| High techs and start ups can outsource treasury |
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| Outsourcing treasury can grow from a few transactions a month to meet the rapid development of hi-tech, start-up companies, writes John Moriarty |
There has been a well documented explosion of hi-tech start-up companies in Ireland in recent years. Each day brings news of companies outlining publicly their plans to introduce new radical web enabled technology solutions and seeking to emulate the Baltimore, Iona and Trintech success stories.
Such companies have been successful in raising Irish and international venture capital to enable them develop their technology and markets. Usually, management and control issues necessarily take a back seat as all systems are go in the race to bring the technology to market.
Business Process Outsourcing (“BPO”) is an emerging business trend whereby all non- core activities are outsourced to specialist service providers, enabling companies focus on their key core strengths. This trend is especially apparent in the US as multinational corporations strive to cut costs and improve service to meet the challenges of e-commerce and increased global competition. Additionally, new market entrants and start-up companies are outsourcing non-core activities to enable them focus on their technological strengths.
The trend in outsourcing in the US has reached financial and accounting activities where companies are no longer assuming that traditional chores need to be conducted in-house. It is estimated that the current value of outsourced financial and accounting activities is circa $40 billion and is expected to more than double in the next 3 years.
So clearly there is an increased trend in outsourcing, especially in the US, and hi-tech firms at the forefront of this trend.
Hi-tech/start up companies’ needs
The recruitment sections of the daily newspapers explicitly outline the armies of technical skills required to develop and introduce new technologies. Additionally, the new entrepreneur company needs a range of business skills in such areas as:
• Sales / business development
• Marketing and market research
• Financial and treasury
• Accounting
• Board of directors
• Legal
The concept of venture capital embraces some assistance in management, usually at a senior and board level representation.
FTI has been active in assessing the financial and treasury needs of emerging hi-tech companies. From this assessment, we identify that there is a lower focus on financial and treasury aspects of the businesses as they emerge. We have identified needs in the following areas:
• Business planning / financial modeling
• Fund raising
• Cash management / banking relationships
• Currency and interest rate risk management
• Treasury transactions, obtaining good market prices
• Control and management
Generally, the accounting and book-keeping elements of the undertaking are sufficiently catered for, often using short term contracted-in staff. Also tax and audit are usually well catered for.
Tradition in treasury outsourcing
There has been a tradition in outsourcing of treasury activities for many years, certainly since the late 1980s. For instance, of the 350 companies who have set up operations in the IFSC, over 90% of them have been outsourced to agent managers. Primarily the focus of this outsourcing to date has been on the tax benefits for large multinational corporations, but increasingly smaller firms are outsourcing for service and commercial reasons. The setting up, managing and maintaining of treasury structures in-house is not easy even for multinationals, particularly in the areas of attracting, retaining and managing staff, and getting the level of service needed. Many companies are opting for the outsourced model. These issues are also relevant for hi- tech/start-up company.
Treasury outsourcing for an emerging hi-tech firm
Treasury outsourcing for an emerging hi-tech firm will involve some or all of the following:
• Assistance in developing a professional business plan, for investors and lenders. Also, outsourcing will update and develop the business plan as the business grows and develops
• Assistance in accessing sources of finance, initially and on an on-going basis
• Collecting revenues (hopefully these will accrue quickly!) and making payments using the best of available technology platforms
• Managing on-going banking relationships, both operational day-to-day and strategic needs
• Identifying, monitoring and managing the currency and interest rate risk issues that emerge on a best practice basis
• Undertaking treasury transactions with access to the best market information and prices
• Controlling and managing these activities to best international practice standards.
Obviously, the needs of a start-up will be small initially, perhaps a few transactions/ activities every month, but expanding rapidly as the company’s business scales up fast.
You might ask how the initial service differs from a consulting service? There are some similarities but the real benefit is the longer term buy-in from the outsource service provider to the hi-tech/start-up company’s business case. This includes its willingness to provide the best tailored solution from day one and its commitment to expanding its role over time. It contrasts with a short consulting solution, which may not be tailored to the real long term needs of the client. The initial cost implications of the outsourced solution are also in favour of the start-up company.
Key issues in the outsourcing decision
Quite obviously, there are a number of concerns in outsourcing financial and treasury activities. Hi-tech/start-up companies should consider the following in deciding on the outsourced treasury solution.
• Visit the service provider on his premises - this is a must.
• Make sure the proposed outsourced treasury provider has the competence to deliver (people, expertise, systems, communications, management) and a proven track record.
• Can the service provider adapt to meet the growing requirements of the hi-tech company?
• Does the service provider have an understanding of the hi-tech company’s requirements and ambitions; is the service provider like minded?
• Make sure there are no potential conflicts of interest, that the outsourced treasury provider is not acting in his own interest, rather than for you, the client. This is a particular concern where the outsourced treasury provider is also potentially the counterparty to many transactions, such as a bank. Chinese walls are not adequate.
• The outsourced treasury provider should be regulated by a respected and competent authority; and also be subject to regular audit.
• The outsourced treasury provider should have a robust, best practice control framework in place in its operations, and existing client referees should attest to this; particularly with regard to funds transfers. We favour a control model where the outsourced treasury provider does not take possession of the client’s funds but has mandate access to move funds between pre-designated accounts.
Financial management skills
As stated at the outset, there has been an explosion of Irish hi-tech and start-up companies in recent years. The technological skills and acumen of these firms is very impressive. They are making their mark on a global stage. It is imperative that the financial management skills of these companies are of equal skill and pedigree.
Treasury outsourcing is an emerging way in which these companies can get best of breed financial management solutions from an early stage in their company’s life and ensure that the technology advantage can attain its full potential. |
John Moriarty is an Executive Director of FTI and is a fellow of the Institute of Chartered Accountants in Ireland and a member of the UK Association of Corporate Treasurers.
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| Article appeared in the April 2000 issue.
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