OpenText has grown rapidly through acquisitions to become Canada’s largest software company, collecting a long list of banks and financial software systems along the way. Several years ago, it began a treasury transformation initiative, aiming to make the department more efficient, cut costs and reduce risk—but just how effective has it been?
OpenText has pursued an array of micro metrics that drill down past the standard financial ratios, such as working capital, interest coverage and other measurements that Wall Street focuses on, to those that measure operations. “We’re using the micro metrics to measure how those changes have benefitted the company, and whether we have made the key changes we need or intended to make,” said Jonathan Burkhead, senior director, global treasury at OpenText.
For example, as part of its treasury transformation initiative, OpenText has dramatically reduced its number of its banks, approaching its target of 20 from over 150, and it has closed 425 bank accounts. It aims to maintain 150 bank accounts, although that number changes continually due to acquisitions.
To monitor progress and the resulting benefits, it has developed micro metrics such as tracking bank fees associated with those accounts. By removing fixed costs from banking services, Burkhead said, treasury has found savings of more than $1 million annually. And now that there are fewer banks to deal with, his group has been able to integrate them more completely, and thus automate more transactions with those banks than were previously processed manually.
In fact, reducing the number of banks was critical to the company’s successful implementation of SAP’s enterprise resource planning (ERP) software, since getting access to 120 banks and integrating them would have been an “impossible chore,” according to Burkhead. But integrating 20 is much more realistic, he noted.
Reducing the risk of fraud has been another major benefit. “Every bank account is a window of opportunity for fraud,” Burkhead said, adding that the more bank accounts there are, the more difficult it is for controllership staff to reconcile transactions, increasing the opportunity for fraud.
Creating such metrics has also helped treasury make decisions that have saved significant amounts of money. For example, it has tracked negative interest in primarily European accounts and determined that over the last year its balances there have grown to more than $100 million in cash. “Tracking the metric has allowed us to continue to focus on how we manage the balance and look for ways to reduce the exposures and costs,” Burkhead said.
DEVELOPING YOUR OWN SYSTEM
Smaller companies may have less need to develop micro metrics to measure aspects of their operations; a smaller domestic company, for example, may have only one or two banks, and thus face fewer cost and efficiency issues stemming from its bank relationships. Burkhead noted, however, that many midsize companies do significant business globally, such as one he worked for previously that had just $200 million in revenue but upwards of 40 bank relationships.
Burkhead noted that metrics can be developed across the company, from operations to sales. The first step towards determining which ones to pursue, he said, is to identify the key activities that drive the business’s profitability. The next step is to drill down to the operational and productivity levels to measure factors such as efficiency and cost. For treasury metrics, that largely boils down to understanding the banking operations, which besides the number of banks and bank accounts includes the cost per transaction and the volumes of activities.
“Everyone knows ACH is the most cost-effective way to make or receive a payment. So how far am I from full utilization of that, and what do I need to get there, and how do I track that activity?” Burkhead said. “By tracking the volumes of ACH vs. wire and check, we can focus on those regions and accounts where we haven’t utilized ACH sufficiently.”
Ultimately, treasury should have little difficult coming up with useful metrics to track, and it shouldn’t be difficult to decide the appropriate targets to reach. More difficult, however, is obtaining the data to do that effectively.
Burkhead noted that a company typically has various systems parsing through transactions with its banks, such as a treasury management system (TMS) and an ERP, and depending on the transactions’ syntax, they will be bucketed differently. Sometimes a BAI or SWIFT code is sufficient, or it may require a combination of indications to identify what kind of payment or receipt it is. In short, the method to arrive at the data is often unscientific and laborious, and potentially prone to errors, but it is the very data that goes into key metrics.
“You’re always validating the data to make sure it’s accurate,” Burkhead said, adding that it is important for treasury executives to seek out other sources of the data that may be more accommodating and accurate.
For example, rather than treasury relying on internal systems to collect data about bank transactions, banks provide reports that may be more accurate. And for credit card performance, processing companies such as Paymentech, CyberSource and Stripe, provide analytical tools and reports.
NARROW YOUR SCOPE
One lesson learned, Burkhead said, is that it is easy to come up with a long list of metrics that could provide beneficial information, but it is also easy to go overboard. Somebody has to gather and analyze the data, so the need for those resources grows alongside the number of metrics, and taking on too many can result in watered down metrics that fail to provide useful information.
“Especially when you’re getting started, just a handful or less than a dozen is probably best,” Burkhead said. “Decide on which ones are priority, and what the ultimate objectives are and the key drivers to get there.”