Outsourcing treasury management

“Cash is king” has long been a business mantra, and managing cash properly has become of critical concern to the C-suite following the financial crisis.

The Association for Financial Professionals’ 2012 risk survey found that 72% of respondents ‒ largely made up of CFOs and corporate treasurers ‒ said that their main concern is managing financial uncertainty, including the risks associated with credit, liquidity, interest rates and currency.

More than half of the respondents said that such risks posed the most significant potential impact on their earnings over the next three years. The survey also found that the two most important factors that executives are using to mitigate these risks are greater cash-flow predictability (74%) and performance forecasts (65%). 

With cash management a major risk for finance teams, one option is using outsourcing providers to take care of either some of the low-value work, or the more high-end, strategic work to get more value from the cash they are holding, or are likely to generate.

“Companies’ motivations for outsourcing treasury management can be complex and diverse, and may not be just about saving money,” says Anthony Hesketh, senior lecturer at the UK’s Lancaster University Management School. “For example, some organisations may seek to access new technical skills, gain new business process acumen, or even re-engineer the business process itself and develop a more effective corporate operating model.”

Hesketh says that the key to a successful treasury outsourcing arrangement is for the service provider to be clear about its cost structure, demonstrate that it understands the financial requirements of the client, and that it is capable of delivering the customer’s strategy – whether it be process-driven, high-volume transactional work, or more judgement-intensive, mid-office functions, such as corporate treasury.

 “Outsourcing providers that combine their forces with CFOs and financial controllers to understand the short-, medium- and long-term capital requirements of the firm – and how these dovetail with its operations and longer term goals – can prove to be an enormously effective partnership,” he adds.

Another key consideration is how much of the function can and should be outsourced. About 70% to 80% of the corporate treasury and risk management activity lends itself to centralisation, says Sabimir Sabev, a director of Novo Altum, a CFO advisory firm based in London. As companies go through their portfolio assessing the potential for outsourcing, they should be able to identify the elements that are the easiest and the most suitable to carve out, he added.

“For most businesses, a case can be made for a large chunk of their corporate treasury administration, cash and debt management or foreign exchange to be outsourced, whereas treasury risk, forecasting and bank relations may need to remain, at least initially, within the business,” he says.

Hesketh says that there are two usual ways for clients to measure the success of their outsourcing agreement. The first is a simple check that the contractor has fulfilled all the commitments of the service level agreement.

“CFOs need to be clear about what success looks like, understand governance processes and be clear about which service-level agreements really matter, and once the deal has been signed off, that both parties stick to it,” he added. “If you try to change things once the project is up and running, you will be out of scope and your costs will increase, chomping your original business case.”

But the real measure of value, Hesketh says, is to see how well the third-party provider has been able to optimise the company’s working capital – ideally so that it is effectively operating on the customers’ cash rather than its own.

For example, some industry sectors are able to operate on negative working capital because they are generating cash more quickly than they spend it – fast-food chains, supermarkets and online retailers such as Amazon are effectively paid for the goods they sell before they have even settled with their suppliers, which means that they rarely have problems raising cash.

“The best relationship you can ask for is for your treasury outsourcer to manage your cash flow so that your company can survive on customer cash rather than using your own. This requires some forward thinking from the CFO and not all companies consider it,” Hesketh says.

Done correctly, Sabev says, outsourcing can bring significant business benefits  from cost savings to better business processes and performance improvements. However, as with any major organisational change, he says that it is important to be aware of the risks involved.

“Clearly understanding your own specific requirements and finding the right supplier to meet them, through thorough due diligence, is critical to maximising your return on investment and creating a sustainable solution that will help to drive your business forward,” Sabev says.

Additional CGMA Magazine resources:

Corporate treasurers face cash-management, structural hurdles, report says”: Although the financial crisis has strengthened the role of corporate treasurers, they face cash management difficulties while using outdated technology and are experiencing difficulty recruiting talented employees, according to a new survey.

Treasury in the spotlight”: The global financial crisis has brought treasurers to the fore. Timon Drakesmith, CFO of property management firm Hammerson, and Joe Romenesko, global treasurer of financial provider to the property industry, Jones Lang LaSalle, explain how their strategies have changed.

CFOs’ plans for cash show mixture of optimism, caution”: CFOs of North American companies plan to devote 27% of their cash to domestic investment and 24% to liquidity in 2012, according to a recent Deloitte survey, demonstrating both optimism and caution in uncertain economic times.

Shared services: The keys to success”: Shared services are no longer solely the preserve of large organisations. So what are the benefits for midsize businesses, and how can they manage a successful transition to shared services?