In today's topsy-turvy regulatory and market environments, agility can be key to corporate survival. Likewise, a willingness to fundamentally rethink corporate treasury can be key to the treasury function's success.
Big innovations have certainly proved a critical success factor for the three winners of the 2015 Alexander Hamilton Awards in the category Treasury Transformation. All three envisioned better ways of running the treasury function, and as a result they improved not only their internal processes, but also the prestige of the treasury function within the broader organization.
Starbucks is a cash-intensive business. In-store sales are generally low-dollar transactions, and many are paid in hard currency. Several years ago, Starbucks store managers would make regular trips to a local bank branch to deposit their store's cash. The corporate treasury team saw room for improvement—the opportunity to improve both the productivity of store managers and the efficiency of corporate cash management and bank account management. Thus, treasury embarked on a wide-scale initiative to revamp the company's handling of cash.
Starbucks began by introducing a courier service to pick up cash from stores, then extended the improvements through technology. The resulting initiative had a fundamentally transformative effect on Starbucks treasury. “We’re trying to set up a platform that enables us to ideate and transform cash activities in a way that’s beneficial to each store and for Starbucks as a corporation," says Tanya Strawn, senior treasury manager. "We’re on that path.”
At Health Care Service Corporation (HCSC), passage of the Affordable Care Act required immediate action on the part of many business units, including the treasury team. Executives anticipated that the law would dramatically increase the number of small, individual premium payments the company received each month. To remain effective, treasury operations needed to improve visibility into the organization's cash position and automate many of their activities so that they could focus less on manual transaction processing and more on analysis and decision support.
The treasury operations team selected and deployed a new treasury management system and developed a software tool that enables managers throughout the business units to initiate their own wire transfers. They re-engineered cash receipts, and restructured their function. "Our entire staff is now fully engaged in consultative project management roles," says Forrest Vollrath, executive director of treasury operations. "We will present solutions and opportunities to the enterprise prior to their realization of the business need to drive business change, rather than react to it."
The management team at Indian consumer packaged goods giant Hindustan Unilever has made a conscious effort over the years to develop a treasury team that will serve as a thought leader among corporate treasury functions. The company's recent treasury transformation project illustrates the myriad benefits of this approach.
Like Starbucks, Hindustan Unilever does a lot of business in cash. Even many business payments to small contractors must be made in cash. Historically, this cash flow has created complexity for the treasury function. "We manufacture goods in more than 35 locations, and we have at least one distribution center in every state of India," says Nidhi Jain, senior finance manager, treasury and insurance, for Hindustan Unilever. "Traditionally, our approach was to have a bank account for every location. However, this created a very complex network of banking relationships."
The company's treasury transformation initiative centered on automation of processes, centralization of payments and collections, and consolidation of bank accounts. In the process, the treasury team pioneered a new approach to sending SWIFT ISO-based payment instructions to banks from their SAP ERP platform, and they became the first business in India to make SWIFT ISO-based payments of statutory taxes and levies. The results have been dramatic. Now 99 percent of the company's payments and collections are paperless, and the treasury function estimates that Hindustan Unilever is saving 2,500 person-days a year. "We believe in being thought leaders," Jain says. "Every new process and technology, somebody has to do it for the first time. So we ask ourselves 'What problems will we face in the future?' and then we start preparing for them today."
Read on for the stories of how these three innovative treasury functions transformed themselves to be better positioned for the future.
Improving Cash Handling in a Cash-Intensive Business
With most of its transactions happening a few dollars at a time, the treasury team at Starbucks handles a lot of cash. The company has approximately 7,900 company-operated stores across the United States, and the treasury function oversees bank accounts and cash flow management for all those locations.
“In 2012, we were coordinating about 35 different banking relationships in the U.S. to make sure all our stores had a place to take their deposits,” explains Andrew Teachout, a senior treasury analyst who started as a shift supervisor in a Starbucks coffee shop before moving to treasury. “It was a lot to manage, and a lot of different maintenance points, to make sure all our stores could get the cash to their bank and that all those accounts were crediting correctly to our corporate accounts.”
“We had high-performing employees spending at least half an hour a day managing banking processes rather than working in the store, trying to make sales and interacting with customers,” adds Tanya Strawn, senior treasury manager.
The treasury team performed a cost-benefit analysis on using a courier service for cash deposits. “Initially, a move to courier could appear to increase costs,” Strawn says. “However, we knew it was the right thing to do to create customer service capacity for employees and help us consolidate banking partners.”
Rolling out courier service to all U.S. stores took Starbucks more than a year. At the end of the courier rollout, the company used five courier services and six banks nationwide. As expected, the initiative enabled a manager in each store to spend approximately 30 more minutes a day doing his or her primary job.
However, the move to courier also created some challenges. “In general, managers were put in the position of having to forecast store cash needs,” Strawn explains. “By consolidating activity, we created efficiency but needed new tools to assist them with managing the reduced flexibility.”
The company deployed DTS Connex, a Web-based connectivity platform that sits between Starbucks and all its different banks and courier services. The software tracks deposits from store to courier to bank. It enables corporate treasury to monitor all flows of cash, and it enables stores to review and alter their change orders online.
Now Starbucks stores have the tools they need to stay on top of their cash flows. A courier comes to each store on a regular schedule. The courier brings change that store managers ordered through DTS and takes the store’s cash deposit. The transaction usually takes less than five minutes. It is recorded in DTS and given a 10-digit unique ID. DTS developed that unique ID for Starbucks in order to follow a transaction through its entire lifecycle. At the time, this was a new idea to the retail industry, but it's now being used by other companies.
This has also accelerated Starbucks treasury’s examination of discrepancies and controls. “Rather than doing general matches and hoping they’re consistent, we have item-to-item matching,” Strawn says. But the back end is transparent at the store level. “The store does not have to worry what bank they’re using, or what courier deposits go through,” Strawn adds. “They simply interact with the Web portal. Then on the back end, DTS sends those messages to the different partners. So the store’s request in DTS manifests itself as a change order on the courier’s next delivery date.”
The resulting cash-handling process has brought big benefits to the coffee giant. Companywide, the elimination of physical bank deposits has enabled stores to reclaim approximately 82 million minutes per year in managers’ time. Starbucks has also eliminated $2 million in annual mileage reimbursements. And the company has simplified its bank relationship management and reduced fees.
In addition to these gains, Starbucks treasury sees opportunities for further improvement in the form of smart safes and recyclers. Smart safes are safes that connect digitally to the company’s bank. When employees feed in bills and coins, the machine recognizes them and communicates to the bank, and the bank immediately credits Starbucks’ accounts for the amount of cash the employees entered, as if they had made a deposit at a bank branch. Once cash is deposited into a smart safe, Starbucks employees cannot remove it. The courier is responsible for emptying the safe.
Recyclers are similar, except that the flow of cash can go in both directions; small bills can be withdrawn as well as deposited. “A recycler is really about utilizing all the cash as efficiently as possible,” Teachout says. “It helps increase your utilization of small bills and prevents you from having to order as much coin or as much cash at a given store.” Starbucks is currently piloting both smart safes and recyclers, trying to determine which machine is the best fit for each of its 7,900 stores.
All in all, the project “really goes back to freeing up that employee who’s in charge of cash handling,” Teachout says. “We are a coffee company. We wanted our employees to focus on serving our customers rather than having to focus on cash management. Adding those high-performing employees back into the store’s workflow has really helped us improve the customer experience. So that’s really been a big win.”
Adds Strawn: “We’re trying to set up a platform that enables us to ideate and transform cash activities in a way that’s beneficial to each store and for Starbucks as a corporation. We’re on that path.”
Transforming Treasury in Response to Legislative Change
Health Care Service Corporation (HCSC) is the largest customer-owned health insurer in the United States, and the fourth largest overall. When its treasury team decided to pivot from being process-focused to taking a consultative, think tank approach, they embarked on a huge initiative—with massive potential benefits.
As the Affordable Care Act (i.e., “Obamacare”) took effect, the HCSC treasury organization recognized that it needed to prepare for a big jump in the number of small premium payments it would receive from individual customers. Treasury leadership decided to address this shift in the business by improving the efficiency of the treasury function. They planned to centralize treasury operations across the company’s Blue Cross Blue Shield business units, as well as its 30-plus subsidiaries, and to make strategic investments in treasury technology.
“To prepare for what was going on in the healthcare industry—particularly healthcare reform—we knew we needed to look at our business model,” says Forrest Vollrath, executive director of treasury operations for HCSC. “We needed to change what we were doing in order to stay competitive in the market.”
Led by the treasury operations team, HCSC embarked on the purchase and implementation of a new treasury management system that would enable corporate treasury to monitor, in one place, the company’s entire $100 billion of annual throughput. They next planned to develop a method for that system to drive the company’s cash forecasting and investment process. They also planned to leverage the treasury management system to improve business continuity planning. Moreover, the treasury team planned to revamp the company’s strategic investment allocation strategy, to re-engineer its cash receipts function, and to develop an automated process through which business units could initiate their own wire payments. Finally, HCSC treasury intended to launch a bank scorecard that would help them evaluate bank fees and services.
The team’s first priority was to implement a best-in-class technology solution. “We were working with a treasury workstation that didn’t quite have the functionality we needed,” Vollrath says. “We needed a solution that could do rolling 13-week forecasts on a daily basis. We wanted to do a regression-based cash forecast, in order to better manage working capital. We had a couple billion dollars in working capital, and we wanted to be able to invest a lot of that excess capital to earn income.”
HCSC went through an RFP process and settled on a software-as-a-service (SaaS) treasury management system. Then the company partnered with the vendor and with banks to push the boundaries of the system, customizing its working rules to increase automation in treasury processes.
The system has been a resounding success. It now provides the treasury team with visibility into 100 percent of the company’s cash and investment activity. Because they always know where corporate cash is located, they can better manage HCSC’s liquidity. Its automated reporting and daily forecast dashboards are customized to meet the business needs of each group, with minimal manual intervention. And the cash forecasting regression model has enabled the company to increase returns on its $10 billion investment portfolio by $140 million.
Treasury has also seen big benefits resulting from its development of an electronic funds transfer (EFT) system for wire transfers from outside treasury. Previously, the treasury team processed every wire transfer that originated anywhere in the company. “That process was very paper-intensive,” Vollrath says. “Eighty to 90 percent of the wire payment requests were originating from a business unit outside treasury. People would drop off a paper wire transfer request, and then my team would process it.”
HCSC customized its new treasury management system not only to initiate wire transfers, but also to accommodate a multilayered financial authorization policy that enables treasury to hand over initiation, approval, and transmittal of EFT payments to the company’s business unit managers. The process automated 5,000-plus EFTs, totaling more than $100 billion, each year.
The company also re-engineered its cash receipts function by automating the exchange of data on its 700,000 receivables, worth $4.5 billion, per month. It consolidated this information from its lockbox providers, credit card processors, and more than 10 internal accounts receivable systems in a “cash application hub.” Virtually all (97 percent) of the paper checks and electronic payments that the company receives are cross-referenced and go through a dispositioning process.
These improvements in cash receipts have reduced the cycle time for paper checks from seven days to same day for cross-referenced items. In addition, the new approach has increased accuracy and reduced exception handling in processing receivables. The centralized hub also improves treasury’s ability to provide research and service to both internal and external customers.
The increase in automation across a variety of treasury processes laid the groundwork for a fundamental shift in the treasury operations team. From a team of 50 to 55 individuals focused primarily on manual activities such as account reconciliations, treasury operations has been reconfigured as a group of 15 professionals with diverse backgrounds ranging from accounting to banking to IT, many of whom have advanced degrees. Together, these professionals comprise a dynamic and balanced team of subject matter experts.
This team now serves as a treasury knowledge center at HCSC. Treasury operations emulates the financial services model by providing consultation across the enterprise on a wide array of finance and system initiatives. For example, treasury operations has consulted on cross-functional initiatives focused on responding to the Affordable Care Act and Industry Prompt Payment requirements, strategic outsourcing initiatives, business unit profitability, enhanced investment returns, Medicaid payment regulation, and cash forecasting.
The improvements in treasury processes provided by HCSC’s treasury transformation initiative have given the company a competitive edge in a changing healthcare environment. They have also raised the profile of treasury within the organization. “Our entire staff is now fully engaged in consultative project management roles,” Vollrath says. “The treasury transformation project has increased organizational efficiency, improved business decisions, boosted working capital and investment returns, and robustly expanded the branding of treasury within the business enterprise.
“The tacit benefits of our interaction with other functions have enriched the careers of the treasury operations team,” Vollrath adds. “The future of treasury will be determined by our continued development of systems and staff that continuously ideate and anticipate financial system solutions across an expansive enterprise. We will present solutions and opportunities to the enterprise prior to their realization of the business need to drive business change, rather than react to it.”
Thought Leaders in Treasury
Hindustan Unilever (HUL), a subsidiary of Unilever, produces everything from soaps and shampoos to ice cream and jam. India’s largest fast-moving consumer goods business, HUL sells almost US$5 billion worth of these products annually, through 3 million stores.
“We are one of the most widely distributed companies in India,” says Nidhi Jain, senior finance manager, treasury and insurance, with Hindustan Unilever. “Two out of every three Indians uses HUL products day in and day out. We collect payments from more than 3,500 distributors, and we make payments to more than 35,000 vendors.”
The company’s size creates both opportunities and challenges. A few years ago, HUL’s payments and collections methods were not streamlined. “We had various modes of collections,” says Mitesh Thakker, funds and forex manager. “About 30 to 35 percent of our collections were paper checks or cash. Close to 70 percent was through electronic methods—but our direct debits also involved a lot of paper and manual effort.” The HUL treasury team saw an opportunity to drastically improve efficiency.
“Today we have a cash velocity of about INR 550 billion, and that is growing at an average of 8 to 10 percent per year,” Thakker says. “We wanted to make our cash management capabilities future-ready. We wanted to streamline payments and collections by standardizing and simplifying processes.”
HUL treasury approached their banking partners with a request for information regarding best-in-class processes and technology solutions for payments, collections, and cash management. After receiving the banks’ responses, they zeroed in on the capabilities that seemed a good fit for HUL’s needs and issued a request for proposals. For the banks shortlisted after the RFP process, HUL treasury evaluated each institution’s capabilities in terms of change management and relationship management.
This initiative resulted in a set of multifaceted improvements that transformed the Hindustan Unilever treasury function. Core to the project were the objectives of centralizing payments and collections in a shared-service center, and consolidating corporate bank accounts.
“We manufacture goods in more than 35 locations, and we have at least one distribution center in every state of India,” Jain says. “Traditionally, our approach was to have a bank account for every location, for ease of operations. However, this created a very complex network of banking relationships. The more bank accounts you have, the more signatories you have to manage and the more reconciliations you have to prepare. And there will always be some money in every account, so you’re losing float on those funds.”
HUL centralized payment processing companywide, which opened the door for the company to also reduce its tally of bank accounts. However, HUL first had to deal with the question of cash: “In the Indian economy, certain things still happen in cash,” Jain explains. “The people who clean our buildings or who mow the lawn at a factory may not have bank accounts. They want to be paid in currency notes. All of our locations have some small payments that have to be made in cash.” HUL considered several options for continuing to provide cash to dispersed locations once banking was centralized. “We realized that we were not going to be able to give every business unit access to our main account; we have significant cash on hand, and our auditors would never allow that,” Jain says. “So we worked with our banking partner to issue a cash card to each business unit and each location. Managers in the unit can use the cash card to make withdrawals up to a certain limit in order to make their cash payments.”
With the cash challenge resolved through issuance of the cards, HUL dramatically reduced its number of bank accounts—from 200 to 40. It then worked on implementation of SWIFT ISO-based payment instructions to banks, for all types of payments. This was a challenge because banks and businesses in India do not have access to the SWIFT network.
“SWIFT as an organization is just starting their operations in India,” Thakker says. “Even today, we are not allowed to use SWIFT in India. To set up this functionality, we leveraged a global bank relationship that our parent company, Unilever, had established.”
HUL integrated SWIFT payment instructions into its SAP ERP system. “The way it works is that we create all our purchase orders in SAP, so the payment date is already in the ERP system,” Thakker explains. “On the payment due date, SAP initiates a payment run and fires instructions to the banks through Unilever’s global bank via a SWIFT channel. The bank receives those instructions and executes the payment. So it’s basically a no-touch process. Everything happens automatically, and all the data flows through SWIFT.”
At the same time, HUL initiated a process for SWIFT ISO-based payments of statutory taxes and levies, which was the first of its kind to be developed in India. “The central government in India has taxes, and then every state has its own set of taxes. The tax environment is quite complex, and processing these taxes manually was a big headache for us,” Thakker says. Thus, as HUL planned its SWIFT ISO-based payment solution, the treasury team worked with the global Unilever banking partner to streamline tax payments.
“Now, with our new process, we send a template file through our SAP system once a month,” Thakker says. “It goes via the SWIFT network to our banking partner, and they have designed the capability at their end to read the data from this file and process payment by going onto the appropriate government portal. There is no manual intervention here; the entire transaction happens on a no-touch basis.”
One more SWIFT-related upgrade revolved around HUL’s supply chain financing program. “Our supplier financing used to be very painful,” Thakker says. “For every invoice included in the program, we would also have a bill of exchange and a cover letter. So every invoice had four or five papers, which we’d exchange with the bank in the process of getting the invoice discounting/supplier financing transaction processed.
“But now we’ve signed an agreement with our banking partner that works as a base for all our transactions,” Thakker adds. “Whenever SAP sends a SWIFT-based instruction to the bank to perform an invoice discounting, the supplier’s credits reach its bank account and then we pay to the bank after the number of days stipulated in the agreement. So we’ve eliminated the entire paperwork that we previously required for each transaction, and the entire process is seamless.”
As it was making these improvements to its payments process, HUL also revamped collections. As it centralized in a shared-service center, the company deployed the new ACH Debit module from the National Payments Corporation of India (NPCI), which is a robust and bank-agnostic electronic collections platform.
To receive payment from a distributor, HUL moves money out of the distributor’s bank account. The organization’s broad scope made manually collecting this money quite cumbersome. “We have more than 3,500 distributors spread across the length and breadth of the country, and each of them has relationships with multiple banks,” Thakker says. “We can’t possibly have bank accounts with all of those banks. The ACH Debit technology allows us to pull money automatically from all our different distributors’ bank accounts into our central pooling account. This gives us a uniform pooling methodology and moves us completely out of paper on the collections side.”
HUL also implemented an “intelligent receivables” system that automates reconciliations. Thakker explains, “Our daily accounts receivable file is automatically transferred from our SAP system to our bank’s system. Then, as the bank receives payments from our customers, the bank uses OCR [optical character recognition] technology to read the payment advice. They turn that into electronic data and automatically feed that back to our SAP system, where a heuristic-based engine matches those collections against the recorded receivables.” If the engine is not able to make a match, the transaction moves into an exception workflow, where a human inspects it manually. “But as long as there is no exception, the entire workflow works seamlessly,” Thakker adds.
Today 99 percent of both payments and collections are paperless, and HUL treasury estimates that overall the initiative is saving the company more than 2,500 person-days per year. “Hindustan Unilever has always pioneered solutions, not only in treasury, but in the business and across finance,” Jain says. “We believe in being thought leaders. Every new process and technology, somebody has to do it for the first time. So we look into the future and ask ourselves ‘What problems will we face in the future?’ and then we start preparing for them today.”