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Corporate Treasury Outsourcing

Treasury outsourcing is the transfer non-core activities/functions to a third party provider, so the corporate treasury department can focus on the essential strategic tasks where they add unique value.

This Checklist describes the key steps in identifying what treasury processes could usefully be outsourced, how to choose the outsourcing provider that would be best for you, and how to develop and manage an effective outsourcing programme.

The aim of this Checklist is to help you implement a successful outsourcing programme.

1. Advantages of treasury outsourcing:

Strategic Focus

The group treasurer is removed from day to day operations, which allows more time to focus on strategy.

Personnel and Systems

User can rely on specialist and experienced treasury professionals using dedicated, treasury management software to manage the treasury operations.

Economies of Scale

Organisations that can’t justify the capital expenditure of having a centralised treasury function can quickly access world class capabilities with little or no upfront costs.

Controlled Environment

A highly controlled and disciplined environment used to execute, account for and settle treasury deals.

Segregation of Duties

Outsourcer will have team of people to ensure segregation of duties, which may not exist in smaller treasuries.

Access to Market Knowledge

The outsourcing company is closer to the market. They will have a much clearer appreciation of pricing and the current trends.

Disaster Recovery

The Outsourcing company will have a comprehensive disaster recovery arrangement in place to ensure the client can continue to operate without any loss in functionality.

Treasury Manual Standards

The Outsourcing company will give constant feedback on the performance of the tactical and operational aspects of the treasury manual and help to identify likely breaches to the policy before the breach occurs.

2. Consider treasury outsourcing when:

  • A new corporate treasury department needs to be set up fast. Outsourcing will save management time on setting up the infrastructure, and recruitment. As well as offering continuity and allowing senior staff to focus on their core activities.
  • Company has to downsize, outsourcing activities will enable you to focus on your core activities, and cope better with the changed business environment.
  • Need to satisfying regulatory pressures from the market (such as the arrival Sarbanes Oxley, IAS 39, EMIR, FACTA) which could require the company to rapidly acquire new skills and resources.
  • Business does not have the specialist expertise to carryout function
  • Cannot afford/justify the investment required to set up a centralized treasury function with world-class capabilities, but still need such a corporate treasury department.
  • Access world-class capabilities is required quickly and in a cost effective manner.

3. How to choose what to outsource and what NOT to outsource:

i. Review, identify and define what is ‘core’ and ‘non-core’ in the current business strategy.

ii. Activities that are ‘core’ to the business, i.e. add value to business and are proprietary to the business, and should not be outsourced, include:

  • setting treasury policy
  • documenting the treasury policy
  • implementation of treasury policy
  • setting treasury Key Performance Indicators (KPI).

iii. Some core activities can be standardised so they can be outsourced, examples, include:

  • valuation processes of liquid OTC instruments;
  • bespoke valuation of illiquid OTC instruments
  • collateral management;
  • hedge accounting.

iv. Activities that are often ‘non-core’ to the business and can be outsourced, include:

  • back office processing (deal confirmation, netting and settlements)
  • processing payments for the organisation (BACS);
  • middle office activities (risk management and treasury accounting)
  • front office (cash management and treasury dealing based on treasury policy)
  • liquidity management
  • treasury recruitment.

4. Define what would be a successful outcome and how you will measure success in your outsourcing program:

i. Senior management should clearly define the outsourcing scope and deliverables (which should be derived from the results of their analysis of core and non-core activities).

ii. Successful outcome will be shown by:

  • A spirit of parnership between client and vendor. (Any differences in culture between the client and the outsourcing company should be understood and managed.)
  • Flexible Service Level Agreements (SLAs) between the client and the outsourcing company that reflect the companies changing needs
  • Other SLA examples could include: volume of activities and speed of response, management information on outsourcing operations – timing and level of detail, speed of exception handling
  • frequent and clear communication between the client and the outsourcing company

iii. Success will be measured and monitored by:

  • a strong vendor management team in the corporate treasury department who monitor a precise set of Key Performance Indicators (KPIs) that define the criteria of success, examples include: speed and quality of responses, level of exceptions - e.g. payments not made, early warnings that not going to achieve an SLA

5. Choose the scope of your outsourcing programme:

i. Exclude what are core activities (see Section 3)

ii. Include:

  •  non-core activities
  •  core activities that can be standardised and outsourced

iii. Define what SLAs are needed in these outsourced activities

iv. Detail exactly what other activities such as reporting, measurement and management can be defined and made into an SLA

Remember: senior management need to approve the outsourcing programme prior to the start of the programe.

6. Choose an outsourcing supplier:

i. Senior management support is required who need to decide whether to use third-party advisers in selection process;

ii. Draw up a Request For Proposal (remember that the RFP for purchasing a commodity is distinct from the RFP for purchasing a service)

iii. RFP questions for suppliers need to include:

Systems and capabilities, including: straight-through processing from the client system to the outsourcing system, SWIFT enabled back office, two way interconnectivity between the clients and the outsourcing company’s systems, IT environment and platform (cloud)

Services provided, including: liquidity management, cash management, collaterals management services. treasury dealing (list of instruments), FX risk management and reporting, Interest Rate risk management and reporting, in-house bank service, risk management services and reporting, treasury accounting services and reporting' system security and audit reports, deal confirmation, settlement and reconciliation processes

Disaster recovery capabilities, procedures and processes

iv. Vender selection criteria:

Overall remember that: 1) the value add of outsourcing is the spirit of enhanced co-operation between the client and the vendor; outsourcing isn’t about abdication; 2) it is the management of an external process; 3)vendor’s strategy needs to complement / enhance the client’s treasury strategy

Key factors should include: 1) long term objective of the vendor, 2) expertise of the vendor, 3) ease of interconnectivity between the vendors’ and clients’ systems, 4) chemistry and stickiness of the relationship, 5) compatibility of between the culture of the vendor and the client, 6) how well does the vendors capability satisfy the clients current and future requirement.

7. How to minimise the risks from treasury outsourcing:

  • Ensure there is segregation of treasury duties
  • Set up clear policy and authorities, limiting funds transfers and bank mandates to accounts in the name of the company;
  • Check that vendor has not under-estimated scope of project and the effort required
  • Ensure that the SLAs are realistic and achievable
  • Focus on making sure that there is clear communication between client and vendor, and that there is joint governance and a spirit of partnership.

8. Manage the migration to the outsourcing supplier by:

  • Ensuring that the project is given sufficient resources and authority
  • Clearly defining the project scope
  • Making sure that migration is considered a separate activity for the joint management team
  • Having a process exists to address ambiguities and deal with unexpected items including issues with resources
  • Defining the Service Level Agreements so that they are part of the migration, and continually refined to remove ambiguities
  • Focusing on good communication across the joint management team
  • Ensuring that the process is appropriately minuted, documented and satisfies all the compliance, audit and governance standards present in the client and vendor
  • Monitoring progress regularly, so that issues and risks can be appropriately escalated and communicated
  • Having in place formal milestones in the migration to be signed-off, such as testing and parallel running.

9. Continuously review and fine tune your outsourcing programme by:

  • Maintaining good communication and a spirit of partnership between client and vendor
  • Having periodic reviews of the KPIs as defined by the SLAs
  • Scheduling regular reviews of the overall focus of the SLAs versus business priorities and how to ensure constant improvement
  • Ensuring that any major changes in business priorities are reflected in the SLAs and KPIs.

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