Outsourcing Cash and Treasury Management

Most corporate treasurers are being asked to cut their costs or to accept new responsibilities without an increase in staff. To do this requires a combination of their own corporate treasury department team and resources combined with outsourced advisory services and processing services. Using the most effective combination of internal and external outsourced processing is known as Best Sourcing. The key ingredients in effective Best Sourcing solutions are:

  1. corporate treasury department processing and analysis
  2. Insourcing: the delegation of operations or functions within the corporate treasury department to an internal stand-alone entity, typically a Share Service Centre (SSC), that specialises in the operations or functions
  3. Application Service Providers which provide computer-based services to customers over the Internet, often called Software-as-a-Service: SaaS, replacing the need to install the systems internally (For further details see Background in Cash and Treasury Management Systems.)
  4. Outsourcing, which is when the department contracts with another company to provide services that might otherwise be performed by in-house corporate treasury department employees. This is often called Agency Treasury Outsourcing.

The operation of an SSC can bring considerable benefits as the Shared Service Centres review showed, but internal SSCs are not always the solution, and some of the largest internal SSCs are opting to outsource some or all of their operations to external processors and service providers.

When and What to Outsource
There are many circumstances and reasons when companies opt to outsource some or all of their treasury operations enabling them to:

  • rapidly acquire a skill and expertise not available internally
  • quickly set up a new corporate treasury department, e.g. when a brand new company is set up as the result of a de-merger of the group
  • improve corporate treasury performance and efficiency, e.g. when setting up new regional treasuries
  • avoid an expensive cash and treasury management systems upgrade or replacement, e.g. when there has been a major expansion in the corporate treasury department's responsibilities or volumes
  • introduce best-practice controls, e.g. when treasury exposures become much more significant.

Outsourcing of treasury functions is not easy and requires a detailed and rigorous evaluation and implementation to:

  1. decide what to outsource
  2. select an outsource provider
  3. minimise the risks from outsourcing
  4. manage the outsourced operation or function.

Almost any aspect of the corporate treasury function can be outsourced including:

  • operation of netting systems
  • cash flow forecasting
  • liquidity management
  • management of intra-group and external loans
  • external funding management
  • FX dealing and exposure management
  • interest rate, credit and commodity risk management
  • back office accounting, reporting and processing
  • making and collecting payments.

The problem is what to outsource. Each company and group are different, but typically, it is accepted that high-level strategic decisions, policy, internal business advice and discretionary decisions should not be outsourced as this is where the corporate treasury department provides its highest value add. The more operational and mid / back office systems can be effectively outsourced.

Choosing what functions to outsource require careful consideration and corporate treasury departments often use consultants and advisors to assist them in this choice.

Selecting an Outsource Provider
Having selected which functions to outsource, the next step is to select the treasury service provider which can be either a bank owned operation or an independent company. Outsourcing is a long-term decision and the outsourcing provider needs to be considered as a strategic partner and so the evaluation should include:

  • development of a comprehensive specification of what is to be outsourced and how it will operate, and the relative importance of the different aspects of the service required
  • a review of the different providers, including a comparison of the types of services they provide and where their particular skills and specialisation
  • issue a Request For Proposal
  • meet with each provider and their current users
  • select the best -fit partner
  • develop detailed Service Level Agreements for all key operations.

This selection process takes considerable time and should not be rushed.

Minimising the Risks from Outsourcing
There are risks from operating any corporate treasury department and indeed, these risks can be as great or even more than from an outsourced corporate treasury solution. Some of the key measures that can be taken to minimise the risks from using an outsourced treasury solution include: 1) ensuring the service provider has no access to the funds of the company; 2) setting up clear policy and authorities, limiting funds transfers and bank mandates to accounts in the name of the company; 3) ensuring segregation of treasury duties and responsibilities, etc. There are many other aspects of the agency treasury provider's systems and processes that need to be covered as well as specifying the internal and external audit procedures.

Managing the Outsourced Operation
The outsourcing of the treasury function(s) doe not mean that the corporate treasurer's work has finished. The outsourcing arrangement still has to be managed, the main elements for managing an outsourced treasury solution include detailed service level agreements, budgets and business plans, regular reporting and progress meetings, agreed contacts and problem resolution procedures. This can be a time-consuming process and is often undertaken by a specialist third party.

Pros and Cons of Treasury Outsourcing
There are clear benefits from outsourcing treasury functions, including:

  • freeing up the corporate treasury department team to focus on more strategic and core activities
  • cutting corporate treasury department operating costs
  • enabling corporate treasury departments to rapidly acquire a skill and expertise not available internally and if necessary quickly set up a new corporate treasury department
  • introduce best-practice controls and segregation of duties.

However, there are disadvantages in outsourcing treasury functions and outsourcing has not grown as much as predicted due primarily to:

  • the cost savings are often not as high as predicted
  • corporate treasury departments resist the loss of jobs that outsourcing can produce
  • the feeling of loss of control in using a third party and the loss of relationships with the subsidiaries and operating units
  • significant exposure to the efficiency, continuity and investment programmes of the outsourcing service provider.

However, there will always be the circumstances when corporate treasury outsourcing is essential such as a company merger creating a massive demand in treasury capacity, which needs to solved very rapidly.

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