As companies grow increasingly global and complex, the siloed treasury function is becoming a relic of eras past. Managing cash flow, handling foreign exchange, and maximizing earnings on excess liquidity remain core treasury functions, of course. But in this day and age, successful treasurers are those who extend themselves beyond the role’s traditional duties.
This trend is exemplified by the winners of the 18th annual Alexander Hamilton Awards in the category Cash Management & Liquidity Optimization, sponsored by Kyriba and Strategic Treasurer. The winning projects are diverse, but all five involved a project lead within treasury who reached across functional or even corporate lines to bring about significant change.
Through these projects, this year’s winners demonstrated important lessons about managing a treasury function in the modern age. Key among those lessons: Communicate broadly, communicate clearly, and communicate often.
When CoreLogic embarked on an initiative to streamline processing of tax payments and to improve utilization of its large custodial balances, vice president and treasurer David Hayes realized his team would need to work closely with the company’s IT, operations, audit, accounting, and legal functions, as well as its external banking partners. “The key to success in trying to make treasury a partner to the business is twofold,” Hayes says. “One, you need to understand the business that you’re trying to help. If you come in saying ‘Do it this way because this is how we in corporate treasury want it to be done,’ you’re not going to be very effective. Instead, you need to understand the business of the other function. It is important to identify and try to solve their pain points. If you can do that, they will know that you took the time to dig in and do your research, and they’ll see that you’re providing instant value to their function. This approach can change the perception of treasury and how we can be helpful in accomplishing what is ultimately a win-win for the organization. This is key to facilitating change and showing that treasury can be more than just a corporate shared service—that treasury can be a strategic partner to the business.”
Treasury groups at General Motors took a similar approach in obtaining buy-in for a massive global cash pooling project. The initiative needed the support of corporate and regional treasury teams; the business units that participated in GM’s regional cash pools; and legal, tax, controls, and accounting teams around the world. One of treasury’s key strategies in achieving buy-in was to identify the specific benefits that the project could offer each function. “People at General Motors want to do what’s best for the company, but they also want to do what’s best for their local unit and what’s best for their function,” says Jim Davlin, treasurer of General Motors. “If you can explain in a way that is clear to them the benefits of the project for their function, their unit, and the company overall, then it will be easier to get folks on board.”
When Murphy USA needed to overhaul cash forecasting, the treasury team began holding regular meetings that included representatives of every business unit in the company. The dialogue was geared toward helping the business units understand how the company’s cash flows, and helping treasury understand how the business units work. Todd Gilreath, manager of cash management for Murphy USA, says the result was that everyone got more of a big-picture view of corporate performance. “We found that everybody knew their part of the business, and they knew it well, but they weren’t necessarily sure how it affected other parts of the business,” Gilreath says. “We told them that we, in treasury, don’t think we know everything. We gave the groups a lot of visibility into what the issues in treasury are, why we need their information, and how we’ll use it. We made our needs clear and tried to be very sympathetic to other groups’ issues. And because of it, we got a lot of buy-in. The business units gained a much greater understanding of what we do in treasury.”
John Chen, treasury director–Asia Pacific for Honeywell International, also believes in reaching across functional lines. His winning project involved the creation of a holding company in China to improve Honeywell’s efficiency in funding new capital projects in the country. “In Asia Pacific, there are so many regulations, so many controls, and so many legal entities that not all the variables can be covered by every function,” Chen explains. “This presents an opportunity for treasury managers to be a little bit more proactive and venture out of the traditional core treasury functionalities. When you see something that’s not covered, it’s a good idea to take up the slack. This helps treasury become more of a valued partner, enhancing the value of treasury and earning the respect of the business.” His key advice for getting others on board with a major treasury project: “Scour around the landscape and identify an ally or two. It’s helpful, of course, if your ally is someone who’s very influential. It's always good to have more than one person pushing an agenda through. It's definitely much easier than trying to do it alone.”
As the winning project for Active Network demonstrates, sometimes stepping outside the traditional bounds of treasury involves identifying an initiative’s prospective benefits for external business partners. Daniel Simmons, vice president and treasurer of Active Network, had an idea for a new banking product. In 2012, Active Network had annual revenue of around $420 million, so the company may not hold the same sway with its banking partners that a business the size of General Motors or Honeywell may have. Nevertheless, Simmons saw his idea as a winner for everyone involved and began a persistent sales campaign. Three years later, Active Network is a participant in a pilot project testing out his idea. “There are always opportunities to brainstorm and collaborate with your external banking partners, and to find opportunities to help fuel the relationship for both parties,” Simmons says. “When you have a great idea, you just have to pitch it.”
Five diverse projects—all great ideas that were well-executed and, ultimately, well-pitched. Following are the stories of how the 18th annual Alexander Hamilton Award winners broke out of traditional treasury roles to expand their impact on the organization.
(To access an archived version of the Treasury & Risk webcast in which this year's winners described their projects, click here.)
Deriving Optimal Value from Custodial Funds
The CoreLogic Tax Service business manages the payment of property taxes on behalf of the large mortgage servicers that are its clients. “If property taxes aren’t paid, the jurisdiction that has taxing authority could move into a first-lien position over the mortgage servicer,” says David Hayes, vice president and treasurer for CoreLogic. “We facilitate those payments. We determine how much each mortgage holder owes to a jurisdiction and when the payment is due, then we pull the appropriate funds from the servicer’s impound account and make the necessary payment to the taxing authority.”
In the past, the company outsourced processing of tax payments to a third-party “trust department.” An internally developed Funds Management System (FMS) would tell CoreLogic how much it needed to pay each taxing jurisdiction on a given day. Then, in a process set up many years ago, the treasury team would fill out a request for wire transfer and fax the request to the outsourced trust department to initiate a bulk payment to each taxing jurisdiction. After making the payments, the outsourcer would send back confirmation notices, and CoreLogic staff would manually record in the FMS software that the payments had been made. The process was inefficient and, like all manual processes, opened the door for potential data-entry errors. Equally problematic was the fact that the outsourced trust department held the company’s custodial balances in money-market funds that did not qualify for FDIC insurance, while the trust department paid CoreLogic a nominal interest rate on balances ranging from $250 million to $7 billion, depending on the season.
“The nature of the tax service business is such that we might have very normalized flows for most of the year, and then in the fourth quarter, or in March and April, we might have billions of dollars due on a single day,” says Hayes. “The lack of automation in our legacy process made it difficult sometimes to get all the payments out on our high-volume days. We had controls in place to correct any missed or misdirected payments, but if we didn’t catch a problem in time, the penalty could be up to 10 percent of the payment amount.”
When operations managers at CoreLogic Tax Service undertook a tax transformation initiative to reinvent some of the company’s fundamental processes, the treasury team decided the time was right to bring payment processing in-house and automate many of its manual tasks. Treasury worked with IT, operations, and accounting staff to develop a far more efficient payment process. Weekly meetings among project managers from each function ensured that the initiative stayed on track and streamlined troubleshooting of any issues that arose.
The company’s assistant treasurer, who had worked in operations and understood that side of the business, was crucial in keeping the project moving smoothly. “As an organization, we try to leverage opportunities where we can rotate people to other functional areas so they can get a better understanding of the organization,” Hayes says. “This helps drive a cohesive effort on joint projects because they know the players and have worked with them before.”
CoreLogic rolled out a new banking platform and fully integrated workflows between the banking platform, the company’s proprietary FMS application, and its accounting system. Now when the FMS software identifies that payment is due to a particular taxing jurisdiction, the system determines which format the taxing district will accept (e.g., check, wire transfer, ACH payment) and automatically passes a BAI file showing needed tax payments to the banking platform. Once the system verifies that the file matches the expected tax payments, the banking platform sends an approved file to the bank. After the payment is made, the banking platform feeds data back into the proprietary FMS system, which reconciles payments at the customer level and the account level. As a clear indicator of the efficiency of the new system, Hayes says, CoreLogic was able to bring the payment processing in-house without adding any staff.
Once this automated workflow was in place, treasury undertook a second phase of the initiative, aiming to unlock the value of its custodial balances. The post-payment data reconciliation in the new workflow, together with a file-naming convention that treasury developed, enable pass-through treatment in which funds in the custodial accounts are directly tied to particular mortgage holders. This opens the door for FDIC coverage for those funds. Reaching this goal required close collaboration with the company’s audit, accounting, and legal departments.
“We had to make sure we were preserving the off-balance-sheet accounting treatment for these deposits,” Hayes says. “I have a background in banking, and I knew the pass-through treatment was something we could accomplish while maintaining our fiduciary responsibility related to the customer funds. I knew we had to work closely with other constituents within CoreLogic who didn’t have the same experience. It was important to help them understand why this makes sense and why it works from a legal and accounting perspective.”
This project was well worth the effort, as it opened the door for CoreLogic to negotiate with its banking partners to create FDIC-insured banking products that would provide far better returns on its custodial balances. “We were able to develop new products that could really solve our pain points,” Hayes says. “Now the earnings from our custodial deposits offset all our banking fees. We still have significant excess deposits above that level, and we’re earning hard interest on the excess. This type of hybrid account wasn’t available to us a few years ago.” The total increase in earnings on the company’s FDIC-insured custodial accounts was $3 million last year, and Hayes expects that number to jump higher in the future. “We’re in this unique rate environment where we can’t make a lot of money,” he says. “Four or five years from now, when we’re in a higher rate environment, that $3 million could be much, much higher. It could result in a significant earnings per share impact in the future.”
What was the key to getting CoreLogic’s banks on board? Hayes says, “We were in constant discussion with our key banking partners for quite some time, explaining what we needed.” More important, though, was the company’s ongoing relationships with the banks. “I give credit to our banking partners,” Hayes says. “They had the interest and initiative to run some of our unique and challenging ideas up the flagpole. You have to make sure you’re fostering those relationships with your bankers so they’re willing to go to bat for you. All of our banks were fantastic throughout this project, and the project underscores how happy I am with the partnerships we have with our primary banks.
“In fact, this whole initiative is a great example of collaboration, both between CoreLogic treasury and our banks, as well as within CoreLogic,” Hayes concludes. “We always talk about the value of functions working together as 'one CoreLogic.' Every step of this project showed a tremendous example of partnership across corporate shared services, IT, treasury, operations, and our executive leadership team.”
Setting Wheels of Change in Motion at a Big Banking Partner
Active Network is an online registration business that had around $420 million in annual revenue before being taken private in 2013. The company’s systems power registrations for events ranging from sports and outdoor activities to community-center classes to business conferences. In addition to providing online forms and collecting registrants’ data, the company processes payments for hundreds of thousands of event registrations each year. This puts the treasury function in the unusual role of managing one of the company’s largest expenses. “Within Active Network, there’s obviously an emphasis on improving gross margin,” says Daniel Simmons, the company’s vice president and treasurer. “As a treasurer, I’m always looking at ways I can impact that. I am responsible for our credit card processing fees, which account for the largest single cost that rolls into cost of goods sold. So I’m always looking for ways to bring those costs down.”
In 2008, the company used JPMorgan for banking and lockbox services, and for credit card processing it used Chase Paymentech, a joint venture between JPMorgan Chase and First Data. When the joint venture ended in late 2008 and Chase Paymentech became the merchant services subsidiary of JPMorgan Chase, Simmons saw an opportunity. “Once that acquisition occurred, it dawned on me that it would make sense for Chase Paymentech to let us take earnings credit for credit card processing fees, just like JPMorgan does for other treasury fees,” he says.
Traditionally, earnings credit from cash in Active Network’s accounts with JPMorgan Chase had offset fees for the bank accounts and lockboxes. Simmons began lobbying to add credit card processing to the list of services qualifying for earnings credit. The idea presented challenges within the bank. The divisions that handled banking and credit card processing services kept separate IT systems and accounting books, and there were tax issues to contend with. Revenue recognition was also a concern. “Paymentech has to be compensated, as the earnings credit means they’re losing revenue that they’d otherwise receive,” Simmons explains. “Also, we typically pay for Chase Paymentech’s services on a daily basis, but earnings credit is calculated monthly. There were a lot of complications for JPMorgan to work through.”
But Simmons was persistent in pushing his vision. “I just knew this was a great idea,” he says. “It’s a win for us. It’s a win for JPMorgan, and it’s a win for Paymentech. No other bank offers this kind of product. Most banks outsource their payment processing to First Data, so they don’t even have the option of doing this. Offering earnings credit on credit card processing fees is a great incentive for treasurers to park loads of cash with JPMorgan. Talk about sticky. It was clear from the start that this was a win-win for all parties.”
The idea of parking so much cash with one bank did create concerns within Active Network about counterparty risk. The treasury team developed a process through which it monitors JPMorgan’s credit default swap (CDS) pricing on a weekly basis, as well as tracking the bank’s regulatory capital ratios, long-term credit rating, and Moody’s bank financial strength rating (BFSR). Should these analyses indicate a problem with the bank, Active Network would immediately move some of the money in its JPMorgan accounts into safe U.S. government securities. “Before I could recommend to our board that we should park all of our money with one or two banks, simply for the earnings credit, I had to be confident that we are able to effectively monitor counterparty risk,” Simmons says. “This process gives us that level of confidence.”
Simmons spent three years discussing his idea with his contacts at JPMorgan Chase. “I have a lot of respect for JPMorgan,” he says. “They’ve been a great banking partner. I’ve known a lot of these folks for years, and we meet with them on a quarterly basis, at minimum, and communicate at least monthly and in some cases weekly on various things we’re working on. Every meeting I had with them would start off with an update on where JPMorgan and Chase Paymentech were with being able to offer this product. I think patience and persistence on our end were really key to making this happen.”
Now Active Network is a participant in a small pilot project in which JPMorgan Chase is offering earnings credit to offset customers’ Chase Paymentech fees. Simmons sees this as a big step toward a more strategic treasury. It’s not news, he says, that the treasury function can help drive corporate profit metrics by moving cash out of interest-earning investments that would not boost EBITDA (earnings before interest, tax, depreciation, and amortization) and into earnings credit, which reduces the costs that are included in EBITDA. “What made this project so enticing,” he says, “is that it’s an opportunity for treasury to utilize earnings credit to move further up the income statement, to improve gross margin by using idle cash to reduce cost of goods sold.”
This same opportunity is not available to every treasury function, but Simmons advocates that every treasurer think outside the box. “At Active Network, the treasury team has the opportunity to influence the business in a positive way,” he says. “Because we’ve been able to make a significant difference in EBITDA, I’ve been asked to take on other roles and responsibilities that may not traditionally fall under the scope of the treasury function. Treasurers who are good at their jobs should always be thinking strategically about how they can improve the financial performance of the company. No idea is too small.”
Treasury as Painter of the Big Picture
When Murphy Oil was preparing to spin off its retail business in the fall of 2013, management realized that the new organization needed a robust cash forecasting system. Cash flows in the larger entity differed significantly from cash flows in the retail division, and the retail business experienced large swings in working capital caused by timing mismatches between payments and receipts. This wasn’t a problem in the consolidated company because Murphy Oil was able to borrow via unsecured revolving credit lines. But the new entity would not have that option.
As soon as the divestiture was announced, leaders of the new organization, which would be called Murphy USA, recognized three treasury-related needs:
- the need for visibility into short-, medium-, and long-term operational cash requirements of the business;
- the need to better understand the ability to invest in the business through capital flows; and
- the need to understand the company’s overall borrowing requirements.
“Before the spinoff, cash forecasting wasn’t very precise in the retail side of the business,” says Todd Gilreath, manager of cash management for Murphy USA. “Forecasts were based on historical data and current trends. As the spinoff approached, we knew that access to cash would not be as easy for the new company. If we were going to have a shortfall, we needed to be prepared. We needed much better insight into our cash position at any point in time.”
From the outset, the project focused on improving communication between treasury and other areas of the business. “Our first step was to understand the business processes and product flows that generated cash inflows and outflows,” Gilreath says. Treasury organized cross-functional workshops to enhance collaboration among operating groups whose cash line items were correlated or operationally dependent. “We pulled everyone together and said, ‘We in treasury need to understand not just how cash flows in terms of the timing of payments and that type of thing, but also how information flows.’ We included every group within Murphy USA—our crude group, our fuel group, and the fuel and merchandise divisions of our retail group. Together we drew up a process map of cash flows for each business unit.”
Initially the meetings included the leaders of each business unit, but as the groups better understood the specific information treasury was looking for, the leaders delegated to the appropriate team members. The large, companywide meetings became more targeted, with participation from many individuals. A primary goal, says Gilreath, was to help groups understand that treasury’s role was to find cash to fund the projects the business units wanted to undertake. “There was a fear that treasury would say, ‘No, we can’t do XYZ because of money,’” he says. “In actuality, what we wanted to say was, ‘Yes, you can do XYZ. We have the money because we anticipated this and we were able to prepare for it.’”
Murphy USA deployed a new treasury management system from Kyriba and a workflow through which business units submit a rolling 13-week forecast to treasury on a weekly basis. Treasury consolidates this data within the Kyriba cash management module, then asks the groups to explain any discrepancies in their forecasts, as well as significant variances between the previous week’s forecasts and actuals. When discrepancies are resolved, the treasury team generates a cash forecast dashboard for the company’s executive management team. Every week, a six-week cash flow forecast is included near the beginning of a slide deck on corporate performance that management distributes companywide.
For teams that submit their cash forecasts each week, the forecasts’ visibility in management reporting offers evidence that the data they provide is being used. “They appreciate that,” Gilreath says. “This project has also helped our business groups make decisions based off the holistic view, rather than their little piece. Everyone knows what they do, and that’s their comfort zone. With this project, we asked people to think about other areas outside that comfort zone. In treasury, we are truly consumers of information. It comes from the experts, who are the people in our business groups. We get information, we consolidate it, and we paint the bigger picture.”
Along the way, treasury has gained a deeper understanding of the company as well. “A big benefit for treasury is that we can now speak the language of the other departments,” Gilreath says. “There were terms I heard in the past that I didn’t fully understand. But now I understand what they mean, and I understand the terms that surround them. That helps treasury make better decisions, and it enables other departments to speak with us in ways they’re comfortable with, without having to change terms so we understand them. We now have more honest, open, and direct communication with the other groups. Just yesterday our CFO asked me to work with another group to determine our anticipated cash balance during our peak season. In the past, I don’t know that treasury would have been a part of this type of process. But because of this project, treasury has become more strategic—and we’re helping make the individual business units more strategic as well by giving them a better view of how they contribute to the big picture.”
Taking up the Slack in APAC
After Deng Xiaoping announced China’s new “open door” policy at the end of 1978, Honeywell International was one of the first multinational companies to open an office in Beijing. Since then, the organization has established subsidiaries and joint ventures in more than 20 Chinese cities, investing more than $1 billion in the nation. With plans to continue expanding in China, Honeywell needed to find a more efficient means to fund this growth.
Business licenses in China limit the scope of activities a company can pursue, so multinationals tend to have an assortment of Chinese subsidiaries, each with a narrow focus. Funding capital projects in these subsidiaries generally takes one of three paths. First, bank financing is an option, but it is costly, it increases leverage at the corporate level, and it involves covenants that may limit organizational flexibility. Second is cross-border intercompany lending. When a foreign investor sets up a legal entity in China, it must register both the business’s total investment and its registered capital with the Chinese Ministry of Finance and Commerce (MOFCOM). The difference between total investment and registered capital is known as the business’s “funding gap”—which is the maximum the company can borrow from overseas. In addition, cross-border cash infusions require registration with the State Administration for Foreign Exchange. “Cross-border investments by multinationals into Chinese subsidiaries require a burdensome administrative process,” says John Chen, treasury director–Asia Pacific for Honeywell. The final cross-border funding option is to have Chinese subsidiaries pay dividends to the multinational parent company, which then harnesses those dividends to fund other ventures. Such an arrangement can be inefficient if continued investment is required.
In light of its cash-generating capacity and its continued need to invest in China, Honeywell determined that its best option was to use profits from one Chinese subsidiary to fund other Chinese subsidiaries so that the funds wouldn’t cross the border in either direction. Direct intercompany lending is not allowed in China, and lending that goes through third-party banks’ “entrustment loans” incurs additional taxes and fees. In addition to actively funding growth through entrustment loans, Honeywell set up a Chinese holding company that could invest in new subsidiaries to be established in China. Existing subsidiaries pay dividends to the holding company, which uses some of the money to form new entities and some of the money to increase equity in existing entities. “When the subsidiaries earn money, they declare it out to the investment company as dividends, and it’s held there for possible use as additional paid-in capital or new paid-in capital to new companies,” Chen says.
That was the idea, anyway. For the first few years that the holding company structure was in place, it was not very effective. Declaring dividends in China requires a streamlined process that executes very quickly. Lacking such a process, Honeywell subsidiaries were failing to turn much profit over to the parent company. Chen explains: “In China, interim dividends require a very cumbersome process. Therefore, most dividends are based on final audited financial statements. China is also very strict about triggering negative retained earnings; you can’t declare a dividend when you are projecting a loss. By the time your audited statements for the previous year are available, you have to be concerned about your profitability in the current fiscal year. This creates a limited window of opportunity for declaring dividends. And in China, a company has to have many different people involved to declare a dividend, including treasury, tax, the controllers, and legal. In the first few years that Honeywell had a Chinese holding company, we didn’t have a smooth process. By the time audited financial statements were available, people would be apprehensive about declaring dividends and we would end up waiting for the next cycle.”
Honeywell’s treasury managers in Asia Pacific (APAC) gathered a cross-functional team consisting of representatives from the company’s tax, legal, business development, mergers and acquisitions (M&A), and finance functions, as well as its external banking partners. “We drafted a new process for declaration and payment of dividends and drew up a RASCI chart to define everyone’s roles and responsibilities,” Chen explains. “If they disagreed, we gave them the opportunity to voice their concerns and we had an in-depth discussion until we came to an agreement. It was a lengthy process, but it was very helpful. Honeywell is such a diverse company that it is extremely valuable to be sure everyone is clear on their roles.”
Now, when audited financial statements are available, Honeywell’s APAC treasury team initiates a conversation with the subsidiaries’ controllers about how much profitability each business unit has and how large its dividend should be. When the two groups agree on the size and timing of the payout, the APAC treasury and legal groups execute the requisite paperwork, and the subsidiary’s board passes a resolution to declare the dividends. “It’s not a unidirectional instruction; it’s a consultative process,” Chen says. “But treasury’s role is to convince the business units to provide a certain dividend level. We might say, ‘We have this project coming up, so if you have sufficient cash, we would really like you to declare this amount of dividends. And if you’re short of cash, we can loan you cash through other channels.’”
These negotiations work because each individual’s roles and responsibilities are clearly defined in the dividend declaration and payment process. “Now everything works like clockwork,” Chen says. “Everybody is synchronized, and the timing is precise. Our Chinese subsidiaries have been declaring dividends regularly. As a result, when we have a new capital investment opportunity, the holding company has money ready for reinvestment.”
Streamlining One of the World’s Most Complex Treasury Functions
With over $150 billion in revenue streaming in from 140 countries in more than 25 currencies, the treasury environment at General Motors is one of the most complex in the world. Several years ago, around 100 GM business units were pooling their cash, but management of the cash pools was cumbersome and labor-intensive for treasury teams. When a unit wanted to either contribute to or withdraw from a pool, it would send an email. The transaction would be manually entered into a spreadsheet and manually re-entered into a treasury management system (TMS). Staff would retrieve the exchange rate from Bloomberg, if appropriate. Settlements would be processed in the TMS and released on workstations for the banks of the business unit and the cash pool. The following day, staff would reconcile the transactions between the bank workstations and the TMS.
Each step required manual data transfer, and the company used manual controls to avoid errors. “At several points in the process, the same data had to be transferred or manually entered,” says Amar Srinivasan, manager, corporate treasury, with GM. “If one person was entering data, we had another person actually confirming that the right amount was entered. A lot of time was being spent just to make sure that we avoided data errors.”
The structure of intercompany lending at GM increased the complexity of the process. Loans were made as term-based advances against the borrowing limit of an intercompany loan agreement (ILA). Driven by requirements of more than 100 business units across the globe, ILAs’ terms varied, which meant that processes for administering loans varied. Most intercompany loans were fixed-rate, so GM had to periodically revalue rates to ensure they met an arm’s-length standard. Further complicating matters, even though most of the ILA advances rolled over on maturity, each advance had to be tracked as a separate loan. For example, a three-month $2 million advance on a $100 million credit-limit ILA had to be monitored as its own loan. And many loans were denominated in a currency other than the functional currency of the business unit taking the loan, exposing the unit’s financial statements to foreign exchange (FX) volatility.
To improve cash-pooling efficiency companywide, corporate treasury undertook a transformational initiative that also involved regional treasury teams; business units that participated in the cash pools; and legal, tax, controls, and accounting teams around the world. To gain the buy-in of all these diverse groups, corporate treasury detailed the project’s goals at the corporate level, describing expected increases in efficiency across functions and business units, growth in the volume of cash being pooled as the pools gained visibility throughout the company, improved responsiveness to business units’ liquidity needs, and better controls around cash pooling. The treasury team also outlined the benefits they expected the project to provide for each function. For accounting, the initiative promised a single book of record. For compliance, it offered automated straight-through processing. And for legal and tax, the project would reduce the resources required to develop and negotiate a custom ILA each time a new business unit joined a cash pool.
“We anticipated that the company would be able to commit fewer resources to intercompany lending and cash pooling activities, not just across treasury personnel, but throughout legal, accounting, and tax as well,” says Jim Davlin, treasurer of GM. “We saw that our responsiveness would be faster, both because the pools would have more cash and because we’d have a better view into business units’ cash needs. And in our conversations with all the participating functions, we emphasized the importance of improving controls.”
GM treasury developed a target operating model for cash pooling and intercompany lending, netting, settlements processing, cash investment, and FX trading. The team decided to replace fixed-rate lending with floating rates and developed recommended interest rate curves and spreads across currencies and geographic regions. Tax staff helped ensure that the final rates met the arm’s-length standard. Corporate treasury worked with accounting staff to plan the replacement of the term-based loan structure with a revolving-credit-facility structure in which interest is calculated daily on the outstanding balance. This change dramatically reduced the number of outstanding loans that GM needs to track. The treasury group also worked with the corporate legal team to draft a standard ILA that ensures the same terms apply to all intercompany loans, allowing for modifications that account for specific local regulatory, tax, and banking requirements. The standard ILA requires loans to be denominated in the functional currency of the borrowing business unit, so FX exposure in intercompany lending is consolidated in the regional cash pools.
Finally, treasury worked with IT to replace multiple legacy systems with one TMS that allows for end-to-end straight-through processing. All the previous steps required to initiate a transfer of cash to, or withdrawal from, any GM cash pool around the world now can occur within the single system, with settlements automatically processed and reconciled via SWIFT messages to and from the banks. Business units participating in GM cash pools can access intercompany cash much more quickly than before, even as controls are stronger.
“One of the biggest benefits of this project is the faster responsiveness to business needs from a cash standpoint, both getting cash places sooner and being able to deploy incremental liquidity faster,” Davlin says. “Another key benefit is the improvement in controls. That really can’t be overstated. We still have controls in place, but automation reduces the degree to which we need to worry about errors being created through manual data entry. Increased visibility and improved controls are very important in today’s regulatory environment.”
Adds Srikumar Vishwanathan, head of transformation, corporate treasury, for GM: “For companies running a treasury operation in multiple countries, having a single standard process; putting a simplified structure in place; and having a consistent methodology in terms of systems, processes, and technology are key to reducing operational risk across the globe.”
Together, the software and process changes in the treasury-transformation initiative are saving GM staff hundreds of hours a week on cash pool administration, netting, investment management, controls and compliance, accounting, tax, risk management, and cash forecasting. The transformation initiative has also provided GM with a global, corporate view of counterparty exposures and has enabled the company to operate with lower cash balances because cash can be transferred more quickly from one business unit to another.
“Now that we have a common system for cash pooling amongst all our different entities, we have much better visibility into our cash balances and foreign exchange needs companywide,” Davlin says. “We have become more nimble as a company because at a moment’s notice, we can pull up the balances, cash needs, and incremental liquidity of different business units. The combination of this visibility and the increased time our treasury staff can spend on data analysis and forecasting—rather than manually gathering data and checking its accuracy—really enables GM to make better decisions globally.”
(To access an archived version of the Treasury & Risk webcast in which this year's winners described their projects, click here.)
Meg Waters is the editor in chief of Treasury & Risk. She is the former editor in chief of BPM Magazine and the former managing editor of Business Finance.