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The Value of a TMS Platform in Transforming Treasury

March 28, 2019

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Adopting a treasury system to streamline, standardize and automate treasury processes can add tremendous value to organizations. Yet treasurers are constantly challenged by minimal budgets to support technology transformation projects as treasury has historically been viewed as an administrative function or a cost center. This under-investment in treasury heightens the need to measure the complete impact of a Treasury Management System (TMS) in order to calculate an effective and compelling ROI for the CFO’s consideration.

When evaluating the business benefits – both direct and indirect – of a TMS, treasury teams should consider the following four categories:

1. Cost Reduction and Efficiency Gains

Organizations can see significant efficiency and productivity gains by standardizing and automating key treasury processes in their organizations. Kyriba’s 2018 Value Realization Survey, conducted with global clients, reported productivity gains ranging from 80 percent to 90 percent, similar to numbers from the Association of Corporate Treasurer’s 2018 survey, which identified an average of 80 percent productivity improvement across all respondents. The biggest time savings in general tend to come from automating cash reporting and treasury cash forecasting processes; eliminating the need to login to bank portals; reduced administration for bank account management; and streamlining cash accounting tasks from hours to minutes.

While most treasurers would not argue that productivity is important, it is also a difficult variable to build a business case around simply because the efficiencies typically spread across multiple headcount within the treasury and finance teams and do not drive actual cost reductions. The exception to this is within fast growing organizations where new headcount can be foregone because the TMS was able to effectively take the place of a new hire. In this scenario, the foregone expense of not having to hire a new person or people should be attributed to the treasury system.

2. Hard Financial Benefits

There are a number of areas, including cash optimization, bank fee reduction, foreign exchange exposure management and elimination of dedicated IT support that are ripe for unleashing measurable cost savings when a TMS is first deployed.

Cash optimization is a logical area to first explore as most companies hold excess cash balances to copy with uncertainty stemming from the lack of visibility into current cash balances, and incoming cash inflows and outflows. According to an ACT Survey, 60 percent of organizations that have implemented a treasury system have seen much improved visibility. Kyriba’s value engineering team investigated further to measure exactly how much excess cash is typically held back due to lack of visibility.

What we found was, on average, 30 percent to 55 percent of cash balances were idle, being held for precautionary measures, because current and forecast data could not be confidently relied upon. Achieving real-time and accurate visibility into cash would allow organizations to invest excess cash to earn a higher rate of return than an overnight investment.

Depending on whether cash is invested longer tem, used to pay-down outstanding debt or reinvested in the business, the measurable value can range from an additional 1 percent to 10 percent or more (if a dynamic discounting program were implemented, for example).

Additional metrics uncovered by Kyriba from its value engineering projects included:

  • 75 percent of Kyriba clients have realized 15 percent increase/decrease in interest income/expense from deploying a treasury system
  • 80 percent of Kyriba customers who have deployed its bank fee analysis module have, on average, decreased bank fees by 8.75 percent per year reduction
  • 80 percent of organizations can reduce EPS impact from foreign exchange gains/losses to less than $0.01

This shows the importance of measuring the total impact of improved visibility into cash, bank fees or foreign exchange exposures. The value is not the visibility, but rather in the improved decision making such visibility enables.

3. Compliance, Controls and Fraud Prevention

Adopting a workflow-based treasury management system enables organizations to either improve existing controls, or introduce new ones – enhancing their ability to comply with existing and emerging regulatory compliance requirements, while dramatically reducing fraud and errors. The 2018 AFP Payment Fraud & Control Survey Report showed that 78 percent of organizations have experienced attempted and/or actual payments fraud in 2017, with 92 percent of all companies reporting underlying costs that can be as high as half a percent of revenue.

According to the Arc Advisory Services, 69 percent of the companies that have invested in a TMS have increased controls. Kyriba also found similar success metrics, including faster time to compliance, and a 50 percent-plus IT cost avoidance for adhering to new compliance requirements when deploying a treasury system through the cloud as opposed to having to support on premise software.

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The value [of a treasury management system] is not in the visibility but rather in the improved decision making such visibility enables.”

The most difficult part of measuring controls and compliance is that most of the financial benefit is focused on avoiding a bad outcome – such as payments fraud. In effect, improved controls do reduce the possibility of fraud or a significant financial error occurring. Yet the challenge is determining what that probability of reduction really should be. While not easy, the exercise is worth doing because leaving out the value of improved financial controls takes away a valuable component of the business case.

4. Strategic Benefits

Transforming treasury from a department to an enterprise function is where the real, long-term benefits are achieved. Freeing up staff from administrative burden and allowing them time to analyze data and create actionable insights offers many organizational benefits. Treasury staff who get involved in strategic initiatives (e.g., working capital programs, M&A and divestitures, business model changes, capital structure, growth investment decisions or enterprise currency analytics) can unleash tremendous value for organizations.

The Hackett Group, a leading research firm, has quantified the impact of improving DPO from median level to top quartile performance to be $54.8M per billion in revenue. Kyriba has worked with organizations such as HCSC (Healthcare Service Corporation), whose treasury team has partnered with the business to achieve $3.5B in working capital benefits. Operational effectiveness is another value lever that can drive significant benefits.

The difference in performance between median and leaders for treasury cash forecasting accuracy and efficiency, for example is startling: best-in-class organizations are able to produce more reliable cash forecasts (within +/- 2 variance) 33 percent of the time (vs. 6 percent for the median company), and faster (4 days vs. 14 days), according to the Hackett Group.

Another example of operational effectiveness value can be found in proactive management of foreign exchange exposures where many organizations can reduce FX exposure by 20 percent to 25 percent.

Transforming treasury to an accretive, enterprise-wide function through a digital, best practices-based treasury system is an endeavor worth pursuing. The benefits that can be generated are both substantial and achievable, spread across a wide array of opportunities ranging from tactical (e.g. cost savings and productivity gains), to financial (e.g., cash optimization, bank fee savings, FX gain/loss impact), as well as strategic impacts (e.g. working capital programs and enterprise currency analytics).

When the treasurer operates as a strategic partner to the business, the treasury team offers insight-based decision making and business intelligence that measure far greater than simple metrics such as savings of XX number of hours per week or earning an extra 1 percent return on cash balances. Offers insight-based decision-making and business intelligence that measure far greater than simple metrics such as savings of XX number of hours per week or earning an extra 1 percent return on cash balances.

Yet, these KPIs remain important as starting points for this level of transformation m– as they make the initial business case to acquire (or upgrade) a treasury management system to enable treasury teams to be available for more value-added activities and projects. A treasury system is key to a strategic treasury operation and a great business case ensures that your team will have a great TMS.