Shared service centers have been in vogue for more than a decade, gradually drawing more complex corporate functions. Treasury departments have largely withstood the pressure to outsource to lower-cost jurisdictions, but now their turn appears to have arrived.
In an interview with AFP, Carina Ruiz, a partner in Deloitte Advisory who leads the firm’s treasury advisory and M&A services, discussed the factors prompting corporate treasury departments to consider using shared service centers, the challenges, and the best practices.
AFP: Why is corporate treasury just now looking at shared service centers?
Ruiz: For one, treasury is a highly specialized function and hasn’t lent itself to rote processing. When talking about liquidity levels in different jurisdictions, for example, it’s not a pure science and much of it is subjective. Other highly specialized treasury areas include risk management, capital markets, pension management and insurance—those pieces typically haven’t been outsourced.
Secondly, treasury executives, including those heading risk management, cash management and capital markets, will usually collocate with the CFO in headquarters.
And the third piece is that technology and automation facilitate outsourcing, and treasury has lagged on that front because of historical underinvestment. But it’s catching up.
AFP: What has changed?
Ruiz: First, you’re seeing that technology has made treasury functions much more standardized and automated, and treasuries have delineated the purely transactional and rote activities from the strategic ones. A decade ago it was unheard of for companies with less than $2 billion in revenues to use treasury management systems, but now it’s common. That’s lent itself to automation, especially for cash management and also foreign-exchange (FX) exposure reporting and analytics. Despite market volatility, the strategy around FX is fairly similar across different corporates, because corporate boards typically have similar levels of risk tolerance, and hedging programs are similar.
Along with standardization and automation comes the question: Who do we outsource this to?
AFP: Are they using captive shared service centers or third parties?
Ruiz: Right now it’s captives. It comes in stages: Companies typically outsource to captives first; it’s more expensive but you control it and you can test it. When the company is comfortable with how it works, it’s more open to outsourcing to a third party.
AFP: Where are the captives located?
Ruiz: There are locations in the world now that lend themselves to these kinds of specialized knowledge. In Europe, the legal entity may be in the higher-cost Netherlands, but where people with that knowledge actually sit is typically in Ireland and Poland. In Asia, Singapore has highly trained people, but for lower cost jurisdictions companies would look to Malaysia and the Philippines. In the Americas, there are lower cost jurisdictions among the states themselves, and companies also look to locations such as Costa Rica, Puerto Rico, and Mexico’s Guadalajara.
There are places in the world now where 10 years ago you would never think they could do treasury functions, but now companies can see they have labor pools capable of doing that work, and they’re more open to the notion.
Today, there are surges of treasury work required during M&A transactions that a company may not need when M&A activity dies down. So that begs the question: Do you hire up in treasury, use consultants, or go to shared services?
AFP: How do treasury departments determine where to put shared services?
Ruiz: Treasury departments have tended to regionalize themselves in advance of most other corporate functions, especially for the cash and liquidity functions. There may be a team for the Americas, Asia and Europe, and usually those locations are determined by where the corporate already has a legal entity. But that’s where they fall into the trap of setting up in higher cost areas, such as the Netherlands, New York, London and Singapore.
Certain companies have been more assertive in terms of putting treasury staff in low cost jurisdictions alongside the higher cost ones. So if you have an office in the Netherlands, you may try to move some treasury activities to Poland, if you already have an office there.
AFP: What are important factors to consider in that process?
Ruiz: It’s important to have a company’s lower-cost treasury resources coexist with existing shared services, mature ones, so those employees have upward mobility. Give them opportunities within the shared service center, to improve retention.
I always recommend to clients to be sure the shared service center is mature, so treasury is not the first one out of the gate, because it’s a specialized department. So once it starts moving activities there, treasury knows exactly how to engage with the shared service center and the processes are highly defined. There’s no ambiguity in terms of what shared service employees are responsible for and can make decisions about.