Treasury tech trials

The financial crisis has created some important challenges for the treasury operations of Asia's leading corporations. What are the lessons learned from the crisis? And how can corporates improve their treasury technology functions? By Harry Thompson

Michael Fullmer, SunGard

In the early 1990s, the function of corporate treasury was simpler - most companies deployed a decentralised, local-level approach, with the efforts centred largely on cash management, balancing debt and foreign exchange through regional branches. In the ensuing years, the role of corporate treasuries became more centralised and strategic, with many operations seeking to optimise how money was used and invested. The role shifted to one of working capital management including liquid assets and liabilities, rather than the traditional cash-only model, as companies focused more on the need for predictable cash generation. At present, many corporations either operate the equivalent of an internal bank via their treasuries, lending internally and investing, or are moving towards this model.

But the functionality of corporate treasury technology has faced a severe test during the financial crisis of the past 20 months, when the rapidly changing financial environment threw up daily challenges for corporations. And many of the systems put in place to handle this increased workload were shown to be inadequate. Corporations had taken complicated hedging positions that were difficult to evaluate, and did not have real-time access to information such as market value. "It's not an issue of technology, it's an issue of control," says Charles Yip, corporate treasury director of Chinese chip-maker SMIC in Shanghai. "Upgrading the technology is meaningful only if we also upgrade control at the same time."

He adds that previously a typical corporate treasury would assess its mark-to-market positions once a month, or once a week at most. "In a volatile market situation it seems this is not enough. The chief financial officer and chief operating officer want instant access to the information of the company," says Yip. "They need to know the profit and loss of their hedging exposure or even margin calls they might have. A volatile market demands a quick response from management and that requires systems support."

The finance unit at agricultural, industrial and energy supply company Noble Group believes immediate visibility over cash is important. "The crisis also highlighted the increasing need to access immediate counterparty exposure information, including bank exposure," says Ricardo Leiman, Noble Group's Hong Kong-based chief operating officer. "It's not so much that Asian treasuries have different concerns - apart from the fact that none of their Asian banks needed government bail-outs - but perhaps they are lagging their Western counterparts in terms of systems sophistication."

And many treasury operations struggle to keep up with real-time demands. Yip explains that losses made by some airlines on their fuel hedges, for example, contribute an important component of their overall costs. Oil prices in 2008 started the year at around $90 a barrel for West Texas Intermediate but soared to more than $130 a barrel on January 1. "The market price is at 50, they discuss, they make a decision [to hedge] but by then the market has reached 70," says Yip. "It puts them in a very disadvantaged situation. They always lag, and they always hedge in the worst scenario."

Much of the discussion around the weaknesses in treasury technology centres on enterprise resource planning (ERP) software. Few companies have a single version of ERP across the enterprise, with bigger corporations often picking up new ERP software with each acquisition.

The problem comes when ERP software does not communicate well with each other, which can even happen across departments. For example, a business team may be planning to make an overseas investment but the treasury department may not know about the trade in advance and as such they may not prepare a hedge on time. "Unless the treasurer can understand and properly monitor their situation, the problem will not be solved. This is why it can be dangerous for companies to become involved with complex instruments that they are unable to independently price and monitor," says Michael Fullmer, Singapore-based segment director for Asia Pacific at SunGard's AvantGard unit. "The gathering, understanding, verifying and correctness of information are paramount for treasury to be successful."

There are differing opinions about the best course of action, with some parties favouring attempting to move all of their operations to a single ERP platform for its stability and compatibility - although treasurers say this is a process that can take anything from months to years, and requires significant effort. An alternative is to introduce a treasury management system (TMS), which is a single system that can communicate with multiple platforms within an organisation. This can also be integrated with counterparty banks, either by connecting with the banking applications or through Swift, the global financial messaging network, allowing improved information on the markets. This is considered by some end-users to be a less costly and labour-intensive way of supporting treasury.

Companies known to be running a TMS system in the region and globally include Acer, China National Offshore Oil Corporation, Lenovo, LG Electronics, Nissan and Toyota Financial Services. Fullmer, who works for a TMS vendor, says a lack of understanding of the benefits and urgency from the board of directors are the two main reasons companies often do not seek to implement a TMS. "Many companies are comfortable using spreadsheets and don't understand the limitations and potential dangers they can produce. We often see that when a company is acquired, one of the first systems implemented is a TMS. This is because the new parent company understands the importance of protecting cashflow."

Noble's Leiman says TMS systems are relatively easy to implement compared with the expense and work required for an ERP implementation. "Companies with effective accounting, trading and other functional systems could well opt for an easier solution in the form of a specific TMS, subject to interface capability," says Leiman.

However, TMS systems can eventually become unwieldy. "An ERP implementation decision typically arises when a company chooses to update and simplify its systems. It is practicable for a period of time to bolt new systems on to an existing structure to derive new functionality," says Leiman. "However, after a period the variety of interfaces, reconciliations and associated manual process pushes the desire to have one system performing as many functions as possible."

The decision to implement a new ERP system is significant in terms of implementation timing and cost. "Many organisations with older ERP systems do not necessarily have global coverage and hence to improve the information flow the decision may be taken to implement the legacy system in newly established or acquired subsidiaries," says Leiman at Noble. "Another option is taking the outputs of the accounting systems in the newly established or acquired subsidiaries and using these to populate the legacy ERP system, with the underlying data remaining in the accounting systems. Frequently, however, a TMS is installed because it is a quicker and potentially more pragmatic fix."

Fullmer believes the financial crisis has exposed a dichotomy in the priority of corporate treasury management. "While some companies began slashing budgets, many took the opportunity to build up a strong treasury infrastructure to better utilise existing capital and monitor potential risk," says Fullmer, adding that "technology alone is never the answer". He says companies should ask what their risks are and where they are coming from, how information is gathered and verified, what is the company's attitude towards risk and if the treasury has the necessary information to evaluate cash positions and exposures.

Some difficulties currently faced are not just technological but procedural, with each department within a company operating its own standard operating procedures, with the possibility of multiple spreadsheet entries for the same information, and thereby increasing the data entry risk. Some of these problems can be solved, however, with the need for multiple spreadsheet entries also removed by an improvement in technology. "When gathering data via spreadsheets and using spreadsheets to aggregate data from multiple sources, the chances for error increase," says Fullmer. "A key quality control of any TMS is that the data is entered once. It can be verified and adjusted, but then it is available at all levels."

Market participants noted, however, that Asia is not homogenous. Hakan Aldrin, head of corporate banking at retail banking group SEB's Shanghai branch, said that the situation in mainland China was a little different from the rest of Asia. "By not being on the ground in China it is not easy for a treasurer located in Europe or elsewhere to fully understand what can be done and what can not be done in such a heavily regulated market." He noted the difficulties converting renminbi into other currencies, and said that during the financial crisis, many multinationals were left with piles of money sitting onshore, potentially available liquidity that they were unable to move offshore to regions where it was needed. "Treasury in China can't really be part of a global treasury," says Aldrin.

From a technological standpoint, Aldrin said that local Chinese companies do not really adopt ERPs, though multinationals based in China do. He noted that given that labour is cheap, it was not really a problem to have lots of people entering data or filling in documents. Given the strict limits on derivatives and other investments in China, complex positions were also not built up by Chinese firms. In this regard, it was not so necessary for domestic companies to pay attention to their capital position on a daily basis, with the same urgency of corporations globally.

Some market participants say there is a need for the continued centralisation of treasury operations Asia-wide as a progressive step towards an efficient treasury as this allows for a more complete view of the company's cash and risk positions. Centralisation also provides companies with the ability to develop in-house banking processes, negotiate better rates through larger banking relationships and understand the full risk view. Ultimately this can reduce cost through alternative funding and risk hedging.