When Glaxo Wellcome and SmithKline Beecham, two U.K.-based pharmaceutical giants, joined forces in December 2000 to become GlaxoSmithKline (GSK), it was Roger Emerson’s job to stitch the two treasuries together. But that was easier said than done, says the head of tax and treasury at the newly merged £18 billion ($27 billion) company.

The greatest challenge, notes Emerson, was trying to set up common systems. Another important issue, however, was deciding how to structure treasury so that it could provide the most efficient service to all 41 countries in which the firm operates. Before the merger, both companies had centralized treasury activities, though they differed in degree. “SmithKline was more advanced,” says Emerson.

His strategy: “to continue and increase the drive to centralize on a global basis.” Why? Centralization, he says, reduces costs and risks.

Although GSK is run out of the United States, its headquarters are in London, and it is there that Emerson put the new global treasury. All internal and external funding and all foreign-exchange (forex) dealing is run with a staff of about 15, including the regional treasury managers for Europe, Asia, and the international region, which covers the Middle East, Africa, and Australia. “We try to keep the business as simple as possible,” says Emerson. “We don’t hedge the foreign-exchange risk arising from trade flows. And we stick [mostly] to U.S. commercial paper for funding.”

In the United States, a three-person team handles country-specific treasury issues from Philadelphia. Cash management is taken care of by three banks, with a fourth running an overlay concentration account that is managed from London. In Europe, a similar liquidity structure is being set up, using between 8 and 10 local providers, with an overlay bank to concentrate funds.

Asia is more complicated. Although its forex and short-term funding needs are managed in London, local regulations and forex restrictions make it harder to centralize treasury activity there. As a result, cash management is done on a country-by-country basis, with a single bank and local cash pools where possible. In the future, Emerson plans to centralize some of this cash management in Singapore. “But we do not intend to establish a full regional treasury center [RTC] there,” he says.

Like Emerson, treasurers face a thicket of foreign currencies, local banking practices, and complex regulatory and tax regimes when trying to centralize treasury. Managing that complexity globally can be a headache. In the past, many companies with international subsidiaries would simply have kept treasury funds and expertise in-country. Today, however, thanks to such technology as enterprise resource planning systems, better banking software, and the easing of regulations worldwide, the centralization trend is being taken to a higher level–sometimes close to real-time global liquidity.

The optimal composition, however, varies. “There are as many ways to do it as there are companies,” says Susan E. Skerritt, a partner at Treasury Strategies Inc. Consequently, says Tony deCaux, CEO of The Bank Relationship Consultancy Ltd., “the centralization decision is not whether to or not, but rather how much, where, and how, given different local practices.”

Centripetal Tendencies

The idea of a global treasury center (GTC) has long been embraced by U.S. multinationals, with companies such as Dow Chemical, Merck, and Microsoft widely admired for their practices. For businesses with operations in Europe, the trend toward centralizing treasury operations has been accelerated by the introduction of the euro as well as by the availability of tax-efficient treasury vehicles, such as Belgian coordination centers. A survey of 980 companies with treasury activities in Europe, released by The Bank Relationship Consultancy, found that 37 percent of respondents had already set up a regional center in Europe, with 60 percent of North American companies having done so.

The attraction, says deCaux, is multifold: economies of scale, concentration of expertise, and increased control. As a result, the usual practice for multinationals is to set up one central hub, and then to have a string of RTCs that report to that hub. Normally, that means having as few centers as possible, which can mean just one each in the United States, Europe, and Asia.

Which structure makes the most sense, however, “depends on the type of business, the size of the business, the locations you are in, and your overall tax objectives,” says Susan Griffiths, principal at Global Cash Management Ltd. DeCaux, for example, believes a company with “more than half a billion dollars in revenue in a region” should set up a treasury center there. And Skerritt says an additional consideration is “the objective you are after, whether it be risk management, control of your banking relationships, or global liquidity.”

One company that is focused on the latter is Sony. The Japanese electronics giant is in the process of consolidating its $25 billion annual forex operation as well as its cash-management and risk-management functions in London. And it expects to save between ¥ 6 billion and ¥ 7 billion in the process.

But savings isn’t its only motivation. Sony also wants a structure that allows surplus cash from each regional center to be concentrated in a master account that “follows the sun”–meaning funds can be used continuously within time zones. “Cost savings is just one reason why we’ve established a global treasury center,” says Hiro Kurihara, managing director of Sony’s Global Treasury Services (GTS) unit. “The more important thing is we can have full control over the global liquidity of the group so that we can utilize the funds [to reduce] the size of the balance sheet.”

The way it works is that each Sony center in Tokyo, London, and New York has individual local currency accounts. All are then linked to a pool account GTS has established in each center. At this level, Kurihara monitors the pooling from one RTC account to another. The amount pooled between RTCs depends on their cash-flow requirements and forecasts. And because pooling is done at the GTS layer, no intercompany lending actually occurs.

That, anyway, is how it should look next spring, once integration is complete. But Kurihara is already happy with the Japanese and European pools. Until two years ago, “we didn’t know what was the financial situation in other regions,” he says. “We could only try to utilize other regions’ money at the end of the fiscal year, but now, on a daily basis, we can do this kind of control.”

Outsourcing Option

Of course, not every company has the cross-border liquidity needs of a Sony or the wherewithal to take centralization to such a limit. For some, such as Flowserve, a $2 billion Irving, Texas-based maker of pumps, valves, and seals, outsourcing treasury for an entire region makes the most sense.

For Flowserve, an acquisition was the catalyst for reorganization. In order to fund its $775 million purchase of Ingersoll Dresser Pumps in August 2000, Flowserve had to issue substantial debt. And given the highly leveraged position that followed, efficient cash management became more important than ever; hence the need to centralize. As a result, Flowserve is reducing its bank relationships and awarding its cash-management business in each region to just one or two of its credit banks.

While this regional centralization is under way in Asia and Latin America, Europe was reorganized before the acquisition, when Flowserve’s treasury operations were outsourced to ABN Amro in Dublin. For Jeff Eastmead, manager of cash management, outsourcing delivers operational control and cost efficiency. “Previously, we had a Belgian coordination center that was expensive to run. The manager in charge had no systems support, and was overwhelmed by the manual workload,” explains Eastmead. But when the euro arrived, he says, outsourcing made more sense. Now he has a zero-balancing structure for euros that concentrates funds in Amsterdam, and the administration of the resulting intercompany loans is handled from Dublin.

“The zero-balancing structure has allowed Flowserve to reduce borrowing costs for the whole company,” says Eastmead. Also centralized in Dublin and outsourced are the management of intercompany netting for 87 Flowserve entities, and most of its European divisions’ forex processing. Eastmead monitors it all from his Dallas office via ABN’s electronic banking software.

Many Barriers

However centralization is achieved, says deCaux, “the biggest barrier to creating an optimal structure is internal corporate politics.” Typically, he and other experts point out, taking control away from longtime in-country treasurers or controllers is a hard sell. And sometimes it comes with a price. Griffiths, for example, cites one firm that centralized its global operations in Germany, only to find its days sales outstanding in Italy go from 90 days to over 300 because of the lack of a local liaison.

Still, given the instability in the world economy, further centralization makes sense, say experts. “If you have global operations,” says Griffiths, “the most important thing is not systems or banks, but knowing what you have got, where you’ve got it, and how you are going to use it.” Whether firms will enhance that knowledge is not guaranteed. Treasurers’ focus on increasing shareholder value may “sharpen during a recession,” says Craig Weeks, managing director, J.P. Morgan Chase & Co. The question is, “Will they be given the resources necessary to be effective?”

Anne Querée is a writer for CFO Europe. Abe De Ramos is a senior writer at CFO Asia.