Cash Management 2010 Transcript

From Treasury & Risk's 15th Annual Alexander Hamilton Best Practices Awards

TOM DUGGAN: Again, welcome back. One of our top categories every year is Cash Management, and this year our sponsor once again is Citi. So joining us to present the awards in this category and moderate the panel is Michael Fossaceca with Citi.

Michael is the managing director and regional head of client sales management for large corporates, for Citi’s Global Transaction Services organization in North America. He’s also responsible for GTS client management for key subsidiaries of foreign multinationals based in North America. Michael has over 20 years of experience in treasury management and has developed and implemented innovative treasury management solutions for clients globally.

And there was another article I read last week in a treasury magazine and it was interesting because it was a European treasurer quote. He basically says, ‘You know, the treasurer’s office is always full of people when there’s a financial crisis or market headache. When things go well or when the world appears safe, we’re all alone with our Reuters and Bloomberg terminals.’ I thought that was interesting, and the whole article was questioning, ‘Is this sustainable? Is it really sustainable for treasury to have that amount of relevance?’ I think it is, and I think it is for a few reasons.

There are really three market forces that I see that are going to drive what we all do going forward and they’re going to continue to make treasury very, very relevant. They’re really around technology and innovation, and that’s how it’s changing what we do. It’s really about the economic realities that we all face, particularly with regulation and what’s going to happen with Dodd-Frank and Basel III, and it’s globalization.

Finally, I think the third market force around globalization is fascinating because it’s not just globalization, it’s also urbanization. If you think again what we’re doing, what we’re driving and not just here but also in the emerging markets, if you just take five countries -- Brazil, China, India, Indonesia and South Korea -- those five countries alone in the next 24 months will drive about 35% of the world growth, while OECD countries growth will be very tepid. It’s going to slow down.

If you think about urbanization, this year for the first time 50% of the world’s population live in a big urban center, in a city, and by 2050 we predict that 75% of the world’s population will be living in an urban center, and if you look at the 25 fastest-growing cities, 22 of them are in the emerging markets.

On the old structure, Amtrak had no uniform banking practices, procedures or controls in place to process station cash, coin and currency deposits. This represented around 15% of our receipts, approximately $3 million per week. We had 215 manned stations that received cash, coin and currency, in addition to credit and debit cards.

At the time we had 35 banks, 145 bank accounts, and we outsourced some of the bank reconciliation function to a third party and reconciled several others in-house. The interesting part from a cash management perceptive was that all of the cash that was out in these stations was concentrated either by the treasurer’s department or some station operators, and I’ll get into more of that in a few minutes about the problems that created.

The armored car had to provide national coverage, either directly or through subcontracting, and they had to have a centralized dispute-resolution system and fees. As a result, we awarded that to one primary armored car service. And bank deposit supplies, again, we created an RFP and sent it out to three companies, and our selection criteria focused on providing all the banks with one style of deposit bag, deposit slips that they would all accept. Also, we wanted the vendor to be the manufacturer of those supplies to keep costs in line and to have a centralized ordering and billing system. Again, it was awarded to one bank deposit supply company.

So under the new structure, we have 215 stations working with two bank relationships, and as far as the treasurer’s department is concerned, we see two bank accounts. There may be other subaccounts at the banks, but we only see two. We have uniform banking practices, policies and procedures in place for the first time. Cash, coin and checks are deposited at bank vaults and branches or by mail, and I could talk about that, too.

So the cost savings: When we did the project, we said it’s over $500,000 but I know it’s more than that because of the fragmentation I described earlier. We knew it was $500,000 from the stations that had armored car and the bank supplies that we could identify, but there was no way we could identify what they were saving. But over $500,000 is a real good estimate. We eliminated employee overtime, and then we have lower bank fees, armored car service fees and bank deposit supply fees.

And, quickly, I mentioned we did an armored car optimization. What does that mean? That means that we looked at the cash flow at each station and the number of days a week [we needed] that cash [to be] deposited in the bank vs. the cost of the armored car service. We have a number of stations where we may pick up once a week now because the cost of the armored car exceeded the interest that we would earn on the bank. So we have stations once a week, twice a week, three times, whatever. It depends on business requirements, but we performed this optimization for each station.

To give you a quick background on Honeywell, prior to this whole crisis that all of us are sitting through, Honeywell had reported revenues of about $38 billion. It dropped down to $31 billion last year, which is a significant drop across all four business segments that we do business with. The four -- just to quickly summarize for those of you who don’t know Honeywell -- the four business units are in aerospace, and you know what’s happened there, as well as automated control systems, transportation systems and the specialty chemicals.

Even without the mergers and acquisitions that Honeywell has embarked on continuously, the legal structure of Honeywell is extremely complex, only because doing business in over 100 countries does require separate legal entities. This amounts to hundreds of legal entities dealing across borders with a lot of foreign exchange regulations. Obviously to everybody, cash remains king, and that’s no different for Honeywell. With such a dramatic drop at the top line, it obviously hurts each of the businesses.

We were not just looking at the savings, it really improved cash flow visibility for us because what we had done was on a calendar basis with the buy-ins of each of the businesses as well as each of the controllerships -- a calendar was placed out there for two years running so that everyone would know this is the date on a monthly basis that we’re going to settle the charges that all the businesses would need to report their payables and receivables.

So once everything gets netted on the settlement date, the cash visibility position for every single unit, every single country was dramatically improved because you really know at the end of the day, with the report generated from the bank, what is it that you have to make payments for as well as incoming receipts. It just provided a much better tool for cash visibility, and obviously we look at the enhanced process efficiencies, because this really allow for accurate cycles.

So Google -- everybody is probably familiar with Google. We’re a very interesting company in many aspects because are we a technology company? Are we a media company? What a lot of people don’t know is we’re actually a payment company as well. We process payments for hundreds of thousands of people around the world every month, and the key for us is really to provide a localized payment experience. So a Google customer could be a very large multinational in Germany who is running an ad campaign, but a Google customer can also be a very small business -- a person -- the flower shop on the corner who’s decided that they want to advertise through our AdWords product as well. So the challenge there is really to find a solution that serves both purposes, so that you’re able to work with those multinational companies but you’re also able to provide a very nice local payment experience for those individuals.

Fifty percent of our revenue is outside of the U.S., and so the challenge is in moving the cash around various countries. It has been challenging, but with so much of that growth coming outside of the U.S. it was becoming more and more challenging.

So on the benefit side, right now, Google has 98% of our Euro vendor payments are SEPA credit transfer. We have one single credit file format that goes across Europe. We were able to leverage our SWIFTNet solution to be able to pass the files. We’ve minimized transaction costs and, I think more importantly, we were able to prove to the business that this was a very viable payment process. While we focused on the vendor payments first, we moved into a next tier of partner payments. We have gone through that process and have been very successful in leveraging this, being able to show those cost savings to the CFO as well as the business units. Now we are in the process of leveraging this solution for other payments.

 And so I think when we step back and we look at this, it was a very elegant way to solve what was a very challenging process for us in terms of bank accounts and wire transfers and local ACH and different file formats and making our IT people crazy, as we kept needing them to refine and change files. We are very pleased with it and looking forward to expanding our SEPA credit transfer reach. Thank you.

FOSSACECA: Other questions from the audience? I’ll ask one. Actually, I’ll move right down the line here. So I’ll go to you, Ronni. You know, often one of the greatest challenges in a project is getting technical resources assigned and up to speed to really make these things happen and they sometimes can even kill a project. How does Google handle this? I understand from talking to you and just reading through the information that Google has a unique approach to technical resources, and I thought it was very interesting.

HORRILLO: Yes, we do. It was about three years ago that we decided to launch on a large automation project, and it was pretty clear to us that we couldn’t leverage our local IT resources and that we needed to figure out either internally or externally an IT team who would be able to support only treasury. So with the support of our CIO, there is a dedicated treasury IT team, and that team is really considered part of treasury even though they don’t report up to the CFO. We bring them with us to events. In fact, I have a table full of them out there. They’re all here. We couldn’t do it without them, and we make sure that they participate in continuing education events as well, to really help them understand more and more of what we do. It builds a really good relationship, and it allows us to be much more productive when we’re doing project implementations.

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