Consulting » OUTSOURCING: Cash management in better focus

Like a growing child, outsourcing has been through a number of phases over the past couple of decades. It began full of promise, a way of ridding the body corporate of things it was really no good at doing. IT, in particular, was becoming harder for companies to do well, and the outsourcing companies offered a lifeline to management struggling to cope with this increasing complexity.

But outsourcing’s awkward phase – a series of high-profile disasters in both IT and non-technological outsourcing – gave the option much unwanted (and sometimes unwarranted) bad press through the 1980s and 1990s. EDS, for example, the company which virtually created the market for IT outsourcing in the US, is a constant victim of scathing attacks in Private Eye for its high-profile contracting failures in the public sector.

Increasing sophistication on the part of client companies, their outsourcing suppliers and even the legal profession has helped restore the tarnished image of the concept. Outsourcing has matured, and now, as companies go through yet another round of cost-cutting and concentration on their core competencies, the finance function is open to the demand for cheaper, more expert ways of handling non-core activities.

One area ripe for this treatment is treasury: it’s highly unlikely to be a core competency of the business (or even, possibly, the finance function), it’s complex and it’s formulaic – precisely the sort of activity that can be farmed out to an expert third party. The only doubt financial directors might have is that treasury is also the hub of financial risk management for their business, and that makes outsourcing it a big decision.

Hiring a third party to take over specific corporate treasury tasks has implications beyond the obvious cost savings. Derek Ross, the partner in charge of treasury and capital markets at Deloitte & Touche, splits the treasury function into four broad areas:

management of monetary assets;

management of monetary liabilities;

management of financial risk; and

relationships with banks and markets

Ross says: ‘You have got to look at how much of that you can actually outsource. Some areas have traditionally been outsourced – for instance, the use of fund managers to look after investments.’

The pressure to look beyond the traditional outsourced activities is growing as finance and corporate treasury departments across the globe come under pressure to simultaneously cut headcount, take on new work and improve performance. Outsourcing in theory should provide the answer to many of these pressures. So, for many FDs and their treasury colleagues, it is not a question of whether to outsource, but what and when.

Other forces are also coming into play: globalisation, for example, is pushing companies to consider how their far-flung outposts deal with their treasury needs. ‘One of the biggest demands from US corporates is to establish a process for European cash management,’ says Pat Leavy, executive director of Dublin-based treasury consultancy FTI (see box, above). The normal procedure with US companies is for FTI to report into the corporate treasury, and to save them from dealing in an area where they have no expertise.

‘We would see ourselves as an extension of the resources of client companies,’ Leavy continues. ‘We’re saying we have here a centre of expertise which is yours to use within the ambit of the service being provided. A lot of international companies will set up a regional credit centre outside of their own jurisdiction in any event, so the same argument arises: how satisfied are they that this centre, either on a standalone or outsourced basis, is going to provide the right services, allow the right level of control and keep the right communications going?’

Treasury is a complex task, and evaluating what processes to farm out is difficult. But treasury outsourcing has the same basic fundamentals as any other sort of outsourcing. In deciding whether to outsource, a company has to examine its core goals and the most efficient way of fulfilling them. Performing a management exercise looking at the possibility of outsourcing forces it to distinguish between core and non-core activities.

However, some treasurers are arguing that with Turnbull putting management of risk firmly at the heart of the boardroom agenda, by outsourcing all of the treasury functions you are outsourcing one of the key elements of how you actually manage financial risk across the organisation. But even if overall risk management stays in-house as a core function, outsourcers argue that a third party can best perform the actual transaction processes and treasury reporting.

In its publication, the Outsourcing Finance and Accounting Workbook, Arthur Andersen argues that ‘organisations [should] take a comprehensive view of outsourcing, rather than focus on individual functions’. And outsourcers also argue that the higher up the decision tree the outsourcer is allowed to take over, the more benefits will accrue.

The benefits of outsourcing are seen as:

allowing senior finance and treasury management staff to use and analyse information rather than merely generating it;

achieving economies of scale by reducing operating costs and overheads;

gaining access to world-class expertise and experience;

enabling the company or organisation to focus on its core business.

If these are the benefits of outsourcing, then the main functions that can be assigned to a third party are financial transaction services, electronic banking, cash management and treasury management.

While what can be outsourced may be fairly easy to determine, it is less easy to say to whom treasury can be outsourced. The FD wishing to find a willing volunteer to take over the treasury department probably has four types of organisation he or she could turn to: consultancies, banks, large-scale IT processors and systems providers, and specialist service companies.

The Big Five consultancies are probably well known to FDs for their preferred method of outsourcing, which is taking on whole departments and teams in an ‘end-to-end’ approach. While they are achieving growth, the consultancies are probably facing stiffest opposition from banks in the field of treasury outsourcing. If just the treasury function is up for grabs, rather than the whole accounting and finance operation, banks are the obvious choice, and they are working hard to win the business.

The move by global banks into this area has been driven by a need to protect their existing business from fierce competition, and at the same time develop new revenue streams based on the expertise, systems and capabilities they already have – but have traditionally not exploited – in their back offices. One of the major – if not dominant – players in this field is Citibank. It claims to provide more finance and corporate treasury outsourcing services than any other bank, with 1,300 clients worldwide. It says it provides ‘end-to-end outsourcing capabilities from cheque issuance, trade services, receivables matching, invoicing, ERP integration and e-commerce, to managing regional treasury operations… for global clients’.

Another big banking player is Chase Manhattan. So far, non-US global network banks have provided fewer outsourcing services, but among the leading European players trying to leverage their expertise are ABN AMRO, HSBC and Deutsche Bank.

Despite the apparently inevitable trend towards treasury outsourcing, some highly experienced treasury consultants, such as Deloitte’s Ross, warn against the hype, and question how much is happening in reality. But he does see some changes, and, inevitably, they are centred on the Internet. ‘E-commerce is an obvious way forward,’ Ross says. ‘Certain services can be delivered on a sort-of-outsourced basis; for instance, an electronically-provided risk management programme.’ This, he adds, involves quite a complicated model, which could be provided by an organisation such as a Big Five firm.

The client would input the financial variables over a set period and then the model would work out the hedges that would be required. Added on top of that could be services such as automated dealing and settlements, confirmations settlements and accounting. In other words, treasury outsourcing’s big push is not switching who does what job, but re-engineering how the functions themselves are performed.

While all this in theory should be good news for enhancing shareholder value, there are other issues which may slow down the treasury outsourcing trend. Ensconced in head-office, the treasurer has been more used to building empires rather than seeing them dismantled and carted off elsewhere. As one treasury consultant told Financial Director: ‘This is the classic case of turkeys voting for Christmas.’ In other words, expanded treasury outsourcing is worrying to many corporate treasury departments because of the decline in the size of the in-house corporate treasury team that it would bring about. Whether the treasuries fight back by taking on new responsibilities remains to be seen.

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