As the economy tilts treasury priorities toward risk management, technology choices are starting to reflect that. When EADS, the 49.1-billion-euro ($63.7 billion) European aerospace and defense giant, decided on a new treasury system, it selected Calypso, opting for the kind of risk management muscle usually associated with banks.
“Volume-wise, we’re like a small bank,” says Andreas Drabert, head of treasury controlling at EADS and sponsor of the selection and implementation project. “A corporate system couldn’t quite give us all the capacity and features we need. We have a strong order book and subsequently big currency exposure, mainly to USD and, to a smaller extent, towards GBP.”
Risk management is becoming a focal point for treasuries across industries and company sizes. Treasury technology for cash and liquidity management is mature and unlikely to take quantum leaps forward, but the tools for risk management are “still in their infancy,” notes Joe Siu, director of financial risk management for Chatham Financial in Kennett Square, Pa. “The crisis spurred a lot of innovation around risk management. That will be the exciting growth area for the next decade.”
Within risk management, investment risk is the most developed discipline and currency risk is developing most quickly, Siu notes. Commodity risk is coming on strong, but supply chain risk remains a big challenge. “It’s hard to pull data that show how your suppliers and their suppliers are doing,” he says.
Banks, with their huge investment portfolios and their role as derivatives dealers, pioneered quantitative risk modeling and developed sophisticated metrics and reporting around risk. Until recently, that level of detail was considered overkill for nonfinancials, and it still is for most companies.
“I don’t think a small or medium-sized industrial company could justify it,” Drabert says. The price for EADS? He says only, “This decision was not primarily driven by cost, but more by the fit to our future requirements.”
Strong growth and the post-2008 economic environment sent EADS searching for a new treasury system in 2009. “We’d had our old systems for 10 years. During this time our business had doubled and we had more subsidiaries using our in-house bank,” Drabert notes. “We needed capacity to keep growing, more tools for risk management and something that could accommodate more regulations that could be coming out of Brussels and Washington.”
EADS put 10 treasury systems vendors on its long list and three finalists got careful consideration before Calypso won.
The decision involved tradeoffs, concedes Claas Kohl, head of middle-office in the treasury controlling team. What Calypso offered for cash management was bank-side, not corporate-side. With the stakes high, EADS and Calypso worked together from 2009 to 2011 to develop a cash management module that would accommodate corporate needs.
“Today, we have sleek and sexy cash management,” Kohl says.
There are other differences between bank and corporations in terms of regulatory risk and how to allocate risk capital. “We looked closely at corporate systems and banking systems,” Kohl says. “The classic corporate systems were very good at cash management but not as strong at risk management. We had to decide which camp we wanted to be in and with whom to close the gap.”
EADS manages big cash—some 15 billion euros of cash, cash equivalents and securities, as of June 30—and through its cash pooling process it consolidates the transactions in the hundreds of bank accounts of almost 200 subsidiaries globally. But the value of top-notch tools is even greater around the company’s OTC currency derivatives—$84.1 billion as of June 30—made up primarily of foreign exchange forward contracts. Calypso brings the best tools around trading, confirming and booking those transactions and providing accounting.
Having a bank-like system brings more than operational capacity. “It helps us see how the banks measure us,” Kohl says. “We can negotiate better when we understand how the bank would apply prices to us. We can understand their pricing, anticipate the fees and negotiate down our charges around OTC derivatives.
“Already we get indications that we are getting much closer to observable market prices than the traditional pricing methods based on discounting and used with most corporations,” he says.
In addition to gaining risk management muscle, EADS consolidated a number of different treasury technology platforms it was using onto the Calypso platform, run by company IT inside the EADS firewall. “This is not an activity we’d consider outsourcing,” says Farid Boussatha, head of treasury applications in the treasury controlling team. “We want everything to be internal. That was of key importance to us.”
The high degree of automation, the high volume of activity and the all-in-one-system integration, which was fully implemented in 2012, are paying off in efficiency. “It has definitely increased the speed of our cash management and cash-pooling process,” Boussatha says. “The import of bank account statements, their processing in the system and the subsequent distribution of the related internal account statements to the subsidiaries against a tough cut-off time, which used to take one hour and 50 minutes, now only takes 15 minutes.”
Furthermore, “the hedge effectiveness testing around our interest rate derivative portfolio, including the accounting entries, is now highly automated and working well,” Boussatha says, “in particular when compared to our old process that required unfortunately also manual steps.”