As external liquidity
grows ever more precious in the wake of the economic meltdown,
corporate treasurers are looking high and low for ways to squeeze
cash flow out of their existing operations. Charles Davis reports
on the growing trend for outsourced treasury management
services.
Go deeper with GlobalData
As external
liquidity grows ever more precious in the wake of the economic
meltdown, corporate treasurers are looking high and low for ways to
squeeze cash flow out of their existing operations.
When cash management is at a
premium, corporations look at every business process as a potential
cost saving. Now payables and receivables are in the crosshairs of
treasurers as a potential cost offload.
As today’s enterprise
corporation becomes more international in scope, and global
footprints expand, the complexity of the treasurers’ task
increases. Everything about the treasury grows more difficult in a
global setting, from maintaining visibility of cash, investments,
overall liquidity and debt, to monitoring and managing
risk.
Throw in the difficulties of
executing transactions in multiple financial markets, each with
different business practices and trading protocols and in many
currencies; add the issue of time zones and languages – and it is
easy to see why outsourcing is a hot topic in treasury
management.
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By GlobalDataIt is getting harder for
in-house treasurers to keep up with the technological change afoot,
even as there is greater pressure than ever before to be able to
identify where cash and other assets reside within a global
organisation literally at a minute’s notice.
The credit crunch has greatly
reduced the margin of error for treasury, and the approach to
managing cash movements has intensified a great deal as a result.
The approach that is gaining the most attention these days involves
consolidating multiple bank connections into a single channel,
thereby simplifying payment processes and removing a lot of time
from the process.
“The benefits to outsourcing
treasury payments are lower transactions costs, often significantly
lower, due to better pricing of higher volumes and substituting
expensive cross-border wire payments with cheap in-country next
wires,” says Jeff Wallace, managing partner at Greenwich Treasury
Advisors LLC. “It also removes the need to maintain a multitude of
bank payment file structures, which change over time. Corporates
only have to maintain one file format.”
Increased
interest
All of this has generated
renewed interest in outsourcing the accounts payable and accounts
receivable processes, as well as a host of related administrative
and accounting functions that once were the province of in-house
departments.
It makes sense: financial
institutions are hungrier for deposits than ever before due to the
new financial reforms. So they are leaning on the treasury
management side of the bank to compensate for their loss leader on
the consumer side. If outsourcing the payments side of the treasury
can yield cost savings, that compensates for some of that lost
retail income.
Any reluctance to outsource
accounts receivable activities is long since gone, as corporations
today are driving the conversation. That is due in large part to
the painful realisation during the financial crisis that they lack
control of the input process, as each of their clients may have
different methods for paying them.
As they learned during the
crisis, these variations in payment method can produce higher
internal costs, as well as lengthy delays and if they are recurring
they compound the pan across the overall base of
collections.
Outsourcing is also of
growing interest as a way to gain better control over processes for
compliance purposes. It allows companies to apply consistency
throughout their operations and have a standard framework in place.
In addition, it provides agility to the operations and helps
companies to match market demand by having all data in one
location.
A lot of the momentum in
treasury outsourcing is towards consolidation of all payment
functions in one location. One of the most efficient ways to handle
this is to go through what is called a “payment factory”. A payment
factory allows organisations to simplify corporate access to banks
by combining a single way in to the treasury, complete with an
array of services, such as message validation, reformatting and
data enrichment, with a single point of connectivity.
“If you know when your
payments are going to be made, which you will do with a payment
factory since you agree on the payment dates for each type of
payment transaction, it is a lot easier to determine your cash
position and then invest the proceeds,” Wallace says.
“You do not have to worry
about a late payment happening at the end of the day when you have
zeroed out your operating account and invested, so the late payment
drives you into an expensive overdraft. The only thing that can
happen in the afternoon is cash coming in that is not invested if
you have already invested your cash by 11am or noon.”
Away from
paper
The payables side of the
treasury is driven largely by migrating paper cheques. This plays
straight into the hands of outsourcing proponents because
outsourcing payables to a trusted counterparty removes security
concerns by masking a supplier’s bank account details from
customers while enabling efficient and low-cost electronic
payments. Another benefit is the full remittance advice data that
can be downloaded in a format specified by each
supplier.
The benefits to corporations
are increasing as well, as many firms have done more and more
outsourcing of other parts of the supply chain to improve the
efficiency of invoice processing and to help their suppliers get
paid more quickly through bank-funded supplier finance solutions.
This also allows corporations to snag those all-important early
payment discounts for themselves when surplus cash
permits.
Corporations are also looking
far deeper into treasury management for outsourcing opportunities,
including such seemingly mundane tasks as the prep work both on
collections and disbursements. The initial preparation of the file
for processing was once seen as too individualised a task for
outsourcing, but now that piece as well has been farmed
out.
Another middle-ground
approach has also emerged. Instead of fully outsourcing all
treasury functions, some corporations are increasingly considering
a partially outsourced relationship, commonly called right-sourcing
or co-sourcing. The company still retains certain functions deemed
central to the treasury, but utilises a bank or other provider for
some functions.
Piece by
piece
In many cases,
corporations are opting for companies willing to provide bits and
pieces of outsourced solutions, rather than end-to-end approaches.
In addition to accounts payable and accounts receivable,
corporations are outsourcing tax management, auditing functions,
billing, cash management and general ledger tasks.
This piecemeal approach is
creating a robust demand for business process outsourcing, which
Gartner recently predicted would grow by 6.3% in 2011 and 5% in
2012.
There are also real
opportunities in outsourcing within the bank payments and lockbox
markets, as evidenced by Wausau Financial Services (Wausau), which
has created a solution that allows client banks to use a network of
‘capture centres’ in multiple locations around the country to
provide remittance processing services as well as remote deposit
capture.
Already under considerable
pressure to cut costs and grow deposits, many banks can no longer
afford to maintain large lockbox operations or invest in expanded
capabilities to penetrate new markets.
Lockbox and deposit capture
outsourcing used to require moving client processing out of the
local geography – a sensitive issue for banks because businesses
are wary of remittance processing that is centred too far away from
end customers. Wausau solved that by building a geographic web of
remittance processing arrangements.
“This breaks down geographic
barriers many banks have, allowing them to serve their local
customers as well as customers across the country,” says Charlie
Gibbons, executive vice-president, strategic business development
at Wausau, in a release.
Wausau maintains a
significant retail lockbox processing network through its ongoing
partnership with First Data’s Remitco, with hub facilities in six
cities, soon to expand to eight. Wausau has also acquired a
wholesale lockbox operation in the Boston market to expand its
services and capabilities.
As its lockbox operations
grow, Wausau is also expanding its network of satellite sites to
extend its deposit capture capabilities. The company now can
provide corporations with access within 150 miles to 80% of the US
population. This eliminates geographic limitations and fills out a
nationwide network of processing centres. The result: today,
approximately one in three remittance payments in the United States
goes through a Wausau system.
On the accounts payable side,
the leader is SourceNet Solutions, a BNY Mellon subsidiary. The
company offers a range of services, including accounts payable
processing, disbursements, purchasing card administration, trade
payables finance, document-to-digital conversion, and e-commerce
solutions such as invoice processing.
SourceNet was ranked top
among accounts payable outsourcing providers for large clients by
Datamonitor for the current Black Book of Outsourcing
Survey. It currently processes more than 15m payable
transactions for approximately 100 clients.
Dan Reiff, senior
vice-president and head of business development at SourceNet, says
that the focus of outsourcing these days is to “take accounts
payable from a cost centre to a revenue centre”. This is a pitch
with real resonance for treasurers.
“The history of payables
outsourcing was all about a cost play, then in the 2000s you still
were about saving money but also compliance and efficiency, Y2K,
Sarbanes-Oxley, and now the ante has become ‘save me money, make me
Sarbanes-Oxley compliant and turn us into a revenue centre through
rebates, discounting and other efficiencies’,” Reiff
says.
The emergence of secure
online transactions and vendor portals has changed the game
entirely at the top end of the market, Reiff says, as the
aggregation of supply chains made possible by the internet has
fuelled a focus on discounting in exchange for more rapid
payments.
“When you start looking at
these big companies, procurement payments can go to a heavily
concentrated set of suppliers, so there is a lot of work to be done
in analysis of payments and increasing the discount the client
receives for its biggest suppliers,” he says.
“Take a look at a client
three or four or five years out and their payments look very
different: it’s advanced from a tools point of view, from a cash
management point of view, from a liquidity point of view. We’re as
much about being change agents as anything else.”
Treasury is much more attuned
to this sort of outsourcing, Reiff says, because “you do not need
anything getting in front of the cash management
function”.
In the near future,
operational treasury functions, primarily those related to the
execution of the cash-conversion cycle, will either be outsourced
to a company’s shared-service centre or to a third party. What
remains in-house will be the strategic, value-added functions, like
the holistic management of a combined risk portfolio and the
optimisation of the internal and external corporate finance
function. Everything else is likely to be outsourced.
But before corporations can
really outsource the treasury’s operational functions and focus on
strategic treasury, many need to start working to prepare their
organisations for the new reality. The tools are all in place;
what’s needed now is institutional commitment. All signs point to
deeper involvement in outsourcing. The savings potential is too
great to ignore.
“Eventually, more and more of our clients come to us
because they reach a point where it just no longer makes sense to
keep all treasury payments functions in-house,” Reiff says. “When
you can show them how they can make money from what is currently a
cost centre, it really makes a lot of sense.”
