The Value of
Treasury Benchmarking
This article argues the case for
treasury benchmarking - what does it mean and what will it contribute to your
organisation?
Every
large organisation operating in a dynamic landscape has to deal with
considerable internal and external financial and operational challenges in
the areas of cash management, financial risk management and balance sheet
management. As a result, financing - and its impact on the business - becomes
more complex as the organisation grows.
Treasury
departments therefore seek to optimise the daily handling of debt-exposures,
liquidity considerations, cash management and financial risk management.
Actual dealing and the resulting confirmations and settlements capture these
activities. While conducting these primary duties, treasury departments are
under continuous pressure to deliver value and the ability to account for
every decision made. Processes need to be transparent, preferably delivered
in 'digestible' reporting-structures, not only for external stakeholders, but
also to a greater extent, for the company itself (top to bottom). Over time,
this has proved to be challenging, as actual treasury performance measurement
is not as straightforward as it sounds.
Benchmarking Treasury
The
challenge lies in choosing the 'right' measurements of company-specific
exposures to exemplify an organisation's treasury performance and its 'fit'
within the organisation as a whole in the best way. But because the treasury
function operates so closely to the core of the company, how can these
measures support the added value of treasury departments as an essential part
of the organisation when they are regarded in isolation? Thus, an even
greater challenge lies in delivering constructive reports that address both
the qualitative and quantitative aspects of treasury's contribution to the
business or, in other words, its interaction with its environment.
Figure 1: Defining
Treasury Department Strategy
source: Deloitte
An
organisation needs a frame of reference to see where it is headed and how it
can optimise its treasury operations. For highly experienced firms, in particular,
it can be difficult to identify the critical factors that determine success
of the treasury department because an objective view is often missing. In
many cases, organisations tend to focus on the weakest point within the
organisation while less pressing issues tend to be overlooked more easily.
Nevertheless, such issues can still offer opportunities and current treasury
activities can be improved.
A
frame of reference can be created through benchmarking. Benchmarking is a
tool used in management particularly for strategic purposes whereby
organisations evaluate the performance measurements of their processes in
relation to best practices within their own sector.
Knowledge
about the quality of one's treasury practices can be gained by comparing your
treasury processes with others in and outside the industry. This allows you
to improve your processes, leading to a more efficient and higher quality
treasury function while being more in control. Organisations can identify
bottlenecks in their performance measurements through benchmarking, which are
vital for more effective management when compared to their peer group and in
taking affirmative action to optimise their performance.
Why Should my Organisation Benchmark its Treasury
Function?
Large
complex organisations with a complete and functioning treasury department,
such as medium-sized or large corporates and financial services institutions,
feel the need to improve/invest in their daily treasury operations or
functions, as it contributes to cutting costs and reducing resources.
Furthermore, they also seek to validate and - if possible - improve some of
the internal measurements. This is done through the creation of a balanced scorecard
to 'translate' current mission and strategic objectives into measurable
benchmarks in line with the company's overall vision and strategy.
In
daily operations, the primary task of a treasury function is to manage
interest and foreign exchange exposures, long-term funding, cash, group bank
relations and corporate finance activities. It is important to be aware of
the positioning of the treasury department within the company and with whom
its main interactions are in managing market risk.
Figure 2: Determining
Exposure Characteristics of Integrated Treasury Processes
source: Deloitte
Benchmarking
all related aspects to the treasury function, such as current collaboration
with other departments (e.g. front-office, accounting and corporate finance),
current balance of power and main communication flows within the company,
will help to create a more structured approach to treasury performance
management and allow management to have a clear view of existing strengths,
weaknesses and untapped opportunities.
It
is important to bear in mind that the objective is not to break down all
existing treasury processes and simply replace them with new ones. It should
be seen as an exercise that broadens and challenges existing procedures
within the organisation, enabling a company to scrutinise its own
effectiveness.
Benchmarking
the treasury function can provide fresh input for improvements within any
organisation, even highly professional companies with well-established
treasury functions and highly qualified staff.
What Will Treasury Benchmarking Contribute to My
Organisation?
In
a treasury benchmark report, the emphasis is on a high-level review where
results of the benchmarking are available in a relatively short time period
and where the amount of detail is dictated by the organisation. It provides
more clarity on required information as well as greater insight. In addition,
benchmarking will provide insight into the level of risk tolerance and more
transparency across requirements for internal treasury measurement projects.
This means that an independent external third party reviews the current
mission, vision and ambitions of a company's management, and what is actually
happening within the treasury function objectively. As a result, possible
changes to treasury management processes will be suggested. If these changes
are implemented, they can lead to improved process performance, a higher
level of accuracy and efficiency in shorter timelines.
In
order to gain knowledge of the positioning of a company's treasury department
and its environment, a benchmark provides perspective into factors, such as
the company's organisational structure, its existing procedures, its people
and lines of communication. Value drivers are also singled out and are key to
identifying critical gaps.
Consequently,
these critical gaps need to be subjected to an interactive and critical
audience in order to create possible benchmarks. Being aware of the fact that
benchmarking can only improve a co-operative environment, where full
understanding of best practices in process performance can be obtained and
shared at reasonable cost, means taking affirmative action to identify the
'best in class' treasury management processes in the industry, map them and
determine a company's position in its industry.
Article
by Ton Verbeek is Director Capital Markets, part of Financial Advisory
Services B.V. and heading the Treasury team in Amsterdam. He is specialised in setting up
Finance & Treasury organisations with different international corporates
and has over 25 years experience in the field of Finance & Treasury, for
i.e. cash management, tax & treasury, cash pooling and working capital
management. His team consists of professionals who have worked for many years
in treasury-, trading- and bank environments.
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