Editor’s Choice: TMI Corporate Awards for Innovation & Excellence 2013

by Helen Sanders, Editor

This is my very favourite time of year, not only because of the excess of Christmas spirit which fills our house, but I also have the privilege of announcing the TMI Corporate Awards for 2013. With so much of the media dominated by headlines that are tragic (or trivial) it is so rewarding to be able to recognise achievement. We have an unprecedented eleven awards for 2013, reflecting the high quality of corporate articles that we have been privileged to feature in TMI this year, and the diverse nature of projects and initiatives in which treasurers have been engaged.

First of all, I would personally like to acknowledge and offer my warmest thanks to François Masquelier. Head of Corporate Finance and Treasury, RTL Group, and Honorary Chairman, EACT, to whom we would like to make a Special Award once again. TMI would be a poorer place to go without François’ regular insights, advice and knowledge that he shares. You can read all François’ articles by clicking here.

The remaining ten award-winning articles are summarised below (in no particular order), all of which are can be accessed by clicking the corresponding thumbnail. We would like to offer our thanks and congratulations to all our award winners on their achievement, and we look forward to sharing further insights and experiences from them in future editions.

 

Ever since hedge accounting regulations in both Europe (IAS 39) and the United States (FAS 133) were introduced more than a decade ago, treasurers have had to balance the need to manage risk effectively whilst complying with hedge accounting requirements. This has often proved a challenge, and many companies adjusted, and typically simplified, their hedging approach for accounting reasons. This was the experience of DONG Energy as Morton Buchgreitz, SVP and Group Treasurer explained,

“Over time, however, we have adopted a more integrated approach to risk management, and we now evaluate our risks on a portfolio basis. As a result, we started to hedge our positions on a net basis as opposed to hedging individual exposures, which made it more difficult to apply hedge accounting treatment. In addition, some markets are less liquid than others, which affected efficiency testing. We realised that we were making our hedging decisions in order to achieve hedge accounting treatment, as opposed to managing our risk in the best way possible, which could be detrimental to be business. We therefore needed to re-examine our hedging and hedge accounting strategy to realign it with our business needs.”

DONG Energy therefore took the bold decision to change its financial reporting methodology to increase transparency and better reflect actual business performance,

“We stopped applying hedge accounting treatment, and instead accounted for mark-to-market movements from hedges and some physical deliveries directly in the profit & loss account. This increases volatility in the IFRS result, but only affects the timing of the accounting impact, without a real economic or cash flow effect.”

Following a structured approach to migration, as Morton Buchgreitz, DONG Energy concludes,

“The change to our risk management strategy and the new reporting approach that we adopted as a result has been a major success for DONG. While we anticipated negative pushback to start with, the opposite was the case, and we have received considerable support and increased stakeholder confidence…. Transparency in financial reporting is essential for every company, and aligning external reporting with the way that the business is managed ensures greater visibility and credibility.” 

 

TDIC prides itself on being a leader in the Middle East, identifying and driving best practices across all aspects of its business. Recently, TDIC became the first company in the United Arab Emirates (UAE) to implement a customised, automated procure-to-pay process. With a large number of accounts and the need to demonstrate a high degree of accountability for cash held for each project, TDIC recognised that improvements needed to be made to its existing, manual payment processes. The company made the decision to build a bank-agnostic solution based on its ERP to maintain bank-independence and avoid additional cost and resource requirements. As a result, TDIC has achieved considerable efficiencies and both direct and indirect cost savings amounting to around $5m each year.

Harish Pai explains the wider relevance of the project,

“TDIC is uniquely positioned as an economic lynchpin in Abu Dhabi and is an important role model more widely in UAE and the Middle East. Not only has TDIC been the first company to create a customised, automated payment process in the region, but our experiences provide a blueprint for other government departments and commercial organisations in the region. This is particularly timely bearing in mind the Abu Dhabi government’s focus on enhancing standards of financial responsibility, accountability and transparency across both government and private organisations.” 

 

 

 

Like Ferragamo, Bonduelle’s treasury took the opportunity that SEPA presented to optimise its financial processes, including expanding the payment services that it provided to group companies. This resulted in a payments factory operating on a POBO basis. Process control, automation and integration have been major priorities for Bonduelle, as Alexis Wattinne describes,

“We use a standardised format across all entities, currencies and regions, and combine multiple files into a single payment process, enhancing efficiency and automation. Payments are validated by two signatories from the relevant entity and then passed to the bank via SWIFT using 3SKey.”

Enhancing payments and cash management is just one of the ways in which Bonduelle’s treasury is adding value to the group. Risk management, financing (including a revolving credit facility and euro private placement) and liquidity management have also been major treasury priorities as part of a process to identify and deliver new ways to add value on a continuous basis. Looking ahead, issues such as SEPA direct debits and working capital management will be priorities, expanding treasury’s influence further within the group. Alexis Wattinne concludes,

“Although Bonduelle is smaller than some of the corporations that regularly appear in the treasury media, we have been able to achieve comparable levels of efficiency, control and automation, and therefore enhance the value we are able to deliver to the business. Technology has a major enabling role to play, but this can only add value when the underlying business organisation and processes are aligned with the needs of the business. In our case, centralisation both of treasury and payments has been a vital catalyst for delivering value across the 18 countries in which we have a presence, enabling business managers to focus on developing new business channels and increasing customer satisfaction.” [[[PAGE]]]

Over the past few years, there has been significant anticipation that the use of cheques in the United States would decline in favour of electronic payments. While there has undoubtedly been an increase in the use of electronic payments, the shift is gradual rather than seismic, particularly amongst smaller and medium-sized enterprises. One of the challenges is that it is not always easy to convince suppliers and customers of the benefits of migrating from cheques; secondly, the necessary infrastructure and settlement instructions are not always in place. According to the Aberdeen Group, best-in-class companies are averaging below $2.00 per transaction for payments processing, compared with over $50.00 at the other extreme. Consequently, the business justification for conversion to electronic payments can be compelling.

Zachry Industrial, Inc. (Zachry) was keen to greater efficiency and control, as well as cost savings by using electronic payment methods, but the company has gone further than simply automating its payments processes. Over recent years, Zachry has centralised and outsourced its payments processing, as well as moving away from cheques to ACH and virtual cards. As a result, the company has eliminated payment processing costs and generates more than $100,000 per annum in card rebates.

As Dawn Lothringer outlines, the project has been successful in,

“… enhancing vendors’ experience of working with the company, and creating a new revenue stream through card rebates. Not only has the company derived immediate benefits, but the structures now in place provide significant flexibility and scalability to support future growth and leverage further efficiencies and rebate opportunities in the future.” 

 

 

“Like many organisations, The Weir Group has historically relied on credit facilities as our primary source of funding. Prompted by the financial crisis, we made the decision to conduct a capital management review…. In particular, we were concerned about the potential impact of the crisis on the availability and cost of financing, and we also wished to review our funding options given both our strong cash generation and ambitious growth aspirations.”
John Jackson, Group Treasurer, The Weir Group

Organisations have taken different approaches to the funding squeeze that has resulted from the global financial crisis, depending on their industry and business model. Funding choices are particularly limited for unrated organisations such as The Weir Group, and non-investment grade entities. Across companies of all sizes and ratings, however, diversification and alternative financing techniques that do not rely on banks’ balance sheets have become increasingly important.

The Weir Group made the decision to access the US Private Placement (USPP) market for a variety of reasons, including competitive pricing, direct access to investors and an extended maturity profile. John Jackson outlines the success of the group’s financing strategy,

“As a result of our issues in the USPP market to date, we have established a flexible financing model that supports our long-term funding needs. Our debt maturity portfolio now extends from 2015-2023 with reduced refinancing risk as there is less concentration over a single period. The cost of issuance is highly competitive and tax-efficient, with a significant reduction in fees. This debt is all fixed rate but we can convert to floating rate using interest rate swaps if required. We have established a relationship with a new group of investors and although we have already issued $1.25bn under a USPP, there is further capacity available for the future.”

 

 

With the deadline for SEPA migration now upon us, all companies operating in the Eurozone have faced the challenge of how to migrate to the SEPA credit transfer and direct debit instruments, with a number of issues still outstanding in many cases. Banks, technology vendors and market commentators have long been urging early migration which has been met with varying degrees of enthusiasm. Some industry pioneers, however, such as Ferragamo, have recognised and taken advantage of the opportunities that SEPA offers for centralisation, rationalisation and simplification of cash management in Europe. For example, as Federico Focardi outlines,

“The introduction of SEPA and the obligation to migrate to the new payment instruments presented the opportunity to… [centralise] payments and implement efficient, standardised processes. We therefore made the decision to implement a payments factory as a related initiative to our SEPA migration. Not only would this enable us to improve efficiency and reduce costs associated with payment processes but we would also be able to manage liquidity more effectively. The payments factory would operate on a ‘payments on behalf of’ (POBO) model, where a single entity makes payments on behalf of group companies, supported by the corresponding debits on intercompany accounts. This would enable us to reduce the number of bank accounts that we required, as we would need only one account per currency, and leverage ISO 20022 formats … to assist with reconciliation.”

Key to the success of Ferragamo’s migration to SEPA and successful implementation of associated initiatives such as a payments factory was the appointment of a pan-regional (or in Ferragamo’s case, global) cash management bank. Federico Focardi concludes,

“It is unlikely that we would have been in a position to justify the budget and resource requirement to embark on this project had it not been for SEPA. SEPA is an opportunity, and a catalyst for change, not simply a compliance issue, and we have already derived considerable operational and financial advantages, including both direct cost savings and an enhanced ability to manage cash and working capital effectively.” 

 

Mahindra & Mahindra (M&M) is a federated group of companies spanning a wide diversity of industries with a decentralised approach to treasury management. However, corporate treasury is creating a proactive culture of collaboration between group companies and group finance, creating mutual benefit, synergy and harmonisation of policies and processes, known as ‘One Mahindra’. This has included setting up an in-house bank, cash pooling in some markets and central financing. Some of the challenges that M&M has experienced are familiar to many treasurers, as V.S. Parthasarathy discusses,

“As part of our treasury vision, we recognise that a successful treasury function is not one that operates as a silo from the rest of the business, but that seeks to partner with both internal and external stakeholders. In many cases, this represents a major cultural and organisational shift, but it is an essential transition for today’s treasury to make an impact as ‘treasury of tomorrow’.”

Treasury’s approach to creating this dialogue and cultural shift is to build financial literacy at a grass-roots level to develop group companies’ understanding of cash and treasury management issues. Parthasarathy continues,

“In our experience, establishing a clear understanding of finance at grass roots level is often a step that is missing from financial literacy programmes. For example, treasurers and finance managers often first look to their banks and external partners for opportunities to add value to the business, when often the opportunity comes from within the business. This was the challenge we set ourselves, with a number of initiatives to build awareness and knowledge of finance-related issues. For example, our ‘Nukkad’ programme is a corner to share developments, while ‘Udaan’ is a platform to disseminate financial domain knowledge and build competences. These initiatives have been very successful in promoting engagement and informed discussion.”

This collaborative approach extends to banks and technology vendors, with a focus on combining a variety of opinions, insights and innovations to enrich the business. By doing so, M&M has developed an exceptional ability to act promptly and decisively to changing market conditions whilst maintaining excellent relationships both within and beyond the business.[[[PAGE]]]

Many of the initiatives recognised in this year’s TMI Awards have included centralisation of cash and treasury management, but Brady Corporation’s project, which included setting up financial shared service centres (SSCs) in China, India and the Philippines, deserved a particular mention. Brady took a highly structured approach to understanding, migrating and optimising business processes, engaging team members both in the SSCs and the wider business, together with banks and vendors. The scale of the project has been considerable, with over 90 migrations over the first two years. The value to the business continues to grow, however, as Kathie Campbell outlines,

“We have achieved the reduction in finance costs as a percentage of revenues that we intended, although we are striving to increase the contribution that the SSC makes to the business even further. From a treasury perspective, we had 14 FTEs engaged in treasury activities on a decentralised basis before our transformation project. In a centralised environment, we now have eight, including two in the India SSC. We had 50 bank relationships and around 400 accounts in the past, and we are now on target to reduce these by around 50%. We have full visibility and control over our cash, with EUR, GBP and USD cash pools in Europe, and USD and RMB pools in Asia Pacific. Consequently, we are able to optimise our use of cash and maximise the amount available for investment. Our intercompany netting and automated clearing solution has proved extremely successful, with twice-monthly netting processes, reducing FX volatility by 75%.”

 

Like Bonduelle, technology has enabled Dassault Systèmes’ (DS) small treasury team to meet the needs of a fast-growing organisation. Cash management has been a major priority, with a structured approach to centralising and optimising cash globally. Ninety-nine per cent of cash is now managed through four banking relationships, compared with 83 banks in the past. Cash pools have been set up for each of DS’ four major currencies, which are then included in a multi-currency, multi-bank cash pool. With account balances swept into a central EUR account each day, treasury has achieved full visibility and control of cash whilst also significantly reducing foreign exchange risk.

Process control and automation was also important to achieve the degree of efficiency that DS required. Treasury implemented SWIFT connectivity with XML formats to standardise the exchange of information between systems and counterparties. Like Bonduelle, DS also implemented 3SKey to allow personal digital signatures on transactions using a single device across banks.

John Colleemallay confirms,

“One of our core business assets for DS is cash, 97% of which is now centralised and invested securely. Our cash management infrastructure is robust, transparent and meets our current and future need for optimal cash and liquidity management. Similarly, by implementing best-in-class treasury technology, supported with industry-preferred standards and security, we been able to enhance efficiency, control and cost-effectiveness both within treasury and for centralised payments processing by our SSCs. This allows both greater process automation and control but also enables better visibility and control over working capital.”

 

Ahold Group is a cash-generative business, with €4bn of cash invested, of which around 75% is in EUR and 25% in USD. Over the past 10 years, the company’s investment strategy has developed considerably from a simple cash flow forecasting process to a sophisticated analysis of future cash requirements, which is largely facilitated by high-quality information from operating companies. Initially, Ahold Group invested a large portion of its cash in money market funds (MMFs) but during an extended period of low yields and concerns about regulatory changes, the proportion of cash invested in MMFs has been reduced. Treasury is working with the investment committee for the company’s pension scheme to share expertise, including introducing a target portfolio as a benchmark with which to manage investments. In addition, Ahold is working proactively with its relationship banks to identify suitable investment solutions.