by Karin Amacher, Treasury Director, Cash Management and Oliver Wolfensberger, Global Head of Treasury Operations, Rio Tinto
Following the acquisition of Alcan in 2007, treasury needed to re-evaluate and integrate its processes and organisation in order to achieve its strategic and operational objectives. At that time, we had five treasury centres, but we recognised the potential to rationalise these centres, and streamline processes more effectively across the group.
Although the new group had a large and in some ways disparate treasury organisation, it was possible to identify and leverage the most efficient processes from within the Alcan and Rio Tinto legacy businesses. We also needed to rationalise our treasury team, whilst ensuring that there was sufficient scope for managing project work as well as daily activities.
Meeting the challenges
While some decisions were straightforward, there were inevitably some more challenging aspects of the treasury re-organisation. In some cases, there were activities undertaken by treasury that we recognised would be better managed by other business functions. In others, there were tasks undertaken elsewhere in the organisation, or distributed across business units, that needed to be centralised in treasury to enable us to perform our role effectively.
Challenge 1: Shared payments responsibility
While payments and collections are an essential function of treasury, we recognised that treasury had too broad a remit in these areas. Not only was treasury responsible for treasury payments, but we also performed a large number of vendor payments. This created a variety of challenges. Firstly, we had insufficient resources to conduct this activity, and manual payment processes increased the risk of error and fraud. Furthermore, it was difficult to verify approval requirements at business unit level. There was also a potential conflict between the activities of treasury and our shared service centres (SSCs) that have primary responsibility for vendor payments. Invoices were not captured in the ERP and were not subject to the SSCs’ approval requirements. Reconciliation was inconsistent, and it was difficult to identify who had processed the payment in the event of follow up enquiries.
Solution 1: Defined payment responsibilities
We went through a process of identifying which payments were derived from a treasury transaction, and therefore best managed by treasury, and which were vendor payments that should be managed by the SSC. The transfer of responsibility required communication with the relevant internal stakeholders to explain why the shift was taking place and to allay any concerns. It was important to take any issues seriously and find ways of addressing them to avoid any interruption of payment services.
Challenge 2: Inefficient and inaccurate collections posting
Treasury was also dealing with a large number of day-to-day collection issues. We spent a considerable time trying to reconcile miscellaneous receipts, and there was a large number of misallocations. It was also difficult to allocate funds to the right business unit, and then to the correct clearing account and cost centres. Delays and errors in collection and allocation processes led to incorrect reminders to customers, with the potential to damage relationships in addition to wasting resources.
Solution 2: Migrating customer collections
We took a similar approach to addressing this issue as we had with payments, and reallocated collection activities to the SSC as far as possible. We identified which receipts related directly to treasury, and which were customer collections. Once again, we needed to ensure that internal parties understood the need for the shift in responsibility to the SSC. We made sure that all queries or concerns were addressed in detail, and managed the migration process to the SSC carefully.[[[PAGE]]]
Challenge 3: Central management of ebanking platforms
A characteristic particularly associated with a company that has evolved through merger and acquisition is the disparate range of electronic banking solutions. With multiple systems in place across the group, it was very time-consuming to manage user profiles across each of the relevant systems. The administrative burden to maintain and keep each system upgraded was enormous, with significant time spent dealing with the security requirements of each system.
Although business units relied on treasury to support their electronic banking systems, including providing training and security advice, these tools were not used by treasury itself, so there was a lack of functional expertise that made it very difficult to fulfill this expectation. Furthermore, as treasury lacked day-to-day involvement in how electronic banking systems were used by business units, it was not clear what access and security rights were required, how user profiles should be defined and how segregation of duties was being enforced.
Solution 3: Transfer electronic banking responsibility
We therefore worked with the respective business unit to determine the best functional group to take over responsibility for managing the electronic banking system according to their expertise and capacity. In the same way as migrating payments and collections, it was essential to explain clearly the rationale behind the shift in responsibility, and gain support from the relevant stakeholders. Furthermore, we wanted to ensure that the service was migrated smoothly and professionally, so we made sure that clean and complete data was handed over, with a transition period to avoid any interruption in service to the business unit users.
Challenge 4: A fragmented approach to treasury technology
Re-organising the treasury function did not simply involve moving responsibilities out of treasury: the aim was to concentrate on activities in which treasury has particular expertise. Previously, each regional treasury centre had implemented the treasury management system (TMS) to a different degree. Some used the system extensively, whereas others captured transactions in spreadsheets instead of the TMS. There were also different ancillary systems in place (such as market data feeds, dealing systems, confirmation matching tools and links to accounting systems) resulting in a large number of disparate interfaces, as well as replication of similar systems in different parts of the group.
No single group had responsibility for the treasury technology infrastructure, which made it difficult to build the necessary skill sets, achieve synergies or manage change effectively. Furthermore, it was not always obvious how technology could be used to optimise day-to-day processes and what degree of automation could be achieved.
Solution 4: Creating a treasury technology centre of excellence
We recognised that group treasury needed to take full responsibility for managing the treasury technology infrastructure, with a view to rationalising systems, increasing consistency and automation of processes, and enhancing data integrity and control. Focusing on using the TMS to its full capabilities by having a single centre of expertise that would reduce the number of peripheral systems, enable a higher quality experience for users, provide better management reporting and reduce cost.
Communication was once again key to the success of this initiative. Each part of the treasury function, and those who provided or received information to/from treasury, needed to understand clearly why the change was being made and the respective benefits.
Although the process had to be managed carefully, the impact was considerable. By developing a centre of excellence, we now have the skills and resources to configure our TMS to meet our evolving needs quickly and precisely, and to build robust interfaces with ancillary systems such as our ERP and SWIFT. We have significantly enhanced the degree of automation and straight-through-processing rates, and implemented highly efficient processes by aligning system and business expertise more closely. We now have standard formats for sending and receiving information to/from our banks through a single gateway.
It is not only treasury’s experience that has been enhanced, but business units also have greater visibility and communication capabilities through the web-based interface to the TMS. At the same time as enhancing the service that treasury delivers, the amount of resource to manage our systems environment has reduced, and control and auditability increased.[[[PAGE]]]
Challenge 5: Lack of timely, accurate cash and risk visibility
Another area of focus for group treasury was achieving full visibility over group cash. Historically, we had to obtain cash information from the corporate consolidation team. This meant that data was only available at the end of each reporting period and/or on an ad-hoc basis, as opposed to having accurate cash flow information available at any time. In some cases, data was only available by segment rather than at an entity level. Consequently, we were often working with out-of-date, inaccurate or incomplete data, and we could not respond to senior management’s demands for cash reporting. These issues affected not only our ability to manage cash effectively, but also to measure and manage counterparty risk; for example, we could not see with which counterparties cash was held, and in which jurisdictions. Furthermore, our ability to mobilise cash quickly across the business or between counterparties was limited.
Solution 5: A framework for retrieving account information
We established a framework for collecting all bank account balance information in treasury on a daily basis using MT940 messages to ensure consistency and automation in the way information is collected, and avoid additional resource requirements at a business unit level. We reviewed all the bank accounts across the group and closed accounts that were redundant. We also revised our treasury policies so that balance reporting by business units became a mandatory requirement. While achieving cash visibility, and therefore greater control over liquidity and risk, was an essential development, it was critical to obtain buy-in from senior management at the outset to be successful. Business units that had been more autonomous in the past needed to understand the rationale for the change, and be convinced that we were not simply building in bureaucracy or additional processing. Once again, it was important to deal with concerns and issues sensitively and fully, to encourage trust and co-operation.
Challenge 6: Maintaining control over bank account inventory
Having reviewed and rationalised the full list of bank accounts, and reconciled this list with our relationship banks, it was important to establish a mechanism to prevent accounts proliferating in the future. While the treasury policy already determined that new bank accounts should not be opened without treasury’s authority, this was difficult to enforce in practice, leading to diverse account controls and segregation of duties, and contracts that differed from the Rio Tinto standards. In addition, by opening bank accounts in the name of smaller, lower-rated entities, we were not necessarily leveraging the banking conditions negotiated at group level.
Solution 6: A new approach to bank mandates and authorities
We worked closely with the company secretariat to define clearly the responsibility for bank mandates, and created a standard bank mandate to be used wherever possible. This mandate gives treasury authority to oversee bank accounts on behalf of the group, while day-to-day activities are still managed by the business units and SSC. We also introduced a process to ensure that the bank account inventory was reconciled with our relationship banks annually to ensure policy compliance.
Transformation in practice
As a result of these changes, which often required hard choices, and even harder discussions to put the resulting plans into effect, treasury has been transformed into a tight, efficient and transparent business function. Rio Tinto’s treasury function now comprises around 70 people globally, including group risk management, insurance and pension investments. Group treasury is based in London, with regional treasury centres covering corporate finance requirements in the Americas and Asia Pacific regions.
Treasury operations are based in London and comprise 16 treasury professionals. The team now has responsibility for cash management, confirmation and settlement, dealing, accounting/control and treasury systems. The team manages over 500 bank accounts in over 20 currencies and over 40 countries, with 400 counterparties. During the first half of 2011 alone, treasury operations made 5,200 external payments, with an average daily payment volume of $1bn and an average value per payment of $23m. Treasury also transacted around $22bn in FX spots and forwards and $1.8bn in FX options during the same period, and issued a $2bn bond in May 2011 and a further $2bn in September 2011.[[[PAGE]]]
Sharing experiences
Throughout this process, we have learnt a variety of lessons that may be useful to other treasurers seeking to refine and rationalise treasury’s responsibilities and modus operandi. It is often necessary to make difficult choices, but once a decision has been made, it is important to act quickly and be resolute. There may be times when a decision is less clear, particularly where in-country or regional differences exist. This requires greater flexibility, with careful analysis of transactions, processes and stakeholder requirements. In these situations in particular, communication is key, specifically to explain why a particular business function is best equipped to undertake a task, and how they will be affected. This requires clarity and honesty, both with internal and external stakeholders, and with the function that is taking on a new responsibility. Throughout this process, it was important to keep in mind the interests of the group and the intended outcomes, as opposed to getting lost in the minutiae of the advantages or disadvantages to a particular user or business unit.
In conclusion, re-organising the treasury function affects many people, both internally and externally, so it is as much a ‘people’ project as a technology, organisation or process-driven initiative. Management support and ongoing, open communication and open mindedness are all essential to success, but with these elements firmly entrenched in the project culture, the benefits can be remarkable.