From the March 2011 issue of Treasury & Risk magazine

Straight-Through Stars Drill Down

As the liquidity crisis fades, companies are leveraging the latest technology to push treasury's semi-automated processes to straight-through status.

Although spending was constrained in 2008 and 2009, corporate brass happily paid for anything that protected the bottom line and strengthened risk and liquidity management. Now the focus is on using automation to cut costs out of high-volume, work-intensive activities like accounts payable, accounts receivable and payments, reports Maggie Scarborough, managing director of FinServ Strategies in Baltimore. Companies want to streamline to the lowest cost possible. Subscribing to hosted or shared services has taken much of the cap out of capex, allowing automation without busting budgets, she notes.

The revolutionary move to software as a service is nearly complete, says Wolfgang Koester, CEO of Phoenix-based FiREapps. "It's always a factor in RFPs these days," he says. "Even fairly small companies can afford the best solutions. Implementations that used to take months occur in hours." Resistance has melted to third parties' hosting sensitive payments and cash management software. "It's become the preferred arrangement for virtually all treasury applications," says Jiro Okochi, CEO of Reval in New York City, which hosts hedging and hedge accounting software.

Business intelligence now defines the technology frontier. "Treasurers have the data," Koester says. "The challenge is to analyze it and use the analysis to reach better decisions." Treasury applications that were built to retrieve, store and display data are getting upgraded to analyze that data and even suggest decisions the data support.

"Every vendor is putting more analytic tools on its site or in its software and making dynamic analysis of data a selling point," Scarborough says. An example is SunGard AvantGard's recent acquisition of Predictive Metrics, which provides credit and collection analysis.

Treasury staffs use business intelligence for hindsight (a rearview mirror), insight (a windshield) and foresight (a GPS system), says Craig Jeffery, managing partner of Strategic Treasurer in Atlanta. Hindsight is the most common, and insight is growing, but treasury leaders are looking for foresight."Many analysis systems are set up to answer questions you would ask today," Jeffery says. "The challenge is to set up a system that can answer questions you wouldn't think to ask today."

Answers come from dimensional dashboards that can tap data from multiple systems across a wide range of fields configured associatively or hierarchically, he says.

The demand for better intelligence is behind the push to move data into XML reporting formats, which can yield richer data. If banks don't enrich the data they send in the new format, or treasuries can't receive the richer data banks send, though, the benefits are moot, Jeffery says.

The new generation of users may be at least as significant as the new technology. Treasury management is being transformed, Scarborough insists, by the rise of mobile communication, enabled by cloud computing and favored by the new generations coming into leadership positions at corporations and banks.

Treasury demographics signal regime change, Scarborough says. Baby boomers are passing the baton, while members of Gen Y (born 1981-1999) are flooding into the market. "They are multitaskers, and they have never been without a mobile phone," she says.

"The members of Gen X (1964-1980) are taking the executive spots, and they are mobile-friendly and looking to Gen Y for support," she adds. "They will recreate the business environment as they see fit. They swim in a social media environment. The iPhone or the Android and the iPad are their tools. They won't be tied to a desk."

Sensing new directions, providers of treasury tech are adapting with a flurry of acquisitions and strategic partnerships. Wall Street Systems, with its acquisitions of Thomson Reuters' Treasura, Speranza and City Financials, has been on a buying spree much like SunGard's a few years ago. Fundtech and Bottomline both bought SWIFT service bureaus last year, she points out, and Bank of America inked a deal with BankServ.

Paymode, a Bank of America product sold to Bottomline and reinvented as Paymode-X, is gaining traction in the financial supply chain world as other banks warm up to what is no longer seen as a competitor's product, she says. "The integration of the financial supply chain is finally coming to pass."

The technology buying pendulum swung from comprehensive ERP systems and workstations to collections of best-of-breed software interfaced to communicate, and is now swinging back to more comprehensive solutions, reports Okochi. "Treasurers are looking for robust functionality across the spectrum of treasury activities." Reval, which thrived as a best-of-breed specialist, recently acquired German treasury software provider ecofinance to position itself as more than a niche player.

Seizing opportunities and turning technological potential into process efficiency, carefully calibrated risk and informed business decisions is what treasury management today is all about. Some companies do it better than others, which is why we offer the following in-depth report showing how two Gen X treasurers are leading Gen X and Gen Y staffs into the promised land of treasury automation.

Google Searches for the Leading-Edge Best

It's not surprising that Google would have one of the most automated, technologically savvy treasuries in the world. The company is rich, dynamic and global, and has both the predisposition and resources to adopt the best technology and configure it for its own operations. Google also has a treasurer and vice president, Brent Callinicos, who was a treasury automation star when he held the same position at Microsoft from 2000 to 2004. In 2007, Callinicos grabbed the opportunity to move to Google and essentially invent a treasury technology infrastructure for the young upstart blazing trails in Internet search applications. When it comes to automating treasury processes, if Google can't do it, chances are that nobody can.

To get to the leading edge, Callinicos relied on his own experience, then hired consultants to provide "landscape and best practice analysis," he reports. Google's success is not simply a matter of buying best-of-breed systems and then interfacing them, he insists. "We don't buy systems for systems' sake. They have to advance our strategy."

The foundations of Google's financial infrastructure are an Oracle ERP system and a Quantum treasury workstation. As a big advocate of software as a service (SaaS), Google basically hosts no treasury software on its own servers, Callinicos says.

With that architecture determined, Google keeps up with the latest developments by talking with technology providers and peers. "There aren't many vendors that we don't know," Callinicos says. "And we do a lot of benchmarking with peers, inside and outside of the technology sector." Google has also hired outsiders to bring the latest in technology expertise to treasury, he adds.

When Callinicos started, one of his top priorities was automating foreign exchange management. Now Google's FX processes are about as good as treasury automation gets. Here is how they do it. To calculate its FX exposures, Google uses FiREapps to define and extract data from Oracle, Callinicos explains. There's just one touch point in the handoff--the file transfer request to Oracle. The transfer is facilitated by a FiREapps extraction script within Oracle, which treasury launches by running a request set in Oracle. The extracted data are electronically transmitted to a FiREapps server and loaded into the Google account. Treasury then logs into FiREapps to select and load the new data set. Exposures are aggregated and listed by currency pair. "FiREapps allows the user to filter or sort the data by transaction currency, functional currency, Oracle account or entity," says Callinicos.

Exposure amounts are validated and exported to a spreadsheet. Offline forecast information may be added to help estimate the appropriate hedge amounts for a future date. Once the hedge amounts are finalized, trade details are imported into FXall, an electronic trading platform. Then the trades are reviewed, marked as ready and executed in FXall, Callinicos explains. The trade economics are automatically matched in the FXall settlement center and distributed to Reval and Quantum. Reval is Google's system of record for all FX trades. FX trade details are exported from FXall via XML files generated by FXall's QuickConnect tool and then imported into Reval via a Reval tool, HedgeRX Connect. Treasury operations and accounting teams generate Reval reports to initiate settlement, prepare journal entries and mark to market the outstanding FX derivatives, he says.

Google's SunGard Quantum treasury workstation manages all settlements related to FX trades. Details of trades are automatically pushed to a SunGard server via QuickConnect in a straight-through process, according to Callinicos. Quantum uses an AvantGard scheduler to pull trade details off the SunGard server automatically every 15 minutes. Treasury compares the Quantum trade inventory (a "cash position report") with Reval's payment report to ensure all the trade details have been imported.

Once that's done, the trades are released for payment. To wrap it up, the payment release process automatically generates e-mail confirmations containing netting and settlement instructions that are sent to the counterparties, he says.

Callinicos' other top priority out of the gate was automating cash management. "In 2007, our cash visibility was about 50% automated," he says. "It took us another day to see the rest. Now we have 96% same-day visibility without a human touch, in Quantum." That cash visibility achievement won Google one of its several Alexander Hamilton Awards.

While 96% is not 100%, it's pretty close, Callinicos notes. The company has a few unusual banks in out-of-the-way places that can't respond to same-day automation. And there may be static escrow accounts connected to pending acquisitions where automated reporting is not an issue, he explains.

Cash-rich Google, with approximately $34 billion in balance-sheet cash, invests on a large scale, and bringing that activity up to optimal automation is still a work in progress, Callinicos says. "It's pretty good, but it needs to be better," he says. "We're looking at vendors, trying to find the best-in-class product. We currently have comprehensive visibility but not always the same day."

Predictably, Google plans to buy, not build. "We don't build solutions," Callinicos explains. "We buy the best system and then do the engineering to integrate it with the rest of our financial infrastructure."

For investments, the key linkage is between Bloomberg and State Street Bank, Google's custodian. "At the end of the day, all roads lead to State Street," Callinicos says. "We also leverage their system for accounting."

And for some asset classes, such as mortgages or agencies, Google uses specialized risk software, he explains. "We have a variety of risk tools tailored to assets. Depending on where the providers sit, we take data from them or send data to them. Whenever we need to interface, we find a way to make that happen." Typically, Google does that by utilizing engineering resources to build data feeds between vendors' systems.

Investing is a big business for Google treasury, which divides the company's cash into two pots and uses two strategies. Investing the pool that covers foreseeable liquidity needs as well as a cushion for the unexpected is a relatively simple, automated process. Using the investible balances shown in Quantum, a cash analyst logs onto a banking portal that displays investment choices for short-term operating cash. The analyst picks the maturity and rate that fit the cash forecast and investment policy, and places the funds in bank time or demand deposits. The trades are automatically recorded and confirmed in Quantum; there are no manual touches once the analyst makes the choices and clicks on OK, Callinicos explains.

Investing the cash in the company's investment portfolio is a more complicated process that involves quite a few phone conversations between Google portfolio managers and bank trading desks. "Once an investment trade has been made, our analysts will key it into our Bloomberg terminal, and that's the last human touch," Callinicos explains. Google racks up a lot of investment transactions each month, he notes. "When we make a trade on the phone or from a system, that should be the last manual activity. It's our mantra to touch the data no more than once. If we run into a situation where someone has to manually key or upload the data into another system, that's a sore point, and we make it go away. We're pretty much free of sore points in managing our cash and foreign exchange. We still have a ways to go with our investments."

For all its automation, if you walk through Google's treasury, you'll still see plenty of people watching screens and tapping away at terminals. That's unavoidable, Callinicos says. "For our FX risk management, we do a lot of option trading, and you can't trade options online," he explains. "You can only do it by talking to people on the counterparty's end, so we have people with headsets talking to traders, negotiating deals and entering transactions into Reval or Bloomberg. But once they enter the trade, the rest is automated. When it comes to certain complex trades, a computer can't take the place of people."

Google uses a variety of forecasting programs for various activities. "We automatically include relevant data that are in our systems in forecasts," Callinicos says. "If it's not in our systems--like a pending acquisition--we enter it manually."

Callinicos says cash flows related to treasury activities have been more successfully automated in Quantum than flows related to accounts payable and accounts receivable. "We still have work to do there," he notes. "We need to see the operating cash flows as well as the treasury cash flows."

Perfect automation of real-time comprehensive data will always be a treasury goal, never a reality, Callinicos insists. "There is always room for improvement. You're never finished."

Microsoft Builds Big Automation

Given the size of Microsoft's global cash flows and its wealth of technological and financial resources, it would be surprising if the company were not a front-runner in treasury automation. And treasurer George Zinn and his 100-person worldwide team, which includes credit and collections, do not disappoint. They have long been something of a role model, of course, although Microsoft's distinctive software-centric approach to treasury remains somewhat unusual and is difficult to imitate.

A treasury workstation, for example, is an important piece of the treasury architecture at most large multinationals but not at Microsoft. "You can have one uber-system that does everything but not always very well, or you can creatively bring together a group of line-of-business applications that are each better for their specific activity," Zinn says. "We've chosen the latter approach."

And in assembling this treasury mosaic, Microsoft makes aggressive use of the company's own products. It also employs the treasury module of its massive SAP installation, the largest single instance of SAP running on Microsoft's SQL Server in the world.

Scale is certainly a factor in treasury strategy at Microsoft, which earns $62 billion in annual revenue by selling its products in more than 250 countries, using more than 40 currencies and 900 accounts at 84 banks. It pays to automate, and at Microsoft, it pays big.

To understand how the company automates treasury processes, consider wire initiation.

Excluding accounts payable, Microsoft treasury processes about 2,100 wires each quarter to move billions of dollars in more than 15 actively traded currencies with a failure rate under 0.02%, Zinn reports. When Zinn gets a wire to authorize, it shows up as an InfoPath form (available in MS Exchange and MS Office) in his e-mail. Which form depends on the size of the wire and the level of authorization it requires.

Zinn reviews the numbers, types in his digital signature and sends the form on to the operations team, which validates it and sends it on its way.

"It wasn't that long ago that we were printing and circulating paper forms and walking them between buildings to get approvers' signatures," Zinn observes. "Now there's no paper in the process. You want to auto-populate as many fields on the form as possible, but obviously you can't do that with the signature.

"InfoPath provides a customizable form that looks and feels like a Word document with complex data validation," he adds. "We use an approval workflow process that routes the forms to the approver with copies to the cash operations team. The approvers get the forms through Outlook e-mail and can sign them electronically on their desktop or handheld device [Windows 7 phone or other smart phone], and route them to the next level of approver."

Once all the approvals are in place, cash operations can process the wire request for payment and archive the electronic form in SharePoint, Microsoft's collaboration and productivity tool. Paper traffic is reduced, and approvers can execute while they're on the road.

Once wires have been approved, they're typically initiated in the SAP treasury module and sent by direct file transfer to nine global banks in the SAP IDoc PEXR2002 format. Microsoft currently employs SWIFT primarily to get its global bank statements, but in a pinch it can use SWIFT MT101 messages to initiate wire payments. The data on outbound wire payments are simultaneously loaded onto an internal Microsoft SQL server wire tracking database.

To achieve critical integration for straight-through processing, treasury uses Microsoft's own BizTalk Accelerator for SWIFT platform. The MS BizTalk server receives the IDoc PEXR payment messages from SAP and converts them to the formats needed by each destination bank, Zinn explains. Currently, treasury uses bank proprietary and EDI formats, but it is pushing to standardize these wires using ISO 20022 XML.

Treasury uses an internally developed tracking tool, eTrack, for inquiries and access to the transactions flowing between SAP, its banks and the wire reconciliations database, whether wires have been processed or are still "in flight." The tracking includes metrics and analytics like throughput levels and how well banks are meeting service-level agreements on speed and confirmation processing. Confirmations from banks are processed back through the BizTalk server and routed to match transactions in the wires database. When there is an exception, operators get an e-mail alert.

Microsoft was quick to realize the value SWIFT provided in achieving efficient treasury automation. "Even before SWIFT introduced SCORE [Standardised Corporate Environment] in 2006, when the only door to SWIFT for a corporate was the MA-CUG [Member Administered Closed User Group], we wanted a network to communicate with all our banks through one channel," Zinn says. "We didn't want to rely on any one bank to provide all our reporting."

Microsoft's use of SWIFT also allowed it to eliminate a third-party banking platform and its associated fees, and redirect headcount from maintenance to analysis. During the credit crisis, an unforeseen benefit of SWIFT-based wires was that funding continued regardless of which bank was in trouble, and treasury could keep balances low at troubled banks with multiple intraday sweeps using MT942 messages. Treasury is now going live with the latest SWIFT ISO XML 20022 format for bank statement reporting, and wire processing will follow shortly, Zinn reports.

In the future, treasury hopes to integrate accounts payable and payroll processes with the SWIFT gateway to move bulk payment files via SWIFT FileAct and ISO 20022 XML.

Beyond current SWIFT technology, Zinn wants to see all bank communications move to ISO 20022 XML. "We want the richer detail. And we want something that will upload automatically to our SAP ERP system," he says. "That will allow us to manage more efficiently and tie up fewer people. The old way was to call a bank and ask them to fax us a bank account statement. Then someone in treasury would type it into a spreadsheet and send a copy to the controller so it could be manually re-entered in the general ledger, the book of record. If banks were to standardize their reporting so their clients did not have to perform complex data searches in different fields to get their balances, it would free up resources to provide greater value-add at both the companies and the banks."

Getting electronic bank account management (eBAM), and getting it through SWIFT, is another Microsoft priority. "We're pushing it and talking it up whenever we can," Zinn says.

Recently, Microsoft treasury has pushed to make its cash forecasting a showpiece of technological efficiency. Ironically, the centerpiece is Excel. While spreadsheets and manual entry are often cited as the hallmarks of inefficient treasury operations, Microsoft has crafted an exception. Treasury gets monthly cash flow forecasts from more than 350 subsidiaries in numerous currencies. In the past, collecting and consolidating these forecasts was a slow manual process that tied up several analysts. Variance reports were generated almost three weeks after forecasts were submitted, and subsidiaries were rarely held accountable for inaccurate forecasts, Zinn says.

The cash operations team now uses SharePoint to receive and consolidate the subsidiary forecasts automatically and upload them to a third-party-hosted tool based on the .Net platform, Zinn says. It still looks like Excel, but the collecting and consolidating are now automated.

Actual bank account statement data come over SWIFT through the BizTalk accelerator, which gives treasury electronic visibility to 99% of its global cash. The data are uploaded to SharePoint using an automated batch process and then onto the same .Net-based platform, where staff can then generate instant variance reports using the bank statement and cash forecast data. With quick, automatic variance reporting, subsidiaries are now held accountable for their forecasts, which has dramatically improved their accuracy, Zinn reports.

"We implemented a system that not only gave us better forecasts but measured the accuracy of subsidiary forecasts and allowed us to reward them for improving their accuracy," Zinn observes. "Incentives drive behavior. We have been able to maximize invested cash and move to just-in-time funding."

Efficiency and economy are still big factors. "In addition to cutting costs by several million and keeping cash invested longer, we can now convert data into meaningful business intelligence, something we couldn't do before," he comments. "And auto-posting has eliminated the need for literally hundreds of hours of our controller's staff time annually, not even counting the exceptions that had to be handled manually in the old process."

While Microsoft is synonymous with interconnected software, speed wasn't a top priority when Zinn was named treasurer in 2004.

"It is not that we were bad at cash flow forecasting; we just never had the pressure to excel at working capital management," he recalls. "That has changed now that we have returned over $150 billion to shareholders since I started and are borrowing in the capital markets."

Automating across treasury these days is about speed as well as operating efficiency and cost reduction, he says.

"For example, we have improved our FX trading system to the point where we cut the time required for end-of-month closing by 100 hours," Zinn reports. The information flows into a spreadsheet and then auto-posts to SAP. "That is critical for getting hedge accounting treatment," he notes.

In addition, the investment operations team has been a leader in driving straight-through processing for the approximately $200 billion in trades it settles each year for the capital markets team. The team has moved to SWIFT-based trade communications and is leveraging the SharePoint portal to manage its custodian relationships. "In fact, this aspect was so successful that the custodian can hardly keep up with the ever-growing demand from its clients to deploy the same interface to improve transparency and timeliness of communication," explains Zinn.

While Microsoft has a profitable line of business hosting IT for other companies, that doesn't prevent treasury from having its vendors host systems when the economics are right.

"Where we have variable demand and high IT requirements, we're moving to S+S--software plus services--arrangements," Zinn reports. "The most striking case was our risk system implementation, where we let TotalRisk [now BarraOne] host it, reduced our staffing needs and saved 50% of the total cost of ownership by not running the servers on-site. S+S, supported by cloud computing efforts, including our own, is bringing economies that are just beginning to be recognized."

To optimize automated operations on such a scale, the treasury team continuously pushes technology suppliers, leverages its own software products and innovatively configures systems and software into straight-through processes, winning several industry awards in recent years. Over Zinn's seven-year tenure as treasurer, automation has allowed him to cut his staff by a third.

Now the biggest obstacle to Microsoft's achieving straight-through processing is banks' lack of progress on a single standard for electronic reporting, Zinn says.

"We'd like to see standards adopted like banks do, for example with ACH--develop and propose a common standard, vote on it and then set a date when everyone will have to adopt it," Zinn says. "That, assuming it is an XML standard, would make banks more valuable partners and provide us with more time to analyze richer data, thereby providing more valuable insight to our management and constituents."

To read about Dell's work to consolidate its banking communication by using SWIFT, see Dell'sSWIFT Global Connection.

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