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.
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 26.3 shows a possible structural framework of the centralisation decision.
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.
Theme | Factor | Weight |
Environment | Legal framework and history | 10 |
Tax environment | 18 | |
Political environment | 5 | |
Regulatory environment | 10 | |
Infrastructure | Infrastructure | 5 |
Cost | 5 | |
Accessibility | 3 | |
Human Resources | Language | 3 |
Resource pool | 10 | |
Standard of living | 7 | |
Sector and Markets | Banking sector | 7 |
Capital availability | 7 | |
Special status | 3 | |
Market development | 7 |
Infrastructure inputs involve system inputs, resource inputs, and inputs and review of the accounting, tax, and legal environment.
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.
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.
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.
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.
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.
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.