REMOTE CONTROL TREASURY?
Now that technology is making it possible to run a worldwide treasury operation from one global location, do companies need treasury staff in Asia?
By Justin Wood

For David O’Brien, centralization is a thing of beauty. But that’s hardly surprising – as assistant treasurer of EDS, an American IT- services and outsourcing giant, O’Brien has helped to build one of the world’s most highly centralized corporate treasuries.

“All our treasury is located in our headquarters here in Plano, Texas. We have no treasury staff anywhere else in the world,” he enthuses. Which is no mean feat, given that EDS has sales of US$20 bn a year, with US$1.1 bn coming from Asia and US$5.5 bn from Europe.

On closer examination, though, O’Brien’s boast isn’t quite as good as it sounds. True, his cash management team of 11 – handling working capital, foreign exchange, liquidity, and bank guarantees across the globe – is entirely US-based. So, too, are the teams managing insurance and pension plans. However, the fourth part of the treasury team, the capital markets and corporate finance team, has one employee in Asia and a further three in London who analyze and finance customer deals.

Still, compared with almost any other treasury department at any other company, EDS is about as centralized as it’s possible to be. The rationale, says O’Brien, is simple. “It’s more effective and more efficient. Take a function like foreign exchange. Do you want to pay one person to be an expert or five?”

Thanks to advances in technology in recent years, treasury centralization like that at EDS is now a realistic prospect for many large multinationals. ERP software, treasury workstations, electronic banking, the internet – all have made it easier for companies to standardize, automate, and centralize their treasury processes. But just because it’s possible now to manage a worldwide treasury function from a single location, does that make such an arrangement desirable? And in Asia, are Western multinationals likely to withdraw their treasury staff in coming years? Will they increasingly manage cash and risk in the region by remote control?

Centripetal forces

Traditionally in Asia, most companies have operated with a highly decentralized treasury structure. Often that has meant having no dedicated treasury staff at all, but rather a network of accountants and finance staff across the region doing various bank-related tasks on a part-time basis. Indeed, many companies still operate in a similar way.

However, changing financial regulations in Asia, the growth of double taxation treaties in places like Singapore, and the emergence of better technology have all increased the opportunities to set up more centralized treasuries in recent years. At the same time, many companies in the region are now big enough to start reaping the benefits of greater centralization.

Tom DuCharme, head of cash management and trade finance in Asia Pacific for Deutsche Bank, reckons efforts to centralize treasury in Asia have focussed on two distinct areas so far: liquidity and working capital. And of these two, it is working capital, in particular the centralization of payables and receivables into shared service centers (SSCs), that has received most attention.

“On the liquidity side, there are only five markets in Asia Pacific where companies can extract excess cash – Japan, Singapore, Hong Kong, Australia, and New Zealand – so maximization of treasury on that front has been limited,” says DuCharme. In contrast, he reckons Asia is now home to well over 100 SSCs managing payables – as well as other tasks – for the region from a single location.

To manage these centralized treasury structures, adds DuCharme, many companies have hired one or perhaps two dedicated staff to help coordinate treasury activity across the region. In other cases, particularly where cash flows in the region are substantial, companies have gone much further and set up in-house banks, whereby the treasury acts as a central counterparty for all loans and deposits of the local operating companies, and consolidates their foreign exchange exposures before placing them into the market. DuCharme estimates around 25 such in-house banks now operate in Asia.

In the most extreme case of centralization, companies not only consolidate their Asian liquidity into a global cash pool, and centralize the processing of working capital into an SSC, they also manage these and other processes from one global site, like the team at EDS in Texas. Ericsson, a US$19.2 bn telecoms equipment maker is pursuing a similar strategy and closed down its regional treasury center in Asia in 2004, pulling its staff back to Sweden.

Cost of compliance

But not everyone feels that the obvious endgame of centralization – having just one global treasury center – is necessarily a good thing. Take Nick Franck, a treasury consultant based in Singapore. “If everyone in treasury is stuck in one global center, then they focus on process efficiency, control, and avoiding things going wrong,” he says. “They don’t focus on getting out to the frontline of the business and helping things to go right, to add extra value.”

Franck reckons a number of Western multinationals have downgraded their treasury presence in Asia recently as part of global centralization drives – many of them sparked by attempts to comply with new corporate governance rules such as America’s Sarbanes-Oxley law. Centralization equals control, the thinking goes.

And yet, stresses Franck, provided a company is of a sufficient size, “there is no business in Asia that cannot benefit from having a treasury physically present in the region. Treasury can add substantial value to a business – it just needs to be allowed to.”

That's a view shared by Jaya Machet, the Asia Pacific treasurer of Nokia, a US$40.6 bn-a-year Finnish mobile phone manufacturer. “Our treasury processes at Nokia are highly centralized,” says Machet, citing the firm’s payables factory in Geneva that handles all of the firm’s worldwide supplier payments. “But we still believe it’s vital to be close to the ground to support the business. You need treasury people physically in every region.”

As such, Nokia has come up with a unique solution: a structure that blends ultra-centralized treasury processes with a strong geographic spread of treasury staff. Underpinning that structure is a chain of three global treasury centers, which together have 55 staff. The main center in Geneva is home to Nokia’s global cash management team, as well as key treasury support functions: a financial markets desk, settlement and controls staff, and a special treasury IT team.

The Americas treasury center, in New York, houses the head of Nokia’s foreign exchange risk identification team as well as its head of insurance and risk finance function. A third treasury center in Asia – with seven staff in Singapore and three in Beijing – is run by Machet herself, who also heads up global cash management including the payment factory in Geneva. Finally, the Nokia group balance sheet is managed by a small team in Helsinki where the group’s treasury accounting team is also based, as well as group treasurer David Blair.

“What’s interesting is that, if you look at the heads of the four main treasury functions, two are in America, one is in Asia, and only one is in our corporate headquarters,” says Machet.

Given this sort of arrangement, it would be easy for staff to get caught up in a tangle of twisted matrix-like reporting lines based on both geography and treasury function. But that does not happen.

“In the regions, the treasury teams report along geographic lines,” explains Machet. “In Asia, for example, my staff are multi-hatting: each does a bit of financial execution, a bit of cash management, a bit of identifying forex risk exposures, but they all report to me. As for the global functions, it’s up to the managers of those functions to get the regions to act in the way they want them to.”

We want information

So why bother having a regional presence? Why not run everything from one center in Geneva? “The issue is access to information,” states Machet. “The more remote you are the less likely you are to know what’s going on. And by the time you do hear about it, it’s too late to influence the outcome.”

Take a recent project in India to accelerate collections from Nokia’s customers that Machet heard about thanks to frequent dialogue with local managers. Left to their own devices, the business unit in India “would probably have come up with a perfectly workable solution on a local level, but it wouldn’t necessarily tie in with Nokia’s global treasury processes,” says Machet. “We've spent a lot of time making our processes world-class, so we don’t want to have to keep reinventing the wheel in new countries. Being close to the ground we make sure that doesn’t happen.”

Like Franck, Machet also believes that her treasury in Asia has the potential to be value-adding in a way that would be impossible with one global center. In fact, Nokia regards its treasury function as a profit center, with its performance measured using a concept called “treasury value added”. The idea is to calculate how Nokia would perform without a group treasury and then to compare the costs and benefits of having a treasury function.

Just as important is a notion of “incremental value added”, so that treasury staff look not only at their own internal processes, but go out and talk to front-line business managers too in a bid to have a direct impact on growing and improving the business.

Once again, India provides a good example. For customers where channel working capital was particularly tight, Nokia’s managers wanted to speed up the time between a customer paying for goods and receiving them. To help out, Machet and her team developed a Unique Remittance Identifier code that customers can add to their payment that means it automatically clears in the accounts receivable ledger, so releasing the customers’ credit blocks sooner and enabling the goods to be shipped immediately.

Another way that Nokia tries to add value through its regional presence is by encouraging its treasury staff to put on proprietary trades in the market. The aim is to earn a profit, albeit within tightly controlled value-at-risk limits, but more importantly to develop a deep knowledge of local financial markets that can then be used to advise the region’s CFOs and financial controllers about the foreign exchange implications of different pricing strategies.

Blazing a trail

Another company embracing a centralized treasury model, while still keeping a strong regional presence, is British American Tobacco (BAT), a £34.3 bn-a-year (US$59.5 bn) cigarette maker. With operations in 180 countries, BAT has traditionally operated with a highly devolved treasury, most of it organized on just a country level. Over the past six years, however, group treasurer David Swann has led a push to centralize the company’s treasury into three centers: one in London set up in 2002, a second set up in Singapore in 2004 and a third due to open somewhere in South America later this year.

“The advantages of centralization are huge,” says Swann. “Obviously it lets us make spread savings on the transactions we deal, but the real benefit comes from our ability to get much better visibility into our risks and a much more consistent approach to managing that risk. The risk aspect is the real kicker.”

The new treasury at BAT is organized as an in-house bank, and in Singapore, the Asia treasury center is staffed by a team of four. Swann says he did flirt with the idea of abandoning the regions in favor of a single global treasury office, but decided against it. “It would be very difficult to do everything from one center, and we do see a lot of value in having treasury staff available locally,” he says.

That value is set to grow more and more as Singapore pioneers a new “agency model” at BAT, which Swann hopes to roll out in other areas of the group too. Rather than simply acting as a counterparty for internal transactions with operating companies, BAT subsidiaries are now outsourcing much of their treasury activity, such as foreign exchange exposure management, to the service center. “A lot of our Australian treasury operations are now managed in Singapore on behalf of the Australian operating company on an arm’s length contractual basis. There’s a service level agreement in place,” explains Swann.

Companies such as BAT and Nokia suggest a healthy future for the regional treasury center in Asia. But even if more and more companies ultimately decide to go with a single global center, it need not be bad news for Asia’s community of treasury experts. As Simon Jones, a senior treasury services banker at JPMorgan Chase, notes: “Global consolidation into one treasury center is increasingly possible, but why shouldn’t that center be in Asia?”

Nissan, the 8.6 trn yen-a-year (US$72.9 bn) Japanese car maker, recently set up a new global treasury center in Singapore, as did Lenovo, the US$2.9 bn-a-year Chinese computer maker. DuPont, the US$26.6 bn-a-year American chemical company, has decided to consolidate its Asian and European treasury operations into one office and has also situated that office in Singapore.

“Companies are increasingly looking at where their business is coming from,” says Jones. “If you add up Japan, China, and India, then in many cases that total is approaching 50%, so it makes sense to have a strong treasury operation on the ground here.”

Back in Plano, Texas, O’Brien prefers respectfully to disagree.