Sometimes, this means that adventurous middle market treasurers have to enlist the help of banks or technology vendors to lend some innovation through beta tests of their latest products or services. That's not the case with REI, which owes its success to no such special favors. Its vision was its own–or that is, the vision of its 36-year-old assistant treasurer, Paquette, and his 48-year-old cash management specialist, Jaynee Brooks.

NO PAIN, NO GAIN

Paquette was working at First Data Corp. in Englewood, Colo., as senior treasury analyst when he saw from a Web posting that REI was looking for a cash manager. After three-plus years there and another nine in money market operations and trade settlement for Aetna Insurance in Hartford, Conn., he was ready to graduate from little fish in a big pond to big fish in a little pond. REI was also in tune with Paquette's recreational hobbies: An avid mountain biker, he rides close to 10 miles each day to the office.

For Brooks, a mother of three and gardener, the move was a little less calculated–and her experience less treasury-focused. Brooks had spent eight years administering payroll and benefits for the Tacoma school district, another nine as a bookkeeper for a private contractor and four and a half doing budget analysis at Pierce College. In 2000, her children reached driving age, and she decided it was time to jump back into the corporate world. That year, five months before Paquette started, Brooks took a job at REI as an administrative assistant in finance, spending half her time doing elementary cash management.

Once Paquette started, things didn't stay elementary for long. "When Russell arrived, he saw all kinds of things we could do better [or that] we hadn't been paying attention to," recalls Mark Lester, Paquette's immediate boss and director of planning and reporting at REI. "He and Jaynee started addressing [them]. They came up with a cash-forecasting template. They drafted an investment policy and a more sophisticated investment strategy. Our whole cash management/investment management has improved dramatically since 2000. We're getting better yields and have netted roughly $1.8 million in additional investment revenue over the last several years."

One recent example of Paquette's willingness to venture out of the conventional treasury box: In January 2005, Paquette conducted two reverse online auctions for all of REI's depository and core treasury services (balance reporting, controlled disbursement, wire, ACH, line of credit, both commercial and standby letters of credit). "Online reverse auctions were being used successfully to buy commodities," he says. "I wanted to apply the concept to treasury services, which are a lot less homogenous than commodities. I actually got the idea from an article in Treasury & Risk Management. I asked our banks about it. A couple of them had heard of it, but none had ever done it in this fashion before."

Nonetheless, Paquette knew that to accomplish what he wanted to in treasury he needed to cut the costs and increase the efficiency of REI's banking operations. In preparation, Paquette sent out two sets of RFPs to 17 banks, interviewed them by phone and watched demos of their products and services. That way, only qualified banks were invited to bid. In the end, eight banks were invited to bid for the core services, and 12 depository banks were invited to bid for all the stores in a state or a region.

Since the quality and breadth of offerings had been determined in advance, the auction focused on price. "Banks like to price by line item," Paquette notes. "We said no to line-item pricing. We offered a bundle of services and asked for a bundled price."

Normally, only the largest corporate customers can get away with this kind of chutzpah, but the process in this case helped Paquette set the rules. Wells Fargo, which had a footprint that matched up nicely with REI's stores, won 85% of the deposit business even though it was not the lowest bidder, and the rest went to Cleveland-based National City Bank. "While the auction gave a good picture solely based on price, ultimately we weighed quality of service, treasury products and solutions as well as transition costs," Paquette explains.

Paquette also knew that banks squeezed too hard for price concessions might cut back on service. "That's just one of several reasons why we didn't pick the lowest bidder," he reports. "So far, we have seen no degradation in service."

A BETTER MOUSETRAP, NOT JUST A CHEAPER ONE

Wells' selling point: Its Commercial Electronic Office (CEO) offered one-stop shopping, particularly important given REI's decision to concentrate its business in only two banks. Even an ASP-hosted treasury workstation would be redundant. "We originate our wires and ACHs, issue stop-pays, get our statements online and see our balances through CEO," Paquette reports. "Whatever we need from Wells is available through that portal. If we need foreign exchange, trade settlement, to see our controlled disbursement reports, review positive pay exception items–they are all there."

In the end, the auctions cut REI's banking costs by close to 40%, and REI was able to cut its depository relationships from seven to two by leveraging "virtual cash vaults" based on the banks' deals with armored car companies in states, such as Georgia, where the two winning banks did not have a physical footprint, Paquette explains. "The deposits from the Georgia stores look just like a deposit in a Wells branch anywhere else," he notes. "We get consistent pricing and consolidated reporting."

But Paquette devised a lengthy agenda for REI's new treasury. Another priority was the company's relationship with its global consortium of vendors, many of them Asia-based. With help from REI's gear and apparel sourcing manager, Alan Wei, and thanks to REI's squeaky clean record of paying on time, Paquette managed to negotiate open-account terms with most of these international suppliers, saving the company $200,000 annually in costly letters of credit. It has also virtually eliminated a $25 million standby bank line of credit used to back those L/Cs.

Around the same time, Paquette also launched a program to pay REI vendors electronically. In the first wave, 22% agreed to participate, representing 65% of the company's annual accounts payables. Despite a comparatively good response, electronic A/P hasn't proved to be as big a financial hit for REI–with only about $20,000 a year in hard-dollar savings, according to Paquette's estimates. On the plus side, he notes that it has been nearly float-neutral and has streamlined the process significantly. "We don't have to stuff as many envelopes and pay as much postage. We don't have stop payments to deal with when checks are lost. We have virtually eliminated the possibility of making duplicate payments, one through treasury and one through A/P. We're less vulnerable to check fraud," he summarizes.

The new electronic payment process also protects REI from losing discounts offered with prompt payments, he adds. "Our A/P system strips off the data from the payables ledger and feeds it into a bank ACH payment file," he explains. It also creates a PDF image that looks a lot like a check stub and is sent to the vendor a day before the payment settles so that vendors can see what's coming and begin their A/R work. The E-pay project, rolled out in April 2004, was a team effort carried out by the treasury, A/P, IS and GL staffs. While the project largely converted checks into ACH payments, some wires were converted as well, a source of additional savings for the company.

Another part of his efficiency program for A/P involved the consolidation of three separate card platforms (a MasterCard purchasing card; an American Express BTA account, which was primarily an airfare ghost card; and a Visa T&E card) into one Wells Fargo MasterCard multicard, saving lots of administrative time and reaping more than $50,000 in annual savings. This eliminated "one week a month of manually keying in information off separate statements," Paquette reports. And by aggregating close to $7 million of card spending, it qualified REI for rebates. "When I started, two of our three card programs were statement-driven. We needed to consolidate and automate," Brooks recalls. "Now everything we need is available online through CEO. It's essentially self-automated." Soon REI will run its vendor list against Wells' list of merchants that accept MasterCard to see if there are additional places the card can be used, she adds.

Here, REI's strategy mirrors trends throughout middle market treasuries–although Paquette and Brooks seem to take it one step further by wrapping all their card needs into one card. "Middle market companies have graduated from travel and entertainment cards to full p-card programs," reports Cindy Murray, executive vice president for transaction banking services for Chicago-based LaSalle Bank. "They're putting a lot of [maintenance, repair and operations] stuff on the card and even charging fixed assets. They're pushing for automated reporting and [general ledger] integration and even starting to negotiate for rebates."

Paquette's first months of creating a de novo treasury were "pretty hectic," he recalls. But a top priority in those early days was cash forecasting and maximizing returns.

Using a template he built on an Excel spreadsheet for REI's first cash forecasts in 2001, Paquette laid the foundation for a more sophisticated investment strategy using higher-yielding investment-grade instruments for the company's portfolio, which then was about $10 million and is today north of $136 million and growing. On its investment portfolio as of December 2005, REI was earning a taxable equivalent yield of 5.08% and had earned an additional $450,000 in revenues through the end of November, averaging at least 50 basis points more than the money market fund benchmark it has used to measure investment performance.

Backup can be a challenge in a two-person treasury. "We make sure that we're never out at the same time except on bank holidays," Brooks says. "We keep track of each other's schedules and make sure we have things covered." For security, two other REI employees have been trained to release approved wires and ACH transactions, she adds.

Among the things on Paquette's to-do list is looking into remote check deposit for the relatively few checks REI still takes in through its retail chain, distribution center and corporate offices; Paquette estimates 5% to 6% of sales. "We'll probably pilot it at our corporate office if we find it makes sense for us to do it," he says.

Remote deposit technology seems to spark a lot of interest among middle market treasuries. Wells Fargo, for instance, was shooting for 500 remote deposit customers by the end of 2005 and met its goal, thanks to strong middle market participation, reports Danny Peltz, executive vice president and head of wholesale and Internet treasury solutions. Other banks report similar enthusiasm. LaSalle, which only launched its remote solution in July, already reports that it has 80 users and another 50 queued up to go.

Down the road, Paquette expects to focus on taking advantage of centralized processing of returned checks, automating some of REI's reconciliation processes, digital signature capture at the point of sale, centralized ordering for REI's banking supplies and staying on top of [payment card industry] standards for securing credit card data.

MAKING A MARK

REI has been very successful in the last several years, distributing some $44 million in dividends to its two million members in 2004. Last July, it also paid down its outstanding debt, which had been borrowed to support its expansion, including the construction of its first distribution center in Sumner, Wash., in the early 1990′s.

Behind much of REI's liquidity and flexibility to finance growth is the company's increasingly robust treasury operations–and Paquette. While in the past REI's senior management took care of debt management and relationships with lenders, in the future, "Russell will be very involved in credit relationships should outside financing be needed," Lester says. "I can't say enough good things about Russell and Jaynee and how they work together. Jaynee is very much on top of things and communicates quickly and appropriately when issues arise. Russell is always bringing creative ideas to the table and finding ways we could do things better. He gets us thinking about things we'd never considered before."