Published: January 01, 2000
Half a dozen years after the financial crisis, the economy in North America is exhibiting signs of solid growth again, and business leaders have regained their optimism. With multinational corporations in the region once again focusing on expansion, many in treasury are embarking on transformational initiatives to improve cash visibility, efficiency and control — even as they address regulatory challenges and manage an array of risks.
Results from Bank of America Merrill Lynch’s 2014 CFO Outlook provide evidence of an improving economy. Nearly all of the CFOs responding to our annual survey (94%) say they plan to pursue new growth strategies this year, due to their greater confidence in the economy and their companies’ performance.
CFOs’ annual economic ratings, which reflect economic confidence, saw a significant bump for the second straight year. Most respondents are forecasting increased sales in 2014 and plan to either expand or maintain the size of their workforces.
In addition, more than three-quarters (77%) report that market expansion is once again a key growth strategy.
At Bank of America Merrill Lynch, the fact that our clients in North America are so optimistic and eyeing growth has us pleased as well, because we are well positioned to assist. During the past five to seven years, we made the strategic decision to continue investing in our transaction services business — in anticipation of this economic turnaround — and that has given our organisation added strength today to support our clients’ growth initiatives. In particular, now that the region is seeing positive growth, we are poised to help clients transform the way they execute payables and receivables, as they seek to migrate from paper-based to more electronic, information-rich solutions.
A good example of this is our investment in the accounts payable segment of the commercial card space. As Kevin Phalen explains in his article, the strengthening economy is creating a greater need for companies to move to more efficient electronic payables solutions. With more purchasing and payment activity, the value of efficient payment practices multiplies — and cards are an effective global payment tool. Unlike some banks that have shied away from card services or attempted to meet client needs through outsource relationships, Bank of America Merrill Lynch is heavily invested in owning the global cards/electronic payables space.
A major trend in North America in the past few years is a move by clients to greater centralisation in the treasury platform. I call this the pursuit of ‘treasury platform operating leverage’.
Drivers appear to be two-fold and related. The first is the need clients have to manage more with the same or less. The last 18 months have seen a pick-up in merger and acquisition activity. The resulting synergy commitments have driven cost take-outs in all elements of clients’ businesses, including treasury departments. There is significant pressure to automate core treasury functions such as transaction execution, cash positioning and investment management in order to facilitate greater focus on capital structure and acquisition funding. This will also be critical as the improving economy results in more volume flow and rising interest rates.
The second driver is a desire by clients to increase control of transactions and transparency to liquidity. Memories of the financial crisis remain fresh and regulatory reporting requirements have increased. Senior executives want to know who their counterparties are and how to nimbly shift funds if necessary.
Treasury workstations and liquidity pooling arrangements can enable such control but are more feasible when managed in the scale that results from centralisation. At the same time, software to manage this centralised treasury has become more sophisticated, yet more affordable as software vendors have migrated to the cloud and banks have improved their portal offerings.
Centralised payment factories have been creating significant savings for companies, and now the centralisation trend is beginning to migrate to accounts receivable processing. Rodney Gardner and Liz Minick report in their article that as companies achieve higher rates of straight-through processing of receivables, and as centralised treasury factories produce greater savings, more companies will look to centralise the processing of receivables, in addition to payables, at these factories. In fact, new regulations allowing ‘receivables on behalf of’ (ROBO) structures are eliminating obstacles to this strategy.
As corporate financial managers contemplate transformation initiatives in the midst of this growing economy, much of their success will depend on their ability to manage technology.
At the centre of treasury technology these days for many companies is the treasury management system. If you poll 10 treasurers, it’s a good bet that several will tell you they are in the process of shopping for a new one. The easy part of that exercise is recognising that your current technology isn’t doing the job. The hard part is knowing how to properly evaluate your company’s needs to make certain you select the best system to meet those needs. To help with that endeavour, Chuck Colliton and Drew Strzepek describe a systematic approach that companies can use to assess their needs before they even begin shopping for a system.
Also in this publication on the subject of managing technology, Dave Kretz explains that treasury automation projects are most successful when companies examine established treasury and payment practices and use technology to improve them. To illustrate this, he describes how companies can add value by building foreign currency payment capability into an enterprise resource planning (ERP) or treasury management system.[[[PAGE]]]
With any treasury transformation project, such as implementing a new treasury management system or transitioning functions to a shared service centre, there’s an element of change management that goes beyond managing process and technology. Projects like these also require you to manage the people impacted by transformation. And that can be the toughest part.
In their piece, Don Addison and Mark Kirsch provide a six-step framework for successfully managing change in treasury that emphasises managing the people component. They offer advice on, among other things, how to build a broad-based change coalition that includes all departments impacted by the proposed change.
While the recent performance of the economy in North America signals that we have finally turned a corner following the 2008 financial crisis, there are some headwinds to address on the regulatory front.
One to monitor this year is Basel III, specifically the plan that’s been put forward by US financial regulatory bodies — but is still to be finalised — for implementing the liquidity coverage ratio (LCR) in the US. Basel III will have a direct impact on the banks that corporate treasurers do business with, affecting the value of certain types of corporate deposits as well as the capital that banks are required to hold against their credit and liquidity facilities.
As explained in the article by Rohan Ryan and Stephanie Wolf, the proposed LCR in the US will have more stringent requirements than the global standard. It requires that different levels of high-quality liquid assets be held against assumed outflows in a stress event. More specifically, the US approach to LCR lays out specific criteria in order for deposits to be recognised as the more desirable ‘operational’ designation to banks under Basel III.
The application of Basel III in the US will, among other things, impact corporate liquidity management, as banks could change their product mix to achieve cost-effective funding in light of these new requirements.
Basel III developments related to money market mutual fund reform, along with record levels of corporate cash and the expected continuation of low interest rates, all combine to provide a strong rationale for companies to reassess their current investment policies. As Tom Mullen notes, the pool of high-quality short-term investments is diminishing, and you don’t want to find yourself in a situation where there is an investment vehicle that meets your safety parameters and offers somewhat better returns, but is not permitted by an outdated investment policy.
Finally, as we move into a period of greater economic promise, and many treasurers find themselves focusing on expansion and transformational projects, they need to remain vigilant in fulfilling an increasingly important role: protector of their company’s working capital.
These days, treasurers at our client companies are tasked with managing an increasingly wide array of risks. Even as they work with us on projects such as migrating from paper to electronic treasury solutions — and achieving greater operating leverage — they must stay focused on protecting the company’s working capital against market illiquidities, counterparty risk, disruption in certain countries or regions, and fraud, among other business risks.
In this publication a year ago, I wrote that treasurers were emerging from the financial crisis with stronger teams and greater influence. At the time I suggested they were beginning to turn a corner and were no longer just focusing on survival.
Clearly, based on the economic optimism we’ve seen expressed recently, treasurers have turned that corner. Their focus now is on growth and transformation. It’s a positive shift, but one that asks even more of them.
This year’s publication is designed to help. We cover topics that are fundamental to transformation, such as change management and doing the necessary homework to make the right technology investments. We also report on some ongoing challenges that have taken on a new urgency with improvements in the economy, including enhancing buyer-seller relationships through collaboration on card payments, improving receivables management and understanding the liquidity management ramifications of new regulations. We hope you find it interesting reading.
At Bank of America Merrill Lynch, we also look forward to partnering with you in the coming months and years, as all of us in North America look to capitalise on the economic turnaround.
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