SURVIVAL OF THE FASTEST?
In the quickly evolving world of cash management, every company should move at its own speed. 
By Steven Crane

A Cautionary Tale

A long time ago, a sleek, silver-tipped swallow settled upon the uppermost branch of a white birch and, so it happened, perched right next to a golden-brown, rather plump, but sad-looking caterpillar. "Why so glum, my friend?", he asked. "Well," replied the caterpillar, "over many months I have crawled up this tree and, admittedly, I have eaten well. But I can’t help but regret, sir, that had I wings such as yours, I could have eaten from all the trees in the forest by now." The swallow eyed the caterpillar and said: "Not a problem, my fine, furry one, it so happens I am rather bored today and will happily take you anywhere you wish." Overjoyed, the caterpillar settled snugly into the swallow’s grasp and soon found itself soaring over the landscape, admiring the glorious view and salivating at the thought of all those trees lush with leaves. After a while, the swallow swooped down to a verdant elm, hovered over its nest, and deposited the caterpillar into the gaping beak of its young. "Ah, those caterpillars," sighed the bird, "will they never learn? With a little patience, what a handsome butterfly that fellow would have made."

When it comes to handling cash, most Asian corporates are either caterpillars or swallows. Effective cash management, therefore, depends not so much upon speed, but knowing how and when to move. The path to glory – better management, an improved bottom line, heightened efficiency – is fraught with risk for finance managers whose knowledge of technology, regulatory and tax issues, and security are limited. But it is filled with promise for treasurers and CFOs who know both their own limits and the limits of the region they work in – and have the foresight to plan accordingly. While most in Asia would argue that the day will come when almost all cash transactions will be electronic, many realize that a cautious approach will ensure success. In the business world, the right path to better cash management can mean survival and growth or, for those who go out on a limb, extinction.

Chan Fook Kong, the finance director at Singapore-based marine services company Jaya Holdings Ltd., knows the perils of buying into the latest sales pitch. "I’ve seen all the trends and management styles: one year it’s a leftist policy, one year it’s rightist, the next it’s centralization and then decentralization," he says. In the late Eighties, Chan’s former employer, a Western multinational filled with good intentions, started an electronic banking system in conjunction with a major bank. It was far from a success. "Interface problems, hiccups, system shutdowns, and more hiccups," recalls Chan.

The lesson was clear – proceed with caution. After taking over the top finance post at Jaya, a company with 30 subsidiaries and annual revenues of about S$90 million (US$56 million), Chan wanted to simplify and automate his accounts payable operations. But he wanted to do it, he says, with a system that matched his company’s needs – not the other way around. "Purely speaking, we are not that sophisticated an operation. We are not an aircraft manufacturer with a huge database," Chan notes. "I just wanted something that could help us to reduce the amount of human effort. At the same time, I didn’t want us to be some kind of guinea pig."

What the Jaya finance director wanted – and what he eventually got – was a user-friendly, dependable, secure, and relatively inexpensive system. Chan says the company’s new cash management service has helped him reduce treasury errors, cut back on manpower, and better utilize finance staff. And it’s done all this, he says, without forcing him to redo his entire accounts payable system to interface with the bank’s. The key to success for Chan was doing a lot of comparison shopping – and keeping his cash management needs as focused as his company is on its core business. The hard part, he says, is not being dazzled by gimmicks and unwanted features. "I welcome the banks introducing me to new products and services because they may open new horizons," he says. "But, in the end, it’s for each company to decide what’s best for their own environment and context."

Swatter or Zapper?

Making such a decision is not always easy. Some CFOs and treasurers in Asia readily admit that they are not yet up to speed on the intricacies of cash management. But service providers say the basic knowledge of cash management is improving, particularly with many companies in the region looking at ways to take costs out of the finance department. In turn, the vendors of cash management services and products seem to have become more responsive to the idea that what is good for the swallow may not be good for the caterpillar. David Blackman, senior vice-president and manager of cash management services (Asia) at BankAmerica in Singapore, notes that a flexible approach works best for clients and vendors, especially if their aim is a long-term relationship. "We don’t believe in using a fly-zapper when a fly-swatter might be the more appropriate use of technology given the evolution of a business."

Indeed, coming up with the right cash management system is often a matter of painstaking progress, not revolutionary change. Just ask Margaret McCarvill, the director of finance and business development for FMC Asia-Pacific, a part of the US chemicals and machinery conglomerate. Over the years, McCarvill has taken a practical, no-nonsense approach in matching the company’s revenue growth to the sophistication of cash management services it requires. "At a basic level, electronic cash management is what we would call a no-brainer – it makes sense, saves money, isn’t going to cost a whole lot and frees up people’s time," she says. FMC currently employs a system that can be plugged-in (and plugged-out) to manage its cash at just such a level – for basic information collection to monitor payables and cash balances.

But as the company achieves what McCarvill calls critical mass’, that is, when the number of transactions reaches a certain volume, then she thinks it will make sense to start considering some of the more complex issues such as cash pooling, the streamlining of banking partners, and full check automation. And when the time is right, McCarvill sees no problem with introducing cash management services in parallel – that is, taking what is best and most useful from the products on the market. "You can capture the sweet spots," she says, "even before automation is complete." Difficulties arise, she cautions, when you are locked into a software system. But as technology evolves she thinks that should be less of a problem.

Of course, many CFOs in Asia are not even close to contemplating the joys of electronic cash management. That’s years away. For those finance managers, the road to efficient cash management should begin with an internal assessment. "Clients generally know what they want to do, though they may not know exactly how," Blackman says. "Our advice will normally start with: Well, we can’t tell you the answer because there isn’t one." In attempting to decide which cash management system would work best, finance managers should ask themselves some simple questions: Where do units source their materials? In what currency, and how is that currency valued? What are the payment terms? Who are the customers? What are the number of transactions? What is the amount of liquidity?

Blackman cites one case where, while meeting with the client’s treasurers in the region, he discovered a few things the company didn’t know about its own operations. Apparently, one local treasurer maintained his status with the banking community by keeping US$500,000 on the side to lure the banks into bidding for his deposit business. The banks courted his account by proffering free rounds of golf and meals by the poolside. "That wasn’t understood by the head office," Blackman observes. "But the point is, there’s always more money sloshing around out there then you expect." Blackman notes that, until finance managers have all the information about their companies’ operations, they can’t know, for example, when withholding tax will rear its ugly head, or when foreign exchange controls will be an issue, or if notional pooling (the offsetting of balances that enables a company to receive interest on the net without the funds actually moving) for balance deficits are allowed in Malaysian ringgit. "Only then can you come up with a structure and method of implementation that makes some sense."

Even then, he warns, nothing is set in stone. Unlike the US and Europe where the regulatory and tax environment is more or less stand-ardized, in Asia, it is not. Add to that cultural and language differences, unstable currencies, less than transparent accounting practices in some areas, and varying degrees of postal service efficiency, and you have a recipe for a large CFO headache. Until recently, the typical by-products of doing business in such a complicated environment were an excessive number of banking relationships, decentralized policies, and a lack of general structure. In short, inefficiency and high risk. Pass the aspirin.

Less Banks, More Service

Scott Wiesenhoff knows the feeling. Three years ago, when Wiesenhoff took over the CFO job at Singapore-based Philips Asia-Pacific, he quickly discovered that the company’s cash management operation had gotten out of hand. The reason was simple. Philips Electronics, the Dutch parent company with sales of US$41 billion in 1997, had national operations in each country in the region, and local CFOs and treasurers were implementing corporate global policies on a local basis. Lacking any regional coordination, the company entered into more and more relationships with different banks – over 100 by the time Wiesenhoff arrived on the scene. And according to Franklin Lavin, vice-president of global relationship banking at Citibank Hong Kong, the first rule of commerce is: "Be careful about doing business with a bank that has a lower credit rating than your own business." Consolidating Philips Asia-Pacific’s banking relationships became Wiesenhoff’s first goal – a goal that he says helps the company leverage its purchasing power and better manage its counterparty credit risk. By the end of this year, Philips will be down to dealing with 70 percent fewer banks.

That’s an impressive reduction. To help with the slimming , Wiesenhoff put together a list of things he was looking for in a cash management provider. For starters, since Philips has operations in 14 countries in Asia, Wiesenhoff only wanted to work with banks that could provide service in most, if not all of them. And, of course, he wanted a bank with a good customer base and information gathering capabilities – to share with clients. Beyond that, he took into account the quality of the provider’s informations systems, as well as the ability to upgrade, adapt and improve those systems. Professional attitude and presentation in response to a request for proposal also played a part. And, Wiesenhoff says, he eliminated bankers he didn’t feel in sync with. Implementing cash management services can be a lot like marriage. It is a long, arduous and taxing process, and the adjustment period will be anything but smooth, simple and quick. "You’re going to be living with these people for years," says Wiesenhoff. "You’ve got to have a similar style and approach so you can get on." Even then, the Philips Asia-Pacific CFO warns of late nights, sitting in a room, trying to figure out what structures will work in different countries, Wiesenhoff says. Regulations, fiscal situations, and banking environments – not to mention internal corporate changes – can test the patience of even the best of partners.

That’s particularly true if potential partners are bombarding you with new cash management systems. There’s an awful lot of product-pushing by banks, admits Nicholas Franck, Chase Manhattan Bank’s vice-president, international treasury consultancy group, global payment and treasury services. "CFOs are not really looking for cash management tools, but cash management solutions," he says. "If someone came up to you and said the camshaft is the most important part of your car’s engine, you may think: ‘Well, that may be true, but I don’t care as long as I can drive where I want to go.’" Franck recites a classic case of a less than heavenly relationship where a bank offered a commodities firm a cross-border pooling service. Apparently, during the implementation process, the company thought to ask about the tax consequences and were brusquely told to check with their own tax advisors. "That’s like a space shuttle manufacturer saying that it won’t do anything to protect the astronaut from gravity," says Franck, "because gravity is not under its control." The obvious difference, then, between a bank selling a commodity and a value-added product, is service.

And it’s service that most banks are trying to sell these days – though some still get caught up in trying to have one more feature than the other guy, confesses Thomas McCabe, head of cash management sales, corporate and institutional banking for Standard Chartered in Singapore. "Although we all like to talk about our products having differentiation, the cold reality is it doesn’t take too long to duplicate them," he admits. "It’s not real difficult to see what the competition is doing. The differentiation is in the service." McCabe stresses that while it’s easy to be impressed by how technology is leveraged, real efficiency comes from the leverage of information.

Change Management

That sort of leveraging is not always easy to pull off, however. Chase Manhattan’s Franck points out that at the majority of companies worldwide, there’s a corporate mindset that views finance operations as a necessary evil; not something a company wants to do, but something it has to do. As a result, there’s not enough investment in the people, processes, and systems to make the most of a finance department. "It’s very frustrating - for those who have vision and capabilities - to realize that even with the best will, intentions and know-how, they can’t put their plans in action because of corporate inertia."

Inertia can materialize in various forms. One is cultural resistance, a common complaint from CFOs in Asia. At Hong Kong’s Dairy Farm Group, a food and drugstore operator with sales of US$2.9 billion in the first half of 1998, group treasurer Simon Neville recently went through the process of outsourcing the check payment and check issuance side of accounts payable. Neville’s first step was to look at paying suppliers directly into their accounts by autopay. "There seemed to be a certain resistance from suppliers within Hong Kong, but also within Asia, to giving away their bank account details to their customers," recalls Neville. But by maintaining an open and frank dialogue, and by trumpeting the benefits of the new arrangement, Neville says initial fears were easily dispelled.

Within Dairy Farm, too, the group treasurer says he takes on the role of an honest broker to convince staff that change can be positive. Whenever Neville introduces a new concept – whether it involves cash management, foreign exchange, or a funding line from the bank – he leaves the ultimate decision to local management. "We don’t have this idea of imposition from the center. It’s down to the local financial management people to say it’s not right for their business," he states.

That’s an enlightened approach. Finance managers and vendors say good change management is crucial to the success of any cash management system roll-out. Take Astra Pharmaceuticals, a Philippine-based company with in-country sales of 2 billion pesos (US$49 million) this year. Vice-president of finance at Astra’s Manila headquarters, Exequiel Lampa, has made some fairly sizeable changes in cash management operations since he joined the company seven years ago. "To give you some indication of the state of our development at the time – what I may call the sophistication of our IT department – we didn’t even have a fax machine," he says.

During Lampa’s tenure, Astra has centralized collections, introduced electronic payments to suppliers, and outsourced check disbursement, though the process was slower than expected due to the interfacing limitations of Astra’s accounting software, FAMAS. "It’s FAMAS, not famous," Lampa jokes. When implementing such changes, says Nolan Adarve, the assistant vice-president of HSBC global payments and cash management in Manila, it’s important to keep in mind that good cash management is a joint-venture exercise. "It would be very difficult for one party to complete the task if they’re not the one using it."

And there are a few tasks that Lampa would like to carry out, but can’t. The regulatory environment in the Philippines, for example, limits foreign exchange and cross-border sweeping (the physical gathering of accounts through funds transfers). But he has worked on soothing in-house concerns about security – specifically the signing and tracing of checks. And, externally, as well: "You’d be surprised, even now some suppliers prefer to see a check physically brought by messenger instead of having it credited in their account the same day."

Under Threat and Overworked

If suppliers often feel threatened by changes in a company’s cash management procedures, so, too, do finance department employees. The outsourcing of non-core finance functions – particularly activities like the processing of checks for payables and receivables – may have some finance staffers worrying about their jobs. What’s more, reduced manpower can leave little time for finance managers to implement new techniques and systems. Typically, the companies with the most urgent need to reengineer their finance departments have the least time to do so. To improve operations, Chase’s Franck says finance staff must have the time and motivation to review, assess, innovate and improve. That, he claims, is why bank consultants are doing such big business these days. "It’s a shame that it’s so rare that finance people take pride in what they are and what they do," he says. "But because they think they’re seen as processing shops with no value-added by the company, they find it hard to be inspired."

In fact, a recent study of finance functions in top US companies by the Hackett Group, a US consulting and benchmarking firm, found that professionals and managers spent nearly 85 percent of their time on routine transaction processing and control activities – instead of helping to grow the business. "Managers spend only 80 minutes a day on higher value-added activities," says president Greg Hackett. "They might as well not bother showing up until 3:00 p.m."

One of the keys to pushing through new cash management strategies, then, is to rally support at all levels – especially senior management. At Astra, for example, Lampas admits that the finance department is in a support role to the company’s industrial operations. "But that doesn’t mean we can’t be creative in the area we are allowed." And within those confines, he says, Astra’s president is actively involved in the company’s cash management processes and encourages change – where change means improvement.

And there’s little doubt that change will come, though perhaps not at the rate of speed most predict. Standard Chartered’s McCabe says that in the US, experts have forecast the coming of the cash-less society for two decades. But even today, the volume of US paper check transactions still outnumbers electronic ones. It’s worthwhile to keep in mind that automating processes, making them electronic, isn’t the answer for every business. Cost-savings and efficiency can be improved for many businesses simply by changing control and monitoring capabilities. And for those whose operations are already at a sophisticated level, the temptation to buy in to the latest product must be weighed against actual need. Says McCabe: "Take speed of payments, for example. You have to ask yourself: ‘How many times do you have to make one within 15 minutes? Isn’t it more important to know whether it will be made in 24 hours or four days?’"

Companies that are ready to move up to a more advanced level of cash management have to find a balance between benefits and costs – and consider the difficulty in implementing change. The best advice: research and review and consult – before rushing in. Franck tells of one company that set up a country wide payables system in Thailand only to discover that long Thai names were cut off on the electronic remittance form. The result: back to square one. Adds McCabe: "When you take all these resources and spend the next few years trying to make sure the back office is so lightning quick that it just sings – where does that get you?" Those resources may be better utilized, he suggests, in expanding the business, getting new customers, and adding value to your product.

Good advice. CFOs and treasurers need to know their own limits – and the limits of the environment they work in – before setting out to overhaul a functional cash management system. Even then, streamlining a handful of cash management functions takes planning and patience. Says Astra’s Lampas: "It’s an evolutionary process to get where we want to go – and quite a slow one." The race to total automation, it would seem, belongs to the surest, not the swiftest.

Steven Crane is a Senior Writer at CFO Asia based in Singapore