The concept is fairly simple. Instead of building, maintaining and managing a treasury function in-house in an organization, it can be outsourced to a specialist treasury management services provider, under a services provision agreement.
The trend generally is very much in favour of outsourcing. Outsource everything except core competencies that are critical to the business. In the US at present, corporations are focusing on cost reduction to offset the current downturn in the economy which is hitting revenue. Outsourcing of non-core functions, which has been in vogue for some two to three years, is now in full swing as a main measure to achieve this cost reduction.
Critical activity
Corporations have always seen treasury as a critical activity, but it cannot be regarded as a core competency, critical to the business. After all, corporations, which contain an in-house corporate treasury function, do not have it as the main business line. Outsourcing of treasury is certainly a valid strategy, and it is now quite common. In FTI, we were contracted to run five new outsourced treasury operations in 2000.
The business context
There are two main business drivers for the establishment of outsourced treasury operations:
• the globalisation of business, and in particular the spate of acquisitions by US multinational corporations (MNCs) in Europe, in recent years, has created a need for treasury structures which match the new global business structures. These MNCs require a treasury operation in Europe to provide services and manage the risk of their European businesses.
• MNCs continue to pursue tax management solutions, using treasury activities and transactions as one of the key vehicles. This often involves setting up treasury structures.
In both situations, corporations will now equally consider outsourcing and in-house options for these structures.
Corporation type
What type of corporations will tend to be interested in an outsourced solution?
The following are the features that would indicate suitability of outsourced solutions:
• MNCs engaged in extensive foreign business, either foreign operations or export.
• Established corporations, which have difficulty in resourcing this function.
• It is an area of scarce expert resource.
• Corporations which have been spun-off from a larger group, and are left without capability in treasury.
• Start-ups, which have achieved critical mass, and they outsource everything possible.
Corporations in US and Europe, with this profile are serious candidates for outsourcing.
What can be outsourced?
The full range of treasury activities and functions can be and are being outsourced. The table opposite sets out the options.
It is worth noting that as well as all the treasury activities and functions, the full infrastructure can be outsourced. Such as market information services, treasury management, accounting and payment systems, IT, office, administration and secretarial facilities. And interestingly, another current business trend - ASP systems solutions - is also accommodated. Corporations can outsource the complex and difficult treasury systems solution, even where the treasury function is kept in-house.
Corporations can elect to outsource all of the activities and functions listed above or any part or parts of them. One of FTI’s clients, a Scandinavian MNC, has no in-house treasury function whatsoever, everything is outsourced to FTI. It has just a Finance Director who manages the FTI service but no treasury structure. Another client, an IFSC-licenced financial institution, has outsourced just the mid and back office functions. It provides its own front office in-house.
Making the choice
Key factors which are considered when deciding between outsourced or in-house options are:
• Does outsourcing fit with the general culture and practice in the corporation? If not, then it must be seen as a risky course, or at least somewhat trail-blazing.
• Can the expert resource and competence be secured, and maintained long term, in-house, or does outsourcing provide a more secure, long-term quality service solution? Is the outsourcing option available in the location(s) under consideration - is the infrastructure there? Dublin has a very well established outsourced treasury capability and infrastructure, the other recognized treasury centers much less so to varying degrees.
• Does corporate management, particularly the CFO, have comfort with farming out this critical function? Is he confident that he can manage and get good service from the service provider? Or is he more comfortable having the function close by and directly under his control?
• Does the CFO have comfort that the controls safeguarding the corporate financial assets and financial-type risks are better provided by an outsourced or an in-house solution? Most often, in-house treasury structures are quite small - few people - and it is difficult to achieve even the basic recommended control structure. This issue does not arise in outsourced solutions.
• Which solution provides the best cost outcome? In-house structures will require a full greenfield solution, while outsourced solutions will benefit cost-wise from economies of scale and existing infrastructure.
These factors weigh up differently in each case and corporations will go through a scorecard type exercise in reaching a decision.
Benefits
The general experience of outsourcing over the past 5 or so years suggest that it conveys the following benefits:
• Outsourcing provides a more robust, quality service over time, with more assured continuity.
• The higher level of expertise and experience found in an outsourced provider team will bring leading-edge solutions and more value to the corporation.
• Controls, especially critical division of duties and responsibilities, will be more likely to be effective in an outsourced solution.
• Return on assets, cost of financing, value from cash and foreign currency flows, costs of banking services and fees will be enhanced through the professional approach in an outsourced solution.
• Treasury risk management will be enhanced as a result of the contribution of the professional and expert approach of the outsourced provider’s team.
• The cost of an outsourced solution will be lower than that of an in-house solution. Economies of scale and existing infrastructure enable the outsourced provider to offer a more attractive cost package.
This set of benefits most often will favour the outsourced solution, especially where the treasury structure is likely to be small, with few resources, as is usually the case especially with treasury structures which corporations set up in Europe as satellites of the main treasury at headquarters.
The future
The general outsourcing trend is expected to gather pace and be the norm for corporations as they continue to ‘focus on core’, to reduce costs and especially to reduce headcount.
Outsourcing in treasury management is nothing new - it has operated in Dublin for some 13 years for IFSC Agency Treasury Companies and Captive Finance Companies. Treasury management and treasury systems and technology are becoming more sophisticated and complex. In my view, outsourcing of treasury will also gather pace and become a standard solution option for corporations which aim for professional management of their treasury activities and risks. As a long-standing outsourced treasury services provider, my firm, FTI, is staking its future on it - we see it as our major growth area.
Finally, we see a lot of interest recently by other firms and organizations around the world in what we in FTI and in Dublin have achieved in outsourcing. This indicates that others see treasury outsourcing as a business opportunity.
Yes, outsourcing is at least an equal option with the in-house solution for treasury in the future. |
