Of course, the degree to which companies actually understand their bankers' returns still varies widely. "Some clients are very analytical, some are more feel-oriented," says Calfo. Most probably fall into the latter category, relying on conversations with their bankers and a basic understanding of how business is allocated. Indeed, 31 percent of respondents to a survey by CFO (see "Last Banks Standing") said they rely on their banker to tell them how the bank values their relationship.
"We don't have a model that tells us how profitable each business is [for our bankers]," says Jack Wagner, assistant treasurer at Cabot Corp. "But each bank has a different appetite for each type of business, so we do try to accommodate them."
Sealed Air Corp. takes a similar approach. "We do not maintain a score card that shows how revenues and perceived profitability are getting allocated among the bank group," says CFO David Kelsey. "We do make an effort to treat these institutions fairly and have them feel that when a transaction comes up, they will have a seat at the table because of their participation in our global credit facility."
A small but growing number of companies, however, are seeking ways to quantify just how effectively they allocate that business. "We do a lot of measuring of fees," notes FM Global's Burchill, echoing 11 percent of survey respondents who said they calculate the revenue that each bank earns on all transactions with the company.
Almost as many — 10 percent — claim they estimate the margin that banks earn on transactions with the company. "We do have clients asking us about our model and how it works," says Wells Fargo's Hardy, who has made multiple presentations at treasury conferences over the past two years to explain the basic RAROC model. "And we have some clients who are trying to put together their own model."
"We have seen a handful of companies that have taken a highly rigorous approach to this kind of quantitative analysis," says Susan Skerritt, a partner at Treasury Strategies, a consulting firm specializing in treasury and financial management. By that she means actually trying to reverse-engineer the RAROC model used by each bank in the group. But the models vary, and several assumptions and variables are available only from one source: the bank itself.
"The companies that are doing this in the most rigorous fashion are actually requesting that their banks explain to them how that individual bank's model is calculated," says Skerritt. According to CFO's survey, 8 percent of respondents said they ask their bankers for that information. And while companies don't always succeed in getting it, in many cases they do. "The banks understand it is in their interest for clients to understand their profitability," she says.
Indeed, while just a few clients have asked for a look at Citigroup's model, says Calfo, "we get as detailed as folks want to get. The greater the transparency, the better our relationship." Former Bank of America CFO Marc Oken told CFO earlier this year that the bank holds "real detailed" conversations with companies that aren't meeting its hurdle rates. "We will either give a customer our model or tell them why their model is wrong," he said.
Of course, with less than 10 percent of companies actually asking for the models, banks are not under much pressure to be completely forthcoming. Wells Fargo's Hardy, a strong proponent of improved corporate understanding of RAROC models, notes candidly that banks are unlikely to give away the store. For example, he says, banks are highly unlikely to tell corporate customers how their models assign costs to noncredit products.
For most companies that estimate the profitability of their banking business, however, it's enough to have a single, simpler return model that estimates a common margin for services from members of the bank group (see "A Simple Return," at the end of this article). "The highly rigorous approach where the treasurer is doing it on an individual bank basis is exhaustive but may be more than your organization needs," says Skerritt. "But it's absolutely a best practice to have at least one common standard benchmark."
Doing the Math
Ken Schutte, treasurer at brokerage firm Edward Jones, uses just such a benchmark to manage his company's 11 banks. A commercial banker for 26 years before joining Edward Jones in 2000, Schutte explains, "I was used to the concept of banks trying to evaluate the profitability of client relationships. So I just reversed it."
Not every service can be measured. For example, Edward Jones offers a company-branded credit card to its clients through MBNA Corp. "I frankly don't know how to assess the profitability of that," he admits. But with a few such exceptions, Schutte attempts to capture all of the business done with each bank — right down to the fees Edward Jones pays for the three ATM machines on its campus.
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