As treasury technology evolves, it presents corporate treasurers with myriad opportunities to improve the efficiency and effectiveness of their function. To harness these opportunities, treasury must, first and foremost, keep an open mind.
Every treasury team understands that staff can gain more time for value-added activities if the company replaces manual processes with automation. To some degree, these benefits can be achieved through a straightforward implementation of standard treasury software. Indeed, the opportunity to offload rote tasks from human to machine is a core selling point of many types of finance systems.
But a treasury team that sets its sights only on by-the-book software implementations may be missing out on crucial opportunities. This year’s Alexander Hamilton Award winners in the category Technology Excellence demonstrate the remarkable gains that companies can achieve if they look beyond the obvious advantages of treasury management systems and related technologies.
For example, Health Care Service Corporation (HCSC), the fourth-largest health insurer in the United States, adopted a new treasury management system several years ago in preparation for the rollout of the Affordable Care Act. The system tremendously improved cash management at HCSC—but the company’s treasury team didn’t allow the initiative to end there. Next they hard-coded into the system changes that enabled treasury to push out all the administrative duties around initiation and approval of wire transfers to the business units requesting those payments. They also developed a bank scorecard that they use in negotiations with the company’s banking partners.
By pushing the new system in directions it did not naturally go, HCSC treasury increased the company’s investment income, while also empowering treasury staff to become more strategic. The technology-driven transformation project was possible largely because treasury managers and corporate executives shared a similar vision of where the function should be headed. “Having the buy-in and commitment from senior management has really allowed treasury to accomplish everything we have over the past several years,” says Forrest Vollrath, executive director of treasury operations.
Likewise, global manufacturer Cummins Inc. took a fresh look at a complex process—managing and accounting for approximately 5,000 leases, covering about 52,000 assets in 32 countries. The company previously tracked leases through a cumbersome process that was inefficient and offered insufficient visibility into the organization’s extensive leasing landscape. Cummins’ director of debt capital markets, Neil Banwart, saw the potential value in improving this process. The company performed a comprehensive audit of all its leases globally and began using a software system that streamlines decisions around lease origination and ongoing management. As a result, the cost of leases has fallen an average of 8 percent companywide.
“I think most companies probably have a lot of hidden costs that they don’t see around their leases,” Banwart says. “Not shopping the leases is expensive. So is letting the leases continue after end of term. There were a lot more leases floating around Cummins than we realized, and I think a lot of companies could realize significant cost savings if they took the time to implement a new leasing policy.”
At Google Inc., an effort to improve a narrow, discrete process—management of the company’s alternative investment portfolio—resulted in truly outside-the-box thinking. Although the treasury team considered some purpose-built solutions, they ended up selecting a database product that was designed and marketed for storage of sales and customer service information. Nevertheless, with a small amount of customization, the system is handily meeting the needs of the alternative investment team. Today staff are much better able to manage the portfolio’s big picture, dealing proactively with any concerns that may arise and even branching out into new types of investments.
“It’s important to be flexible in which systems you consider,” says Jason Allen, principal, asset management, at Google. “I’d also suggest being flexible with your processes. You’ll likely come to a much better outcome if you are open-minded in how you approach the problem.”
Process Revamp via Technology
Health Care Service Corporation (HCSC) is the largest customer-owned health insurer in the United States, and fourth largest overall. It operates Blue Cross and Blue Shield plans in five states, with more than 15 million health plan members, and serves as the parent company to affiliates and subsidiaries—such as Dearborn National, TMG Health, and Medecision—that offer group life, disability, and dental solutions, as well as a range of other individual solutions.
A decade ago, the company funded operations out of its always-large cash stores. “At a very high level, HCSC has had—and continues to have—a fortress balance sheet,” explains Forrest Vollrath, executive director of treasury operations.
Prior to 2008, the company’s cash operations staff spent a significant amount of their time processing cash receipts. “They were receiving checks, taking them out of envelopes, and sending them to the bank for deposit,” Vollrath says. HCSC executives knew they needed to overhaul their cash application process to stay competitive. And following the passage of the Affordable Care Act, as health insurers across the country prepared to take on 30 million to 40 million previously uninsured individuals, HCSC managers foresaw an exponential increase in the number of individual payments they would receive.
“Historically, HCSC’s business was primarily focused on small and large group accounts,” Vollrath explains. “But with the introduction of the Affordable Care Act, we expected the proportion of our business comprised of individuals to grow. Collecting premiums for individual policies is much different from doing it on a group basis. Rather than receiving one large premium that covers tens of thousands of employees, we would start receiving a much larger number of small-dollar payments. Our systems needed to change.”
With these changes in mind, in 2010 HCSC began transforming the company’s treasury operations in terms of people, processes, and technology. The company changed the way cash receipts were processed and shopped for a new treasury management system. The company selected, then implemented, a software-as-a-service treasury workstation.
One of the system’s key benefits is that it provides daily cash-activity updates, enabling treasury to manage cash with much more precision than they could previously. “We’ve reengineered the whole cash management process,” Vollrath says. Every day, information about cash flows is uploaded into a regression model that automatically calculates variances and tracks three years of history to produce a rolling 13-week forecast. Treasury sets the company’s daily cash position first thing each morning, allowing for more attractive investment opportunities. This new approach to cash forecasting has reduced HCSC’s excess cash and has improved returns on the company’s investment portfolio.
The treasury team has also leveraged the treasury management system to reduce their involvement in the company’s wire transfers. Prior to the implementation of the system, treasury processed every wire transfer that originated from any group within the company. “That was a very manual process,” Vollrath reports. “It was paper-intensive. Eighty to 90 percent of the wire payment requests were originating in a business unit outside treasury. People would drop off a paper wire transfer request, and then my team would process it.”
Once the treasury management system was in place, the company decided to push out the wire payment initiation and approval process to the business units. “I told the leaders in these different areas, ‘No one knows better than you what vendor, or member, or tax authority needs to be paid, and how much,’” Vollrath says. “Over time, they got comfortable with it and took ownership of the wire transfers within their department.”
Now certain individuals outside the finance function can initiate a wire transfer within the treasury management system. The system automatically routes each request to the authorized approver, and after approval it routes the wire payment to the appropriate HCSC bank. Once the wire has successfully reached the destination bank, the Federal Reserve returns a file to the treasury management system that includes Fed reference numbers, along with other details of the payment. Then the treasury management system automatically records an accounting entry for the transaction within the company’s general ledger (G/L).
The treasury team hard-coded the company’s authorization policy—i.e., definitions of who has the authority to make, and who has authority to approve, what size of wire payments—into the treasury management system. “Let’s say the tax department needs to make tax payments to a given state for premium taxes,” Vollrath explains. “We’ve set up the treasury workstation so that only three particular individuals have authority to go into the workstation and initiate wire transfers in amounts up to these specific limits. Then a particular person within their department needs to approve it before it moves forward.”
The cash operations team retains responsibility for maintaining the finance authorization policy, and for ensuring that any updates to authorizations are accurately hard-coded into the treasury management system. “This provides appropriate separation of duties and controls around this very automated process,” Vollrath says. “And it’s working very well for us.”
HCSC has harnessed its finance infrastructure to improve its banking relationships, as well. Previously, because the company had little need for borrowing, it did not maintain a traditional credit revolver. One of Vollrath’s first actions after joining the company was to put in place a revolver that taps HCSC’s cash management banks and investment banks. “Healthcare reform was coming online, and it was a big unknown for us,” he says. “Having a set bank group gave us confidence that if we needed to draw, or we needed to fund some M&A [merger and acquisition] activity, we would have some external capital available. It’s better to put a credit revolver in place when you don’t need it, because then you can get favorable terms and favorable pricing.”
The team developed a bank scorecard that reports on how much capital HCSC is receiving from each financial institution, as well as how much it’s spending on fees—information pulled directly from the company’s G/L. Then they estimate the risk-adjusted return on capital (RAROC) each bank earns on its relationship with HCSC. At least once a year, the company sits down with each of HCSC’s banks to discuss the scorecard information. “With the data that we share with them, it’s a very transparent discussion,” Vollrath says. “Going forward, I make sure that we balance the best services we can get from the banks with the share of wallet, to make it fair and equitable.”
Overall, Vollrath estimates that the company’s revamp of its treasury infrastructure has dramatically improved productivity of treasury staff, largely because the team is no longer responsible for tedious paper-based cash application and wire initiation processes. He attributes the project’s success to executive support.
“We are fortunate to work for a company that can take a bit of a longer-term view of what we want the treasury department to look like in four, or five, or seven years,” Vollrath concludes. “We got senior management buy-in early on, and they committed to the time frame and the cost. Having the buy-in and commitment from senior management has really allowed treasury to accomplish everything we have over the past several years.”
Fresh Look at a Complex Process
Cummins Inc. is best known as a global engine manufacturer, but the company also has a components business, as well as power-generation and distribution segments. It does business in 190 countries and employs 55,000 people around the globe. As the director of debt capital markets, Neil Banwart, puts it: “We’re providing power to the world.”
To generate that power, Cummins relies on a lot of leased equipment, from industrial-scale machines to lab equipment, from corporate aircraft to auto fleets, and from HVAC systems to computer servers. “We currently have about 5,000 leases covering around 52,000 assets in 32 countries,” Banwart says. “We have a large number of leases, in part because we tend to have fairly small lease schedules for our IT equipment.”
Despite this lease volume, a few years ago Cummins lacked a standardized process for entering into these contracts. A manager who planned to take out a lease might contact corporate treasury for assistance with a lease-vs.-buy analysis, or for help selecting a leasing company. “We would certainly help if asked,” Banwart says. “But other times a plant controller might just reach out to a leasing company and initiate the lease themselves, then make payments locally.”
The lack of standardized decision-making meant the company sometimes leased equipment that would have made more sense to purchase. In addition, the overall cost of Cummins’ lease contracts was higher when the company failed to leverage companywide lease volumes to secure better pricing. Worse, lease originators did not always make optimal decisions at the end of term about whether to return equipment, buy it outright, or renew the lease.
“When you get to the end of the lease term, some leasing companies are really happy to continue to charge the same monthly payments, even if the piece of equipment you’re leasing is worth a lot less,” Banwart says. “If you approach a leasing company and ask to extend the lease, but for a lower price, you can often get a discount. But if you don’t ask, you won’t get it. And there were isolated instances where we were still making lease payments on equipment we were not even using anymore.”
Treasury was responsible for working with corporate accounting to put together the 10-K footnote estimating the company’s lease obligations. The treasury team tracked the leases they knew about in a database that Banwart describes as “archaic.” Business units would submit their lease information via email, perhaps in the form of a contract or perhaps described in an Excel file. Then a treasury employee would manually enter the lease data into the database. The manual work was time-consuming and also error-prone.
When the database crashed and treasury wasn’t able to extract the information they needed, Cummins began looking for a better solution for lease management. The company partnered with LeaseAccelerator and embarked on an audit of all its leases companywide. It was an eye-opening project.
“We started from scratch; our CFO asked every Cummins business unit to send treasury information about each of their leases,” Banwart reports. “The process took a long time. We definitely underestimated how long it would take to gather all these leases, and then to get documents from around the world translated so that corporate treasury could understand them. But we got really good responses—probably because the directive came from the CFO. We received thousands of emails with attachments describing Cummins leases.”
Cummins contracted with LeaseAccelerator to enter this data into its system, then Banwart and his team developed a standardized process for initiation of a lease, ongoing management of lease information, and end-of-term decision-making. Now every Cummins facility has a lease coordinator who has been trained on the corporate process.
Anytime a plant controller or business manager wants to lease equipment, he or she contacts the local lease coordinator to initiate the process. The lease coordinator completes an “asset request form,” entering information about the equipment, its value, and the cost and duration of a prospective lease as quoted by a third-party leasing provider. The form automatically sends this information to LeaseAccelerator, which processes the data and returns a preliminary analysis of whether leasing or buying makes more sense.
If the business unit still wants to lease the equipment after receiving this analysis, then LeaseAccelerator—working within parameters and guidelines established by Cummins treasury—determines whether the equipment could be added to a lease line Cummins already has. If not, LeaseAccelerator shops the business, sending RFPs to an assortment of leasing companies. Treasury secures a lease with the winner of the RFP process. After the business unit signs a certificate of acceptance for the equipment, the lease coordinator returns the final lease documents to corporate treasury.
The lease details are entered into the LeaseAccelerator database, which tracks the lease lifecycle and automatically notifies the lease coordinator anytime action needs to be taken. “For example,” Banwart explains, “if a three-year lease is coming due, it will be flagged 180 days before it expires, and the appropriate lease coordinator will receive an email that says, ‘This lease expires in 180 days; here are your options… What do you want to do?’ It gets the dialogue going and reminds people that they need to take some kind of action. The lease coordinator will get another email at 120 days, 90 days, 60 days, then at 30 days, and then right at the end of term.”
Treasury is available to the lease coordinators for guidance and support throughout the process, but Cummins leaves end-of-term decisions to the lease coordinators. “They have the best idea of what should be done, and they control the equipment,” Banwart says. “We don’t mandate that the equipment be returned at end of term. There are instances where it makes sense to hold certain equipment beyond the initial lease term. However, if the decision is to return the leased asset, the lease coordinators can work with the leasing company to come pick it up.”
Banwart admits that Cummins still experiences some resistance to the process, despite making clear to business units companywide that the new leasing policy is not optional. “We have a policy, and anyone who doesn’t follow the policy is out of compliance,” he says. “We have the ability to escalate that, and in certain instances we have done so. I think we’ve achieved a high degree of compliance by setting up a process that is straightforward and pretty simple, by providing training to the lease coordinators, and by making sure everyone knows this is not optional.”
Nevertheless, Cummins treasury monitors the volume of leases coming into its centralized system from different units around the world. “We look at summary reports by business units, even different facilities, to detect situations that we might need to investigate,” Banwart says. “If there’s a jurisdiction or entity that seems to have fewer leases than we would expect it to, we may contact the managers directly and ask them to send us their current leasing portfolio.”
Cummins estimates that overall it is saving an average of 8 percent per lease through its processes for lease origination and end-of-term decision-making. Banwart also believes that having this process in place has helped prepare the company for the new lease accounting standards that are on the horizon.
The project took a good deal longer than expected, but Banwart believes it was well worth the effort. “I think most companies probably have a lot of hidden costs that they don’t see around their leases,” he says. “Not shopping the leases is expensive. So is letting the leases continue after end of term. There were a lot more leases floating around Cummins than we realized, and I think a lot of companies could realize significant cost savings if they took the time to implement a new leasing policy.”
Open to the Alternatives
Google Inc. is flush with cash, which means that managing corporate investments is one of the main responsibilities of the Google treasury function. The vast majority of the company’s cash is in traditional low-risk investments, such as government bonds and other fixed-income securities, but Google also manages an investment portfolio that includes renewable energy and affordable housing investments.
“We have a dual mandate,” explains Jason Allen, principal, asset management, who oversees Google’s asset management team. “First, we make sure that we get good risk-adjusted returns on these types of investments. But at the same time, we’re expected not just to make a return, but also to provide social benefits. With our renewable energy investments, we’re helping to ‘green’ the grid. And with our affordable housing investments, we’re helping increase the supply of affordable housing in areas that Google, and our parent company Alphabet, operate in. If we can earn a good return while delivering those benefits, the project is a win-win.”
By committing over $2.5 billion to these types of alternative investments, Google has the capability to do a great deal of good. But a few years ago, the asset management team was stymied by inefficient processes.
Across the portfolio, every investment has its own stable of co-investors and its own terms, all of which Google’s asset management team must track on an ongoing basis. Previously, all of the operational and financial information was tracked using multiple spreadsheets. This method worked adequately with just a handful of investments, but after Allen took on the portfolio four years ago, it grew very rapidly. Given this growth, the portfolio became too large and complex to be tracked and managed using spreadsheets alone.
“The nature of the information that was being shared meant that very large spreadsheet files were being transferred,” Allen says. “Having one system where the pertinent information could be warehoused—as opposed to storing it in multiple spreadsheets, each with multiple versions—has a lot of advantages for us.”
Allen worked with Lilly Won, Google’s manager of treasury systems, and Arthur Zeyda, the systems lead for Google treasury’s capital markets systems, to determine how these investments should be managed. They quickly decided against building a system in-house.
“We went through the process of evaluating whether to buy vs. build,” Zeyda says. “But there were a number of solutions that could do what we needed. It made sense for us to go with an external solution to reduce maintenance costs and resources needed to maintain the system over time.”
The team evaluated a number of possible solutions, including software demos from several vendors. Although most of the systems they considered were purpose-built for investment management, they ended up selecting Salesforce, a solution developed and marketed primarily for sales and customer service functions. It might not have been an obvious choice, but the team looked past the branding and saw a good fit.
“There are a lot of parallels between the processes that the asset management team uses to track those investments and the core processes that Salesforce is known for,” Zeyda says. “As investment ideas come in and need to be tracked, those processes are somewhat akin to lead generation. Then as the investments are made, they transition into a maintenance account that has various metrics associated with it. And then there’s additional reporting on the back end.”
The team liked the ease of use and flexibility of the system, so they rolled out Salesforce to store legal documents, pitch decks, and monthly financial and operational reports around the company’s assorted investments in renewable energy and affordable housing projects. They adapted the Salesforce “Account” data object to hold Google Alternative Investment Management System (AIMS) “Entity” data objects—one for each investment fund, as well as each participant in the investment, including co-investors, consultants, and project developers. Then they created several data fields that are specific to renewable energy or affordable housing, and they added data objects for storage of specific financial and operational data on each investment. They built relationships between the data objects to enable reporting at various levels of granularity. Finally, they deployed the Salesforce Apex Dataloader, and a series of standardized templates, to streamline the import and export of large quantities of data.
Won emphasizes that all of these modifications were handled by analysts. “No developers were involved in this implementation,” she says. “That really speaks to the flexibility and configurability of the solution. Along the same lines, maintenance is greatly simplified by the fact that this is a SaaS [software-as-a-service] solution. We don’t have to manage the technical upgrades or infrastructure changes.”
Now Google stores large quantities of investment data in a structured and easily accessible format. Salesforce Apex Dataloader enables the team to easily import data from a wide array of sources into the standardized format of the Google AIMS database, and the standard Salesforce reporting tool simplifies the generation of standardized reports on investment performance. Data is interconnected, so a change in one data element—such as a downgrade in the credit rating of a major customer of one of Google’s renewable energy projects—can be made in one location, and all relevant dashboards and reports will automatically reflect the change.
Processes are so streamlined that productivity for the asset management team has risen dramatically since they first rolled out the solution for renewable energy investments in 2013. “We’re able to get at information, in a usable format, so much faster now that the data is structured,” says Allen. “We’ve more than doubled the size of the portfolio since I’ve been here, but we haven’t had to double the size of the team. And even though the staff hasn’t grown proportionately to the portfolio, they have a lot more time to focus on activities that add value, rather than just entering the data and manipulating it to get it into the right format.”
Allen says that having such a flexible system has also enabled Google to enter new types of investments more easily. “Having AIMS enabled the team to add another asset sub-class under affordable housing seamlessly,” he says. “If we were still managing the portfolio using spreadsheets, we might have had to bring on additional headcount just to deal with this new sub-class.”
All in all, Zeyda says, this project demonstrates the value in thinking outside the box with technology initiatives. “Just because something is not labeled as a treasury system or a finance system—or in our case, a renewable energy investment tracking system—doesn’t mean that it won’t work in that capacity,” Zeyda says. “Companies undertaking a technology upgrade should look at their process flow at a higher level and see whether it might map to any solutions that might not advertise themselves as being in the exact space you’re looking at.”
Adds Allen: “It’s important to be flexible in which systems you consider. I’d also suggest being flexible with your processes. Trying to scope a system to match your existing process might not be the right approach; a better approach might be amending your process. You’ll likely come to a much better outcome if you are open-minded in how you approach the problem.”