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Four Success Factors for Treasury Centres

  • By Francois-Dominque Doll and Susan Xu
  • Published: 10/4/2018

TCAPAC
A leading practice in treasury management is to centralise operations into a treasury centre, and an in-house bank (IHB) is considered a best-in-class structure of a regional or global treasury function. The concept of IHB is not new and the benefits are self-explanatory. However, only a small number of companies have adopted this structure. Here are four factors to successfully transform their existing treasury operations into a treasury centre.

A well-recognised, leading practice in treasury management has been to centralise distributed treasury operations into a treasury centre, and an in-house bank (IHB) is considered as a best-in-class structure of a regional or global treasury function and a necessary evolution in the centralisation journey. The IHB’s roles and responsibilities include:

  • Cash management—to concentrate cash and to make or collect payments via payment and collection factories
  • Intercompany transactions—to perform nettings and arrange intercompany funding
  • Risk management—to monitor interest/foreign exchange/commodities/credit risk and enter into hedging scenarios where necessary
  • Bank relationship management—to manage bank accounts and negotiate terms & conditions
  • Treasury framework custodian—to standardise and enforce treasury policies and processes.

Compared with decentralised or less centralised structures, IHBs will benefit companies with better visibility, stronger control, and a higher degree of standardisation and economies of scale. The concept of IHB is not new and the benefits of having an IHB are self-explanatory. However, so far, only a small number of companies (usually industry leaders) have adopted this structure.

A reason for the low adoption could be that companies are hindered by the lack of knowledge to successfully transform their existing treasury operations.

KEY STEPS TOWARDS SUCCESSFUL TRANSFORMATION

Operating model. Ideally, all treasury activities are conducted within the IHB; however, it is not always feasible in practice depending on a company’s geographic reach. A single treasury centre is possible for a company with footprints in free markets alone; this structure might not be a good fit for a company with footprints in regulated countries where cross-border cash concentration and nettings are usually not permitted. A global treasury centre supported by local or regional treasury functions is a typical operating model to address the complexity of varying regulations. This model is also a prevalent approach if a company has to transact across multiple time zones.

Stakeholders. Centralisation of treasury functions requires substantial spending and cross-functional collaboration. Therefore, it is vital to have senior management champion the initiative in order to secure financial support and to obtain active inputs from other internal business partners. Within the treasury function, centralisation means an organisational restructure. Treasury teams may experience changes to their team dynamics with new additions and exits. In such cases, it is critical to have an effective knowledge transfer to minimise interruption. A secondment arrangement from professional services firms is a common solution to address a temporary talent shortfall during the transition period.

Meanwhile, ongoing engagement with internal stakeholders is essential for a successful transformation as treasury activities such as cash forecasting and trade finance rely heavily on efforts from other functions within a company. The treasury team needs to inform their internal business partners of the changes in treasury operations and elaborate on the benefits to each stakeholder. The team should also articulate the follow-up actions that are required, setting KPIs where necessary. By doing so, internal stakeholders are no longer passive information receivers but active contributors in the treasury transformation. A balanced change management approach is necessary to ensure project success and positive outcomes.

Beyond the organisation, engagement with external stakeholders such as banks and technology providers is equally important. As the treasury function evolves to become an IHB, current banking relationships and system capacity should be relooked. Can existing banking relationships serve a new proposed cash management structure? Are legacy systems robust enough to execute treasury activities, support increased volumes and generate reports on an IHB level? The treasury team needs to consider these questions as early as possible to assess if any replacement or upgrading is needed so that additional budget and human resources can be discussed and planned for.

Ultimately, establishing a treasury centre is a full programme management, with several projects and initiatives running in parallel.

Location. Ideal IHB locations are countries/regions with low corporate income tax and wide tax treaty networks, given that there are benefits such as reduced or exempted withholding taxes on interest of cash pooling and intercompany lending. Singapore has been the most preferred location for treasury centres in Asia because of its attractive tax rates, liberal currency control, competitive business environment, efficient infrastructure and high-quality talent pool. Hong Kong, an equally popular location in Asia, is seeing a growing trend of corporates setting up treasury centres since it rolled out its CTC (Corporate Treasury Centres) tax incentive in 2016 to compete Singapore’s FTC (Finance and Treasury Centre) incentive. People may say Singapore is the gateway to Southeast Asia while Hong Kong is for corporates with strong commitment to Chinese market, but this is just a general pattern observed. It would be unfair to say which one is a better choice as the selection of location for treasury centres is determined not only by tax regime but also by other considerations including business strategies, cultural proximity and local banking and government relationships.

Aside from Singapore and Hong Kong, other potential locations in Asia including Shanghai, Manila, Bangkok and Kuala Lumpur for treasury centres are emerging mainly due to their cost-effectiveness and gradual deregulation. However, due to factors such as business environment and availability of talent, these locations currently act, in most cases, as regional treasury centres or shared service centres, not as an IHB.

Technology. The motivation to set up an IHB is to improve effectiveness, efficiency and transparency of treasury activities. Previously, the capabilities of treasury centres were constrained by technological limitations. Treasurers had visions but did not have effective tools to help realise them. Today, technology is advancing at an exponential rate, making once impossible targets now possible, and turning insights into foresights. The move towards treasury centralisation offers a good opportunity to rethink the company’s treasury technology. To plan for this, these key points need to be considered:

  • Are there any gaps between the centralisation vision and current technology capability? For example, in order to achieve centralisation, an automated payment process is expected. Will the existing connectivity be able to support this automation? If status quo is no longer valid in the context of a new treasury structure, what will be the solution? Would it be to improve the legacy system or to deploy a new one?
  • Besides mainstream solutions, are there any other new technology that can be adopted? Fintech has become a buzzword in the treasury space and there is great potential with Robotic Process Automation (RPA) to automate repetitive, labour-intensive, and high-volume processes. Blockchain based solutions for KYC, supply chain, payments and confirmations are also emerging. At present, treasurers are still cautious towards the application of Fintech but this will change as Fintech gains wider adoption.
  • As companies increasingly utilise cutting-edge treasury technology, it is important to integrate between the treasury system and other internal/external platforms such as ERP, accounting and the banking system. Effectiveness and efficiency will be compromised if the information cannot be interfaced cross platforms automatically, the objective being to achieve real time availability of data and full visibility.

The transformation of the treasury function towards the centralised IHB structure is not a one-time endeavour but a continuous effort to do better. The business landscape is constantly evolving, providing an environment ideal for innovation. The treasury function needs to keep adapting in order to create sustained value with its business partners.

Francois-Dominque Doll and Susan Xu are, respectively, Director and Manager, Global Treasury Advisory Services, Deloitte Singapore. The views expressed are their own.

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