Introductions: Donna Miskin, editor in chief, Treasury & Risk magazine.

Donna Miskin: One of our top categories for entries each year is cash management, and this year’s sponsor is Citi. Joining us today to present the awards in this category and moderate the panel is Diane Quinn.

Diane is the managing director and global technology industry head for client sales management in Citi’s Global Transaction Services Business. She was named to that position in July 2009. Diane also serves as the GTS North America sector head for technology, media and telecoms in consumer and healthcare and the North American product sales head for corporate. Previously, she was the managing director of Citi’s Working Capital Solutions Group and has served as European business manager and healthcare market manager for other financial institutions. She has more than 26 years of experience in global financial services and treasury management and coauthored a major research study with The Economist entitled “The Next Generation Corporate Treasury.”

Diane Quinn:  Thanks so much, Donna. I’m very pleased to be here as a sponsor representing Citibank. This is probably my favorite event because I never see so many people with so many good ideas in one room ever. Congratulations to everybody out there that’s won awards today and congratulation to my panel in particular. Let’s give a round of applause.

One of the things on my bio that Donna didn’t read is that I also achieved once in my life -- and I’m not going to tell you when because it was long ago --recognition for Treasury & Risk’s 40 Under 40 rising financial executives to watch. Bob Pedersen, who’s joining me on my panel today, just introduced a new award, which is ”Nifty Over Fifty, or Fossils in the Field.” So anybody who supports that idea and wants to sign up with Treasury & Risk to support that, we’re all for it up here. Me, I’m the only one over 50 on our panel.

Just to tell you a little bit about Citibank and Citibank’s Global Transaction Services, this has been a wild ride for us this year. I think everybody who’s been a part of this underscores the exciting and interesting times that we’ve been going through.

I had the pleasure of moderating this session last year, right at the beginning of the financial crisis, and now hopefully, with my moderating it at this point, the financial crisis is starting to end. What we do in the area of Global Transaction Services is a key business for Citi. We’re huge sponsors and supporters of treasury and treasury management trade and securities management for companies, for public sector entities and for financial institutions around the world. We operate globally in over 104 countries, and we bring about $10 billion in revenue to Citigroup. We are one of the three core businesses that talks about around the world.

We invest about $1 billion globally in technology and solutions that support all of you in the field as you look to take a good financial crisis and not waste it and do things like standardize, streamline, optimize your processes, gain visibility and control over the things that you manage on a day-to-day basis.

So without further ado, I’m not going to spend any more time on me because the focus is on the award winners. I’ve personally read all of the submissions that they put together. They’re fabulous. To be frank with you, Donna, I don’t know how you and your team picked between each of these submissions. The bar just keeps getting raised higher and higher every single year, and my panel is very interesting, with a whole variety of different people.

We have Crista, who is a first-time Alexander Hamilton Award winner. She also won the Association for Financial Professionals Pinnacle Award for the City of Los Angeles a couple of weeks ago at the AFP. So that’s great. It’s her first.

Cash Management 2010 Transcript

Looking at Kim, we’ve all seen Honeywell plastered all around the awards that have been given out at this particular session, and in past years, Honeywell is a very, very large winner of these excellent awards.

And then when I look at Bob, Bob has won this award several times, and I’ll tell you a personal story. The first year that the Alexander Hamilton Awards were offered, which was in 1996, I managed a team that covered Bob’s relationship. I was very young then. I started out as an intern for the bank at that particular time, and during that time, after we did the awards submission, my team worked with Bob and his team.

When they actually won the award, I was in the hospital. I had two concerns as I went in for this significant operation:  Will I come out with lipstick on my face, because I always have to wear lipstick, and will the U.S. Postal Service win the award? And thankfully, both happened, so it was a good day. So I’m very excited to introduce the panelists to you.

What I’d like to do first is introduce our bronze winner for today. When I ask that person to stand up and begin presenting, I would also like the people who worked with that person on this award to stand up because many of these awards take a vision, and they take a village. I know that many of you are here supported by your colleagues who worked very hard on these submissions. So I’d like you to get a little recognition, too.

The person I’m going to introduce for our bronze winner today is Crista Binder. Congratulations, Crista. Let me just tell you a little bit about Crista. She has worked in public sector financial management for about 19 years. You’ll see why the experience that she’s lent to this project has been particularly valuable, and I’m not going to steal any of her thunder, but she is the assistant treasurer of the City of Los Angeles. She holds numerous degrees and has had a very, very, very credentialed career. Without further ado, I’d like to invite Crista to come up to the podium and share with you what I think is one of the most exciting solutions I have ever seen in public sector city government.

Before she does, who else is here from the City of Los Angeles? Can you stand up, Joya? Joya De Foor is the treasurer, and I can tell you personally that it takes strong leaders with strong vision to get a project through. I know that you had very much of an impact on this, Joya. Thank you for supporting your team here today. So Crista.

Crista Binder:  Thank you very much. Good morning everyone. Let me spend a few minutes telling you about the City of Los Angeles, which is a $17 billion enterprise. We happen to own the nation’s busiest port. We own and operate three airports, one of which is LAX with its 60 million passengers a year. We have 50,000 city employees. We own three waste treatment plants. We have a police department and a fire department. We have 390 parks, and the list goes on. We also own a zoo. I don’t know how many companies out there actually own a zoo. So how do you provide banking services to all of these really different, non-related city businesses?  With great difficulty.

When I first stepped into Treasury five years ago, we had a 30-year-old banking structure. We deposited all of our funds into one bank account. Now think about that. Forty-two lines of business depositing money into one account. How do you figure out whose money is whose? Very challenging. We have tons of returned items. People sent their checks through inter-office mail, and my favorite -- this is my absolute favorite -- we had to write a check to ourselves and cash it in order to make a wire transfer. Yeah, I still don’t understand that one.

Cash Management 2010 Transcript

Given the nature of how we were organized, how do you go about basically blowing up the ship which is what we did and reinventing ourselves? You do that primarily with vision. You can’t have this type of overhaul without a solid vision, and that was brought to us by our city treasurer, Joya De Foor. We couldn’t have done it without you. Thank you, Joya.

So we decided to go out to bid. Everybody knows governments. Governments like to go out to bid. They like to submit bids. They want the same thing. They don’t want to change. So we decided to do it a little differently. We really wanted to find financial services providers that were willing to challenge the status quo with us.

In order to do that, we needed to organize our project around seven key stakeholders who were going to review the bids.  Typically in government, the people who sit on the panel are representatives from the mayor, the city council and the chief legislative analysts. Those are the folks who like to tell you what to do. They don’t necessarily do what you do. So we deviated from that process.

On our panel, we chose The Port of Los Angeles, the airport, the nation’s largest utility, which is the Department of Water and Power, and our largest revenue producer, which is our Office of Finance. We also had the treasurer, of course, the elected city controller and our chief information director.

It was a great mix of people that had a complete vested interest in the outcome of the project. So who did we pick? We went through a very exhaustive review process, and we spent a lot of time grilling the banks. I remember one of our bankers said, “That grilling process, it was ridiculous, but it was ridiculous in a good way.”

So what we did is, we picked two banks, one [Wachovia] which had a really strong consultative approach and really strong technology, and then we picked another bank [Wells Fargo] that had a strong presence in California. They were a very solid bank, and lo and behold, one bank bought the other. I knew that was going to happen, which is why I picked both.

How do you plan to basically blow up the entire City of Los Angeles and rebuild it? The first thing that we did, which was actually one of the ideas brought to us from one of the banks, was to go through a really exhaustive assessment phase where we identified all of the problems that I as assistant treasurer knew were wrong in the city. It kind of felt like I had just been arrested, like I’m sitting in county jail. I’m like, “What did I do?” And the lightbulb is swinging over me, and I’m basically confessing everything that went wrong. This went on for, I want to say a good seven to eight hours, and I’m not kidding.

After that process, we were able to identify our action plan and how we wanted to tackle changing the City of Los Angeles. We came up with an assessment model that took all of our 42 lines of business and organized them into the ones that were more complicated as far as their financial processing.

As you can see from this chart, these were the ones that have a lot of bank products. They receipted  a lot of the city’s money. They were very heavy technology based. So the banks partnered with us to do a very detailed exhaustive assessment review of all of those departments. In the middle column were the ones that were less complex, and then obviously on the far right column were the ones that were not as complex.

The nice thing about this is the consultant that we engaged did the assessments for us on what we call “the deep dive,” and as Treasury staff was going through this, we actually learned how to do the assessments ourselves. In the second part of it, we did the assessments with the supervision of the facilitator, and then on the other side, we did it on our own. We gained so much knowledge about how to look at ourselves and how to diagram and document what our processes were.

Cash Management 2010 Transcript

This is one page of the outcome of that process. This is one of our departments, General Services, and at top,  their different service sectors. They manage buildings; they have parking lots. This is how their money flows in through the city in the different parts. We did documentation for each department, and there are three slides for each one. We did not only funds flow, we did the accounting processes, and we documented all of the systems, the thousands of systems.

It was a really exhaustive process. It took us about four to five months, seven or eight hours of my time a day, but it was really worthwhile.

What did we implement? We implemented products and services in four major categories. One of the great things for us was the redefining of our bank account structure. We took that one bank account and instead, we now have our one concentration account. We then have nine sub-accounts, and then we have over 1,000 shadow accounts. Those thousands of shadow accounts help us identify revenue for all of the different city entities. It really streamlined our process and our reconciliation.

We also have automated payables. We implemented controlled disbursement. People may say, “That’s been around for years.” Well, not for us. It was a great tool for us to use.

One of the other things that we implemented was automated data management. Our goal was to go virtual. We didn’t want paper. We didn’t want the employer, the stakeholder, having to go to a branch or get a bank statement.

We created a multitiered user reporting structure, so each client department could actually establish their own users within certain parameters. It freed up a lot of our time and empowered the user as well. And then on the risk side, we implemented positive pay, which has also been around for years. We used to have reverse positive pay, and if anybody has time afterwards, I can explain how convoluted and scary that process is.

As for measuring success, these are my favorite slides. In Treasury alone, through the sub-account structure we created, we managed to reduce our unidentified items from about 1,200 to 20. This saved a horrendous amount of time in Treasury.

We also were able to decrease our compensating balances, which is a typical tool used in a lot of governments, from hundreds of millions of dollars to much less than that, saving a lot of money.

For our office of finance, this is very exciting. Throughlockboxes, data feeds and image transfer, we were able to reduce a lot of keying for them, which our other financial service provider couldn’t do. It freed up a lot of their time. This last one is sort of fun because everybody goes to these conferences and they travel all over the world and often end up parking at LAX.

Before, we had credit card terminals set up at each booth and they all shared one modem. So if you were in one lot and you gave the nice person your credit card, that nice person would have to jump over four lanes of traffic, go to the credit machine, swipe it, wait for the dialup to occur. You’re waiting. You want to get to the airport. Okay. She or he then runs back over the four lanes of traffic, hopefully doesn’t get hurt, and lets you sign the receipt.

What did we do? We implemented virtual terminals at parking lot booths. So now you can go in, pay your bill very quickly and efficiently, and the city gets to collect your money -- thank you very much.

In conclusion, I just want to say thank you so much for having us here. We are absolutely thrilled to be an Alexander Hamilton Award winner, and I hope you enjoy the rest of the conference.

Cash Management 2010 Transcript

Diane Quinn: That was fantastic. Thank you so much, Crista, and congratulations. Are you publishing these submissions at any point, Donna?

Donna Miskin:  Look in–in the November issue of Treasury & Risk.

Diane Quinn: To sum up, I hope you took away some of the key points that I took away after reading their submission: the fact that they had great vision, strong support, but more importantly, they really put the legwork in to assess every single process that they had in place, turn it on its head, and build a team of support within all the different organizations that they service to make these changes happen. Can you imagine the exciting culture that’s at the City of Los Angles?

Do you mind if I read your first paragraph of your submission? It is phenomenal. “To quote Dragnet, this is the City of Los Angeles, California. I work here. I’m the assistant treasurer. It was April 2008 and sunny in Los Angeles. I had just awarded all of our banking business to two new banks. What was I thinking?  The city was facing its worst budget deficit in its history, and I was going to modernize the second largest city in the country with a handful of staff and bankers that were just beginning to understand the enormity of this project. The story you are about to read is true, and the names have not been changed to protect the innocent.” Is that classic? Very good job.

Do you want to tell who the banks and consultants are that you worked with?

Crista Binder: Wells and Wachovia.

Diane Quinn: Just great, great partnership. According to the submission that we read, the guys really rolled up their sleeves and gave some great advice. I think what was very interesting about what the City of Los Angeles did was to take a “train the trainer” approach. That’s a good economic way to use consultants in this market environment when you need the professionalism and help with the process discipline. You take that on and it becomes part of your culture. I learned a lot here, and I’m sure you all have questions for Crista after the presentation.

Now the next person on my panel is the silver award winner. I’m pleased to introduce Kim Leary, the director of finance at Honeywell International. I think there’s a hundred people here from Honeywell because you’ve won tons of awards. Can the people from Honeywell stand up? Congratulations everyone.

Kim joined Honeywell’s treasury team in about 2000. She’s responsible for global banking relationships, and a lot of the mergers and acquisitions and due diligence integration that goes on at that firm. Prior to that, she was also with a number of U.S. bankers. So she probably has lots of good stories to tell. I’m really pleased to have her come up and tell us about what Honeywell did to win the silver award in cash management.

Kim Leary: Thank you, Diane. We’ve been here at the podium for numerous years. It’s really due to the vision of our treasurer, similar to what’s going on with the City of Los Angeles. We’re constantly revising and looking for process improvements as we expand our presence across the globe. There’s always room for improvement, and our treasury team is truly a believer of this. That’s why we love to show what we can do with all of our innovations, and we can learn so much from all of the participants and all of the previous and current winners of the awards.

I’m not going to take all the accolades for what we’ve done in China. Our Chinese team can’t make it, and I’m just representing our Chinese team. Our treasury staff is pretty small considering what a large organization we are, and in China we just have three folks working on the Chinese team.What makes this a wonderful solution in solving the problems we face is that not only were we so restrictive in terms of personnel but we also navigated the regulatory environment that happens to be part of doing business in China. For all of our participants here who have had business dealings in China, you certainly would understand the legal framework, and how long everything takes to get processed. Everything is heavily regulated.

Our challenge was to solve a problem, which is:  What do we do with our cash, which continues to build up in China? We all know it is pretty much trapped cash, and we are quite fortunate that our Chinese operations have been quite profitable, that we’re able to accumulate cash and have such a problem. It’s a blessing in disguise, but then how do you get the money out of the country?

Our situation there keeps building because over the years, our management has deemed China to be where our Asian center is going to be for all of the businesses because of the low cost. Over the past few years, cash has built up to an enormous amount where we really need to watch it and be able to utilize the cash there in an efficient manner knowing that you cannot take the money out.

Cash Management 2010 Transcript

Also, as we expand businesses over there, we certainly don’t want to keep injecting capital into the country because it’s a one-way trip, and the complexities that we have over there involve about 30 legal entities in China itself and over 300 bank accounts. That’s enormous to handle for one country with a staff of three.

What we looked at was only for the U.S. dollar cash because we already had a cash pool in place for the renminbi cash, which did not have as many regulations as U.S. dollars.

When your CFO asks you, “What’s the cash situation like in China?”, we really want to be able to have an answer.

So how do you go about getting the daily visibility?  We didn’t have that at all, because with the banking structure in China a lot of the local banks just don’t have the wire transfers as well as the information technology that can feed directly into our banking system that could give us a daily cash visibility. We were still relying on our businesses overseas as well as our treasury team manually inputting on a weekly basis what they thought the cash was.

Firstly, that’s really prone to human error, and secondly, it’s not accurate. And thirdly, it is really old news; it happened a week before. So our structure that we’re looking at is, how do you get to a point where you can really tell what was yesterday’s cash?  There are also regulations that restrict the interest rates that you can earn on the cash. Some of the other regulations restrict overdrafts in certain accounts. You can’t have inter-company loans with U.S. dollar bank accounts. It goes on and on and on with the regulatory. You can’t co-mingle funds. There were strict foreign exchange controls.

What we did was, we worked with our banking partners, and we’re really big on bank relations where we cultivate our banking relationships for years and years. Our bankers know our situation. We keep everybody informed, so that when it comes time for solutions, RFPs to be sent out, we know who is going to be the best partner for us. We went through a whole RFP process that took quite a while, but it was something that we had to do.

It still took a couple of months. We went out to about four or five banks. I’ll just fast forward. There’s a slide here with our timeline where we awarded the RFP to Citibank, which has been a partner to us globally for many years not just in the Asian region but elsewhere.

So the RFP process was the shortest piece of all of this, but while that was still going, we were constantly discussing our situation with SAFE, which is the Chinese regulatory folks. We showed them ideas, getting feedback from them as to what would work, how they would be comfortable with our solutions.

Once we awarded the RFP to Citibank, it took about three or four months to prepare the SAFE applications, and this wasn’t done just in Beijing. It also had to be in Shanghai. There are many SAFE locations. So simultaneously we’re working on that, and it still took about six months for the government to approve all of the banking structures that we had presented to them. This was already with years of advanced notice, knowing who the government bureaucrats are, and working with them.  It involved soliciting our partner Citibank, where they would also introduce ideas to the regulatory bureaucrats as well as us. As soon as the regulatory approval was given, we were able to implement within about three months.

This was really the first of its kind with banking structure. In the U.S., it’s quite simple where we – use a zero balance account (ZBA). Everything would be at the header account. You can really consolidate. It’s not that simple in China. We had over 300 bank accounts. What we had to do was set up a three-tier structure. If you were to look all the way at the top tier, which is the loan account, that’s really the header. That’s pretty much your equivalence to the ZBA here in the U.S.

This account is where we were able to get approval to notionally pool, and this is acting as the in-house intercompany bank that was recognizable by the government.

The government’s main concern is they don’t want co-mingling of funds. As they’re going through it, they want a paper trail of who is lending money to who and for what purposes. It is highly controlled, so we put this structure together, where we have a header and then it’s automated. The second tier shows all the loan accounts. Those are all the intercompany loans that are set up for each legal entity. We’ve got 30 legal entities, yet we have over 300 bank accounts.

Cash Management 2010 Transcript

Every legal entity has to have its own bank account. It has to have its own purpose. For instance, if it’s a settlement account, it has got to have its U.S. dollar account. It has got to have a renminbi account. Every purpose must have a separate bank account. That’s why this is so enormous. It’s very difficult to streamline the bank accounts. And then we had to mirror physical locations for each of the banks.

Needless to say, Citibank’s presence in China physically would be where each of our operations are in each of the big cities. For the third tier, we still have to have other overlay accounts using local banks because Citibank doesn’t have a presence with the local banks.

So we segregate everything –- three tiers, everything automated to a point where this visibility with the cash that we’re seeing going through not only meets the regulatory documentation required by the government, but it gives us the flexibility to see where our cash is and then transact intercompany loans among our different legal entities.

Kim Leary: This slide shows the first three-tier account done. Regulatory approval was given, and we implemented it in November of last year. I don’t think anybody else has gotten SAFE approval to this. Again, we’ve consolidated the overdraft facility, and regulations do require that your settlement accounts can never be in an overdraft position.

By us putting together that structure, we made sure that all of our payments were going into what we termed to be our settlement payment account. Therefore, we’ll never be in an overdraft position, tripping up any of the regulatory roles and the multibank solution. Again, this is where we include Citibank as well as each of the local banks where Citibank does not have a presence.

We were able to get improved interest rates in China. Because everything is so regulated, interest rates are dictated by the government. By putting the structure together, we were able to negotiate with Citibank and get approval by the government for our rates to be based on Libor. We are able to have a better interest rate on the amount of cash left over there, and it is a significant amount of cash in China. The way that we structured it, it’s very easy for us to keep adding legal entities including joint ventures, and we do have numerous joint ventures in the country.

We previously had so many different bank relationships, not only with the multinational banks but also with a lot of local of banks. This structure allowed us to focus on Citibank and just a handful of the smaller local banks when we needed them. Again, this is just reiteration where we improved the cash visibility. And yes, bank fees have been drastically reduced only because we were able to streamline a number of bank accounts and also reduce the number of transactions and all the wires that have to go in between the banks.

With external funding costs, we don’t have to go back out and borrow locally from other banks. We can now use intercompany loans. Investment returns, we talked about. And with operational efficiencies, everything is heavily documented using our automated statements.

Diane Quinn: Thank you. What Kim and her team were able to achieve is really significant. We heard first from Crista and talked about enormous political obstacles in making sure that you do something for the transformation of the city government.And then we heard Kim talk about how Honeywell took a very highly regulated country, which quite frankly is one of the fastest growing marketplaces that many of you are in, and put some structure to it to significantly reduce fees.

I’m going to brag a little bit about Kim and her team. When she says significantly improved yield on the cash that’s left over, we’re looking at about 80 to 120 basis points difference in what she was able to achieve on investable dollars, which is significant in a challenging market like China.

The other thing that was really interesting: they saved on bank fees. They saved about $320,000, which obviously grows as you take more advantage of the structure, and that’s not insignificant. I think Honeywell made over $320,000 on the increased investment potential and optimizing investments, but the cost reduction was half a billion. It’s pretty complicated.

There are a number of banks that can help you work through these solutions, and I encourage you to work with your banking partners, whoever they are, to attack some of the same kind of challenging issues that both Crista and Kim have faced.

. Thank you so much for sharing a really innovative structure, and thanks to the whole Honeywell team in China who put this submission together. It’s a great job and really revolutionary.

Cash Management 2010 Transcript

The last person I want to introduce is the gold winner. Bob Pedersen is somebody that I knew when I was still 40 under 40 and have known for a long time. He’s got a long and distinguished career at the postal service. He’s been the treasurer since 2002 and has got an extensive background in debt and investment portfolio management. In his current role, he manages the collection and disbursement of more than $95 billion annually, which is not insignificant.

As many of us know, the U.S. Postal Service is the largest retailer in the U.S. The cash that is handled by the postal service is enormous, and cash represents a huge problem for anybody who is in the business of handling it.

Bob holds a bachelor of arts degree from the College of William & Mary, and he also has his master’s in economics from George Mason University. The other known fact about Bob is that he is a Civil War buff. So if any of you have questions about the Civil War, feel free to ask them in the question-and-answer period.

I’d like to invite Bob’s team members to stand up and take recognition. Come on you guys. This award has really special significance for the postal service. I’ll let them explain to you what the special significance is, because I will cry, and you’ll know what I mean when he tells you. Congratulations, Bob.

Robert J. Pedersen:  Thank you, Diane. I’m not going to get away with this without my reading glasses. That’s my plug for part of the “Nifty Over Fifty.”

Diane Quinn:  Fossils in the Field.”

Robert J. Pedersen:  Fossils in the field, that’s us. Receiving this award is a great honor, and it marks the end of a specific journey that started more than five years ago.

The concept of a standardized nationwide depository system for the postal service was the brainchild of Joe Keramanica, who served as an assistant treasurer for many years. When he first discussed his concept with me in 2003, he went over these three pieces of paper which laid out his vision for the coming five-plus years. Now, I realize we’re not going to win a technology award for this and that’s okay. So Google, you’re safe for now.

He laid out his vision, and he asked if he could proceed. My response was, “How can we not proceed?  We have got to do this.”  Much to my delight, his multiyear plans were immediately actionable. It seems crazy that something should take five years, but what we need to know from the beginning is that since we’ve done our bank contracts on a rolling basis, they all had different expiration dates. So if we were going to go nationwide, it’s kind of like people preparing for the euro. You had to achieve certain alignments first, and some of those just plain took time.

Unfortunately, Joe passed away almost five years ago, and this was long before his vision could become a reality, but we have followed the roadmap he laid out for us. I wish he could be here today to share in this honor. Our Alexander Hamilton Award is a tribute to Joe Keramanica and to his unique vision and it is part of his professional legacy.

Our award is also a tribute to many of my highly capable colleagues. Two of these people, as you know, are here today. There’s assistant treasurer Liz Schafer and banking specialist David Kosturko. It’s no secret that they did a lot of the work.

Despite consolidation of accounts, processes, couriers and banks over the years and some award-winning initiatives, we still needed to change if only because we could. We needed to standardize our processes, internal and external, our requirements and our pricing templates with banks and armored couriers. We needed to centralize. We needed to simplify, and we needed to automate.

Cash Management 2010 Transcript

We expected our nationwide depository bid to produce answers to two bothersome questions:  Do we know that we are getting the best that a competitive market has to offer, and why do we see so many disparities in service and pricing across geographic areas? We had nine at the time. At various conferences and roundtables, we had heard a great deal about virtual vaults and about banks’ capabilities to partner with armored couriers and with each other.

We needed to find out what the banks and the couriers could commit to in written contracts with us as opposed to their marketing brochures. Our message to our 21 bank partners was that we planned to increase both their risk and their opportunity through a nationwide depository solicitation.

Diane, have you been messing with my slides again?  This -- this is not the slide I wanted. Come on now. There we go. That is not me with the shovel, but we were shovel-ready.

We structured our RFP to give us flexibility for anything, from winner take all to an outcome close to status quo. Banks were able to bid on any one of our 80 individual districts, all 80 or anything in between. In my view, there was no way to lose. After all, we were already moving the money every day including both banks and couriers. We ended up evaluating more than 3,000 different bids.

A company called Combined Net provided customized bid evaluation software, which had formerly been used primarily to evaluate bids for services covering complex transportation networks rather than cash management. In fact, it was a colleague in supply management in the postal service who said, “We use this software for the exciting world of transportation. Why don’t you use it for the exciting world of cash management?” And we did. We adapted it.

The software sorted through the several thousand combinations to find the lowest-cost solutions and also answer “what if?” questions such as: What would be the incremental cost above the minimum of going with a particular number of banks, or of insuring that no single bank processed more than X% of our deposits, or of awarding a geographic area to an incumbent who had a good track record rather than risk the unknown of a new lower cost bank?

Please note that our engagement with Combined Net is a matter of fact. As a public servant, I am not permitted to even appear like I am endorsing any entity, and that is a criminal statute. Also as a matter of fact, we benefited from deployment of off-the-shelf account analysis software from Weiland Financial Group. This was a key step in Joe Keramanica’s multiyear plan. I understand Pat Weiland is here today. Pat, will you give a wave?  Thank you.

At implementation last February, we went from 21 banks to 15. Our top three banks handled 60% of our deposits. One bank did bid on 74 of our 80 districts. These numbers and others are less important than the fact that they were produced by a highly competitive process in which competitors had much at stake.

Our armored courier relationships were almost completely overhauled. Here we made a midcourse adjustment by decoupling the couriers from the banks and asking the couriers to submit new bids directly to us rather than through the banks. In the end, we reduced couriers from 11 to seven, with four couriers accounting for 99% of our courier fees.

Cash Management 2010 Transcript

We do have one major bank with virtual vaults that process our Washington area deposits and some in the New York area, but we do not have a single bank providing service through bank partners. We think there’s knowledge to be gained from our experience for banks, couriers and cash managers, particularly with respect to large, high cash volume retailers. Vault capacity requirements and difficulties in meeting all potential parties’ profit margin requirements are two of the lessons cited by banks in discussions with us about partnerships and virtual vaults that did not materialize as expected.

In our bid analysis, some of the virtual vaults were priced at twice the winning price. I’m also happy to report that we are saving money. Our bank and courier fees have been reduced by 11%. Additional savings due to downward field price adjustments are not included in the 11%. Like a good treasurer, I will close on that note about the money. Thank you very much.

Diane Quinn: That was an incredibly challenging project. Imagine that for your individual company, managing that amount of cash and achieving that level of cost savings. Boy, I appreciate that as a taxpayer. Thank you so much for a great job by the team. The submission was incredible, and I know you guys worked really hard on it.

What I’d like to do now is open it up for questions and answers. Does anybody have a question?

Q: First of all, congratulations to all of the winners. My question is to Crista. You faced a considerable undertaking when you first started. Who did you have to sell on the idea, and how did you sell it? There had to be some obstacles along the way as well, which I’d be interested in hearing about.

Crista Binder: We were pretty sold on it internally ourselves, so we had to sell it to our primary stakeholders, and that was challenging because when you deal in government, you deal in politics. I mean, everything becomes an LA Times article, at least where I live.

So we spent a lot of time developing communication strategies, both culturally and politically. We actually developed a communication model that sort of said, “Who are we going to talk to, how often are we going to talk to them,” and then a lot of -- like you talked about – “how do we convince?” We really made a concerted effort to go forward and keep it a little bit under the radar and then as we were going along, saying, “Well, here, look at how great the progress is.” Because the more people you involve in the decision-making from the political side, the more your project gets bogged down.

That was a very challenging balance between giving them enough information so that they felt comfortable but not giving them too much information where they could start sort of bogging down the process, because it’s complicated, and for most people and our elected leadership, banking is technical and challenging. So we didn’t want to have to really try to go through that whole explanation, and I think we did a good job.

Diane Quinn:  Great. Any other questions? I have one  shocker. My question is to Kim. Given the fact that you’ve won so many awards in the past and at this particular session, what’s next?

Kim Leary:  Well…

Diane Quinn: No one will steal your idea in this room, right?

Kim Leary: Right now we have a team back at the office drumming up the next idea, the next innovations. Having already won two “Overall Excellence” Awards two years in a row, it’s going to be hard to top that. But nevertheless, because of our large organization, different geographic regions and so many new categories to compete in, we are constantly working on improving, and it’s not just treasury related. One of my colleagues is coming up later to discuss green solutions as well as our pension investments. We’re looking across the board.

Cash Management 2010 Transcript

Diane Quinn: Thanks. Any questions from the audience?  Yes.

Q: Two questions. Firstly for Bob from USPS: You won the gold award for Cash Management Efficiency. Do you think that there will be no more postal rate increases because of that?

Diane Quinn: Oh, soothsayer, Bob.

Robert J. Pedersen: Um.

Q: Seriously, I do have a serious question. I’m sure we’ll see postal rate increases regardless of the efficiency…

Robert J. Pedersen: No postal rate increase for about probably 18 months. I just told my mother that. So she’ll have to wait a while to yell at me again.

Q: But on a serious note, what do you see as the next major challenge that you’ll face in treasury?

Robert J. Pedersen:  That’s a good question. I appreciate that question. In this particular area, right after implementing it, I said, you know what? We have 540 pickup points. How do we know that’s the right number? And so we’re working on that. It involves a lot of cross-functional integration with our operations people because they’re the ones who have to be there when the courier comes by, and we’re doing a lot of changes.

The biggest challenge that we’re facing right now is that we went from zero debt four years ago to $10.2 billion of debt at the end of September, a little symptom of the difficulty we’re having here, and we’re looking very hard at the fixed-floating rate mix. We got a $4 billion expense reduction from Congress that helped us remain liquid on September 30t.

Forecasting future activity in that arena, what do we need to do to remain flexible? Should we get a repeat of that kind of thing? It’s immensely challenging and involves a lot of dialogue with senior management, which means a lot of PowerPoint presentations as you might imagine. So that’s the real big challenge, keeping our interest expense stabilized or from getting out of control.

Diane Quinn:  Great. Another question.

Q: Thanks. This question is for Bob. I’m interested to know if you benchmark against other countries’ postal services in terms of best practices or any private sector providers in the U.S. in terms of improving treasury cash management efficiencies?

Robert J. Pedersen: Thank you. We do not benchmark internationally with other posts. We do a lot of benchmarking in the United States. As part of this whole process, we kicked a lot of tires with other treasurers, especially retail treasurers. We sat down with bankers in a very consultative process. I put the steel cage up there but that’s really not how we view our relationships with our bankers. There was a lot of consultation and dialogue and a lot of tweaking that took place along the way, but the short answer is yes, we do a lot of benchmarking.

Diane Quinn: Question over here.

Q: It’s for Bob again. As a taxpayer, I’m very happy to see someone like you in government. The question is, what keeps you in government?

Robert J. Pedersen:  What keeps me in government? What I’d like to do is go back to my psychology classes in college in the 1975/1976 school year in which a professor said, “We’re all just rats in a Skinner box, and if we keep hitting the lever and getting a pellet, we’re not going to change our behavior.” So basically, it has worked. It has worked from a family standpoint. It has worked from a career development standpoint. I’m very intellectually curious, and if that curiosity is not being satisfied and if I did not look forward to coming to work, that would be a major problem for me. So far that hasn’t been a problem.

Diane Quinn:  One more question.

Q.   Hi. This is for Crista. You’ve got all of these different agencies or entities within the City of Los Angeles, and I don’t know if they’re all in the same general ledger system or multiple GL systems. Do you guys do STP back to those GLs or are you on just one GL?

Crista Binder: Let me count. I think we have about four primary GL systems, and we’re actually in the process of implementing a new GL system citywide. The main city system is a legacy system, and I think it’s from 1982 or something sad like that.

So there’s no straight-through processing for that at all. But one of the things Treasury did on the cash management side is, we actually developed and recently trademarked a system we built in-house in Treasury that translates the bank information. So it takes the BAI file and it dissects it and inputs it into the right GL code, and then we created an automated interface to this 1980s GL system. That created tremendous efficiencies with our own office.

Some of the city departments like the port and the airport and the utility have separate systems, but we’re starting to actually bring that dialogue forward, which is really what this implementation did. It showed everyone the importance of having financial systems that communicate. A lot of what we’re going to be working on in the next couple of months is to enhance that.

Diane Quinn:  Great. A final round of applause for all of the folks today. Thanks so much.

Tom Duggan: I would like to thank Diane for great coverage of this topic, and again, congratulations Robert, Kim and Crista for your awards in cash management.

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