Chapter Thirty

Outsourcing

WE HAVE DISCUSSED THE BENEFITS of, and potential issues with, outsourcing Treasury and its operations. In this chapter, we examine the key elements of any outsourcing programme and discuss, item by item, items (see Figure 30.1) that need to be present when outsourcing Treasury activities. Outsourcing can be divided into four stages: selection, pre-implementation, implementation, and post-implementation.

FIGURE 30.1 Outsourcing Checklist

SELECTION STAGE

The process starts from the idea origination through to the selection of the vendor.

• Needs analysis. A list of processes to be outsourced is determined through discussions and identification of areas that could be done more efficiently with higher control and lower cost by experts in those areas. Decision-making activities typically rest within the firm. The existing process maps and notes provide a good indication of the activities/processes to be considered for outsourcing.
• Process list. The list of processes to be outsourced is prepared.
• System checklist. The list of system activities and systems to be outsourced is prepared, along with a list of potential system access points for each outsourcing activity.
• Volumes analysis. A list of transaction volumes in the future is projected for all process and system activities to be outsourced.
• Risk assessment. A risk assessment across various risks is made for the outsourcing project. Hedgeable or insurable risks are highlighted, and potential financial loss owing to any of the risks being manifested is also made as part of the risk assessment process.
• Budgeting. Approximate budgets are made, as is the break-even point where outsourcing would make financial sense.
• Peer review. If possible, a visit to peers who have successfully implemented outsourcing for Treasury should be made, and key elements discussed with them.
• Vendor due diligence and short-listing. A list of outsourcing partners/vendors is made, and due diligence is performed on the likely candidates. The request for information process (similar to the banks/system selection process) may be followed in this case.
• Request for proposal and selection. The final request for proposal is sent out, and the partner is selected. If possible, prior to selection, a visit should be made to the top three vendors’ outsourcing sites to get a better feel of the processing on the ground. A recommended practice is to have informal discussions with processing officers to get a firsthand feel of the levels of motivation, control, and process ownership.

PRE-IMPLEMENTATION

A high degree of preparedness for the implementation stage is essential, and a few detailed but simple initiatives set the stage for a smooth execution when the time comes.

• Transition team formation. The project or transition team is formed; this team will run the entire migration and launch process, and should be a cross-functional team with members from both the vendor and the firm.
• Site visit and process observations. The vendor team starts visiting the site of operations. It performs process observations and data gathering and gains a better understanding of the systems available.
• Confirmation of processes and enhancements of current maps and notes. The transition team confirms that the processes are as per existing process maps and notes, and makes any amendments or enhancements to the process maps and notes to reflect current status.
• Legal and regulatory aspects. The legal and regulatory aspects of outsourcing must be assessed and discussed. If required, external opinion should be obtained.
• Service quality aspect. Preliminary discussions around service quality and turnarounds can occur. Internal clients of Treasury must be involved to determine what they expect overall Treasury service levels to be.
• SLA requirements. The service-level agreement (SLA) is one of the most critical elements in the outsourcing chain. The SLA requirements are drafted and discussed at this time.
• Other agreement and documentation requirements. A list of other documents and agreements required is prepared and drafting work begins.
• Preliminary project plan. A ballpark project plan is prepared with effort and timeline estimates.
• Infrastructure requirements. A list and estimate of infrastructure requirements, especially telecom and system, is made. The requirements on the ground at the vendor location and availability of such infrastructure are determined.
• System development. Any changes to the systems, either through functionality or interface, are estimated, and discussions with the system vendor are organised.
• Resource inventory. A talent and skill inventory of resources at the vendor’s end is prepared, and a few senior people interviewed for their views, in order to be able to incorporate their perspectives and experiences into the plan.

IMPLEMENTATION

The implementation phase begins once the preparations are complete. It has to be meticulous and seamless. Solid grounding, thinking through, and anticipation of issues prior to the start of the implementation will ensure that the resources, time, and effort are utilised in smooth execution during this phase.

• Revised outsourced maps and notes to be made and signed off. The process maps and notes need to be amended to reflect the revised outsourced process. Handoffs have to be accurately documented, and processes must be redesigned to reduce handoffs between the firm and the vendor. Control processes are documented, control elements are designed, and responsibilities are identified.
• Capacity model and pricing. Based on the volume estimates and revised process, the vendor prepares a capacity model of resourcing with prices.
• Finalise project plan. The project plan is finalised once the go-ahead on pricing is obtained. Milestones and critical paths are established.
• SLA. The SLA is finalised. Its contents cover:
  • Scope
  • Cutoff times
  • Turnaround standards
  • Exceptions (turnaround, documentation)
  • Records
  • Reporting
  • Billing
  • Exit costs
  • Contact points
  • Contingency plan
  • Review process
  • Changes
  • Liability
• Power of attorney and authorisation. The mandate to execute transactions on behalf of the firm is created and reviewed with legal.
• Other documentation. Other agreements, such as management agreements, information security, system and system access, people, and fiduciary are finalised.
• Hiring. The hiring process based on job profiles begins. The firm may be involved for hiring into key/supervisory roles. Existing firm employees are redeployed into other roles.
• Technology procurement. Systems and infrastructure items are procured and set up for operations at the vendor site.
• Training. The hired employees are trained on company practices and new operations. The firm is involved in this process as well, led by the transition team.
• Continuity of business. Contingency planning must be developed and tested. Backups could be back with the firm or another vendor site.
• Test run. A test run is performed, including system entries and the like in the controlled environment. Existing processes continue, and any teething issues that materialise are ironed out.
• Parallel run. Finally, a parallel run is conducted, where both sides perform their tasks. Once the Treasurer is satisfied of the efficacy of the new processes, the cutover is formalised.

POST-IMPLEMENTATION

• Review. The review process is ongoing but should be extremely detailed and diligent in the first few quarters to set a strong and robust precedent for the long term.
• Feedback. Feedback must be provided to the vendor on performance levels and improvements. Remember to include all that the vendor is doing well too.
• Documentation issues. Pending or incomplete documentation is completed and reviewed, followed by corrective action where required.

Next we present a case study of the practicalities of outsourcing a Treasury function by Kelvin Hayes, who has had much experience in outsourcing the Treasury of his firm.

CASE STUDY: OUTSOURCING TREASURY: A HANDS-ON EXPERIENCE NOTE

In an environment where the role of the corporate Treasurer is under greater scrutiny than ever, the decisions made in the treasury department need to be of the highest standard possible. One way for Treasurers to improve the quality of their decision making is to allow themselves dedicated time to think about, and act upon, the strategic aspects of their business.

It is in delivering this precious resource of time that the outsourcing of core Treasury functions can improve the quality of a corporate Treasury and the decisions made within it. This is not the only reason of course, the advantages of outsourcing non-core functions that can also be realised include: increased scalability of operations, cost savings, the reduction of operational risk, and the transfer (or adoption) of best practices.

Many Treasurers may be reluctant to give up control of what they feel are their bread-and-butter transactions. However, it is in realising that control can still be maintained while freeing up the Treasurer to perform higher-value tasks that the outsourcing proposition truly delivers value to an organisation. This is especially important as many small and midsise corporations may have a relatively small or resource-challenged Treasury department. As the business grows, the demands on Treasury grow, and outsourcing low-value transactions can greatly aid the Treasury department with these challenges. Indeed it is often the growing Treasury department where outsourcing will have the greatest impact as outsourcing can lead to efficiencies of scale and cost savings from the specialisation provided by the outsourcing partner. This is because the addition of labour resources to the Treasury department is usually “lumpy” and may require considerable training and adaptation, while growth may continue unabated on a linear growth path. An outsourced treasury function is less constrained under these circumstances.

When contemplating the decision to outsource, the Treasurer needs to consider which functions, actions, and responsibilities will be delegated to the outsourcing provider. Treasury should seek to farm out low-value add, repetitive transactions that are time consuming. The classic candidates here are foreign exchange dealing, intercompany loan and deposit transfers, cash pool administration and funding, external deposit and borrowing transactions, intercompany netting arrangements, middle office reporting, and back-office deal confirmations (see Figure 30.2). All of these tasks are recurring and, while important, are a product of Treasury department decisions rather than the reason to be of the Treasury department. Additionally, all of these tasks can be governed by written guidelines such as to amounts, counterparty facility limits and credit ratings, so as to eliminate any subjectivity that could otherwise concern a Treasurer.

FIGURE 30.2 Candidates for Outsourcing

It is important for the Treasurer to retain control over the outsourcing partner’s actions and to carefully define the relationship between the partners. For this reason, the treasury department should retain full control over the setting of the Treasury policy and guidelines, control over the banking relationships and as prudence would dictate, financial control over the results of the treasury department and outsourcing actions.

Presently there are three main outsourcing models in common use, as shown in Figure 30.3.

FIGURE 30.3 Different Treasury Outsourcing Models

Which model a Treasurer will choose is an individual corporate decision that will take into account the business needs and costs as well as the relative merits and disadvantages of each. Obviously cost and complexity are crucial factors in the choice of the model. In general the Agency and Application Service Provider (ASP) models will provide their services at a lower external cost; however, there will be higher costs retained within the Treasury department. A full Business Service Provider (BSP) model will have higher contractual costs but has the advantage of freeing up the scarce resources within the Treasury department. The Treasurer should familiarise themselves with the pros and cons of all the models in order to determine which will make the most appropriate fit with their business needs.

Within the author’s experience of outsourced Treasury, the “Full Service” Business Service Provider model has proven to be a robust solution to expanding demands on the Treasury department. This model fully leverages the scalability advantage.

Once the decision has been made to implement an outsourced treasury function the Treasurer must begin the process of analysing and selecting a business partner. It may be that the available choice of model will change or evolve depending on the business partner offerings within the company’s region or location. While the functionalities of the various proposed Treasury Management Systems (TMS) may appeal to the Treasurer and indeed are often the “selling points” of the business partners it should be recognised that systems will do the job they are built for. Bells and whistles are nice to have but the most important variable in the decision equation is the choice of business partner itself.

The business partner decision is critical and should not be made hastily. Analysis of the track record and more importantly the commitment of the business partner to the outsourcing model must be undertaken. Future changes in the market, or a change in business conditions could result in the undesirable situation of the business partner exiting the outsourcing business—this could happen even if the underlying model is profitable, say, in the case where an outsourcing partner is a smaller part of a larger group which wishes to restructure in order to focus on their core competencies.

Partner Management—Learning the Hard Way

What happens when the outsourcing partner decides that they do not want to focus on outsourcing as a business model anymore? In this case, ask what would be the contingency plan should the partner vanish and who will own the TMS software for example or even ownership of the data itself? Indeed, this point is raised deliberately as the first business partner, a large commercial bank, which our company used as the primary outsourcer, decided to exit this “niche” operation. While not the end of the world, there was certainly a great deal of angst knowing that a new partner and solution would need to be found and implemented within a fixed time frame. And since this change was inevitable, there was no point in trying to waste time, but to just move on with trying to make the change as seamless and smooth as possible. It was also a sign of the maturity of the company’s management that the partner’s decision and the possible aftermath did not cloud their decision on the need for outsourcing itself. Instead, the identification of a new partner became the focus of the discussions and way forward. This support from management helped Treasury focus on the transition, since the business case had anyway been made at the time of the outsourcing, and nothing had changed on that front.

Considerable thought should be given to the service agreement when engaging the business partner. The agreement should clearly define the relationship and responsibilities of the parties in order to meet the expectations of the Treasurer. Corporate policies, guidelines, and limits will need to be integrated into the agreement and so it is an opportune time to either review, (or define if the case requires it) all corporate treasury policies, authority levels, and position limits.

In any event, once the treasurer has determined the most appropriate model and chosen a business partner for the future, the process of planning and executing the transfer of operations to the outsourcer will begin. Usually the integration and onboarding capabilities of the business partner will have been explained in or during the request for proposal process. However, a treasurer should not underestimate the time and difficulty involved even with an experienced outsourcing partner. The model and partner choice obviously have a large influence on the amount of work that will need to be done and who will have the expertise to execute that work. However, a realistic and solid planning process will help guide the implementation and ensure that the necessary responsibilities are clear and that the project is a success from the go-live.

In practice, the Treasurer and chosen service provider need to draft and review operating procedures, arrange signatory and dealing authorities, hard-code settlement instructions, arrange external and internal counterparty confirmation procedures, and work out the reporting requirements and how these will be met. Some of this work is simply rote—the information must be collected, provided, and input; however, some will require critical thinking about the structure of the organisation or the reporting entities as this will determine system functionality.

Planning needs will vary from operation to operation but some of the basic considerations will remain the same. In a large scale case one of the major challenges will be to define and implement the various interfaces that will be required. Consideration here needs to be given to which direction data will flow to or from the treasury system. This raises a whole host of challenges for the Treasurer and for their IT support. The Treasurer must liaise closely with the IT department and it is important that the IT resources assigned to the project understand the multitude of interfacing requirements.

IT Integration: Core of the Treasury Outsourcing Model

Integrating the TMS with electronic bank statements, e-payment systems, and the accounting or Enterprise Resource Planning (ERP) system will also need to be addressed. Here the treasurer may have considerable work to perform in terms of arranging the necessary electronic or MT940/941 reporting authorisations or testing electronic payment systems, for example via SWIFT MT 101 instructions. Additionally, any existing deals or data will need to be transferred to the new system and then checked and reconciled. The old adage: “garbage in, garbage out” holds true!

Practical consideration will need to be given to the hardware requirements of the new operation as well as communications lines, email addresses, and contact details. If remote access to the treasury system is to be available then this will need to be tested and backup procedures will need to be put in place.

If the Treasurer plans to interface the Treasury related dealing transactions with the accounting system then this should not be underestimated and dedicated project resources should be applied to ensure that the data generated is correct and thoroughly tested before any live data is input into the accounting results. The Treasurer will not make any friends in the accounting control department by causing delays or errors to the monthly or annual reports.

Ideally there would be a perfect cut-off time to make the switch to the new provider, but the reality of many corporates is that the constant cycle of month end reporting means that there is no perfect changeover time. Instead it is strongly recommended to engage in a parallel run in order to identify any problems or issues with the new TMS or associated processes.

Once the processes and systems are proven to be robust and effective the Treasurer can go live with some confidence that the outsourcing solution will perform to their satisfaction. This does not negate the need for subsequent periodic reviews of the performance of the TMS and the business partner however. It is important to review, improve, refine, and correct the processes and systems. Additionally it is essential to regularly review the interaction of the Treasury department with the business provider and the provider’s performance against expectations, in order to smooth out operations and adjust for any problems which will arise.

When the hard work has been completed and the Treasurer has an outsourced model performing to expectations the benefits will begin to accrue. One should expect that, whatever the model, there should be improved reporting and more timely analysis of positions and exposures. Outsourced execution of deals should result in time savings, lower error rates, and potentially better pricing arising from scale and the specialisation (or division) of labor. Improved compliance and a solid audit trail should also be expected. A well-built Straight Through Processing (STP) system and integrated interfaces add to the robustness of the solution.

The key, though, comes from the release of the Treasurer’s time—wherein having released oneself from the repetitive, low value tasks, focus can be given to the higher level strategic and risk management roles within the job.

Contributed by Kelvin Hayes, deputy group treasurer, SGS. SGS is the world’s leading inspection, verification, testing, and certification company. SGS is recognised as the global benchmark for quality and integrity.

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SUMMARY

Outsourcing, unlike centralisation, requires a strong will on the part of company management to implement. Only the brave take this on, for the entire concept of allowing a third party to run a critical function (even if it is an implementation role) is difficult for many to digest. Yet as the race for hyperefficiency and focus on core competence continues, outsourcing is an alternative that many more firms are now considering, and at the right price, control, and resource point, the migration would take place.