From the November 2009 issue of Treasury & Risk magazine

Seeing Ahead of the Curve

It was the worst of years to be associated with either the auto or finance industries, let alone both. But Toyota Financial Services managed to survive the double whammy without a government bailout or a fire sale of its assets and even gained market share. Credit a long-standing innovative vision that treasury could evolve well beyond its core functions and help create opportunity for the company. That vision was shared by treasurer Wei Shi, CFO Chris Ballinger and long-time CEO George Borst, who made treasury a member of his management team from the start of his tenure in 2000.

This pursuit of excellence on an enterprise level through unprecedented economic turmoil has brought Toyota Financial Services (TFS) to the Alexander Hamilton overall winners' circle for the second time in three years. Then-treasurer Ballinger graced Treasury & Risk's cover in 2006, the year Shi joined the company. Shi became treasurer after a reorganization in March 2008. Ballinger, who had served as treasurer since 2003, says he won't forget the day he became CFO: Sept. 15, 2008, when Lehman filed for bankruptcy.

Of course, there were some bumps along the way. Two financial restatements, which were blamed on the company's rapid growth and the significant manual processes in use, resulted in a new team taking over risk oversight and management. TFS' efforts to restore confidence won third place in the Enterprise Risk Management category this year.

But the story actually begins when parent Toyota Motor Corp. separated TFS from its sales division nine years ago and made TFS the finance and insurance operations umbrella worldwide. Borst, who was then head of Toyota Motor Credit Corp. in the U.S., became CEO for TFS in North, South and Latin America. Based in Torrance, Calif., the U.S. subsidiary accounts for 75% of the division's operating revenue and provides financing and leasing for Toyota, Lexus and Scion buyers, and insurance and vehicle protection plans.

From the beginning, Borst says, TFS aimed to add value by creating additional loyalty for the Toyota brand. TFS studies have found the likelihood a car buyer will return to the dealership is 18% higher if the financing comes from TFS and not another source. "The question is what more can we do to grow loyalty and gain market share," he says. Moving "treasury from a back-office kind of function to a much more sophisticated, professional organization that was a strategic asset" became part of the plan to improve infrastructure and lower the cost of funds early on.

Much has changed since 2006, when TFS won the AHA overall title. This year, the company is also taking home one gold, two silver and two bronze awards. "We are becoming a more professional and independent financial services company," says Ballinger. "In 2006, we had relatively few entries, about four, all our best projects. At this point we've reached a level of professionalism and competence in our treasury that's sustainable. This year, we submitted eight and we could have submitted more." Most projects in 2006 centered on core treasury functions and were more inwardly focused, he notes, "whereas a lot of our activity today is more outwardly focused, having an impact on the broader corporation and creating opportunities for the business."

The difference between now and 2006 is the depth and breadth of treasury, says Shi. "Everything has an enterprise flavor to it. We have moved in this direction quite a bit in the last three years and do whatever we can to ensure that we don't have silos." In 2006, the treasury staff numbered 26. Now it's 43, and the merger of the financial planning and analysis department with treasury brings the number of people who report to Shi to more than 70.

Reorganizing treasury to include financial planning was an extension of Ballinger and Shi's vision of the role of treasury. "Beyond all the core responsibilities, like funding, cash management, managing banking relationships, what is unique about treasury is its ability to bring the prices the firm faces in the capital markets inside the company, or transfer pricing, so that every decision maker in every business, every activity of the company fully understands what prices the firm faces externally," says Ballinger. That ensures every decision maker accurately bears the costs of funding for risk, which can be a very powerful force for driving efficiency.

"Decision making then can be decentralized. You can't run a big, complex organization from the top," he says. "Wrapping those prices around financial planning allows decentralized decisions to be made and the analysis part after the fact shows how well the decisions match up against the plan and against the expectations. Having all those pieces--treasury, planning and analysis--altogether in one group is how you drive change in decisions and behavior throughout the organization."

It's about how treasury regards its role, says Shi. "Everyone acts as an owner. There's a much better awareness in the company--of alignment, empowerment and integration." People get the right information, make decentralized decisions where appropriate and are measured on the results. "Performance measurement is a very important function of treasury," he says. "All entries this year embody our philosophy of not solving problems in a silo, especially enterprise risk management, where we mobilized the entire company."

TFS' assets went from $22 billion to $23 billion in 2003 to "just under $80 billion this year," says Borst. Spurred by Ballinger, TFS has expanded its structured debt offerings since 2004. "Over time, we've leveraged out what used to be our triple-A rating (which is now double-A) because we have capability, structure and flexibility to meet individual investor needs," says Borst. Another key move was to bring the commercial paper operation in-house.

"During the liquidity crisis, we were able to keep our dealers operating and stay in the leasing business," Borst says. "By using our relationships from our commercial paper, we were still able to fund in the September to November period last year, with our reverse inquiry and being flexible with pension funds on specific deals they wanted. That's a tribute to the folks in treasury and the outstanding organization."

During the economic crisis, Toyota raised its market share from 50% to 59%, says Borst, and, more importantly, it was the major player left standing in the leasing business. "We get well over 90% of anything that's leased."

This was the real test, says Borst. "You have to have the infrastructure in place before the crisis hits," he says. "It's an easy thing to put aside. It takes time and effort to build this kind of infrastructure and capabilities and make the treasury department a strategic part of the organization."


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