Professional Documents
Culture Documents
Petr Polak
Corresponding Author, Associate Professor in Finance, Faculty of Business
Economics and Public Policy, University of Brunei Darussalam
Jalan Tungku Link, Gadong BE1410, Brunei Darussalam
E-mail: petr.polak@ubd.edu.bn
David C. Robertson
Partner, Treasury Strategies, Inc., Chicago, USA, Magnus Lind
Chair, European Treasurers' Peer Groups, Gothenburg, Sweden
Magnus Lind
Chair, European Treasurers' Peer Groups, Gothenburg, Sweden
Abstract
This paper discusses the role of the modern corporate treasurer in a multinational
company and its transformation in response to current challenges companies and treasurers
face. The most significant incident driving change in the role of the corporate treasurer is
the credit crisis that occurred in 2007-2009. The crisis replaced a focus on earnings with a
focus on cash and liquidity, and marked the end of easy availability of cash for most
corporates and the beginning of a situation in which the financial markets were no longer
able to reliably supply corporate demand for financing. The crisis saw the end of a credit
expansion initiated in the 1980s by the deregulation of the financial markets. Increased
focus on liquidity and financial risk management changed the role of the treasurer
dramatically. During the crisis, many sectors of the markets totally ceased to function, e.g.
the ability to hedge foreign exchange and interest rate exposures was constrained for
certain emerging markets and certain structured securities, such as Auction Rate Securities,
became wholly illiquid. These disruptions led to an inability to hedge, manage liquidity or
even properly measure certain risks any longer. Embedded risks - e.g., in vendor and
customer contracts - also emerged as a critical focus and corporations were forced to take a
broader view of risk in light of weaknesses and risks exposed by the crisis. As a result of
these changes, treasury is no longer merely a function for cash management, funding and
hedge accounting. Treasury is now a strategic function securing liquidity and understanding
the true risk profile of the corporation. The treasurer is now much more involved in the
management of the business and has become a business leader instead of an administrator.
This transformation in role has placed a much higher demand on the skill sets of the
treasurer and he or she must command the arts of communication and sales as any business
area manager would.
While the changing role of the treasurer resulted in new requirements, multinational
companies maintained their focus on efficiency particularly in response to the economic
downturn. Yet executive managers and treasurers must not concentrate solely on cost
savings, as this would fail to recognize and prioritize critical strategic benefits such as
improved quality, resiliency and scope of work. As Treasury has become a strategic role,
the legacy operational mandate has lessened in importance but Treasury must still
determine the optimal organizational structure that meets both strategic goals and supports
overall efficiency. In optimizing the organization of roles, treasurers and business leaders
must also consider multicultural and other barriers - in many countries, "custom and
practice" inhibit pure efficiencies that might be achieved via centralization or even
regionalization. Further, an excessive focus on rationalization of functions can fail to
attract and motivate key and highly qualified specialists required for critical knowledge
centers, such as treasury departments. While a purely centralized model may, on the
surface, appear optimal due to enhanced control and efficiency, competing factors that
argue for local structures make it difficult for treasurers to determine the optimal balance
between centralization, regionalization and locally sourced activities. Thus, treasurers must
explicitly assess multinational organizational structures at the same time they face an
expanding and more complex set of responsibilities.
The ideas in our paper optimally apply to multinational companies operating in
global environments that present challenges in language barriers and different time zones
across the globe. While the paper has direct applicability for financial and treasury
managers, the text also holds larger insights for any strategic manager at a complex,
multinational organization. It addresses:
The change in the role of the treasurer resulting from the change in financial
markets functionality and the new restrictions in cash availability and risk
hedging introduced during the credit crisis. This includes new strategies for
cash and liquidity management.
The process of optimal centralization and segregation of operational duties
across regional centers, a single global centre at the headquarters, and local
units. We will show that centralization cannot be a theoretical construct, but
must take into consideration regulation, local conventions and the identity and
morale of the workforce.
Factors to consider when identifying optimal locations for regional centers.
The role of outsourcing in meeting emerging challenges while optimizing
efficiency and organizational structure. While the challenges faced by the
largest multinational corporations are complex, pressure on greater efficiency
applies to mid-size companies too, and small to mid-size enterprises (e.g.,
those with less than 1 billion Euro annual turnover) may access additional
competencies and improve efficiency by removing the process out of the
company entirely. The article will help those companies evaluate what to
outsource and how to choose a provider of outsourcing.
1. Introduction
The paper works with following ideas:
1. The emerging responsibilities of the treasurer in light of the financial crisis.
2. An evaluation of how organizations can be optimally structured to maximize scale and
strategic impact while also addressing underlying operational functions and risk.
3. A contrast of centralization and regionalization on a global level.
1.1. Definition
The paper discusses the role of the modern corporate treasurer in a multinational company and its
transformation in response to current challenges companies and treasurers face.
Todays treasurer is challenged by increased financial risk, a transformation of the financial
regulatory environment and a continued corporate focus on efficiency. Against the backdrop of these
challenges, treasury must determine an optimal organization and location of roles across the globe.
International Research Journal of Finance and Economics - Issue 78 (2011) 51
Blake (2011) points out that a company operating in todays world [faces] the unprecedented
challenges we have experienced over the past few years. He categorized the challenges into risk
management, access to cash/credit and efficiency. Seifert (2011) notes, forthcoming regulations, such
as SEPA and Basel III, are also set to focus the attention of treasury on improving and centralizing
payments in the Eurozone and improving internal financing efficiencies. Overall, the focus of treasury
is increasingly on delivering value and efficiency for the company and acting as a strategic support unit
to achieve the company's overall commercial goals. And centralization, standardization,
simplification and automation - these are the focus areas for an efficient treasury process as per Ala
(2011). The importance of treasury function centralization is highlighted by Polak et al. (2010b),
centralization of treasury activities offers corporations the ability to achieve higher efficiency, greater
transparency and access to real time information across a broad geographical area and many entities.
In addition one of the treasurys most important roles is to develop and nurture its relationships
with the core banks facilitating the corporations financial needs Lind (2008). Through research, the
European Treasurers Peer Group (www.treasurypeer.com based in Sweden) found that over the last
couple of years bank relationships have been further centralized and the evaluation criteria and
interaction with them has developed substantially. Similar to the needs of a corporate treasury, banks
now need to understand the underlying business model of the corporate to be able to support its full
supply and demand chain. Treasury Strategies corporate research (Corporate Treasury Research
Program: 2008, 2009, 2010) showed a gradual concentration of transactional banking relationships
across all regions of the world at the same time that corporations sought existing liquidity and credit
providers in order to ensure their ability to access and invest liquidity.
According to Hartung (2010) companies increasing focus on treasury along with their
heightened awareness of the need for better liquidity management after their experience during the
economic downturn over the past two years has led more companies to take advantage of the benefits
regional treasury centers can provide. BMW, for example, expanded its center in Singapore this year
and said the intention is to benefit from greater economies of scale and to simultaneously instill
improved process efficiencies.
To understand the changes facing a multinational company today, we have categorized the
challenges as traditional and emerging.
2. Traditional Challenges
Since mid-2000, corporate treasury had to return its focus toward development of core activities
needed to address traditional challenges, such as financial risk management (focused on interest rate
and foreign exchange risk), forecasting of cash, optimization of access to credit and liquidity, assets
and liabilities management, management of cost of capital and bank relationship management. Even as
these initiatives were pursued, treasury groups continued a gradual trend towards increased centralized
control.
We have here chosen the term centralized control rather than centralization since the trend is
not always to gather all treasury activities in one location. However the trend is definitely to get control
of the treasury activities throughout the corporation. One particular reason why centralization to one
location is not always possible is the current regulatory environment in many of the emerging or
growing economies, e.g. Brazil, China, India and Russia. Highly regulatory frameworks remain in the
financial markets in the growing countries. For instance their currencies are not fully convertible with
free-floating rates, and cross-border cash transfers are restricted, creating so-called trapped cash
inside these countries. These regulatory restrictions are designed to shield growing countries from the
constant pressure of fluctuating financial markets. Open economies such as in the western economies
require full transparency and governance to be able to maintain an unregulated financial market, which
vastly improves the cost effectiveness of financial transactions and thus boosts productivity and
growth. Free flowing investments to areas and countries that most efficiently can utilize capital prove
52 International Research Journal of Finance and Economics - Issue 78 (2011)
to be the most efficient way to create value and growth. Conversely, trapped cash causes corporations
to hold cash on the books but be unable to use it outside the jurisdiction. It may also force local
representation of treasury in one form or another to manage these cash balances within the boundaries
of the country.
Another reason why treasury is not located only at one location is contingency planning. Image
for instance that a large corporation only has one office performing payments and collections for the
whole group. What happens if that office becomes restricted to handle its tasks for a day or several
days? One location would also create problems with time zone cut-offs, backups, verifications,
allocations and repair of payment issues.
3. Emerging Challenges
In response to a dynamic environment, many corporate treasurers plan to create value for their
companies by focusing on the following non-traditional areas:
Efficiency.
Globalization.
Centralizing the control and management of treasury and outsourcing of some of the
treasury activities.
Identifying geographic organization of roles in light of centralization, local requirements /
conventions, labor markets, proximity to key business constituents and other factors.
Standardization and integration of treasury activities to improve alignment and
coordination with the companys core business activities.
Adapting to new regulation, especially those emerging in response to regulatory
frameworks established in response to the credit crisis. One particular example is the
expected regulation of OTC (Over The Counter) derivatives being forced to be traded
over an exchange, a so called CCP (Central Counter Party).
3.1. Efficiency
Optimizing operational and financial efficiency has been among the objectives for treasurers in recent
years. Increasing operational efficiency in treasury and finance management is closely connected to its
risk management role. There are a wide variety of ways to increase efficiency, which in turn help to
mitigate the risk of error and fraud. Efficient business processes reduce costs, which reduce pressure on
margins, and facilitate better decision-making based on greater visibility over information and
transactions. Automation and process optimization reduce the potential for errors or data latency.
Improved efficiency can also improve the speed and quality of information a critical component for
Treasury in dynamically assessing risk and liquidity.
Potential efficiency improvements for MNCs (Multi National Corporations) include:
Automation of low value added operational tasks including basic intelligence activities,
such as, for example, managing payment and investments.
Location of staff in low cost / high talent centers.
Removal of paper documentation from the entire process.
Migration to e-payments and mobile payments
Leveraging the scale of partners to reduce unit costs of activities.
Improving straight-through processing of payments and collections to minimize costly
exception processing.
One of the foundations for achieving efficiency is to have full visibility over cash flow in all
currencies and countries. While it is very easy to understand in theory, it is a problem in practice as
detailed payment formats vary by country and companies often work with multiple banks that
frequently store and communicate information in disparate formats and frequencies. Companies may
International Research Journal of Finance and Economics - Issue 78 (2011) 53
also operate multiple general ledger systems, often due to acquisitions, each with unique data elements
and formats. In one consulting engagement, Treasury Strategies worked with a multinational
corporation that operated 27 unique general ledger systems characterized by poor data integration at an
enterprise level. Another problem is that in many of the fastest growing economies, e.g. Brazil, China
and India, movement of cash is trapped or, at best, severely constrained through regulation and cannot
be sweeped to a single concentration location. Further, many emerging economies are characterized by
banks with incomplete or delayed information reporting capabilities and poor transparency into
payment execution and settlement.
A common first step in increasing the efficiency of treasury operations is to centralize the
control of the treasury processes. A centralized treasury management system is a prerequisite for
supporting efficiency. But even if the company has centralized processes, it may still need to
standardize and simplify both the internal and external processes, and those steps must be attempted
before automation. During the recent credit crisis, the value of real-time access to key information
global visibility of cash position, immediate access to counterparty risk, and global cash flow
forecasting - was further highlighted. The crisis also increased the need for real-time management
reporting.
There are a variety of reasons why companies decide to automate their treasury functions,
including improved cash forecasting and straight-through processing, integration with multiple banks
and multiple formats, increased visibility of cash, improved management of risk, and regulatory
compliance just to name a few. However, the recent convergence of several environmental factors
such as globalization, rapid business growth, increased competition, has made treasury automation a
priority for many corporations. In addition, treasurys increasing ability to affect the bottom line has
resulted in a significant shift in the role and responsibilities of corporate treasury professionals. This
shift has brought about a renewed focus on cash forecasting and global cash management, interest rate
and foreign currency risk management, and overall working capital management. This, in turn, is
further driving the need for automation and collaboration across a broader ecosystem.
operating in emerging or growing markets is to adopt significant automation and leverage their
standards to integrate payment and treasury data directly to the core system to maintain their
competitive edge and reduce costs.
As more companies expand operations across international borders, the erratic behavior of the
international financial market forces standardization of international payments, as the simplification of
fund movements becomes the extended challenge for corporate treasury. Corporate treasury is required
to be more aware of the volatility of the international financial market and conversant with the current
payment standards practiced by other corporate treasuries, in order to keep up with international trends.
For example, the recent implementation of the single euro payments area (SEPA) has resulted in the
SEPA Credit Transfer (SCT) replacing myriad payment instruments across the EU countries. The SCT
was introduced in January 2008, and the SEPA Direct Debit in November 2009.
Standardization of data promises faster, more comprehensive, and more efficient consolidation
of data which in turn will enable treasurers to access strategic insights more quickly e.g.,
identifying variances to forecast and expediting the inclusion of data into automated general ledger
posting and forecasting systems.
reduced; at the same time, stop signs can be raised about transactions that may put the company at risk
of Sarbanes-Oxley violations. Technological advances and the solutions of banks and third-party
providers make centralized cash management and the operation of an in-house bank a reality for any
multinational company. An in-house bank provides the most aggressive level of cash centralization, as
a centralized treasury unit maintains control and oversight of the internal accounts of individual
companies and performs investing, borrowing, hedging and other treasury operations on behalf of the
internal accounts of these companies. An internal settlement is usually processed on a bilateral net
settlement basis. The in-house bank generally includes one or more primary concentration accounts for
external settlement. However, larger corporations do not want to be dependent on one external bank
and try to optimize their banking costs by managing the external bank accounts as efficiently as
possible. At the subsidiary level, it does not make a difference if one or more external accounts are
maintained by the central treasury, because the subsidiary can manage its external banking activities at
a level of autonomy determined by Treasury e.g., for collections and local disbursements and is
provided with short-term investment and borrowing through its interaction with the in-house bank.
The severe credit crisis began in 2007 in the US and expanded globally in 2008-09. It changed
the basics of cash and liquidity management. Pre-crisis we had a situation where access to capital was
not a direct bottle-neck even at fairly aggressive leveraged balance sheets and sub investment grade
rating. During the crisis and in its aftermath corporate treasuries realized they needed to develop more
reliable alternatives for funding and raising liquidity. A trend to deleverage, which many times was
imposed by financial institutions, meant corporates started to build up cash cushions, in the form of
reserve capital for situations of financial stress. This trend was many times also driven by the
companys stakeholders, including shareholders, who requested lower levels of debt and/or increased
cash balances. The normalization of the financial markets after the crisis has thus led to improved
capital structures and reduced reliance on committed facilities. Besides having higher levels of cash on
the balance sheet, corporates also have diversified their channels of funding using more varied debt
instruments and spreading into more funding markets (e.g., such as by issuing debt in multiple
regions). Corporate treasury and investor relations have in many cases started to cooperate and
performing joint road shows and communication directed not only to investors owning company shares
but also those holding company debt. This shift in liquidity management and funding strategies is a
systemic shift and there are no signs that the corporate sector will return to the relatively lax attitude
towards capital availability as they had prior to the credit crisis.
The size of the cash cushions vary across companies dependent on the conditions under which
they do business. Here are some factors that reduce the level of cash a firm might hold:
1. Strength and stability of cash generation capabilities.
2. Degree of balance sheet leverage, as high levels of leverage require the use of cash to
repay debt.
3. Precision of cash forecasting accuracy.
4. Low levels of business risk for example firms with high levels of operating risk may
unexpectedly require sudden inflows of cash for major product and market investments.
This is typically the case for the technological and telecom markets for instance.
5. Trust in commitment for the corporates banking relations.
6. Lack of merger and acquisition demand.
7. Low volatility of cash flows (e.g., large pharmaceutical firms, which are dependent on
unknown returns from heavy R&D spend will often hold multi-billion dollar cash
balances as a hedge against cash flow risk).
One consequence of creating considerable cash cushions is that cash requires investment
management of the resultant interest rate and credit risks within the cash portfolio. Another major
concern is the cost of carry, as firms may face a negative return on cash when debt is held at a higher
interest rate than the cash cushion generates. This cost of carry is regarded as an insurance premium
but in situations of high-risk aptitude in the financial markets it may create a motivation to take higher
56 International Research Journal of Finance and Economics - Issue 78 (2011)
risks in anticipation of higher returns, increasing the overall risk position of the company. We saw that
tendency during 2011 prior to the credit downgrade of the USA in August 2011.
The new liquidity management conditions have changed the corporates banking relationships
strategies. Pre-crisis corporates aimed to decrease the number of core bank relations to maximize
efficiency / minimize integration costs, with the anticipation that banks were always prepared to lend
sufficiently. In Europe in particular many corporates regarded banks as vendors rather than long-term
partners. The pre-crisis led instead to an increase of number of bank relations and also securing other
sources of financing (both bank and non-bank) aimed at an expanded investor base and increased cash
reserves. The SOW1 (Share Of Wallet) analysis became more important as corporations had to reward
the banks providing the most balance sheet commitments with the largest amounts of auxiliary fee
services such as cash management and payment solutions. SOW measures three target areas to
optimize the portfolio of bank relations:
1. Strategic goal of securing cash headroom including operational liquidity and extra
financing required for acquisitions or in situations of severe stress e.g. committed backup
facilities.
2. Interest rate margin and fees paid for debt. This includes defining and reaching an optimal
credit rating.
3. Bank fees paid for auxiliary bank services.
Lind (2008) defines share of wallet as the most common method of rewarding the banks to
achieve desired behavior. The corporate therefore needs to know what revenues it creates for each
bank. This information may be obtained either by performing its own calculations based on
transaction volumes and expected spread and capital adequacy requirements, or, in many cases, can be
received by the banks themselves through account analysis reporting. It is important for banks to share
business within their target market segment and specialties.
In fact the crisis did not create any change of trend in the areas of core cash management
meaning centralizing payments, bank account management, and introducing payment and collection
centers. The greatest inhibitors of centralization are disparate standards, requirement of large
investments by the financial institutions for harmonizing with one global payment standard, and lack of
sufficient business cases to do so. Other reasons include regional and country legislation and regulation
prohibiting transfer of cash cross-border. One major problem is that in the countries with the highest
growth rate the cash are many times trapped within its respective borders. Corporates obviously strive
to centralize as much as possible despite these obstacles but that trend pre-existed the crisis.
To optimize bank structure in conjunction with the organization of Treasury activities, many
firms chose to select banks on a regional, rather than functional basis e.g., a North American primary
bank rather than a global collection provider.
With new technology providing better solutions for collections and purchasing, new suppliers
have entered the market. One example is purchasing cards for B2B relations. However they are still
very expensive for the vendors and therefore mostly applicable for SME vendors. However in B2C we
can see a shift towards providing customers to pay with online payment solutions (e.g., PayPal, Google
Wallet, Amazon Payments) and credit cards, which many times are incentivized through discounts in
order to change customer behavior. For the selling company, receiving payments through mobiles or
card payments result in fewer DSO (Days-Sales-Outstanding) and thus reduces working capital that
has to be offset by the sellers margin being shared with the mobile network or the card issuer. A
special concern with mobile and card payments is security on several layers, e.g. stolen cards and
keeping customer payment data secure from improper use.
1 SOW = marketing term referring to the amount of the customer's total spending that a financial institution captures in the
products and services that it offers. Increasing the share of a customer's wallet a company receives is often a cheaper way
of boosting revenue than increasing market share (http://www.investopedia.com/terms/s/share-of-
wallet.asp#axzz1XElWfGvj).
International Research Journal of Finance and Economics - Issue 78 (2011) 57
Myriad payment vehicles pose opportunities and threats to Treasury. In addition to the need to
support multiple payment methods with attendant costs of data integration, treasurers must now
evaluate the overall cost / benefits of various payment methods by segment. In one consulting
engagement, Treasury Strategies helped a global 100 company identify the optimal target payment
media mix. In addition to traditional views around payments (risk and costs of different payment
vehicles), the company assessed the strategic impact of various payment media by segment e.g., the
extent to which a payment type might increase the firms share of wallet with a customer segment.
2 http://www.nfs-group.com/
58 International Research Journal of Finance and Economics - Issue 78 (2011)
treasury will need a large degree of autonomy in order to function effectively, its precise
role and the scope of autonomy should be very clearly defined.
V. What information will treasury have access to? A centralized treasury will need access to
accurate and up-to-date information for all the companies it manages.
VI. Bank relationships. What is the nature of the companys bank relationships? Are there
multiple local bank accounts the treasurer will need to manage? Will the treasurer have
access to real-time bank account information?
VII. What information systems and technology does the company have in place? Are they
reliable? Are they integrated with the rest of the company?
VIII. Does the company have available staff that can be relocated to implement a treasury
abroad? In order to implement a successful centralized treasury, the company may want to
relocate some key staff. These staff can train new employees at the central location and
oversee the set-up. They may also run the treasury for a short or a longer period.
And finally, there may be a concern of subsidiaries that, if funds are transferred to the treasury
center, they may not be returned as and when required.
Centralization of treasury activities offers companies the ability to achieve higher efficiency,
greater transparency and improved access to real-time information across a broad geographic area,
multiple time-zones and many entities. There are different phases in the centralization of treasury
management, from the decentralized treasury to fully centralized cash and treasury management. Many
firms start with the centralization of foreign exchange and interest-rate risk management as the first
step towards centralization of treasury activities, and then proceed through cash and liquidity
management up to fully centralized treasury.
To some degree, the process of centralization reflects the evolutionary nature of treasury
management. It also reflects the differences in executing corporate finance and cash management
activities. Developments in technology and the global financial markets have made it possible for
funding and hedging requirements to be collected and executed centrally. Given the opportunities for
cheaper and more effective management of these functions when handled centrally, including the
opportunity to net exposures internally, most multinational companies employ a professionally trained
corporate staff to execute the transactions for the entire company and then to distribute internally the
required funds or hedging.
In comparison, it has not been as easy to centralize the daily operational tasks of maintaining
bank accounts, monitoring cash inflows and outflows and investing short-term funds. There are
external legal, tax and banking issues, and internal political/personnel issues that constrain
centralization. Many established companies with existing financial operations in multiple countries
find vested local interests that resist centralization efforts. As a result, up to this point, most companies
have established regional centers not single global centers to coordinate and perform international
cash management activities. This has become most common in the Eurozone where the introduction of
the Euro since 1999 has led to the opportunity for concentration of Euro-denominated funds. The
concept of pan-regional cash management activities has extended especially to the Asia-Pacific region,
however, the hurdles in these very heterogeneous regions are more pronounced.
Even there is a decision, and steps are taken, to centralize the treasury functions, additional
factors must be considered, such as:
Existing bank relationships the participating companies may think they enjoy good
terms and conditions from their current banks.
Lack of control over funds there may be a concern that if funds are transferred to the
treasury centre they may not be returned as and when required.
Additional administration required to track inter-company loans.
Culture for example, in Southern and Central Europe countries, companies may be used
to have banking relationships with more than one bank. That means it may take some time
for these companies to make the cultural change to work with one bank system on a pan-
European basis.
Treasury management system upgrade requirements and its integration with the ERP
system.
6. Regional Centres
Considering that most multinational companies have already decided to centralize their treasury and
cash management activities, one of the most important questions is: Where is an optimal location for
our treasury activities? If a new central treasury company is going to be formed to perform the
international financing activities, the corporation needs to consider the optimum location from an
organizational, as well as legal and tax point of view. Giegerich et al. (2002) and the European Cash
Management a practical guide (2007) define a treasury centre as a centralized treasury management
function which is legally structured as a separated group or as a branch and is normally located in a tax
efficient environment. A tax efficient environment is essentially a location that offers multinational
companies a more beneficial tax regime compared with another location. Blair reaffirms the
importance of the tax system. When Nokia needed to be closer to its international operation in
Singapore, it considered setting up a regional treasury in Singapore, Hong Kong, Malaysia and
Australia, but chose Singapore due to its more favourable tax regime. Furthermore, Murphy (2000) and
Polak et al. (2009) point out that regional treasury centres are primarily tax-driven, where tax on profits
generated is at favourable rate.
As more and more companies expand operations across international borders, international
financial market erratic behaviour entails standardization of international payments to simplify fund
movements becomes extended challenges for corporate treasury. Corporate treasury is required to be
more aware of the volatility of the international financial market and conversant with current payment
standards practiced by other corporate treasuries in order to keep up with international trends. These
challenges are key influencers of corporate treasury to the extent of provision of functions and
practicality of management organization.
When considering the set-up of a regional treasury structure, a key issue is to validate what its
role will be in driving and managing core treasury functions. If a company already has an active group
treasury, it is likely that this group function will be the one driving and establishing the company s
strategy and policies regarding most of the above. In that regard, the role of the regional treasury centre
becomes one of execution, essentially acting as a hub for the group treasury function. On the other
hand, the regional treasury centre has a key role to play in ensuring that the company maintains an
appropriate knowledge of local issues and local peculiarities and therefore is in touch with the local
markets. It also needs to ensure that these local issues are duly reflected and understood by the group
treasury function. A possible segregation of tasks between the regional and global treasury centre is
around the front, middle and back office functions as seen in the following example where all the tasks
relating to execution are maintained within the regional treasury centre whilst the corresponding
accounting work and risk control remain centralized at a group level.
Corporate treasuries face problems with treasury functions to undertake and degree of
management to organize i.e. degree of centralization and decentralization, and decision making here is
greatly influence by these associate challenges. The complexities of treasury centres organizations are
of crucial importance for understanding different structures and models developed by other studies
based on common practice by multinational corporations.
Figure 2: Segregation of operational duties between regional and global treasury centre
For further reading about the regional treasury centres, tax environment and other criteria that
must be assessed before establishing an regional treasury centre, and an effect of a globalization, etc.
please see the corresponding author previous papers and a book:
Polak, Petr and Rady Roswanddy Roslan. 2009. Regional Treasury Centres in South East Asia
the Case of Brunei Darussalam. Management Journal of Contemporary Management Issues, 14
(1): 77-102.
Polak, Petr and Rady Roswanddy Roslan. 2009. Location Criteria for Establishing Treasury
Centres in South-East Asia. Journal of Corporate Treasury Management, 2 (4), 331-338.
Polak, Petr. 2010. Centralization of Treasury Management in a Globalized World.
International Research Journal of Finance and Economics, issue 56, 88-95.
Papers are available for downloading through the internet, e.g. at:
http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=411555
Polak, Petr and Ivan Klusacek. Centralization of Treasury Management. 1st Ed. Sumy:
Business Perspectives, 2010. 100 pages. ISBN 978-966-2965-08-7.
Book is available for downloading at: http://aei.pitt.edu/14063/
Cash Positioning
Within the remit of corporate treasury is the cash positioning meaning the monitoring of available
surplus and deficits of cash funds on each individual bank account. Each morning the balances are
mapped and the account deficits are filled and surpluses are swept, or transferred, to a corporate top
account. The reason for cash positioning is firstly to net out gross balances of surpluses and deficits to
decrease balance sheet size and interest expense. Secondly the purpose is to get group control of the
cash and be able to use it efficiently throughout the whole group. Cash positioning is closely performed
with the accounts payables and accounts receivables teams. Cash positioning is managed per currency
and can be swapped into one group currency and one final residual amount being borrowed or invested
in the financial markets.
Cash positioning requires a cash management technical solution with the ability to connect to
all providers of cash data, typically via banks or SWIFT. These solutions are provided by system
vendors and banks.
market rates on the cash flows, income statement and balance sheet of the company. Hedging in the
financial markets using financial derivatives, for instance does not take away financial risks that arise
from ongoing operations (though they may fully offset one time events). Foreign exchange risks are
usually created by having production and supplies in a different currency denomination than that of the
sales. This means that through investment decisions the company creates foreign exchange exposure
that must be managed through derivatives and other financial instruments. The only way to eradicate
the financial risks is to have all costs and revenues in the same currency. The credit crisis created
awareness from the Board of Directors that financial risk is actually created through business decisions
and can only be fully eradicated through business decisions. Financial risk management has become a
much more strategic issue after the crisis. However many companies still try to avoid the effects of
adverse foreign exchange movements through specific accounting treatment, so called hedge
accounting. Hedge accounting is a technique to link the financial hedges to the underlying commercial
cash flows. Hedge accounting does not change the structure of the risk but merely accounts for the
financial results in the overall results rather than specifically in the financial net.
Some firms now structure their balance sheets and expense / income structures so as to create
natural hedges. For example, a firm which bought raw materials denominated in one currency may
establish sales offices and production facilities in local countries, in effect diversifying the foreign
currency risk exposures faced by the firm. As can be seen, strategic business decisions around markets
and the location of expense centers can shape financial risk exposures and thus Treasury is increasingly
pulled into business strategy questions of which financial risk may be a material component.
The treasury department has three possible alternatives how to handle financial risk:
1. Strategically avoid the risk - for instance, by locating production and sales costs in the
same currency jurisdiction of the customers.
2. Tactically manage the short term effects through financial risk hedging to gain a grace
period to adjust for the effect, for example, by changing customer pricing.
3. Accept the risk and retain it and present the effects in the accounts. This is usually the
case when the risks are reasonably small.
4. Outsource the risk.
Risks that arent avoided must be accepted by the company and either retained, reduced
internally or transferred externally. There are a number of distinct steps in the management of financial
risks, first of all treasury must identify financial risk within the organization and be able to measure
these risks and estimate the probability and impact of each of them. Then, as a response to each type of
risk, treasury must define the companys risk management policies, which will be enshrined in the
companys financial policies and implement the financial risk program for a whole company as well as
each department. The final, but very important part of the whole process, is to report on the progress
and efficiency of the policy (i.e. assess the extent to which the policy chosen has reduced the risk in the
most efficient manner possible), periodically provide feedback, and re-evaluate the entire financial risk
management process.
These levels can be seen both as a decision framework and, in the case of activities that lend
themselves to full geographic consolidation, as an evolutionary roadmap.
Scale
Discussions of scale typically focus on unit cost optimization, whereby higher fixed costs are used to
reduce marginal variable costs, thus producing significant unit cost improvements at higher volume
levels. A good example of this would be RTGS processing by commercial banks
However, for a knowledge-based unit such as treasury, the primary focus on scale is the scaling
of competency and resources. A treasury unit comprised of 6 people will necessarily be staffed
primarily by generalists, each responsible for multiple functions. Such a staff will often have to
externally source deep functional expertise due to limitations in staff size. Further, such a staff will
often be characterized by weak resiliency, as lack of staff limit overlap in competencies. In contrast, a
unit comprised of 80 staff can develop functional specialization and improved redundancy in staffing
levels. Smaller firms and firms with limited treasury staff levels may lack sufficient Treasury size to
develop deep functional expertise across multiple domains.
For key knowledge functions, merely standardizing processes and data does not provide scale
as the underlying expertise will remain fragmented organizationally. In its corporate consulting work,
Treasury Strategies sees clear differences in the expertise levels of treasury units based on the degree to
which responsibilities have been globally centralized. For example, while core treasury functions may
be centralized, a firm may have decentralized staff managing customer credit risk exposures. Even if
processes and data are standardized, this function will generally be relatively immature, due to the lack
of consolidated expertise around this function. In contrast, a consolidated function (even if
geographically dispersed) can have the resources to pursue ongoing improvements such as improved
tools, analytical methods, etc.
With respect to the new and emerging roles of the Treasurer, we can see that these activities are
more strategic, which argues for more of a generalist approach. However, simultaneously, the depth of
risk and liquidity expertise has intensified, arguing simultaneously for functional specialization,
necessitating scale. While outsourcing may be a promising avenue for smaller firms seeking expertise,
treasury outsourcing has failed to thrive, despite several attempts. The degree of integration and the
strategic importance of treasury makes outsourcing these functions challenging.
International Research Journal of Finance and Economics - Issue 78 (2011) 67
Requirements
When centralization efforts are pursued, local units will often argue against centralization due to
unique requirements resulting from regulations or market conventions. Evaluating which of these
concerns is legitimate can be a challenge. Navigating this decision will depend on several factors:
The flexibility of a firms treasury technology in meeting disparate local requirements
Access to local expertise e.g., via third parties such as banks, treasury associations and
consultants
The comfort of the firms culture in interacting remotely e.g., via phone, web and other
indirect channels
Within the domain of treasury, several elements have historically limited the scope of
centralization:
Provider scope until recently, few banks had the capability of delivering fully global
solutions. Today, multiple banks are expanding their footprint and partner arrangements
to deliver global banking.
Regulation several emerging / large economies e.g., China, India, Brazil are
characterized by significant controls around the movement of funds. Other jurisdictions
may have unique restrictions around invoice methods / formats, reporting or even the use
of non-local resources for key activities. As a result, treasury must not only determine if
the unique requirements of a market can be met via a centralized unit, but also must
determine if the dynamic nature of the market (e.g., China) requires a more active
presence merely to remain up to date on regulatory requirements. Conversely, a treasury
unit could decide that unique regulatory requirements and market conventions can be
monitored via third party sources and that a centralized unit can fully meet the
requirements of locally restricted markets via technology.
Expertise while banking is gradually standardizing at a global level, unique payment
and banking conventions exist in many jurisdictions whether it be Islamic banking and
credit, unique payment media or conventions around settlement practices. Navigating
these differences requires local expertise that must be sourced internally or externally
While the above factors may argue for unique processes, a firm may determine that these
activities may still be centralized due to the similarity of the required competencies or the benefits of
control. Subject to economies of scale, a firm may determine that local requirements are best met via a
Level 2 centralization in which roles are dispersed geographically close to local conventions while
reporting centrally. The key challenge in this regard is that such an approach may lack scale for
example, a local jurisdiction with unique requirements may not have sufficient scope of treasury
activities to warrant a full staff and even if it were to warrant a single staff, it would provide very
little redundancy and overlap as a single staff unit.
Conclusion
The challenges to greater efficiency and mitigating risk faced in a global environment must be the top
two priorities for any treasurer today. Their expanding role will continue to evolve and become even
more significant within the companys hierarchy. The way to achieve a greater efficiency and broad of
risk responsibilities within the company to incorporate counterparty, country, and financial supply
chain is treasury centralization. The centralization consolidates control within treasury, giving it the
power to automate / optimize functions AND to gain greater visibility into and control over risks.
The new trends of corporate treasury emerge from the credit crisis, which changed the trust in
the reliance of the efficiency and existence of the financial markets. Most companies experienced a
severe shortage of funding and many financial markets, especially in the emerging or growing markets,
were merely shut down. It meant that liquidity became a scarce resource, hedging was not able to be
performed. The shock waves from the crisis created a realization from the companies of the importance
of the treasury operations and the need for contingency plans for financing and risk management. This
led to a fast balance sheet deleveraging and creation of cash cushions and increasing the financing
sources. The role of the treasurer also became more strategic and central to the companies. The crisis
also exposed the lack of transparency in financial risk exposures whether it was a fund, a structured
asset or even an indirect exposure e.g., if Lehman were a funder in a revolver, access to that funding
was disrupted when Lehman failed. Accordingly, treasurers must disaggregate risk to its underlying
International Research Journal of Finance and Economics - Issue 78 (2011) 69
components, which sounds simple in theory, but could mean understanding, dynamically, all the
components of a fund.
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