made, the final model is worked on. This is followed by implementation and then review.

Implementation is best done in stages and in a few countries at a time, a few processes at a time. The company may also choose to implement pieces of the model at every stage—for example, a shared service centre can be implemented first, followed by basic Treasury centre activities. It is best not to move everything at the same time.

Senior management involvement, support, and assistance is important at every stage, given the various sensitivities.

BARRIERS TO CENTRALISATION

The guest note on centralisation by Damien Glendinning, Regional Treasurer, Lenovo, in Chapter 2 covers some of the implementation issues. Some of the barriers to centralisation are summarised below.

Technology Integration

Different systems and the lack of connectivity can be an impediment to achieving a centralised process and Treasury management. A starting point for centralisation can include a one-time investment in integration and creating uniformity at least in the Treasury system.

Culture

The compelling business and financial case and goal congruence will help overcome organisational barriers to centralisation. Tying the goals of decentralised centres of power and influence to success of the centralisation aspect and empowering country operations with more managerial time to focus on the business by moving a support function would be a logical next step, but one that would have to be articulated by senior management, including the CEO.

Merger Activity

An agglomeration of various companies will have a large mix of legacy systems, processes, and business practices. Technology will be a starting point for overcoming these hurdles, and the process changes that follow based on central systems will be a logical precursor to centralisation.

SUMMARY

The need for centralisation is a debate that brings with it heated debates about control, cost, efficiency, human resources, technology, and governance. The underlying emphasis is that of change. Change is for the better when it has a long-term goal and is aligned with the objectives and plans of the firm and when the relevant issues that it causes, especially for the people involved, are addressed appropriately.

Successful centralisation depends on teamwork and goal congruence. And therein lies the solution.