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September 19, 2011updated 04 Apr 2017 4:15pm

Treasury technology

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.

By Charles Davies

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.


Line graph showing outsourcing accounts payables results in significant cost savings over a five-year periodAs 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.

It 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

Bar chart showing risk management software expensesIn 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.”

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