When it comes to treasury technology, there is always discussion at the start of a new year about what new trend will drive adoption of treasury management systems. Is there one need that stimulates demand over all else? In the past, there certainly has been – mark-to-market and hedge accounting in 2001, the need for cash visibility in 2009, SEPA1 and EMIR2 last year (or, for those procrastinating… 2014).
However, my argument would be there is actually a confluence of factors – a perfect storm of variables. While each could potentially be managed successfully on their own, in combination the requirements become too big, dragging down productivity and negatively affecting operational treasury results.
These factors include:
- Regulation: This is the easiest target, simply because in most cases there is no opt out for a corporate. Usually you cannot simply cease the affected activity (like many corporates did in the wake of FAS1333). Regulatory compliance is a matter of complying as efficiently and inexpensively as possible. The need for a TMS should be easily quantified, although the comparison vs. using existing staff must be delicately made. There is a cost to using the team’s time; thus it is necessary to measure the value of tasks they are foregoing to concentrate on regulatory activities.
- Shareholder/Stakeholder demands: While this may seem an odd inclusion, the pressure from internal (yet more often external) stakeholders cannot be ignored. Every publicly traded corporate – along with most every private equity owned entity – is heavily scrutinized in efforts to ensure every ounce of profitability is wrung out of the balance sheet…on a quarterly basis. Corporate CFOs and treasurers must leverage cash, among other assets, to maximize returns. Having cash on balance sheet is no longer an acceptable practice. The recent example of Apple having to issue debt so as to return cash to shareholders is a perfect example.
- Risk Management: Six years ago, risk management in corporate treasury meant FX, interest rate, and/or commodity hedging programs. Some corporates had them, some didn’t. For those that did, many were straightforward cash flow hedging scenarios designed to minimize regulatory headache. Since 2008, though, the definition of risk has expanded. Volatility in risk exposures has also increased (in FX and commodities, at least – interest rates have been pleasantly stable). Counterparty risk concerns have eased since 2009, although still remain a necessity to manage. However, operational risk management – especially ensuring data and internal processes have proper controls – has become incredibly important. There have been too many examples of fraud, including well-publicized data hacking (and less publicized social engineering attacks), to think that manual treasury processes and imperfect information visibility are unnecessary.
- Value Chain Performance: What, you ask? Too many treasury professionals have the same question. What the heck is a value chain and, more importantly, what does cash management have to do with it? Simply put, treasury is no longer on an island within the organization. The value chain (the supply chain plus receivables chain) makes a company go, from acquiring goods to generating revenue and…ultimately cash flow. If you’re part of a treasury team, your boss and their boss and their boss all spend time trying to improve performance of the organization. Whether it’s improving working capital, reducing costs, increasing sales, identifying strategic investments, or making acquisitions to improve all of the above – treasury has a key role to play. However, treasury cannot help in a meaningful way until they a) become more efficient and b) offer meaningful insight from comprehensive analysis. If you’ve heard the term big data, then you know that it applies here. The next step in corporate treasury is intelligence, and that intelligence comes from finding patterns within bank, cash flow, and other treasury data. Aite Group coined the term Treasury Intelligence Management Systems (TiMS)4 in 2011 because it saw corporate treasurers requiring more than just automation and visibility from their TMS. The need to generate business value became, and still drives, treasury’s mandate.
It is reasonable to say that in 2014 corporate CFOs and treasurers will ask questions of their current processes, and just how capable they are to meet and exceed their organization’s requirements for compliance, productivity, risk management, visibility, and business intelligence. I expect many technology decisions to be made as a result. It’s going to be a fun year to be in technology!
1. SEPA overview
2. EMIR overview
3. FAS133 overview
4. The New Treasury Management Systems: Treasury Intelligence Management Systems