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Latest Downsizing Victim? Corporate Treasuries

More and more companies are outsourcing more and more of their treasury departments. Where will it end?
Justin Wood, CFO Europe Magazine
February 1, 2002

Attend any corporate treasury conference these days and the chances are that the subject of outsourcing will feature on the agenda. Indeed, the concept of a company handing over bits of its treasury department to be run by a specialist third party is seen by many as one of the biggest trends of the moment.

Karen Kombrink, however, disagrees. "Outsourcing treasury isn't a trend of the new millennium, nor even of the 1990s," states the deputy director of Bank Mendes Gans in the Netherlands. "It's been around for at least 40 years."

And Kombrink has the evidence to prove it — back in 1967, Bank Mendes Gans set up its first treasury outsourcing deal with Dow Chemical, agreeing to run the US firm's inter-company netting system in Europe and its regional cash pool.

Nonetheless, while treasury outsourcing may not be new, Kombrink does concede that it is evolving rapidly. For one, more and more treasurers are starting to do it. For another, they are going much further, and outsourcing more of their departments than ever before.

From Forex to Forecasting
Consider the case of MacGregor, the SKr3.3 billion (E340m) maker of cranes, decks and cargo systems for the shipping industry. In June 2000, the Stockholm-based company handed over the management of almost all of its treasury to a company in Dublin called FTI.

Under the agreement, FTI now handles all of MacGregor's internal and external loans and deposits, and all of its foreign exchange deals — which together amount to around 5,000 transactions every year. FTI also manages all of MacGregor's netting, liquidity reporting and forecasting, and its treasury accounting. The only parts of the treasury that MacGregor has retained are the setting of treasury policy, the management of bank relationships and the handling of financial guarantees, such as pre-payment and delivery-on-time guarantees, which are an important part of its business.

"Our aim was to keep the strategic long and medium-term aspects of treasury in-house but to outsource the daily operations and transaction processing," explains Mats Hansson, MacGregor's CFO.

A deal such as this — which takes in each of MacGregor's business units, from Sydney to San Diego — goes well beyond traditional treasury outsourcing arrangements. Typically, those have tended to focus on just one or two functions, such as netting or balance reporting. And, in general, companies have only outsourced on a regional basis, for example, US firms outsourcing their treasury in Europe. But, as the case of MacGregor shows, that's all changing as businesses look to outsource bigger and bigger chunks of their treasuries, and to do so on a global scale.

Such developments come as no surprise to Anne Collard, head of treasury consulting in Europe for JP Morgan. As she sees it, corporate treasury functions can be outsourced just as easily as IT, payroll or any other activities that aren't the core business of a company. "Much of what treasury departments do is becoming a commodity. It can easily be standardised and managed by a third party," she notes.

The benefits are the same as for any type of outsourcing. Because the third party is a specialist, it can provide its services more cheaply, reliably and efficiently than the company could do itself. Outsourcing also lets firms expand quickly into new markets without worrying about their treasury infrastructure. Nor do companies need to keep upgrading their treasury technology — such headaches are transferred to the outsourcing partner.

Against this backdrop, says Collard, "treasurers are realising that processing cash and foreign exchange transactions is taking up precious time when they could be doing more valuable work," such as improving working capital performance.

At MacGregor, the decision to outsource came about after a review of its treasury. With only three-and-a-half treasury staff, Hansson was aware that MacGregor faced issues of security and control. "The Chinese walls between front, middle and back office were really just small fences that could be stepped over," he says. And when a member of staff was ill or on holiday, the Chinese walls disappeared altogether. What's more, being only a medium-sized firm, it was both difficult and expensive to keep the treasury operating as a leading-edge department.

So it was that Hansson and Per Malm, MacGregor's treasurer, looked at how they could improve matters. They arrived at three choices: hire more staff, outsource parts of the treasury or outsource almost all of it. Deciding to take the third option wasn't easy, notes Hansson.

"Treasury is important. When you outsource it, you become dependent on a third party, and you feel like your backbone has weakened," he admits, "and our board was concerned about security."

Taking Control
Eighteen months later, though, and Hansson has no regrets. He hasn't saved the company any money — the outsourcing deal costs the same as running an in-house treasury — but he has achieved "better value-for-money".

"The reliability, quality and control of MacGregor's treasury is much better now than it used to be," enthuses Hansson. For instance, the number of problems that arise when doing the treasury accounting and reconciliation has fallen sharply. And Malm, who is now the sole treasury professional at MacGregor, has a better picture of the firm. Each week, FTI feeds him a full set of reports, showing all the company's loans and deposits, its main transactions, and all of MacGregor's risk exposures plotted against pre-agreed limits.


Another company that has decided to outsource its treasury is Flowserve, the $1.5 billion (E1.7 billion) maker of pumps, valves and seals. Although the US company hasn't gone as far as MacGregor, it is moving in the same direction.

Flowserve has focused on Europe, outsourcing to ABN Amro in Dublin the management of its regional foreign exchange, its inter-company investing and lending and its cash pooling. On a global basis, the firm has outsourced its netting, again to ABN Amro, and is working on outsourcing its inter-company investing and lending in Asia.

For Renée Hornbaker, CFO of Flowserve, the decision to outsource came as a result of the company's rapid growth. Flowserve had bought a lot of businesses outside the US, and planned to continue its aggressive M&A expansion. By outsourcing much of her international treasury, Hornbaker was able to install robust systems that could grow rapidly. As she puts it, "Scalability was important. Since we decided to outsource, Flowserve has doubled in size with very little incremental investment in treasury." In fact, adds Hornbaker, because ABN Amro regularly updates its systems, Flowserve stays at the forefront of treasury technology. "We have a whole suite of web-enabled tools that we haven't had to develop in-house," she says.

Still, in spite of notable successes such as those of Flowserve and MacGregor, the treasury outsourcing marketplace remains relatively undeveloped, and the next few years are likely to see a lot of change. In particular, the types of outsourcing provider, and the services they offer, are set to change dramatically.

Currently, the most established players are the big international cash management banks such as JP Morgan, Citibank, ABN Amro and Bank of America. Besides them, however, are a variety of independent operators such as FTI. Another one is being set up by JM Huber, a US oil, chemicals and timber group. In 2001, JM Huber bought Assistanttreasurer.com in the US and Vtreasurer in Dublin and is combining them with its own in-house treasury to create a global outsourcing service aimed at mid-cap companies.

Opinions vary as to whether banks or independents are better. At MacGregor, Hansson and Malm are adamant that they will only use a partner that is independent of the banks. While at Flowserve, Hornbaker says she is happy with ABN Amro running her treasury—strict guidelines ensure that, for example, all foreign exchange deals are subject to a full competitive bid among her relationship banks. Another potential force in the market are the treasury software vendors such as Trema, Alterna and XRT. Many of these companies have developed ASP versions of their workstations, which let companies outsource just the technology side of their treasury departments.

Toothless ASP?
Sungard, for one, has an ASP model of its software called eTreasury.com. Ken Dummitt, president of Sungard Treasury Systems, says sales of eTreasury.com are "meeting expectations," although many in the industry believe ASP outsourcing is destined to fail because it doesn't deliver the benefits of full outsourcing.

Looking to the future, some foresee consolidation, with banks, technology providers and other partners teaming up to form treasury outsourcing powerhouses. That's certainly the vision of David Knight, a senior partner at PricewaterhouseCoopers. He predicts the emergence, in two or three years' time, of "treasury solutions providers" which will act as a full in-house bank and payment factory to their clients, providing a broad range of trade and financing services. For example, they'll offer receivables securitisation, giving treasurers a real-time view of their receivables over the internet so that they can be sold on to banks.

Whatever the future, treasury outsourcing looks set to grow. As Kombrink at Bank Mendes Gans notes: "Treasury departments aren't getting any bigger."




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