Outsourcing treasury and cash management: top-level best practice

August 24, 2016
Colin Evans
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outsourcing treasury

Further to the recent TGG blog about Outsourcing the Global Supply Chain in the light of Brexit, this article takes a look at the implications of outsourcing treasury and cash management.

The whole subject of Treasury Outsourcing is a hot topic right now, it was a big driver of corporate strategy a decade ago during the Shared Service Centre (SSC boom), but slowed following widespread adoption by the mid and large corporates who had the sufficient economies of scale to achieve a real benefit. I thought it worthwhile to write something for the TGG Blog that might interest readers.

Brexit could result in even more corporates considering treasury outsourcing to move perceived Brexit risks out to external ‘specialists’.

Current initiatives such as pan-European SEPA payments/collections, cloud ERP systems, and deeper digital integration, (plus the wider range of outsource providers and solutions); the economics and strategic appeal of outsourcing has reached a new audience of companies who are smaller than the first wave, plus larger corporates who are taking another look at outsourcing.

Last year I participated in a discussion on the Treasury website CTM File, which considered issues such as the impact of outsourcing on organisations and a wide range of topics around this subject, such as when (& when not) to outsource, implications for treasury, getting the implementation right and (if the worse happens) bringing outsourced services back in-house.

Some key thoughts…

What to Outsource

Inevitably, many corporates are likely at some point to consider outsourcing internal functions; inevitably Treasury processing would be included in outsource project discussions; my view of this is that only generic processes (e.g. generating, processing and reconciling payment files and other bank transactions) should generally be considered for possible outsourcing; key tasks that require specific expertise, decision making and personal interaction with other departments or external parties (such as FX dealers, bank lending departments etc.) should be excluded from the outsourcing work scope. A major exception to this is if the corporate is taking on complex new responsibilities outside the expertise of its treasury team then it may reduce operational risk by appointing a specialist service provider.

Treasury is now a key segment of many corporate finance departments, with treasury holding decision making responsibility that can affect tax, audit, funding, M&A and wider corporate finance strategy; there are many specialised treasury tasks being done within the business that could be put at risk by migration to an external provider creating exposure to unnecessary risk.

My recent blog explores the growing importance of treasury in the organisation in more detail.

What are the Potential Benefits (or Otherwise)?

• Technology that gives the ability to access state-of-the-art technology from professional outsource providers can promise major cost and efficiency and implementation savings, especially if an organisation is at a point of having to upgrade or replace its current treasury systems and facing either a large IT spend request, or use of increasingly obsolescent software and hardware.

• Transaction Costs – The economies of scale available to outsourcers can be very attractive if the corporate is able to create a very specific set of tender documents, allowing bidders to offer detailed pricing in response to accurate types and volumes of transactions to be processed. This then becomes a very useful part of any Service Level Agreement (“SLA”) that will be used to manage the service if it goes live.

• Reduced Headcount – It is true that large scale outsourcers should be able to maximise efficiency compared to certain in-house processes and functions; if these are realised, then the corporate would be able to reduce headcount via redundancy or redeployment of those roles being replicated outside the company. However, this does create a risk that should something go wrong, the business may have lost the people it needs to fix the situation.

• Increased Value of Remaining Functions – A treasury department with certain outsourced functions should be able to focus on improving the quality of its remaining services to the rest of the organisation, whilst also increasing skills and developing its team abilities in more complex areas of treasury.

• Increased Risk – There is a downside to the above ‘benefits’; it should be recognised that ‘headline’ cost savings driven from the direct replacement of in-house services by outsourced providers is not the whole story. If the service isn’t delivered on time, on budget or if minimum acceptable SLA metrics are not met, then the potential risks in terms of reputation of the business, management time dealing with error correction, customer interest claims, additional bank fees and costs etc. can far outweigh those P&L costs realised through the outsourcing project itself.

Implementation – the Role of the Treasurer

Ideally, the Corporate Treasurer must be a full time member of the project team and be able to conduct a full risk analysis of any proposed outsourcing requests, to consider the following:
Appropriateness of the tasks to be outsourced

A detailed examination of the outsourced treasury work specification to be included in the bid documentation, checking for accuracy and detail of descriptions and volumes of work to be performed.

Full participation in the bid evaluations, with particular emphasis on checking the functional specifications offered by bidders, scrutiny of quoted costs, evaluation of any specialist treasury software and hardware to be employed, as well as security in what is a highly sensitive area of the business.

Creation of a Treasury specific SLA that can be clearly implemented and managed by both the corporate and vendor as the ‘living’ document used to run the outsourced treasury functions. The SLA should include clear sets of measurable metrics and objectives that can be monitored and agreed by both sides, together with agreed sanctions, corrective actions and timescales to be applied if the SLA terms are breached, whilst the SLA may also offer certain incentives for high performance.

The vendor should provide a detailed protocol explaining its business recovery procedures and back up arrangements if there was to be a major interruption of outsourced services, stating timescales and pre-determined actions to restore full services to the client.

Finally, project failure is always a possibility and the Treasurer together with the CFO, CIO and other key team members should document internally how the processes could be brought back ‘in-house’ in case of either catastrophic failure of the outsource project, or change of policy by the company. Having direct contractual access to hardware and software providers in case of any breach of contract or termination could minimise problems for corporates who need to bring services back ‘in-house’.

Controlling the process

Strong vendor management is key to delivering & maintaining successful outsourced projects; large sums of money and reputational risk are at stake and every outsource vendor should be prepared to allocate dedicated key staff to the client, providing access to senior management at regular client review meetings, which should review all key data metrics and overall compliance with SLA objectives, together with presentations by Vendor representatives on how service will be maintained and / or improved from current levels, together with any risks or issues identified as potentially affecting the outsourced service.

It is critical that the corporate appoints a senior member of management to manage the vendor relationship and who has sufficient knowledge of the subject matter; able to spot any weaknesses in the outsourced service and to challenge the vendor, whilst directing them in such a way that a clear set of corrective actions are implemented very quickly.

In conclusion…

Any outsourcing of treasury functions creates new problems and situations that don’t already exist in the business and therefore there is inherent risk in taking on these complex and expensive projects. I have no doubt that employing the correct mix of planning, active treasury involvement, close scrutiny of bid proposals and micro management of the implementation and subsequent operation of outsourced functions can significantly mitigate those risks, and deliver the promised cost and efficiency savings with minimal disruption to the business. Conversely, those projects that rely too heavily on the outsource provider to drive the process, write its own process specifications and generally be the lead partner in the relationship are highly likely to face significant cost and process dangers, and the client may not be sufficiently equipped to deal with any major problems that arise from the outsourcing project.

Further Reading: there is some good online content to provide further insight into the big subject of outsourcing, the following resources offer further detailed and useful insights into the subject.

Brace, R. ( 13 Nov 2014).
Taking the Stigma Out Of Treasury Outsourcing, Special Report | Treasury Outsourcing; Global Finance Magazine

Bahni H. (n.d.). Treasury Outsourcing in Practice; Treasury Management International

Alfonsi, Michael J. (13 May 2014); Get the Most out of Payments Outsourcing, TreasuryandRisk

Disclaimer: Any views or opinions represented in this blog are personal and belong solely to the blog owner and do not represent those of people, institutions or organizations mentioned and are made in a personal capacity, unless explicitly stated. Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual.