perspectives on world-class corporate treasury
TRANSCRIPT
0
Perspectives on world-class corporate treasury
McKinsey Corporate Finance Practice
May 2010
1
ZWR392-20100514-PM
Context and objectives of our corporate treasury survey
Objectives
• What best practices differentiate world-
class Treasury functions??
• What outcomes define success for the
modern corporate Treasury? ?
• How is the role and operation model of
the treasury evolving??
• What obstacles do Treasuries face and
how have companies overcome them??
Context
• In the wake of the
financial crisis,
McKinsey & Company’s
Corporate Finance
practice kicked off an
effort to study the
Corporate Treasury
function across leading
organizations
2
ZWR392-20100514-PM
Basis for our perspectives
External publications and white papers
15+ deep structured interviews with corporate
treasurers
McKinsey client experience and expert
interviews
2010 corporate treasury survey (~70 survey
respondents)
3
ZWR392-20100514-PM
Key opportunities for Corporate Treasury to create value
Emphasis on an enterprise approach to risk management
1
Focus on capability over size for creating value
5
Increased ‘seat at the table’with BU’s for strategic decision making
Streamlining use of tools and IT systems to focus on strategic decision making
Centralization of functions for quick decision making
Reducing complexity and
robustness of cash visibility and forecasting
Building the ‘treasury
dashboard’ for performance management
Increase role in working capital to drive free cash flow
2 6
3 7
4 8
4
ZWR392-20100514-PM
“ERM is crucial for reacting
quickly in a crisis – without a
wholesale understanding of
risk, you can’t react”
“We are migrating towards a
look at risk across all of our
functions in an integrated
way…developing new
processes is the biggest
hurdle”
Emphasis on an enterprise approach to risk management
Most value creating levers for Treasury % of respondents that had the lever in their top 5
“We manage our risk in silo’s
and are trying to bring it all
together…this may not report
into treasury but we will play a
big role in getting there”
SOURCE: McKinsey
Takeaways: • Managing risk is seen as the biggest lever for the Corporate Treasury • Many leading institutions are adopting an ERM approach
1
Managing financial risk is viewed as top Treasury lever……and ERM gaining increasing importance post-crisis
Optimizing capital allocation 50%
Optimizing Treasury headcount costs
55%
32%
Minimizing cash flow volatility 65%
Optimizing interest income/payments
Minimizing bank transaction fees
75%
45%
Optimizing capital structure/funding sources
Managing cash conversion cycle
85%
Managing financial risks 98%
5
ZWR392-20100514-PM
Building the treasury dashboard for performance management
Most popular KPIs % of total responses • Metrics are often
qualitative in nature
• Lack of weighting of relative importance leading to a high number of indicators being looked at
• Compensation often bears little relation to KPI performance
56
67
78
47
64
49
Effectiveness of FX/risk management program (i.e., amount of unexpected losses)
Ready access to capital to meet business needs
Funding cost/cost of capital (compared to benchmark rate)
Others
Best performers
Takeaways• World-class treasurers find the right balance of quantitative and qualitative
KPI’s rolled up to the critical few that comprise the “treasury dashboard”• A portion of compensation should be tied to performance of the treasury
function and achieving dashboard targets
2
While there is some consistency in KPI’s…
…performance management is still a pain point
SOURCE: McKinsey
6
ZWR392-20100514-PM
…but many treasuries are increasing linkage with BU’s
Linkage with treasury is still primarily within broader finance function…
Increased ‘seat at the table’ with BU’s for strategic decision making
11
22
44
89
89
12
28
35
74
75
Manufacturing/Production
Marketing & Sales
Procurement/Supply Chain
Controlling
Tax Management
Others
Best performers
Takeaways• Treasurers can create value by formalizing strategic linkages to BU’s (similar to linkages with finance)
3
32%
35%
59%
24%
20%
Strategic partnerships with other functions% of responses
Opportunity for tighter linkages% of responses
SOURCE: McKinsey
“BUs not always aware about the risk
– more training”
“We hold monthly reviews with “BU’s
and procurement for top 5 commodity
risks”
“We set policies, and work with BU’s,
but they make execution decisions
within those policies”
“Treasury once viewed as a necessary
evil, now a strategic partner”
7
ZWR392-20100514-PM
Centralization of functions for quick decision making
Number of centralized Treasury functions
% of responses
Takeaways• Many treasurers have increased centralization of functions for faster decision
making while keeping some local presence (e.g., Treasurer of Europe)
100
78
89
100
78
91
80
78
96
49
Capital planning,
adequacy and allocation
Bank/creditor relations
and management
Cash management and
transaction processing
Financial risk
management and hedging
Capital funding and
liquidity management
Best performers
Others
4
SOURCE: McKinsey
8
ZWR392-20100514-PM
Focus on capabilities over size for creating value
World-class5
Somewhat better than peers4
On par with peers3
Somewhat less than peers2
Underperforming1
Overall performance (Self-rated)
Self-reported performance does not correlate with size Quotes from select respondents:
“If you are in the top quartile in Treasury overhead, you are too lean; if you are in the
bottom half, you are not leveraging IT
enough”
“When you’re managing hundreds of millions
in cash, or more, trying to cut the staff from
10 people to 9 just doesn’t make sense.”
“When the company had to cut staff after the crisis, we actually added Treasury FTEs.”
“We operate in 100+ countries and are
consolidating bank accounts by 65% to
minimize complexity and tactical work”
“Having a top-notch IT system frees up our staff to focus on more strategic activities.”
Median
Takeaways• The most successful Treasuries are those who recognize that they can create value by developing
advanced strategic capabilities, while using top-rate IT systems and simplifying the function (e.g., consolidating bank accounts) to minimize tactical activities
5
SOURCE: McKinsey
9
ZWR392-20100514-PM
Bringing the ‘cash’ mindset to working capital
Treasuries role in working capital reduction varies significantly by company…
3%
14%
30%
33%
20%
Other (please describe)
Little/no involvement in optimizing working capital
Providing data/metrics
to BUs as required
Strategically engaged
with BU-led initiative
Leading working capital
reduction program
…However, most treasurers anticipate their role to increase in the future
Less involvement 0%
No change 33%
More involvement 67%
How would you describe your Treasury's role in optimizing working capital? % of responses
How do you anticipate your Treasury's role to change in the future with respect to optimizing working capital? % of responses
Takeaways• Treasury is often one of the few areas that has a ‘cash mindset’ and serves as an educator to the organization (historically
typical for companies in financial distress, but now broader post-crisis)
• Treasury can have an immediate impact on the organization by providing visibility and importance of working capital
management and asset management (e.g., establishing metrics, target setting and tracking working in conjunction with BU’s)
6
SOURCE: McKinsey
10
ZWR392-20100514-PM
Streamlining use of tools and IT systems to focus on more strategic activities
Adequacy of tools and IT systems to create most value% of respondents
39% 32%Other 29%
Process and oversee electronic fund transfers 8% 67% 26%
Manage and reconcile cash positions
48%
Forecast cash flow
11%
24% 64%
Manage debt and equity positions
55%
21% 52% 27%
35%
Manage short- and long-term investments 12% 61%
Monitor financial risk exposure
27%
Monitor available capital against required capital 26%
11%
41% 33%
Evaluate capital requirement
41%
23% 33% 44%
Adequate w/o current tools/systems
Adequate with current tools/systems
Opportunity for improvement
SOURCE: McKinsey
7
Significant opportunity for improvement in tools and IT systems…
“With my workstation, I can view all of my cash balances anywhere in the
world, instantly… this gives my team
capacity to focus on important tasks”
“Integrated web tools increased our efficiency and freed up the team to
work on more strategic issues ”
“We choose our banking
relationships based on compatibility
with our IT infrastructure”
“We use the treasury workstation for
FX management, cash, tracking
bank accounts, debt and investment
management”
Quotes
Takeaways• Workstation systems and standardized banking platforms (e.g., SWIFT) have the potential to allow
Treasury to free up capacity for strategic tasks
• Few Treasuries have tapped this opportunity to its full extent or are aware of success stories
…some have found success in workstations and bank account rationalization
11
ZWR392-20100514-PM
2%
8%
8%
To lower transaction costs
Other(s)
Size of operations
Transparency of cash
reconciliation processes12%
Legacy accounts 14%
Number of countries 18%
Legal entities 39%
Primary reason for complexity in bank accounts and cash visibility
Takeaways• Increasing demands of Treasury for cash
visibility despite increasingly complex
businesses. Opportunities include:– Consolidate accounts
– Standardized IT platforms with banks
and workstation approach to cash
management
– Increased coordination and robust processes with tax team
• To avoid surprises, cash forecasting has
increased in importance. Opportunities to increase robustness of process:
– Treasury moves from ‘aggregator’ to
more intimate role
– Treasury develops a top-down cash
flow forecast and convenes a monthly reconciliation meeting with
bottom up forecast from BU’s
(challenging assumptions)
– Error report by BU/region published
on a monthly basis to ‘shine the light’on chronic accuracy issues
8
SOURCE: McKinsey
Reducing complexity and robustness of cash visibility and forecasting
Adequate without tools
and IT systems12%
Adequate with current toolsand IT systems
24%
Opportunity to improve 64%
Cash forecasting: Adequacy of tools and IT systems to create value
12
ZWR392-20100514-PM
Questions for discussion
• How do these perspectives compare with your treasury function?
• How closely does this match what your CFO expects
from your corporate treasury?
• What challenges did you encounter when addressing
any of these and how did you overcome?
• Other questions?