LOCKBOX, AND TWO SMOKING BARRELS
Consolidating treasury operations is not for the faint of heart.
By Sethuraman Dinakar and Tom Leander

Meet Simon. Recently, Simon was promoted from finance manager to the post of treasurer at a top-tier Asian company. Given his new position, it's not surprising that Simon is now being courted by a clutch of bankers. The Asian crisis has changed Asian finance, the bankers point out, and with it, the role of treasury. Simon's job, he is told, is no longer a support function, but a core competency. Down there at the core, the best way to cut costs and to wring cash out of the system is to centralize the company's cash management.

Full speed ahead. Simon consolidates his cash management operations in a regional treasury center in Singapore. He severs the many independent banking relationships maintained by his local finance managers, hiring a single bank instead. The managers don't like it, but Simon dismisses this as irritation over losing the golf outings the banks offered to win their business. He begins to whittle down the administrative staff in the branches. In Indonesia, one of Simon's company's biggest markets, it turns out that the manager of the office is the wife of one of the company's biggest clients. Simon leaves her in the post, and riles every other employee in the company.

Meanwhile, back at the hub, Simon begins having trouble with his new bank. He discovers that - due to tax restrictions in Japan - the pooling strategy that the bank recommended actually adds costs. This forces him to reverse his entire liquidity management strategy. And the transfer to e-commerce is turning into a nightmare. Bankers had promised to substitute cumbersome paper payments with new transaction-based software. In half the markets where Simon's company operates, suppliers and customers are resisting the move. One customer still wants to pay by delivering bags of cash over the Indian railways. A sales manager loses his temper over the issue, and the customer walks.

Worse, the treasury committee forecasts that Simon will fail to meet his ambitious goal of a 40 percent cost savings - a number suggested by one of Simon's consultants. Late into the night, Simon rewrites the team's original objectives, making the disastrous effort look like a modest success. But the original plan falls into the hands of the CEO. One afternoon, his mobile rings. Simon recognizes the CEO's voice. "Simon, we'd like to make you the new finance manager for all the Andaman Islands."

Unfortunately, Simon's tale is not a fabrication. While his trials and tribulations are a composite, all the events in the story are based on the real life experiences of real life treasurers.

This should give finance managers real concern. These days, bankers and consultants in the region are busily trumpeting a host of leading-edge techniques to help companies better manage their cash. Mostly, the push is for centralization - from consolidating treasury operations to creating shared service centers. Others are deploying browser-based technology, taking advantage of new e-commerce products introduced by banks.

The push for consolidation has real merit. Centralization cuts costs, improves productivity, and brings a wealth of benefits. For proof, bankers note that centralizing treasury functions has worked beautifully in the US and admirably in single currency Europe.

It won't be so easy in Asia. The truth is, the different currencies and markets in the region make it tough to move cash seamlessly across borders. Given that difficulty, it's not surprising that a survey of our Panel (CFO Asia's exclusive polling group of some 270 finance managers) revealed that cross-border collections and payments remain a high priority when companies choose a cash management vendor (see chart). Privately, some treasurers complain that arcane regulations in many countries in the region make it impossible to centralize all treasury functions.

Ask Damian Glendinning, manager of IBM's treasury services in Asia. In a candid assessmentin a bank guide to cash management, he writes: "IBM's experience of cash management in the region is that it continues to lag behind the best practices seen elsewhere, and that structural impediments to improvement are far from being removed."

Not exactly great news for corporate treasurers - particularly those working with limited cash resources. In a survey conducted by Asia Market Intelligence in late 1998, finance managers at 467 Asia-based companies rated cash management as the most important corporate banking activity. "Earlier, Asian corporates ignored cash flow because they were flush," says Richard Jaggard, a manager in Bank of America's global treasury services in Hong Kong. "Now it's different."

Before the Asian crisis hit, high returns meant CFOs and treasurers rarely had to worry about the occasional cash shortfall. Just as important, companies could raise money offshore at a cost of funds well below that of local rates - a remarkable boon that lasted for years. Thai companies, for example, could borrow US dollars at 6 to 7 percent, while borrowing in Thai bahts might have cost them 9 percent or more. In such an environment, cash management seemed like little more than a quaint art.

Not anymore. As Glendinning notes: "Managing [cash] effectively has become the key to profitability of many companies in Asia, and for some it may even be a question of their ultimate survival."

Hubbub

To help wring much-needed cash from working capital, some companies have consolidated their main treasury operations in a single hub. Such a move allows companies to shed relationships with a dozen or more banks. By dealing with one primary cash management vendor, a treasurer is generally able to negotiate a discount on fees.

Control from the center enables a corporate treasurer to more easily set up netting, sweeping and pooling of accounts. Netting, for example, allows the treasurer to aggregate the dozens of transactions in a currency such as, say, Hong Kong dollars, and settle them all at once in Deutschemarks, therefore eliminating dozens of separate transaction costs. Sweeping repatriates capital back to the hub, eliminates or reduces the need to borrow and allows surpluses to be invested in higher yielding instruments. Pooling allows a company to pool the notional amount of multiple accounts into a single entity without actually moving funds. In theory, all of these liquidity tools can be handled more effectively - and more cheaply - from a central hub.

But it's hard to tell just how cheaply. Figures on savings from centralizing cash management in Asia are hard to come by. Nicholas Franck, director of CFO Solutions, a Singapore-based treasury and finance consultancy, estimates that "Centralization can save around one percent of revenue, or often more." He adds: "Smaller companies tend to get greater savings on operating costs and larger ones on financial and tax costs."

One company - admittedly, a financial institution, but the figures remain instructive - has tracked its own treasury hub, which is part of a larger financial shared service center. US-based Bank of America set up the center in Hong Kong in 1994 to manage the flow of some US$7 billion to US$8 billion worth of Asian transactions daily. Daniel Tay, manager of the bank's cash management operations in Asia says that the center generated savings of US$10 million a year between 1994 to 1997.

But there's more to this urge to merge than just cost-cutting. Off the record, managers at some distressed companies say lax regional treasury operations have dearly hurt their companies during the financial crisis. Centralization takes away autonomy from the regional branches and puts it in the hands of more expert finance managers - or so the argument goes. A company also has more control staffing a consolidated operation.

Further, some treasurers claim it's easier to manage risk from a centralized hub. Certainly, most finance managers believe they can best manage what they can measure, and a state-of-the-art treasury center does provide up-to-the-minute data. That data, coupled with centralized supervision of cash flow, opens new opportunities for currency hedging and forecasting. Treasurers at some larger companies have introduced sophisticated techniques such as liquidity modeling to forecast shortages and surfeits of cash. "Treasurers have an edge in assessing risk because they control fund flows and interact regularly with banks and clients," says John Thurlow, treasurer for Merrill Lynch's Asia Pacific operation.

Sacks of Cash

While the merits of a consolidated treasury center may be plain, the difficulties in setting one up are not always so obvious. One of the complications: the very different level of operating conditions in different markets. In Singapore and Hong Kong, for example, CFOs say it's easier to find good computer programmers and finance staffers. What's more, communications networks in these countries make for smooth electronic movement of cash. But in places like China and Indonesia, relying on local phone networks is a real throw of the dice.

A bigger problem, experts say, is that varying tax regimes in various locales means there's no universal pooling of funds in Asia. For example, the taxation for pooling in Japan is advantageous for two Japanese businesses, but prohibitive for two foreign companies operating there. Singapore, on the other hand, allows sweeping but not pooling of local currency. In Hong Kong, it's just the opposite. In Malaysia, pooling is allowed within the same legal entity, but there are restrictions on borrowing in local currency. Korea, the Philippines and Taiwan allow netting, but foreign exchange transactions must be executed locally. In China, there is no netting. Get the picture? Johan Hafstrom does. "We cannot manage funds here as we do from our Stockholm office for Europe," says the manager and treasury consultant at Singapore-based Astra Pharmaceutical. "There are too many local regulations."

"I've heard treasurers of multinationals who are new to the region say, 'I need a very sophisticated tool, such as cross-border pooling, in every country I operate in,'" says Anthony Solimini, senior vice-president, product, for HSBC's global payments and cash management. "But there are limits to the possibilities in the current environment. You have to face reality, looking at the situation country by country."

Tan Choon Hua, senior product manager at Deutsche Bank, is blunt: "The task of managing liquidity is a challenge to even the most experienced treasurers in Asia."

That challenge increases exponentially in India, where the free flow of foreign currency is prohibited. On the subcontinent, the Companies' Act places restrictions on inter-company lending and in-house banking. What's more, local companies usually make payments in cash. You can't blame them. Checks must be physically transported from one bank to another, a process that can take up to a month. In some cases, companies move money through couriers, or angadis, who zip between towns on trains, carrying hoards of cash. "India needs an independent treasury operation," says Sameer Kakar, corporate treasury head at Whirlpool, India. "We cannot run it by remote control from Singapore. Transactions have to be done in-country."

Some finance managers, however, say such Dickensian practices only heighten the need for a consolidated corporate treasury. Philips Electronics Asia Pacific began consolidating its regional treasury operations in 1995. According to CFO Scott Weisenhoff, the company tracks the cash management practices at nearly 220 local sites from its treasury center in Singapore. "In India and Pakistan, everything is done locally," Weisenhoff notes, "but we monitor from Singapore and frame policies." Those policies include financial best practices, which are implemented at as many sites as possible. "We can afford some expats here," says Weisenhoff. "They are closer to the market and give added value."

In all, Weisenhoff employs 15 workers at Philip's treasury center in Singapore. According to the company CFO, the center has helped pare the number of banks Philips uses in Asia by a whopping 80 percent. What's more, Weisenhoff points out that Philips has transformed the center into a management information unit, tracking local developments and advising subsidiaries on how to manage risks. The finance center, in a roundabout way, can also fund company subsidiaries by diverting cash flows to countries where inter-company funding is barred or is taxed at a high rate. Weisenhoff says Philips Singapore can offer up to six month's trade credit to most of its subsidiaries as a substitute for working capital borrowing.

Contract Bridge

Anixter Asia Pacific, a US$100 million-in-revenues subsidiary of US-based Anixter International, is trying to go one step beyond. Anixter is setting up a full-blown shared service center for several corporate functions, including its finance department. In contrast to a regional treasury center, a treasury shared service center actually functions as a stand-alone operation, and typically charges other business units within the company for using its services.

Anixter gave the green light to its shared services initiative in 1997, and the 3,000-square foot center in Singapore went into operation this year. But according to divisional controller Scott Berman, the process is far from complete. Berman says the center will ultimately help separate back-office processing from decision-support functions. In addition, the center should help Anixter rectify any accounting glitches coming from the company's branch offices. Before the shared services initiative, payroll, accounts payable, purchasing, vendor relationships and treasury functions were run by individual country managers, with little control or coordination. That led to inconsistencies.

Today, Anixter's shared service center handles payroll for most of the company's operations in the region, nearly all vendor payments, plus accounting and treasury functions.

One of Berman's last steps before opening the center was to sign performance contracts with managers. Employees are evaluated on the quality of service they provide to other business units. That helps keep the treasury department attuned to the needs of the branch managers. Berman hopes to make the center self-sustaining.

So far, that's yet to happen: Anixter has failed to realize substantial gains from the shared services experiment. But it's still early in the game. Berman says he expect to see a 30 to 40 percent savings in administrative costs this year. But the bigger picture benefits - better financial strategies, improved operational focus, smoother cash management - have been slow to develop. The only big mistake Berman admits to having made along the way was changing his bank during the shared services rollout. He says the combination can be practically lethal.

Five Years in the Making

Ignoring personal and political problems can be just as nettlesome. Experts say the transition from a decentralized structure to a regional treasury center can touch off some nasty internal squabbling. To give potential customers a first-hand look at the possible pitfalls, Bank of America's Tay sometimes allows companies interested in sharing services to look at the operations he built.

Bank of America employs some 300 people in its finance shared service center, which handles cash management as well as trade finance activity. The center took a jaw-dropping five years to develop. "A lot of people ask why it took so long," says Tay, "but the reason is obvious. You have to look at each country as a separate situation, and assess the degree to which you can draw it into your plan for centralization."

And then there's the question of finance managers giving up their local autonomy. Tay says a German company seeking to centralize its Asian treasury operations asked about the bank's experience. "Their primary concern was the people issues," he acknowledges. "They thought the technical problems could be mastered, but they wanted to know how to resolve the situation in which branch offices lost autonomy."

One consultant recalls being hauled into the office of a multinational client in the chemical industry with operations in nine Asian countries. The company had centralized quickly, without taking the time to get the branch managers to buy into the program. "There was a lot of driving the process from the center," recalls the consultant, "but they weren't really listening to what the finance people in the subsidiaries were telling them." The company found out about the problem when "a groundswell of anger" rose from the subsidiaries. It got more serious when sales staff began reporting back that customers had grown irate after the center altered billing practices and payment schedules without notifying anyone.

Not a pretty picture. Still, the fact is, a recent study by consultancy Ernst & Young showed that centralized operations cut treasury costs at US and European companies by as much as 50 percent, with an average payback period of two years for capital expenditures.

With figures like that, its not surprising that as many as 300 multinational corporations are currently considering some form of treasury centralization in Asia, according to consultancy PricewaterhouseCoopers. The plain truth is, there may not be a better model out there - yet (see box). Franck of CFO Solutions says: "Centralization does not mean that you lose local support - but you do have to make local support a high priority." Treasurers who ignore this simple advice might want to keep this is mind: the Andaman Islands are located in the Indian Ocean, 800 miles east of Calcutta. It's very hot there.

Sethuraman Dinakar is CFO Asia's Singapore bureau chief. Tom Leander is a contributing editor.