From the February 2009 issue of Treasury & Risk magazine

Making the Most of the Middle

Sophisticated treasuries often boast about their success in getting out of the check world, but just because a middle-market company stays fixed in that paper orbit doesn't mean it can't streamline, automate and leverage scant treasury resources effectively. HealthTrans, the $250 million Denver-based pharmacy benefit manager pays almost exclusively by check, generating about 6,000 a month, largely to pharmacies. On the inbound side, it collects 7,000 to 8,000 check payments a month in its paper-intensive lines of business, reports Chris Hanks, COO/CFO. But Hanks and his staff see very few of those checks anymore. The payments are outsourced to KeyBank. "We are able to deal with high payment volumes and keep a lean staff by using Key's check outsourcing service, which we implemented in 2006," Hanks says. "Rather than run a manual operation or build the automation in-house, we just create the A/P data file and send it to Key through their treasury management Web site. They create a positive pay file, load our check run data into their system and send the file to a check printer they use. The check printer prints and mails the checks and stubs."

HealthTrans wanted an efficient, automated payment solution without giving up checks partly for financial reasons: "With $20 million a month in check payments, getting that mail time matters to us. Our strategy is float-driven," Hank says.
Hanks rarely sees incoming check payments as well because they mostly go to a lockbox operated in Denver by Vectra Bank, a Zions Bank affiliate. Vectra opens the mail, scans the checks and remittance documents, deposits the checks and sends HealthTrans a file of remittance data that has been formatted so that it can load into HealthTrans' A/R system and post automatically most of the time. HealthTrans gets an automatic posting hit rate of about 80%, he estimates. "We only work with the exceptions."

According to Craig Brown, director of finance and analysis at HealthTrans, "our biggest saving came from the lockbox and outsourcing collections. That saved us 6,500 man-hours annually."

Hanks believes that Vectra uses intelligent character recognition technology to convert document images into formatted data files. He doesn't know all the details because he doesn't have to. He just knows that the bank takes care of it and it works.

HealthTrans may be a middle-market company, but it has "the mindset of a large, sophisticated corporation," says Kari Osborne, vice president, senior treasury adviser and the Key rep on the HealthTrans account. "They're a technology company. They're very bright, receptive to new ideas and not afraid of technology. If you offer them a solution that matches their strategy, they're ready to go for it. They have a lot of energy."

The company identifies with that perception as well. "This is a very dynamic, evolving, entrepreneurial company," says Brown. "We were entrepreneurial before we separated from the public company. Maybe is has to do with our industry but we just have this attitude that we want to get better."

Hanks wanted to bring his operations up to a best-practices level, Osborne says. "He liked the intuitiveness of the online platform we could offer and all the things he could do online. They didn't have fraud protection at first, and we helped them add that. We did a cost-benefit study around controlled disbursement and that grew into a decision to outsource payables. When we figured out how to add the remittance information piece, it really saved them a lot of manpower. It took some upfront work to get it going, but now it virtually runs on auto-pilot."

HealthTrans was founded in 2000 and got a fast start by linking itself to a public company in a joint venture, effectively operating as a subsidiary of the public company. Then in 2005, using money borrowed from Orix Venture Finance, it dissolved the joint venture and became a free-standing company with what Hanks calls "modest debt," structured as a series of term loans from Orix. HealthTrans also has a revolving credit arrangement with Orix that it has never used but could tap if it needed funds quickly, Hanks explains. Besides the Orix loans, financing consists of an equipment leasing program with Key Equipment Finance, he adds.

HealthTrans runs cash positive, with about $10 million invested in fairly vanilla options offered by Key and Zions, generally picking the safe money-market instrument with the best rate. But it leaves enough in its bank accounts to cover its fees with the earnings credit rate, a strategy that larger treasuries are starting to adopt now that FDIC insurance covers all corporate balances in transaction accounts. (See the Treasury Management department on page 12).

And HealthTrans has been able to pick up some above-market yields because it inherited a relationship with Citigroup through one of the acquisitions it made. "With their liquidity problems, they've been offering some pretty good yields, and we've been able to take advantage of that and get a better return on our cash," Hanks says.

Like HealthTrans, Little Caesar Enterprises Inc., the Detroit-based pizza emporium, has a middle-market balance sheet but a large corporate mindset to go with its giant footprint--thousands of locations and complex cash flow issues. Taking a sophisticated approach, according to Matt Greenough, director of cash management, means not adopting best-practices solutions for tactical gains but looking past those solutions to the real end-game. Many middle-market companies, for example, improve collections by leveraging the most advanced lockbox services. Little Caesar simply did away with lockboxes. "We eliminated our lockboxes over time," Greenough reports. "We improved our processes to the point that we didn't need them. For us, the real goal was to move to electronic payments, not process paper payments more efficiently."

Part of the solution for Little Caesar was refusing to accept check payments for food, except for large orders for group events. Most of those check payments were replaced with debit card payments, something that is essentially electronic and highly automated for the treasury staff. Another part of the solution was leveraging the capabilities of a treasury workstation and ERP system to get the information that otherwise would come in a lockbox report.

While many retailers used the POP (point of purchase) program for converting paper checks into ACH transactions, Little Caesar tried POP and found that it slowed down transactions, so it discarded POP and just stopped taking checks.

Despite its middle-market size (the company is privately owned and won't disclose its annual revenue), Little Caesar also has a larger payroll than some Fortune 500 firms, so it was a pioneer in the use of pay cards for employees who didn't have bank accounts for direct deposit. The result is that over Greenough's 12-year tenure paper checks declined from 65% to less than 5% of payroll, he reports.

With so many dispersed locations and substantial currency to bank, funds concentration is a major treasury ctivity for Little Caesar. "When I started, we used 120 different depository banks. Now we have just five," Greenough reports.

"They have the best cash concentration strategy they can get," says Kathy LaPine, the company's account officer at Bank of America, where she is senior vice president for global treasury services. "They monitor their stores closely and can always pinpoint where a discrepancy occurred." With

B of A, the company uses a network of shadow accounts that work much like ZBA sub-accounts, except that more store-level detail is captured and reported, she says.

While Little Caesar seems a likely candidate for a virtual vault service, that's another solution that Greenough looked past. "We experimented with virtual vault, but exceptions proved to be a problem," he says. "Rather than deal with the finger-pointing, we stopped using armored couriers chosen by the banks and hired our own couriers."

When Little Caesar has a store that is outside armored courier service, the enterprising Greenough gets on the phone, calls other merchants in that community and recruits them into a big enough group that they can persuade a courier company to add that town to its routes.

While Little Caesar cancelled checks and HealthTrans swept them out of sight, $400 million Western Container Corp., based in Midland, Texas, crafted its own solution to fit its circumstances but still dramatically cut the cost and trouble of dealing with checks. Just a year ago, Dale Hosack was surrounded and hemmed in by checks. Western Container, where Hosack is CFO, paid almost exclusively by check, and it took eight to 12 hours a week to get the 500 checks out the door. Now Hosack rarely sees a check. Western Container outsourced its check production to Wells Fargo Bank and saved a lot of time. "Yesterday I spent 15-20 minutes, and that was with two interruptions, getting our payments for the week off to the bank," Hosack says. "Each week we create two files in our Infinium accounting system, one for checks and one for ACH payments, and we send them to Wells Fargo. They do the rest." Better yet, half of those payments are now done by ACH instead of check, Hosack reports, and ACH transactions account for 75% of the A/P dollars. Getting suppliers to accept ACH payments was easy. "We just sent vendors a one-page letter, informing them that we were converting as many payments as possible to ACH and asking them for their bank account information. Half our vendors faxed that information back to us."

Western Container is one of many middle-market companies that, pressed to do more with less, are signing up for packaged bank solutions that automate processes, expedite cash flow and don't take much work to get up and running. "There is a strong preference for plug and play," notes Christa Muth, senior vice president and senior regional sales manager at Wells Fargo. "When we offer multiple options to a middle-market company, they're likely to pick the one that is quickest and easiest to deploy and requires the least help from IT," she says. "They're eager to make improvements, especially anything that improves their working capital position, but it's tough for them to get IT resources. Any project that involves IT has to have multiple payoffs."

Western Container also found a way to eliminate a troublesome number of local accounts and small payments. The company operates seven plants across the United States that make plastic bottles for Coca Cola products. A year ago, each plant had its own checking account and kept small balances in local banks to cover such things as Christmas party expenses and donations to local charities. Now both the checks and the accounts have disappeared, thanks to the company's first purchasing card program. Local people still make donations and buy eggnog and fruitcake, but they do it with cards, and the company makes just one electronic payment per month to Wells to settle all those purchases, Hosack reports. The streamlining didn't save the company a lot of money, but it eliminated a big operational headache, he says.

With a sophisticated package of online services from Wells, Western Container now uses a template to initiate wires through a portal and uses another portal for the occasional foreign exchange transaction. And when Western Container receives an incoming check payment (over 90% of incoming payments are now electronic), Hosack's staff doesn't have to take it to a bank; they just feed it to a scanner that transmits an image of the check to Wells for deposit.

While all the products and services Western Container uses have been around and have been used by leading-edge companies for a few years, it was a revolutionary change for this company. "We had been operating in the Dark Ages. We made a single leap into a contemporary, efficient, automated solution," Hosack says.

Before last year, Western Container had been using a local West Texas bank for collections and disbursements. The new efficiencies came when the company switched all its banking business to Wells, Hosack says. In making the change, Western Container had help from Coca Cola Enterprises (CCE), which owns 85% of the bottle manufacturer. "CCE's treasury helped to orchestrate our makeover," he says. "Their vice president and treasurer, Joyce King-Lavinder, sits on our board and got things rolling. They have the treasury expertise department we can't afford, and they could tell us what to look for."

But it was Western Container that made it happen. "Dale is an agent of change in
Western Container," notes Jim Fox, the Wells vice president and sales consultant who works with Western Container. "They're always looking for new ways to do things better and are very receptive to suggestions. We came in and gave them options for ways to migrate payments from paper to electronics. They wanted efficiency and cost-reduction. We found several solutions that worked."

CCE made some introductions and facilitated conversations, but Western Container made its own decisions, Fox says. "They're open to suggestions, but they operate autonomously." Although Western Container is a separately chartered company with its own board, it's happy to have CCE operate some of its cash flow levers, funding Western Container's accounts at Wells as needed under a revolving credit agreement and sweeping excess cash into CCE accounts to pay down the revolving note or make investments, Hosack explains. The 15% of Western Container not owned by CCE is owned by several independent bottlers, he adds.

Now Western Container is planning another run at the vendors still being paid by check. "The first time we approached vendors, we were selling something we hadn't tried ourselves. Now we've been using it for about a year and it's working fine. The vendors always get paid on time and always get an email with the remittance details. This time we know we're offering a win-win solution."

Losing some float was no problem. "The process savings more than made up for lost float. I'll trade float for efficiencies any day," Hosack says. And with interest rates falling so low, float is practically worthless, he adds.

HealthTrans, Little Caesar and Western Container may be leaders, but they share with many other middle-market companies the intense pressure to control cash, cut costs and protect assets in the face of a plunging economy--and to do it with minimal staffs. Labor-intensive re-engineering is out of reach for most. In this plug-and-play world, lockbox is enjoying a resurgence of popularity. "Adding data transmission can be a quick, easy-to-implement solution today," Wells Fargo's Muth says. "Years ago, banks dictated the transmission format, and companies had to adapt to meet bank standards. Today we can tailor the transmission to the company's A/R system. You just run a test file and it's a go. It takes very little work from IT, and it can save companies a lot of time in posting payments."

P-cards are another middle-market hit, Muth says. "It lets them offload a lot of low-dollar check payments. They get huge front-end control, cut their processing costs and if they build up enough volume, they may qualify for rebates. Commercial card programs have been one of the big success stories in the middle market."

Remote capture is another middle-market favorite. "The desktop scanner has become today's toaster for treasury," observes Dan McCarty, senior vice president for treasury management services at Comerica Bank, Detroit.

But some of the services that theoretically would be most rewarding for middle-market companies get tripped up by IT limitations that the three companies featured managed to avoid. "We offer payables outsourcing where we run payments against the company's rules and choice of payment channel," McCarty says. "Interest is strong, but the challenge is to find the IT resources to create the file we need to receive. Access to IT is really getting squeezed in the middle market. The more esoteric, IT-intensive products can bring impressive efficiencies, but it takes work to get there, and middle-market companies don't have the resources."

"Every dollar matters more today than it did six months ago," says David Fuller, executive vice president and head of treasury and payment solutions for SunTrust Bank, Atlanta. "Middle-market companies want to be sure they're getting the most value out of basic treasury products. Some things that may not have made sense a year ago could make sense today. For example, a company may have controlled disbursement on three accounts and decide to add it to a fourth so it can manage cash more precisely. Or it might be using three of our five modules for its p-card program and decide to add the other two."

Communication is more important than ever between middle-market companies and their banks, Fuller says. "Relationships were always important, but now they want more frequent discussions and deeper dives into what we can do for them. Anything that expedites collections or improves control over disbursement timing is sure to get attention." And frazzled middle-market managers like push technology, he notes. "They can be in the midst of a hectic day, tied up in a meeting, but still get an alert that something important needs to be done. They like that better than having to pull up reports for routine checks."

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