Chapter Two
,Treasury Design
THE CONCEPT OF TREASURY DESIGN is simple: to organise the Treasury function, its people and processes, working toward efficiency, elegance, and utility.
The starting point for Treasury Design is a study of the key performance indicators (KPIs), since the existence of Treasury and its structure has the eventual goal of achieving these performance goals. These KPIs were mentioned briefly in Chapter 1 and are further elucidated in the Toolkit in Part Five.
Since it is possible to have more than one route and model to achieve similar goals, other considerations come into play in designing an appropriately organised Treasury for the organisation. These considerations are:
- Lower cost
- Lower turnaround times for decision making and resolution
- Higher degrees of control and wider net for control
- Lower cost of capital and increased availability and diversity of capital
- Legal environment of various locations
- Accounting practices followed by the firm and accounting environment of the geographies in which the business is being done
- Tax aspects
- Automation required
- Existing and future volumes
- Growth and increase in business and geographies
- Expectation of turbulence of competitor and industry landscapes
The three Treasury themes or functions—the management of transactions, balance sheet and liquidity, and risk—are the foundation for these KPIs and considerations.
Figure 2.1 shows the development of the Treasury Design process.
FIGURE 2.1 Treasury Design
KEY ELEMENTS OF TREASURY DESIGN
Next we run through the key elements of Treasury Design and then explore some models and how they can be made to work.
System Design
The importance of systems and technology and their role in Treasury was introduced earlier. Systems must be designed with various aspects and considerations in mind. The Toolkit in Part Five contains a detailed overview of the Treasury system selection, implementation, and integration process.
People and Organisational Structure Design
This people and organisational structure design entails identifying the right people, equipping them with the right skills, and putting them in the right jobs with the right reporting line. It is also linked to the decision of the degree of centralisation and outsourcing.
Process Design
Based on creating watertight processes with controlled and measurable handoffs, the process design forms the bulwark of the Treasury function.
Control Design
A strong control element is a safeguard against potential hazards and situations around implementation and execution. Even if the rest of the Treasury Design elements are put in place, a weak control design element will not help sustain the strength of the implemented Treasury Design and processes. We explore the control element through the various chapters and end with a detailed overview in the Toolkit in Part Five.
Account Structure Design
Covered in more detail in Part Two of this book, designing the right account structure is an often-underrated element. Ad hoc account creation can result in increased cost, lower control, and poor visibility and utilisation of cash. In some countries, regulatory conditions could also force the decision on which account structure to go with.
Cash Flow Design
Cash flows can occur across locations, in various forms and currencies at different times. Consolidating and concentrating these flows creates greater efficiencies through reduced cost, increased control, and better visibility of flows.
Capital Structure
One of the Treasurer’s key areas of delivery is ensuring that the firm is adequately capitalised and that the price the firm pays for the capital is the lowest in the circumstances. Capital structure also has a bearing on the firm’s credit rating and financial perception and performance, making it one of the critical areas evaluated by potential investors and lenders.
Risk Architecture
The last, but one of the most critical, components of Treasury Design, covered in detail in Part Four, is that of risk management and its architecture.
We now explore the evolution of Treasury models, with snapshots of various models, and discuss some of their benefits and concerns.
INTRODUCING CENTRALISATION
Centralisation as a topic has been one of the larger areas of focus of Treasurers over the past few years. Growing businesses, increasing geographies, evolving technologies and emerging markets have necessitated fresher approaches to managing cash and risk more efficiently.
Centralisation itself can cover a wide gamut and array of themes. The concept itself evolved to achieve three key objectives:
What are we actually centralising? Centralisation involves concentrating aspects into one physical location. The factors going into the choice of these locations vary by company and situation and are described in detail in the Toolkit in Part Five. The aspects that can be centralised may be broadly classified into the following:
- Accounts and financial activity. Moving the actual venue of where the accounts and financial activity, such as capital raising, cash concentration, risk management, and investments, are situated is one of the aspects. The drivers of these will be location specific, such as availability and cost of capital, cost of maintaining accounts, accounting status, tax friendliness, any potential financial benefits on offer, and the like.
- Systems and infrastructure. Cost, control, backup, access, and service providers, among other aspects, determine the location of centralised systems and infrastructure.
- People (processing, execution, and decision making). Location of the people actually performing these roles could be different from the locations of the accounts and systems. For example, a centralised Treasury with accounts in Singapore could be operated by people based in London with the databases and systems located in Hong Kong.
With these objectives and areas in mind, we explore the context and themes of centralisation, depicted in Figure 2.2.
FIGURE 2.2 Centralisation Themes
The idea is to move from multiple systems, nonuniform processes, different legal entities having different degrees of control in different locations, various service providers, numerous bank accounts in various currencies, and varied degrees of support, toward an operation that minimises all of these; the end result is close to having uniform systems and processes to support various entities from one location, with a rationed set of service providers, minimal bank accounts, and consistent service levels.
Various benefits accrue from these that tie into the three key objectives discussed earlier.
EVOLUTION OF TREASURY MODELS
We now explore the various models of Treasury and what they mean across various parameters.
Figure 2.3 (not to scale) summarises the value added across various stages of centralisation.
FIGURE 2.3 Evolution of Treasury Models
The definitions here are only indicative, and different companies follow different models of implementation and achieve varied degrees of success and benefits from these models. Some companies do not follow a progressive, stage-by-stage route but prefer to implement entire structures at one go.
Decentralised Treasury
The decentralised Treasury is the basic model, where many companies start off. Decision making across various criteria is decentralised at a subsidiary or country level, with headquarters (depicted as HQ in Figure 2.4 and subsequent figures) only consolidating the numbers and framing the overall group policy. This is more in vogue in younger firms where business leaders in each country run the businesses more or less independently with an entrepreneurial and sometimes unstructured approach. The dependencies and control then depend very much on the people running them, and consistency of results and value is not guaranteed.
FIGURE 2.4 Decentralised Treasury Model
As can be seen in Figure 2.4, the bulk of activities in the boxes are being done by the local teams on the ground. Aspects such as systems, reporting line, and performance measurement can be done centrally at headquarters or locally, or a hybrid model can be developed.
The benefits of this model are increased flexibility and speed of operations. Control, economies of scale, and lack of synergy could contribute to increased costs, potential losses, and larger degrees of exposure and risk to the firm’s financials.
Shared Service Centre
A shared service centre (SSC) utilises the concept of centralised processing of high-volume and low-complexity activities, achieving economies of scale by concentrating activities and control in one location through the use of systems, communication, and interfaces with banking and service provider technology.
Processes such as payments and disbursements, accounts receivable (AR) and accounts payable (AP) management, reconciliation, expense processing, payroll, general ledger (GL)/enterprise resource planning entries, and report generation are typically handled by the SSC, sometimes referred to as a payments factory (an accurate but incomplete description). More evolved SSCs also perform confirmation and settlement of foreign exchange (FX), risk management, and investment transactions.
The SSC technically covers areas that report to the financial controller. While it retains very close linkages to the functioning of the Treasury, it can be distinct from an organisational standpoint. Given the closeness and proximity, transactionally and conceptually, to Treasury activities and process and the interconnectedness of the two, we have included these areas in the scope of this discussion. Figure 2.5 shows the activities typically housed in an SSC.
FIGURE 2.5 Shared Service Centre Model
Basic Treasury Centre
The basic Treasury centre (TC) model (see Figure 2.6) adds value in parallel to an SSC. Here, more complicated activities are taken up, and the TC comes under the direct ambit of the Treasurer.
FIGURE 2.6 Basic Treasury Centre Model (with SSC)
Cash concentration, trade operations, netting, centralised bank relationship management, financing decisions, and FX decisions are made in the basic TC. In addition, account ownership may reside with the TC. What is the key difference between an SSC and a TC? The answer is quite simple: complexity and core functions. The SSC is a typically high-volume, low-complexity shop with lesser decision making and a high process and task orientation. The TC is a typically high-complexity, lower-volume shop that is more oriented towards decision making and policy. Figure 2.7 highlights some of the activities occurring between the two centres.
Various aspects of TCs and SSCs, including structure and location decisions, are covered in detail in the Toolkit in Part Five.
Value-Added Treasury Centre
The value-added Treasury centre (TC++) concept takes off from the basic TC, with activities of forecasting, risk management decision making, investment decisions, funding and liquidity sourcing and intercompany funding, systems, control, and reporting all moving to a centralised location. Likewise, the confirmation and settlement of the risk management and investment transactions could move into the SSC or the TC. Now we have reached a stage where the entire Treasury operations are now centralised, with very little activity residual within the subsidiaries or country operations (see Figure 2.8). There may be some variations on this format, depending on regulations regarding outsourcing and ownership.
FIGURE 2.8 TC++ Model (with SSC)
In-House Bank
The next stage in the evolution is the concept of the in-house bank, typically as part of the TC (see Figure 2.9) Value-added services such as invoicing (or re-invoicing), credit management, and supply chain financing are taken up here. Most important, however, the TC acts as a bank for all subsidiaries and countries that come under the ambit of the in-house bank. The TC behaves as a banking service company, providing account management, funding, funds transfer, investments, and risk management solutions to the entities. In turn, the TC interfaces with banks and professional market counterparties to execute consolidated transactions on behalf of the entire group.
FIGURE 2.9 In-House Bank Model
An in-house bank requires a very high degree of expertise and a high process orientation. The scales of the operations and financial transactions of the group must also justify the investment and maintenance cost of the in-house bank.
Outsourced Model
The outsourced model of Treasury works in a rather simple way: Outsource the process-focused or non–decision-making activities and keep the decision making, review, and ownership in house (see Figure 2.10).
FIGURE 2.10 Outsourced Model
The Toolkit in Part Five covers outsourcing in some detail with a checklist on essential aspects of outsourcing.
Figure 2.11 summarises the various processes and centralisation aspects across these sample models. This is only an indicative list. Companies must thoroughly analyse their requirements and situation prior to embarking on this exciting but involved journey.
FIGURE 2.11 Detailed Processes Across Various Sample Models
Hybrid models can also be structured as a combination of these models, where some activities are done in-country or in the subsidiary and the remaining activities done centrally at the SSC or TC.
We now go through a case of Treasury Design for a global company in the growth stage.
FIGURE 2.12 Treasury Reengineering Case
TABLE 2.1 Treasury Reengineering
| Theme | Starting Point | End State |
| Location of Treasury Ops | Decentralised | TC++ model. |
| Location of AR and AP Ops | Decentralised | Integrated with TC++ model (SSC). |
| Banks | Locally decided and mandated | Centrally decided and managed, moved down to few global relationships and local ones only where required. |
| Systems | Parent and 2 subsidiaries using systems | Centralisation necessitating increased use of systems. Integration with global banking and local banking systems. |
| Accounts | Multiple. More inactive accounts than active ones. Some subsidiaries have one active account per stock-keeping unit (product item) | Accounts rationalised and moved to one per subsidiary as much as possible. Intelligence in the reconciliation built into the transaction reference number and easy to track through integration of systems mentioned above. |
| Cost | Distributed and multiple operations | Headcount saved through removal of redundant activities and reaching economies of scale (redeployment of resources). Banking costs rationalised and saved—potentially over 50% saved. Uniform pricing from global banks and local banks. |
| Service and Relationship Management | Multiple relationship management and service levels | Location of Treasury operations centralised to another location with one person located at head office reporting to Treasurer to manage banks’ relationships centrally. Banks’ service side managed by Treasury operations with identified points of contact from the banks’ side. |
- Regulatory (capital control, outsourcing, and data). It is important to speak to the regulators and sensitise them to the developments. Any concerns highlighted are to be mitigated through concrete action. Possible concessions may also be obtained in some cases, so it is better to look for these opportunities and speak with the regulator.
- Systems integration. Especially with different legacy systems and culture, integrating requires effort. Single turnkey project responsibility with the vendor is one approach that can be adopted.
- Professional services support. Accounting, tax, and legal across countries have to be deeply involved in the process. HR and related aspects will also have to be considered.
In summary, growing companies may not always have the management bandwidth to implement centralised operations right away, but smooth process management and integrating policies and systems when acquisitions are being done helps to reduce the effort to centralise considerably, when the time comes.
The next case study, contributed by one of my favourite Treasurers from his own experience and observations in the industry, articulates some of the important but unwritten situations that companies could face.
- Using cash available in some legal entities to avoid borrowing in others, thereby avoiding the bid/offer spread.
- As a result, reducing pressure on funding lines for the borrowing and counterparty limits for the deposits.
- Reducing the number of banking relationships and rationalising them. This results in greater bargaining power and more customer attention from the cash management banks which are retained.
- Ability to offset currency positions, to reduce the amount of hedging required
- Enhanced visibility of the cash position and balances, reducing the need for cash buffers across the company
- Improvements in cash forecasting—or, at least, a reduced dependency on accurate forecasting, as errors in individual legal entities will tend to offset each other, and emergency cover can always be provided from the central Treasury.
- Enhanced Controls
- There is no longer a need to monitor the activities of multiple local Treasury teams to ensure compliance with policies.
- Enhanced separation of duties—often the finance or Treasury teams in subsidiaries are not big enough to ensure this.
- The central Treasury team can also invest in skill levels not necessarily available—or desirable—in smaller subsidiaries.
- Last, and not least, a reduction in the overall number of Treasury headcount.
- The central Treasury operation will not be able to make urgent payments in time. This will mean that essential items, such as taxes and payroll, will be paid late.
- Payroll has to be paid via a local bank. Employees cannot be made to open accounts with an international cash management bank, which usually will not have enough branches in the country.
- Customers will not agree to pay cash directly into an account with a foreign bank.
- It is difficult to close the relationship with the local banks that have provided support to the company over the years.
- The international cash management bank will not provide the same level of service as the local bank.
- The local Treasury team can get better rates by trading—and timing—in the local market.
- The central team “just don’t understand” the local environment.
- Payroll is often a real problem. Employees often choose to have their personal accounts with a local bank rather than with one of the recognised international cash management banks. It is important to have a payment process that interfaces with the local clearing system. This can be surprisingly difficult—especially in Europe and Latin America. If worst comes to worst, an account can be maintained with a local bank, just for payroll—the bank can often be incented to provide good service by giving it the opportunity to access the personal banking requirements of the company’s personnel.
- Confidentiality is also a major issue with payroll. The best modern banking interfaces provide a summary debit to the account for accounting and reconciliation purposes, so the Treasury and accounting teams do not see all the details of the payments. Again, the availability of this facility can be uneven, but it can be a determining factor in deciding on a local versus an international bank.
- The local service levels are a problem. Even the best international cash management banks can find it difficult to provide top-quality service to the smaller local entities, which often are not big enough to be serious clients for their local teams. In awarding international cash management mandates, it is essential to make sure the bank can always give top-quality service, even to the smaller entities that do not represent a significant business opportunity for the local branch. The effectiveness of this process often depends on the internal incentive and management systems of the bank; do not be afraid to ask how these operate for international mandates.
- Funding is essential. In negotiating a cross-border cash management mandate, it is important to make sure that sufficient local liquidity lines are available. This can be a significant challenge—not all international cash management banks have cheap access to local funding in all countries.
- At the same time, it can be very helpful to call in references from other companies that have implemented these solutions, to demonstrate that they can work.
SUMMARY
In this chapter, we explored the concept of Treasury Design, dwelling on the key themes of a good Treasury Design, and evaluated some Treasury models that could be adopted by global firms, with the use of shared service centres, Treasury centres, in-house banks, and outsourcing many process-oriented activities.