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How to make sense of corporate treasury outsourcing

Getting results from corporate treasury outsourcing is counterintuitive, well at least for CFOs and many consultants. Getting rid of the repetitive accounts payables and receivables processes is not the place to start, or even go there ever, particularly if you plan to do it with a third party. 

There are two types of corporate treasury department’s work that can be outsourced:

  • specialized discrete, confined processes
  • labour arbitrage of repetitive manual processes.

Specialized discrete, confined processes outsourcing 

A corporate treasurer, who runs one of the most efficient corporate treasury department in the world today and prefers to keep control wherever possible, admits that, “Although, I’m not a big fan of  outsourcing, I can see it making sense for certain confined processes depending on the size/maturity* of an operation.” These include:

  • Systems:
  1. running TMS as a SAAS
  2. SWIFT service bureau versus in-house
  3. outsourcing TMS and/or SWIFT upgrades and testing to an outsourced provider
  • Processes:
  1. hedge accounting
  2. pension fund management, valuations, etc.
  3. collection management
  4. payroll
  • Banking:
  1. bank running inter-company netting
  2. provision of FX exposure management and spot trading within company parameters
  3. investment fund manager investing company funds within fixed parameters
  4. large spot trades outsourced to an algo bank, so they can break it up and not have impact on market.

Labour arbitrage of repetitive manual processes

Labour arbitrage is where the process is shifted to the lowest cost country, sadly often even before the process has been cleaned up/optimised. This approach is favoured by IT and senior management because they want to cut current costs (regradless of long-term impacts) and often involves everyone moving onto SAP and Genpact for processing. 

The theory is that if you cut all processes into small pieces, anyone can be slotted in to perform the task as it has been deskilled, so can be carried out by low skill level and cheaper FTE. But this approach produces many problems:

  • high turnover of staff and frequently changing locations to cut costs even further
  • cost savings are not obtained from improved, scalable process improvements but purely dependent on cost differentials. 

This labour arbitrage approach to cutting costs also raises many issues and problems. One corporate treasurer has many concerns over such outsourcing , including:

  • How far do you take the outsourcing: Do you allow third parties to approve/release payments? Do you allow them to contact your customers in case of disputes?
  • Does the pricing model you have agreed with the third party drive unwanted behavior? (For instance if you pay them per line typed there is no incentive to identify inefficient processes and resolve or spend time on complex payment errors/inquiries)
  • Cutting the process and associated knowledge into many small pieces creates a problem when something goes wrong. Overall knowledge and understanding is gone and a small issue quickly requires 15-20 people to address or solve.
  • There is definitely a lack of knowledge/affinity with the companies processes which will show in how issues are handled/assessed. (Common sense approach is out the door as the processes are purely based on parameters. It will not be uncommon for multi-million dollar invoices to be put on hold because there is a 10 cent difference. Because every issue is parameter driven, it will not be escalated and driven to a quick resolution. Instead, a standard message is sent to a mailbox and the invoice will sit there for an unknown amount in time.)
  • Delinquency payments and charges are likely to go up substantially and a number of vendors will revert to only shipping on direct cash payment terms which does not fit within the model.
  • Outsourced payment models do not go well in cheque rich environments as cashing/pick-up will be challenging
  • HR impact: Historically finance departments often used the low level accounting positions as the entry pool to select future junior managers.  By outsourcing these jobs, there is no longer a junior pool to select from and in the future the detail knowledge of how the company works disappears.

——

* Operation or process needs to be stable and not still going through the rationalisation that inevitably occurs when operations are first set up.


CTMfile take: The difference between outsourcing specialised discrete confined processes and the labour arbitrage outsourcing of repetitive processes is important and clear. The hidden consequences and costs of using labour arbitrage outsourcing are significant and should, at least, make CFOs and consultants try and answer the questions we highlighted earlier. In the New Year CTMfile will be reviewing alternative approaches to corporate treasury outsourcing of the repetitive processes in the A/P and the A/R departments, but a great example of how to outsource repetitive tasks see Shell's approach.

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This item appears in the following sections:
Operations
Best Practices & Benchmarking
Control & Compliance in Operations

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