Corporate finance
Cash control
Banking regulation
People and skills
Liquid assets
Good housekeeping
New ways to lend
Flair for finance
The golden age of easy credit is unlikely
Is your organisation really in touch with
Tighter regulation is forcing banks to find
More firms are looking overseas
to return | Page 5
cash flow or are you still relying on
new ways to work with business | Page 9
for solid finance and accounting
quarterly figures? | Page 8
talent | Page 11
June 2011
Distributed within the Daily Telegraph, produced and published by Lyonsdown which takes sole responsibility for the contents
Money man In the age of tighter credit, businesses need their finance supremos to be more than great bean counters. A report on transforming the finance function
Business Reporter · June 2011
an independent report from lyonsdown, distributed with the daily telegraph
Foreword
Finance and Accounting – in this issue
3
Say goodbye to spreadsheets Financial managers can no longer just concern themselves with spreadsheets. Welcome to the new world of the multi-tasking CFO By Andrew Rosenbaum The role of the chief financial officer or treasurer has changed from bean counter to business leader. There was a time when the finance function was confined to keeping track of the numbers, and reporting to the taxman when necessary. Then a CFO could simply keep track of overall financial performance on a spreadsheet. But the role of the CFO has changed entirely.
CFOs not only have to keep track of corporate cash and working capital in real-time, they have to maximise the return on all of it Today’s CFOs not only have to keep track of corporate cash and working capital in real-time, using internal performance measures, but they have to maximise the return on all of it, taking an active part in developing overall strategy. “It has become the role of the finance function to drive performance culture deep into the organisation,” says Philip Broadley, group finance director
at insurer Old Mutual. “Maximising shareholder value is a large part of our responsibility.” The most effective finance and treasury teams are developing the forward-looking analysis and insight needed to strike the right balance between curbing finance costs, ensuring effective risk management and maintaining the flexibility to capitalise on opportunities. “The finance function is a facilitator for growth,” agrees Chris Jones, UK financial services leader at PricewaterhouseCoopers in London. “Its core competence is in forward and capital planning at a corporate level – value chain analysis, market assessment, scenario planning and forecasting.” The function is marked out by its market savvy and strong communication skills, both internally and externally. “I spend much of my time working on business strategy and supporting the CEO in communicating that strategy,” says Stephen Morana, CFO of online sports betting provider Betfair. The term “CFO” is fast becoming a misnomer, according to Les Clifford, head of the CFO programme at Ernst & Young in London. “CFOs will need to balance competing priorities across markets at varying stages of maturity. They will need to strike a balance across four quadrants: transaction processing, reporting – both internal
and external – controls and compliance, and business partnering,” he says. “The CFO must have a 360-degree view of the enterprise and be able to translate that into ensuring that individual decisions are in-step with other parts of the firm,” says Brendan Walsh, senior vice-president and general manager at American Express in London. So the combination of new growth-centred strategies and a more complex funding environment will require a much more proactive and sharply focused approach to financial management. This publication looks at the ways in which companies are adapting their finance function to take on these different roles. We look at how the global financial environment has changed since the financial crisis, and how the relationship with banks can be managed now banks have been targeted by regulators. And we explore how this very different finance function handles cash tracking, information technology and outsourcing. The portrait that emerges is one of a finance function that is intrinsic to the creation of shareholder value. “The key stakeholders depend on us to understand how the business is performing, and where it is going,” says Pat Regan, CFO at the insurance group Aviva. The era of spreadsheets is long gone.
Cost of the crunch
5
Money, money, money
8
Business of banking
9
Tapping talent
11
Where is capital coming from? It’s all about sustainable cash flow Banks see freedom to lend curtailed Hiring overseas could reap rewards
Techno-finance 13 The latest in money management
Contributors Publisher Bradley Scheffer brad@lyonsdown.co.uk
Production Manager Nicki Sitaras nicki@lyonsdown.co.uk
Managing Editor Lucie Carrington lucie@lyonsdown.co.uk
Project Manager Evelyn Wobil evelyn@lyonsdown.co.uk
Editor Andrew Rosenbaum editor@lyonsdown.co.uk
For more information on any of our supplements please contact us: Telephone 020 8349 4363 Email info@lyonsdown.co.uk Online www.lyonsdown.co.uk
Creative Director Martin Nolan studio@lyonsdown.co.uk
Andrew Rosenbaum has been a London and Paris-based financial journalist for 15 years. He has contributed to Time magazine, Euromoney, The Daily Telegraph and Financial News, as well as being a corporate writer for several Fortune 500 companies.
Leslie Holstrom is a London and Geneva-based financial journalist. She has worked for Euromoney, and currently works for Eurofinance and a number of other publishers. Cover photograph: Istockphoto
Kathleen Kiley is a financial journalist based in New York City. Along with finance, she writes about B2C business and sustainability. David Hayhurst is a Paris-based financial journalist. He has written for the Economist Intelligence Unit, the World Bank newsletter Beyond Transition and the US entertainment business news site Variety. Barbara Casassus is Paris correspondent for the Bookseller and Antitrust & Trade Regulation Report. She also contributes to Nature and Science and has contributed to the Financial Times, The Economist and many other newspapers and magazines.
Sponsors
Business Reporter · June 2011
4
an independent report from lyonsdown, distributed with the daily telegraph
Industry view
Compliance and efficiency Organisations face a heavy burden of risk and compliance but business process management and automation can help to ease it – and potentially boost profits too Faced with multiple initiatives scattered across operations, the burden of risk and compliance has become a widespread problem. These challenges are driving organisations to look for new approaches to governance, risk and compliance (GRC) management. The upside has been that, since the compliance dust has settled, the true complexity of ensuring good corporate governance has been laid bare. Furthermore, GRC software platforms have emerged which can drive sustainability, efficiency and consistency in managing enterprise risk and compliance.
Technology has driven the costs of implementing governance, risk and compliance solutions down to a much more affordable level Organisations that fail to take an enterprise approach to risk, compliance and efficiency end up with duplicate technologies and inconsistent approaches to measurement and reporting. This results in dispersed “islands” of information scattered throughout the enterprise and prevents
managers from having a clear overall view of compliance and performance. Thankfully IT in the form of tailored process solutions can be a critical enabler to drive corporate governance best practices. In fact, recent research has indicated that business process management (BPM) initiatives have resulted in improvements in the methodology of business change. Various financial services industry case studies of BPM initiatives have highlighted some dramatic improvement in operations. For example, simply understanding and changing existing processes can increase efficiency by 30 per cent. BPM projects have succeeded in improving customer responsiveness by 60 per cent and cutting the time needed to carry out internal processes by as much as 75 per cent. Example processes include complaint handling, expense reporting and claims management. Technology has driven the costs of implementing GRC solutions down to a much more affordable level and placed these solutions firmly within reach. This may finally dispel the myth that good GRC does not positively influence competitive advantage. That said, there is no one-size-fits-all approach for GRC and efficiency improvement.
A good enterprise GRC solution has three central pillars: policy and procedure management, risk and control management and issue and action management. These should be underpinned by effective training and ongoing process reviews and enveloped in strong process automation and enforcement. Whereas traditional automation of processes was expensive, it is now possible for people in-house, with necessary training, to deploy automated processes to suit their own organisation and publish it strictly to a collaboration platform such as Microsoft SharePoint. “Our success is based on providing a processbased integration platform that ties together systems making disparate information readily available in SharePoint,” says Nail Sudin, CEO of ShareVis. “It creates a consistent audit trail with the added benefit of turning your SharePoint installation into the vehicle for regulatory compliance.” Today, sound governance requires an extensive and complex framework of systems, principles, customs and processes; it is not just focused on complying with the specific rules and regulations that exist in any given industry sector. Corporate governance has become a strategic goal of every enterprise, large or small, public or private, whether formal regulation demands it or not.
In conclusion, compliance and performance are not necessarily opposing forces and can coexist to increase productivity and underpin good governance. Enterprise GRC platform Risk and compliance dashboard and analytics Training Policy and Risk and Issue and Audit mgmt procedure control action mgmt mgmt mgmt mgmt Business process automation and enforcement – ShareVis Collaboration portals and platforms – SharePoint
In addition, the governance, risk, compliance and business process automation process is increasingly in reach to enterprises of all sizes. Used effectively, there is ample evidence to suggest that there is significant added value in regulation and compliance, irrespective of the regulatory commitments. Donal Bourke is CEO of Saticon, a compliance and automation specialist with more than 20 years’ experience in adding value through BPM in the financial and life sciences arena www.saticon.com
Driving growth with asset based finance Increasing numbers of companies are using items on their balance sheets, such as plant and machinery, stock inventory and property, to generate working capital 10 years ago, if you were to mention at a networking event that you’re considering asset based finance, you probably would have been met with blank incomprehension. However, the way in which asset based finance is viewed by businesses has changed in recent years, says Martin Cooper, director and head of large and major corporate business at Lloyds TSB Commercial Finance. “Asset based finance provides working capital solutions for businesses to optimise their cash flow and realise their growth ambitions,” he says. “A lot of very well run companies, from small firms to multinationals, use it in a very strategic manner. It puts them more firmly in control because it’s directly linked to what they’re trying to achieve.” At one end of the scale, long-term customer, Stagecoach, one of the UK’s largest public transport operators, has recently utilised Lloyds TSB Commercial Finance’s hire purchase facility for the 30th year running to provide passengers with a modern, accessible and sustainable bus fleet. This round of funding, worth £40 million, will ensure the business can continue to renew its buses and coaches, and invest in the latest technologies. At the other, baking firm The Fabulous Bakin’ Boys also approached Lloyds TSB Commercial Finance as the company found it needed a cash flow boost to capitalise on rapid growth due to
new supermarket contracts. The firm secured a £2 million invoice discounting facility and as result of the increased capital available to invest, is set to increase turnover to £20 million this year. The principle of asset based finance is simple enough: using all the assets on a company’s balance sheet – receivables and debtors, plant and machinery, stock inventory and property to generate working capital. The closer an asset is to cash, the easier it is to lend against, so the core product tends to involve invoice discounting, says Cooper. The bank advances 85-90 per cent of the value of an invoice when it’s raised and hands over the remaining 10-15 per cent when the customer settles. Interest is charged on the advance, plus a service charge. Clients can choose how much the bank actually does, from a complete factoring operation which is leveraged on issued invoices and offers an in-built debt management system to a confidential service that’s transparent to the end customer. Special options are available, such as reverse factoring (supplier finance) for large corporations, and a combined payroll and factoring service for temporary staff agencies called Recruitment Finance. When other kinds of assets are involved, says Cooper, the finance can be directly linked to their acquisition or use. New manufacturing
plant or a build-up of stock for Christmas can effectively be paid for by finance secured on the asset itself (although existing plant or stock is equally suitable for asset finance). Most asset finance agreements run for 12 months, but Lloyds TSB Commercial Finance’s client charter allows smaller firms (up to £15 million turnover) to give just 28 days’ notice without early termination penalties. Fully online operations make the facility easy
to use and keeps all clients in full control. Lloyds TSB Commercial Finance also supports turnaround businesses and participates in the government’s Enterprise Finance Guarantee scheme. But it’s just as likely to be asked to help finance a merger, an MBO, a new factory or expansion into new markets. The funder works closely with the wider Lloyds Banking Group, to ensure customers are offered the most appropriate form of finance to match their needs, whether it is an asset finance facility, which allows firms to invest in expensive equipment without denting cash flow, or a loan or overdraft to drive growth and fund expansion. “Asset based finance is a great way of fuelling growth,” says Cooper. “And, on average, our customers only borrow around 45 per cent of what’s available to them, so it’s quite wrong to suggest that asset based finance is the last resort of businesses in trouble.” Nor is it more expensive than other forms of borrowing. A fair amount of up-front work is involved so service charges are higher than an overdraft facility, but this can be offset by lower interest rates and the benefits that come with early release of working capital. “Businesses that take up asset based finance become very strong advocates of the product and tend to use it long-term,” Cooper concludes. www.ltsbcf.co.uk
Business Reporter · June 2011
an independent report from lyonsdown, distributed with the daily telegraph
Corporate finance
5
Counting the cost of the crunch
Hard cash will be harder to find
Costs related to bank’s capital position
Access to market financing
Bank’s liquidity positions
Expectations regarding general economic activity
Industry specific outlook
09Q2
100
80
60
40
20
0
10Q4
10Q1
10Q4
10Q1
10Q4
10Q1
09Q2
10Q4
10Q1
09Q2
-40
10Q4
-20
10Q1
Before the credit crunch in 2008, capital was cheap and easy to obtain for businesses. Corporate finance lives in a different world today – a world of low predictability. Markets are volatile, inflation is – very gradually – rising, and the geopolitical situation is unstable. All this affects liquidity and imposes the need for careful strategic planning. In addition, markets are now global, so working capital needs have to be met in different ways in different markets. Surviving banks have ridden out the 2008 credit crunch with massive support from governments and strong funding markets. Their scars from the crisis have still not healed and will not be helped by the increasingly gloomy outlook for markets as 2012 approaches. “We expect a significant draining of liquidity from the market next year, as banks’ behaviour starts to change in anticipation of the new Basel 3 framework and other regulatory changes,” says Richard Bartlett, who is in charge of corporate funding at Royal Bank of Scotland. “The funding market for companies is very strong now, but will undoubtedly weaken as the supply of money reduces.” Yuri Polyakov, head of risk solutions at Lloyds Bank Corporate Markets, agrees: “The biggest challenge we will face is a rise in bank funding costs. Capital will become much more expensive, so we will have to be much more sophisticated about using our balance sheet.” Lloyds has more limited choices than some, as it claims to play a special role in the market. “We are core lenders for a great number of our million corporate clients,“ Polyakov says. “This means we have a huge responsibility, so even if markets are volatile, we have to continue providing liquidity. “ Against this backdrop, businesses are now more worried than they were about market risk on all sides, Lloyds has found. Its latest six-monthly survey of nearly 2,000 British companies from small and medium-sized enterprises to major multinationals, showed that 42 per cent were more concerned about commodity price risk, 26 per cent about interest rates, and 20 per cent about currency. Only 5 per cent, 9 per cent and 5 per cent respectively were less concerned. The latest figures, which were gathered in February and published in April, also show that only 12-14
per cent of companies have hedging strategies in place. However, that does not mean they are not risk savvy, Polyakov notes. Lloyds takes care to ensure that their corporate clients cover risk wherever necessary. “We invest heavily in helping customers with their risk management, and are constantly challenging them by asking tough questions, such as whether they just do the same as they have always done or are they now taking account of inflation and liquidity prospects,” Polyakov says. For the moment, banks’ willingness to lend continues to outstrip corporate demand as a lingering result of the massive fiscal stimulus packages governments introduced to lift their economies out of the mire. “Maturity of loans is a great indicator of the strength of the market,” says Bartlett. The bank’s statistics illustrate the point – at the beginning of 2009, international loans to companies were generally for one year, while loans of five years duration were a rarity and accounted for less than 5 per cent of deals. By contrast, in the first quarter of 2011, nearly 60 per cent of transactions were for five or more years. The total volume of bank loans to business is still lower than four years ago, but fiveyear maturities as a proportion of the total have already bounced back above pre-crisis level. “This shows that the drop in borrowing by international companies is due to a lack of demand,” Bartlett says. Companies raised an unusually large €342 billion (£302 billion) in the first quarter of 2009 in the Eurobond market as they sought to diversify away from bank financing. But they fell back to a more standard €306 billion (£270 billion) for the same period of 2010, and declined further to €231 billion (£204 billion) this year. The figures for sterling are even more telling, says Bartlett – down from £89 billion to £43 billion in 2010 and £34 billion this year. A significant proportion of new bond issues by companies is now being used to redeem older ones before maturity and take advantage of low interest rates and narrow credit spreads. “The volume of these deals has more than doubled overall,” says Bartlett. “We have handled 60 in the past year, whereas the usual level we would see is 15 to 20 over any 12-month period.” Now that businesses have lengthened maturities on their borrowings and widened their funding mix, most are happy with their capital structures, he says. Banks have exceeded their targets for reducing lending, but there is no significant recovery in mergers and acquisitions or new capital investment by companies for the time being to take up any slack. And when the pick-up in demand for financing does come, it will probably be slower than some people think, according to Bartlett. “Companies are still very hesitant,” he says. But despite the challenges facing economies and the difficulties financial institutions have had financing themselves, the availability of funding for international companies has been very strong. “Companies have diversified their funding away from banks and are generally well capitalised,” says Bartlett. “However, if concerns over inflation persist, and liquidity decreases as expected, they could easily find themselves in a more challenging environment.”
09Q2
By Barbara Casassus
09Q2
Banks and businesses are finding different ways to raise money as the dust settles on the financial crisis
Changes in credit staandards applied to the approval of loans or credit enterprises (net percentage of banks contributing to tightening standards) Source: ECB Bank Lending Survey 2011
From engineer to banker RBS’s Richard Bartlett swapped civil engineering for a career in the City
Against the backdrop of higher capital costs, businesses are now more worried than they were about market risk on all sides
Richard Bartlett started out his professional life with every intention of spending the forthcoming decades designing major civil engineering works. Then, after five years, he started asking a question that went beyond whether the infrastructure would perform its task as intended. The more fundamental point that repeatedly came to mind was whether a project was a good idea in the first place, or made financial sense. “For example, I started to wonder whether a bridge was necessary, or whether a ferry was more appropriate for transporting people and goods across a given strip of water, “ says Bartlett, who recently became head of corporate debt capital markets and rates solutions at RBS. He crossed over to banking 14 years ago, after completing his engineering qualifications and undertaking a short stint building water supply systems with Oxfam in Africa. He first joined Barclays Capital, then moved to RBS 12 years ago to set up an infrastructure funding business. One deal he is particularly proud of is the sale of Welsh Water to Glas Cymru 10 years ago. He was responsible for the financial engineering behind the privatised non-profit utility which guarantees customers a share of the spoils through rebates on water bills. ”This aligned the interests of customers, regulators and lenders around an efficient and accountable utility,” he says.
Business Reporter · June 2011
6
an independent report from lyonsdown, distributed with the daily telegraph
Industry view
An untapped source of funding Asset-based lenders offer an alternative to loans and overdrafts in tough periods but they also offer a significant source of funds to help thriving businesses grow The recession caused companies in the UK, particularly small and medium-sized firms, to make tough decisions in order to keep their businesses running. Latest figures for the government’s project Merlin deal with the banks show that SME loans in the first quarter of 2011 have fallen short of the target by £2 billion. So while bank lending has been limited during this period, asset-based lenders (ABLs) have stepped forward to provide essential financial support. While data indicates there was marginal economic growth at the start of the year, we are still a long way from a full recovery of both productivity and confidence. However, there is a genuine sense that the economy is turning a corner as we move further into 2011. Figures from the Asset Based Finance Association (ABFA) recently showed that its members have £6.3 billion of unused funding available through invoice finance. With so much funding untapped by businesses, both the government and the finance industry have important roles to play in educating firms about the types of finance available to them other than loans and overdrafts, and how this can benefit the overall development of their business. However, we have seen an increase in some ABLs applying more stringent lending criteria when businesses have faced their toughest challenges. Asset-based lenders must be flexible with funding solutions and understand that each
business will have different needs, so lending should be tailored to provide the most effective route to finance. At Bibby Financial Services we have maintained our “open to do business” attitude, particularly during the downturn when UK businesses have needed our support even more so. We work closely with business owners and managers across a variety of industry sectors including sub-contractors in the construction industry, manufacturers of domestic and exported products, courier firms, IT companies and recruitment agencies across the UK and indeed the globe. Through our expert client services teams, we are able to work with these businesses to identify the best invoice finance solutions to suit their industry and business size. Invoice finance can provide a long-term viable solution to help businesses improve cash flow by releasing the cash tied up in outstanding customer invoices. This enables them to meet those vital creditor payments such as taxes, not to mention the more obvious supplier payments and, of course, have sufficient funds to foot the wage bill. Due to our willingness to fund businesses of all sizes and our appetite for niche deals, we are able to provide invoice finance for all business situations – from new start-ups and restructured businesses which need financial support but are often seen as high-risk by banks, to businesses
At Bibby Financial Services we have maintained an “open to do business” attitude, particularly during the downturn when UK businesses have needed our support even more so
gearing up for growth or even a management buy-out (MBO). While invoice finance has proven to be a popular funding option for businesses when times are tough, it is also successfully used to support a business’s growth strategy. At Bibby Financial Services, we have clients who have utilised invoice finance and embraced its flexibility for a number of years in order to maintain a robust cash flow and allow their companies to grow and succeed. Though invoice finance is traditionally viewed as an option for businesses to free up cash for growth, it is increasingly a viable and costeffective way to provide the finance required for mergers and acquisitions. It is essential for companies going through an MBO or management buy-in to work with an ABL that has an understanding of the transaction and their industry. A specialist asset-based lender offering this solution will be more empathetic to the business’s needs and provide the required support. As the asset-based lending industry continues to change, ABLs have an opportunity to lead the way by being creative in the way they tailor funding solutions allowing them to ensure they help even more businesses succeed and grow. Edward Rimmer is UK chief executive of Bibby Financial Services www.bibbyfinancialservices.com
Business Reporter · June 2011
an independent report from lyonsdown, distributed with the daily telegraph
Industry view
7
Time to get your hands dirty From cash flow to outsourcing to managing the accountants, our experts look at the challenges facing today’s finance director
Sid Vasili
John Booth
Chandra Patni
What major sourcing contributions were you involved in that have had a significant impact on the business community?
Why should owner-managers get more hands-on with their business?
What is an electronic wallet?
In 2008 I founded Invapay, because I realised there was a need to help vendors get their invoices paid faster than within 30, 60 or 90 days. We created a platform where buyers and sellers interact. The buyer receives the goods, and then the vendor receives payment in five days. Everybody wins. Imagine that. The problem with the current business dynamic is that corporate buyers tend to want to preserve cash flow, so vendors find themselves waiting weeks and sometimes months to get paid. This disrupts vendor cash flow and means that businesses can’t afford to expand. I don’t know if corporations want to change. Why would they? But improved vendor cash flow would improve the overall efficiency for everyone because there would be more capital in the system.
What key change do you predict will occur in the next 12 months? I believe banks and corporations will have to change their behaviours. We need to drive liquidity back into the economy. When businesses hold back you see a decrease in a country’s core assets, its people and innovation. That’s the problem we’ve had with offshore outsourcing; it’s a short-term solution. If you look at Germany, for instance, they are doing really well because they protected their core assets and didn’t outsource their services to low wage-paying countries.
I’ve been doing business for 40 years and I actually think outsourcing is an excuse for not dealing with problems What is the most debated question in the industry? Whether offshore outsourcing is beneficial. I’ve been doing business for 40 years and I actually think it’s an excuse for not dealing with problems. What tends to happen is that corporations shift their messes to countries with low-cost employees. It pleases shareholders but it has a negative effect on local operations. We have to find a way to sustain jobs because that has long-term implications.
Sid Vasili is the CEO and founder of Invapay www.invapay.com
Their business is their investment so they will want to be close to it. Traditional exit strategies – selling the business, passing it to the next generation or simply taking a back seat – have become more difficult in the current economic climate and we’re seeing many owner-managers getting back into the saddle.
It’s important that your accountants understand your vision for the business How can they do this? By taking advantage of all they’ve learned over the years. They should have a better idea now of what’s critical to the business, where it is currently heading and where it needs to be heading. This can be encapsulated in a handful of key performance indicators (KPIs): specific measurables like staff utilisation levels, turnaround times or debtor and creditor days. These let you check the pulse of the business regularly: focus on getting them right and you should see performance improve.
How can KPIs improve business performance? Because what gets measured gets done! It’s too easy to define a strategy but do nothing about it. KPIs are the key milestones that drive you forward and measure your progress. Share them with all your staff to help them understand your strategy and change their behaviour accordingly. You can also change the rewards system to encourage this further.
What other changes will business owners have to make? Many diversified during the boom years, often into areas where they lacked expertise. Now they must measure performance and divest of areas that are less profitable or are a drain on cash. Now times are tougher many staff will need training and hands-on supervision to improve their performance and bring it in line with your own vision.
Where can businesses get help? Their in-house finance function should be utilised, if they have one. For KPIs to be effective you need detailed, current information and so it’s also becoming common for the external accountants to become more involved on a regular basis and to be more proactive rather than just being called upon at the year end. It’s important that your accountants understand your vision for the business: they can then help you build on your strengths and identify opportunities to help you realise your vision.
It’s a piece of software that contains details of all your credit cards, debit cards and store cards, plus loyalty cards, gift tokens, money-off coupons and so on. It doesn’t hold cash because you can use your credit or debit card. They’re already becoming popular on the web and are now starting to be used for mobile payments.
Why would I want one on my mobile phone? Firstly, convenience. Instead of carrying a wallet stuffed with plastic cards and scraps of paper, you just walk up to the till, select a payment method and tap in your security code. The phone either displays a barcode for scanning, or communicates via 3G or a short-range wireless link. The wallet can store electronic receipts (even if you pay with a physical card) and keep a running total of what you’ve spent. You can’t lose paper vouchers or leave them at home. And you can get location-related information and offers: coupons for the shop you’re in or discounted tickets for the cinema round the corner.
What about security? The wallet is protected by security codes. And because your card numbers are stored on a central server, not on the phone, it’s more secure than a physical wallet – if you lose your phone, you don’t lose your life! It also means shop assistants never see your name and card number, and cards can’t be “skimmed” to steal their data.
Electronic wallets are quick and easy to use on the web and retailers like them because they don’t have to store customers’ card details Will it link up with what I do online? Yes. Electronic wallets are quick and easy to use on the web, and retailers like them because they don’t have to store or process customers’ card details. Soon you’ll be able to go virtual shopping with your friends on Facebook and, over time, mobile wallets will become more and more the consumer’s persona.
How soon can I get one? Several companies already offer mobile wallets, including YESpay, Barclaycard and Orange. They’re free to the consumer, and within a year I think they’ll be widely accepted by retailers and leisure outlets. Chandra Patni is CEO and CTO of YESpay International, the secure multi-channel payment service provider www.yes-pay.com
John Booth is a partner at accountants and financial advisers Armstrong Watson www.armstrongwatson.co.uk
Business Reporter · June 2011
8
an independent report from lyonsdown, distributed with the daily telegraph
Cash management
Cash in a cold climate Money makes the world go around and when times are tough, managing your cash wisely can make all the difference to a business By Kathleen Kiley
Since the global financial meltdown in 2008, a buzzword has emerged: sustainable cash flow. Like most buzzwords it’s catchy and useful to corporate marketers but, surprisingly, not enough CFOs and treasurers really consider the full dimensions of the term. “Cash management is now a major priority – a consequence of the financial crisis,” says Philip Broadley, group finance director at insurer Old Mutual. “I well remember the first time anyone on the board asked me about cash management; it was in 2007, after seven years as finance director. Now it is very much on the minds of the board, and even the shareholders.” Many CFOs still rely on budgeted cash flow or the current tally in the bank to gauge cash flow, not considering outstanding account payables, says Jerry Shapiro, managing director of BDO Consulting Corporate Advisors in New York. A CFO may use monthly financials and quarterly filings to gauge cash balances, tracking balances at the beginning and end of a period, but on a weekly basis, businesses often don’t know what constitutes their cash flow, according to Shapiro. “I am looking at pure cash: how’s it coming in, and asking, ‘Can I predict how I am spending it?’” he says. “But many companies don’t understand how they collect the cash from their customers or how they disperse it to vendors.” Adding the word “sustainable” to cash flow denotes a feeling of doing a good deed, but there’s more to it than that, according to Bruce Barren, CEO of global financier EMCO/Hanover in Los Angeles. “Smart companies should have a minimum of one-year cash capability on their balance sheets because banks are ultra conservative about lending these days,” he says. Small and medium-sized companies, which have less access to the capital markets and rely more on bank lending, are finding it more difficult to access cash, according to Barren. The Project Merlin agreement between the government and banks was meant to increase the amount of cash available and while lenders were forecast to miss their targets, the socalled “stretch” targets allow them to match
Shapiro: doing nothing is not the answer
liquidity with demand. Lenders are remaining cautious, too. “Banks are looking to enhance their balance sheets at the cost to the client, particularly in recessionary times,” Barren says. So CFOs need to be proactive and develop a couple of relationships with banks: “A company should have one to deal with the payroll and another bank for other forms of financing.” Many companies are convinced one bank relationship is the ideal way to go, but that can be risky. If you run out of money at the 11th hour, it’s going to be tough to satisfy your cash needs and the terms won’t be favourable. Shapiro suggests building “holistic” relationships with loan officers. Having periodic face-to-face meetings and inviting the loan officer to see a company’s operations can mean that when a company needs capital the banker will know a company’s story and won’t just rely on a set of formulas to extend credit. “Companies need to be proactive and get ahead of banks and educate them about their business,” he says. “You want them to know your best story. This is what sustainability means – closely monitoring operations and cash flow and being proactive. Doing nothing is the worst thing you can do.” While much of the burden and responsibility falls upon the CFO in creating a culture of financial sustainability, this concept has to filter from the top on down, Shapiro adds. “Sustaining profitability depends on the quality of management. There needs to be urgency in running day-to-day operations as well as communication up and down the organisation to assess risks and opportunities. You’d be surprised how many CFOs don’t understand their cash position or the cash risks that lie ahead.” Many companies aren’t good at operating during times of adversity. When efforts to turn the ship around fail, management often stops making decisions for fear of making more mistakes, he says. But developing a sustainable cash flow forces
companies to know their customers’ markets and what challenges they are also facing. The same goes for a company’s vendors. When credit is tight, companies will ask vendors to wait for payment, but companies can only use that strategy for so long, he adds. But even those companies that have survived the economic crisis and are doing well with sustaining cash flow often need to do more, according to Shapiro. “Take many of today’s retailers. They have been forced to live with less availability, have mastered payable and receivable control but have had to examine all their locations, closing some and renegotiating leases in others. As a result, many emerge smaller, smarter and acting with more urgency than when the trouble began.” And in creating more sustainable corporations, with sustainable cash flows, training future CFOs will play a big role to ensure the management is there when needed. Although spreadsheet analysis is important, there needs to be a greater emphasis on really understanding the operations, Shapiro adds.
“Having periodic face-to-face meetings and inviting the loan officer to see a company’s operations can mean that when a company needs capital the banker will know a company’s story” – Shapiro
What makes a sustainable CFO? Formal training and broad experience are key to CFO success, says Ernst & Young According to a recent Ernst & Young survey on CFO training, there’s a correlation between strong company performance and taking a formal approach to developing CFO talent. But the survey of more than 530 CFOs and their direct reports across Europe, the Middle East, India and Africa found that not many companies do take a formal approach. “Since the 2008 financial crisis, the role of the finance function and the CFO in particular in guiding company growth and strategy has increased dramatically to meet challenges such as increasing volatility in financial markets, regulatory change and the rise of emerging markets,” says Les Clifford, chair of Ernst & Young CFO Programme in the UK and Ireland. The study identified nine key training areas, including diverse financial and international experience. Of the CFOs surveyed, 67 per cent said that aspiring CFOs who spend their career in specialist finance functions are likely to find themselves at a disadvantage. “Aspiring CFOs should not try and build their career by working in every financial discipline from treasury to tax and investor relations. Instead it is considered far more important to build on skills acquired at head office and progress to working in divisional or operational roles for example,” says Clifford. But not many corporations offer formal training opportunities. The leading CFOs surveyed said there’s not a lack of talent in the organisation, but just few opportunities to develop the necessary skills for this top post. Given that strong company performance has been linked to formal CFO training, leaders need to provide more training, especially as the CFO role becomes more central to sustainable business strategy and growth. “This study indicates the leading companies think ahead by nurturing their CFO talent with structured internal development,” says Clifford.
Business Reporter · June 2011
an independent report from lyonsdown, distributed with the daily telegraph
Banking
Credit where credit’s due? With regulation firmly on the agenda, banks and businesses have to try to find new ways to borrow, lend and invest By Andrew Rosenbaum A wave of banking regulation is forcing banks to find new ways to work with corporates. Banks don’t have the freedom they used to enjoy to offer credit, so they must find new ways to package products that both fit the rules and earn profits. “Many banks have already begun to modify their business models in advance of full implementation of upcoming regulations, as well as in response to the demands of their investors and counterparties,” according to David Tescher, a credit analyst at Standard & Poor’s. “The result is that CFOs and treasurers are also working to change their relationships with banks,” according to Les Clifford, a partner and head of the CFO programme at Ernst & Young in London. “They are seeking a broad holistic relationship that involves a group of services.” For most of the past decade, watchdogs tried to allow banks to regulate themselves. The high priest of deregulation, former Federal Reserve chairman Alan Greenspan, preached the doctrine that markets could make their own rules, and most of the world followed. The credit crunch followed by the financial crisis put paid to the doctrine of deregulation. Without rules to follow, banks chased easy credit and bankers sought high bonuses without much regard for the future. Greenspan, who has been demonised since the crisis, has himself admitted that his doctrine was flawed. The result has been a slew of banking regulation: the global Basel 3 capital and liquidity framework; the proposed introduction of bank levies and taxes in the European Union; the Dodd-Frank Wall Street and Consumer Protection Act in the US, and similar legislation elsewhere.
It is painfully clear that banks will try to pass the costs of all this regulation to the client. “If banks are going to have to raise more capital, they are going to need a larger return to pay for that capital, so they will have to look at their pricing,” says Chris Jones, UK financial services leader at PricewaterhouseCoopers in London. Even this expensive lending is being radically reduced, and not just to smaller and mediumsized companies. According to Tescher, even the largest, highly rated companies, which had got used to banks offering them easy credit at easy terms in the deregulated, precrisis period, have found that credit lines are either not being renewed, or that terms have become much tougher. For some smaller companies, getting access to bank credit means jumping through endless hoops, often to no purpose. Cash is king in this new highly regulated world, and banks are finding ways to incentivise longer-term corporate cash deposits, and to control the amount of risk-related assets on their books. At Barclays Corporate, one newly launched product offers a special rate for deposits that are kept there by companies for more than 100 days. The bank is putting together a number of such offers – a spokesperson recently said: “The lending interest rates we charge to customers are influenced by a number of factors, including the increasing regulatory demands to hold more capital.” Bankers throughout the new highly regulated industry admit their services are to become more expensive. “It’s all very well to talk about ‘holistic’ relationships with clients rather than product sales,” says one British banker, “but the new rules force us to charge our clients more. What bankers are doing now is to work closely with their clients to find new ways to adapt.” “At Citigroup, we are in the process of changing our strategies and products,” says Ruth Wandhöfer, EMEA head of market policy and strategy at Citi Global Transaction Services in London. “We are looking at different ways to provide incentives for cash deposits and new types of cash management, and trying to broaden our relationships with many of our clients.” Deutsche Bank has reworked its entire strategy for corporates in this perspective, according to its head of trade finance EMEA,
Alan Greenspan: the high priest of deregulation
Daniel Schmand. “We have completely changed our way of working with corporate clients, as a result of a major review of policy, and we are now succeeding in creating new, holistic relationships,” he says. There appears to be some progress on the accessible credit. According to UK manufacturing organisation EEF, credit to companies is easing up. Its survey of almost 500 companies in May found that finance availability is improving for a substantial number of members. Ultimately, corporate borrowers should benefit in the new regulated environment for banks. There should be less volatility, and fewer shocks to the system, economists point out. But, in the meantime, the credit environment for both corporates and banks has become very complicated. One result of the new, regulated landscape has been the growth of the European corporate bond market, and the US private placements markets, as companies seek alternatives to bank financing. It will be up to the banks to bring these potential clients back, despite new regulations.
Ultimately, corporate borrowers should benefit in the new regulated environment for banks. There should be less volatility and fewer shocks to the system, say economists
European or British regulation? With officials looking to set Europe-wide rules on bank capital, UK regulators have a fight on their hands to remain independent How much capital banks are obliged to keep in reserve has always, ultimately, been the decision of the national regulator. But the European Commission has announced plans to prevent national regulators from setting tougher bank capital rules, seeking a so-called Europeanisation of banking regulations. The commission is seeking to override the prerogative of national regulators, which is the right to force lenders to hold reserves above minimum levels set by the Basel 3, to maintain a level playing field in the EU’s single market. UK regulators are against the move. Financial Services Authority chief executive Hector Sants says: “Within the European Commission there is discussion about standardising rules. In other words, national regulators could not allow banks to go above or below the European standard... all we would be doing is policing European fixed standards.” In the UK, regulators feel strongly that such an arrangement would tie their hands, and make it impossible for them to apply the appropriate actions in particular cases. The Bank of England believes bank regulation could suffer similar problems to those of the euro, where monetary harmonisation is playing havoc in countries that would benefit from devaluation. “If we are moving to a macro-prudential framework to fit the cycle here, and within Europe there are different countries at different stages of the cycle, then we will need a degree of national discretion,” says chief cashier Andrew Bailey. Sants: unhappy with European regulation
Bank of England: looking for national discretion
9
Business Reporter · June 2011
10
an independent report from lyonsdown, distributed with the daily telegraph
Industry view
Choosing the way to pay As cheques disappear, companies have to select from a bewildering slew of choices to get money from here to there. Adrian Stafford-Jones, managing director at Albany Software, explains how UK businesses can get the benefit of this rapid evolution by consolidation It’s decided. Humourists will finally be forced to forego all the old jokes about ‘the cheque’s in the post’. As of 2018, our government has decreed that cheques will disappear as a form of payment in this country. Cheque usage was declining rapidly anyway, from 2.7 billion in volume per year in 1999, to 1.1 billion in 2010, according to the UK Pay-
“Effective payments management demands the ability to make volume payments, schedule forward payments and introduce multi-layer authorisation to reduce the onus on the finance director” – Stafford-Jones ments Council. Meanwhile, as the chart shows, automated payments are on the rise. But cheques were a relatively expensive means of payment, as are CHAPS payments, and credit/
debit cards. Internet payment requires manual input; it’s too time intensive for regular business use. Businesses are already moving towards faster and cheaper ways to pay, like direct Bacs, bulk Faster Payments, paperless Direct Debit collections and a number of emerging global payment solutions. “By managing these payment processes through a single payment infrastructure organisations can impose tighter cash flow control, attain better cash visibility and accountability and drive greater efficiencies through the payment process,” explains Adrian Stafford-Jones, managing director at Albany Software. The payments industry is constantly evolving – the arrival of Faster Payments, the establishment of the Single Euro Payments Area (SEPA), and the move to HMRC’s new “Real-Time Information” initiative, which will start in 2013, are all payment issues cluttering up businesses’ radar screens. Coping with all of these choices effectively can be critical for the large number of challenged British businesses that owe about £52.7 billion to creditors. Faster Payments has gained significant momentum, accounting for £294m in 2009; a figure expected to grow to £836m in 2018 according to the Payments Council. “SEPA shows much promise for faster, cheaper European payments,
Automated payments Number of Bacs payments
Q4 2010
Annual rate of growth
Total value of
Q4 2010
Annual rate of growth
£1,048bn
5.2%
£45.9bn
6.5%
1.5bn
0.6%
Bacs payments
119.9mn
9.3%
3
CHAPS payments
8.3mn
0.8%
CHAPS payments
£15.179bn
-4.7%
Number of
Annual figures (2010)
Annual rate of growth
Total value of
Annual figures £166.7bn
Annual rate of growth
Bacs payments
5.7bn
0.6%
Bacs payments
£4.062bn
5.2%
432.1mn
46.6%
3
Faster payments
£166.7bn
56.9%
32.2bn
0.8%
CHAPS payments
£61.588bn
-4.7%
3
3
Faster payments
Faster payments
CHAPS payments
Faster payments
3 The Faster Payments Service was launched on 27 May 2008. The per cent growth for Q4 2010 relates to a three month period. © UK Payments Administration Limited 2011
but is not available directly to corporates, and is still in development,” warns Stafford-Jones. Swift offers another option for international payments, but it is not really accessible to all companies, catering for large corporates in the main, and it is relatively expensive. Corporates often find working with private payment system specialists the best option for international payments. “Effective payments management demands the ability to make volume payments, schedule forward payments and introduce multi-layer authorisation to reduce the onus on the finance director,” Stafford-Jones continues. “Soon it will mean adapting to HMRC’s new legislated requirements - in line with the introduction of the Universal Credit benefits system – in which employers will automatically report earnings, tax and deductions at the same time as they pay their employees, rather than at year end.” There is a clear need to consolidate these payment processes. With this multiple payment
approach organisations have little visibility over cash flow, limited accountability and no chance to streamline payment authorisation processes. Indeed, the cost of managing so many different payment methods is actually increasing. “The most effective approach is the integration of all of the key payment mechanisms – direct Bacs, bulk Faster Payments, Direct Debit collections and global payments – into a single, integrated payments gateway. Within a secure, consolidated payments environment, organisations can streamline the authorisation process, and achieve complete visibility of all payments and collections – businesses can track their cash position in real-time,” Stafford-Jones points out. The integrated process also provides intelligence, enabling organisations to improve cash flow management to achieve greater efficiency and impose tighter controls on spending. “It’s all about cash flow and, today, cash flow is king,” Stafford-Jones says. Surely, since the financial crisis, few CFOs would disagree.
Think you’re too small for MDM? Think again Master data management pays for itself many times over and allows you to extract maximum value from your information to drive critical business decisions One key to doing more – and to earning more – with less is to increase efficiency by making better use of existing resources and assets. Many finance directors and IT managers have discovered that their enterprise data is under-utilised and could be a greater source of value. For example, the data could be mined to provide insight into directions for new product development. Sales data could be analysed to identify opportunities for cross-selling and upselling and customer service and satisfaction could be improved to reduce churn. Everyone would agree that these are all important uses for enterprise data. So why aren’t organisations extracting more of the value that their data could deliver? To do the sort of analysis that delivers insight and competitive advantage, an organisation needs to consolidate customer information that has been acquired and stored by multiple lines of the business – each of which usually has its own applications, databases, data formats, access rights and platforms. The result of which is an enterprise with fragments of often inaccurate, incomplete and inconsistent data which reside in various application silos. To be able to extract the untapped value in its data, an organisation needs to transform that fragmented environment and arrive at a “single version of the truth” – that is, data that’s accurate, integrated, up-to-date and easily accessed
throughout the operation. A data management platform that delivers this is essential for customer retention, regulatory compliance, risk management and many other business-critical applications. Such a single version of the truth is made possible by master data management (MDM), now widely accepted as the means to manage shared data more efficiently. Unfortunately, as important as MDM is for operational efficiency and value creation, most MDM solutions are beyond the reach of most organisations. The entry point for deployment of proprietary MDM ranges from hundreds of thousands to millions of dollars. Many have tried to implement an MDM solution and failed, some more publicly than others. To tackle such an expensive project, organisations have historically gone “wide” – that is, included the entire enterprise. But that approach represents a significant risk because implementing MDM on that scale is complex. For the project to be successful, many technological requirements need to be orchestrated and the business needs to be aligned. New licence models and open-source alternatives have revolutionised this market, meaning that organisations of any size can now take advantage of MDM. Additionally, solutions have shifted to a more project-based or iterative approach, allowing for the business to be aligned over
An organisation needs to arrive at ‘a single version of the truth’ – data that’s accurate, integrated, upto-date and easily accessed throughout the operation
time. This start-small-and-grow-big approach increases the probability of success. Key benefits of MDM for organisations of all sizes include: • Improved customer retention – better access to complete, accurate customer data ensures a better experience at every touchpoint. • Sustainable growth – analysing consoli dated, up-to-date data on buying behaviour can lead to better strategic decisions on resource allocation to boost growth. • Better risk management – fast access to secure, accurate master data enables you to demonstrate compliance with regulatory requirements and reduce the risk of fraud. MDM has become a priority because it delivers on both the cost and revenue sides of the balance sheet. It can increase operational efficiency and reduce operating expenses while improving customer satisfaction, providing insight for product development and fostering growth. Talend offers a free version of its open source MDM solution under the GNU General Public Licence. It can be downloaded at www.talend. com/mdmtelegraph. It also offers a commercial subscription version with value-added features and services for enterprise deployment.
Business Reporter · June 2011
an independent report from lyonsdown, distributed with the daily telegraph
Skills
11
A world of opportunity Companies seeking talented staff are not restricting recruitment to the UK. Offshoring is increasingly as much about skills as savings by David Hayhurst
Most businesses are aware that offshoring or outsourcing, whether in the UK or abroad, may offer cost savings. But, increasingly, outsourcing and offshoring have also become vital for UK companies needing to fill skills gaps in critical areas, especially in finance, accounting, compliance and operational support positions. A KPMG report last summer found that nearly one in 10 of the 600 private sector companies surveyed planned to offshore jobs within the coming year. Cheap service jobs such as call centres accounted for more than half of these jobs, but the others were in highly skilled IT (51 per cent) and in finance (49 per cent). “There is an increasing need to look abroad for skills,” says Stephen Morana, CFO of the Gibraltarbased betting firm Betfair. “The pressure to recruit skilled people is much greater today.” With the financial services sector accounting for 10 per cent of British GDP and around a million jobs (a third of them in London), the hiring of staff overseas could have a serious impact both on the UK employment market and on the long-term willingness of British companies to nurture domestic skills development. The severity of the recent recession has also done little to nurture home-grown talent. “Graduate recruitment schemes by accountancy firms as well as banking and financial services organisations were limited during the downturn, resulting in a lack of trainees and now recently qualified professionals,” says Andy Dallas, associate director of financial services at specialised staff services company Robert Half International. “The issue is compounded by many expatriates who returned home during the recession, or who are now hindered by the non-EU migrant cap. “A survey by Robert Half indicates that half of London CFOs planned to hire non-EU workers in
Carmen Watson: not convinced by offshoring
the first six months of the year, and nearly four in 10 feel that limiting migrant workers will have a negative impact on their businesses,” he adds. In terms of domestic outsourcing of non-core competencies, a 2010 study by the Financial Services Skills Council stated that the trend would probably have a two-fold effect. The report stated: “On one hand, it could lead to a more widespread distribution of employment in financial services across the UK, with a number of up-and-coming centres of financial services activity able to capitalise on existing and emerging pools of talent. Employers differ in their approach to near-shoring and outsourcing activities: some will argue that the availability of a skilled workforce in situ is a necessary condition. Others will be willing to… train the right candidates.” Carmen Watson, managing director of recruitment agency Pertemps, sees definite and under-publicised benefits for companies – not least in the financial services sector – being able to capitalise on their new, greatly increased flexibility to take on outsourced workers only as needed, while also helping shield such personnel from the shocks of future economic slumps. “A skilled outsourcer will have access to other clients and be able to ‘flip the asset’, for lack of a better term,” she says. “If you have one company using its staff only part-time during the day, and you have another client – one that may or may not be in the financial services sector, but uses the same skills – they can lend those people in down times to other clients. “The skill of the outsourcer is being able to do that in an appropriate manner, so that they are maximising those skills and keeping people employed, while at the same time not offloading unnecessary costs to their client.” According to Watson, the experiences of many financial services firms with offshore operations have been “very, very mixed”. While some are deeply committed to furthering their efforts, others have decided that results have not really gone their way. “They will have been (in their foreign locale) for two or three years, met the commitments of their contract, and have then actively sought to come back to the UK,” she says. “In general, the reasons for it not working have been more than cultural issues. They have been client-based.” Watson has also seen notable variations in client satisfaction with outsourced services depending on their geographical location within the UK. Some areas have a workforce that is skilled enough to take over complex IT and finance tasks, but others require more training, and there is not necessarily enough time for the skills level to be established. Increasingly, many firms have learned to look beyond qualifications and experience when it comes to accessing the best job candidates. This leads many to look abroad for people who may often have fewer demonstrable skills, but who display enough potential to be brought up to speed quickly and effectively. “This is not just based around skill-sets – it’s also around attitudinal and work-ethic issues,”
says Watson. “A lot of our clients have said that with both people from the UK and abroad, they have clearly been trained to do their jobs, but in terms of the value they will add to the company, there are other issues to consider.” And location has to be considered, too. Companies have to look for the skills they need in the right kinds of places. That may well be right here in the UK, or it may be in eastern Europe or South-east Asia. When it comes to staffing, the world really can be your oyster.
Many firms are looking abroad for people with fewer demonstrable skills, but who have potential to be brought up to speed quickly and effectively
Off and running Offshoring presents a number of challenges to companies around the world, an expert study has found Employers have a variety of reasons for setting up offshore operations – and what happens when they do can vary, too. So found the sixth annual study of offshoring trends published by the Offshoring Research Network of Duke University’s Fuqua School of Business, which also revealed that shortages in skilled domestic employees – not cost-cutting – is the primary motivator behind many companies moving some job functions overseas. The survey sampled 2,000 companies of various sizes from around the world in sectors including finance and insurance, software design, healthcare and utilities involving more than 4,300 different offshoring projects. Forty-four per cent were North American-based, followed by Europe (35 per cent) and Australia (15 per cent). Financial services and manufacturing companies regarded “labour cost savings” as the most important driver of their offshoring initiatives, while retail and consumer goods companies saw “organisational flexibility” as their most important concern. Finance and insurance firms were also the sector with the highest rate of planning for offshoring activities in the next 18 to 36 months: 57 per cent compared with software (39 per cent) and manufacturing (33 per cent). However, survey participants across the board had lower expectations than previous respondents for average cost savings in several offshoring functions. Contact centres, IT and software development saw the largest declines among all offshoring functions, as companies new to offshoring discovered a number of hidden costs involved, including expenses for training, staff recruitment and retention, and government and vendor relations. Taking offshoring to the next level: the 2009 offshoring research network corporate client survey report
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Business Reporter · June 2011
an independent report from lyonsdown, distributed with the daily telegraph
Finance technology
13
Keeping track of the cash Technology is providing the answer when companies look for better ways to manage global funds By Leslie Holstrom When companies need cash, the first thing they do is look to see whether they have it or not. But until the financial crisis, most companies didn’t pay close attention to how much money they had – if they didn’t have enough on hand, banks were happy to provide it at cheap rates. All that changed as the financial crisis unfolded. Companies needed to keep track of every penny, and the CFO was expected to say exactly where it was; what was the status of every payment; and the balance in every account globally.
That technology is a sophisticated range of cash and treasury management systems. Large cash management banks can now provide webbased portals that allow clients to manage bank accounts, often including cash-flow forecasting and e-invoicing, while specialist treasury systems suppliers such as SunGard, IT2 and Wall Street Systems offer powerful applications that allow companies to manage everything from cash to foreign exchange risk. And even enterprise resource planning (ERP) systems such as Oracle and SAP have much of the functionality of treasury management systems and can be a solution if a company is operating one underlying ERP system.
allow easy access to cash, debt and investments information plus the ability to export data into a treasury management system or ERP. US company Bottomline Technologies is working on or has launched a host of new developments that will make banking platforms increasingly competitive. A recent launch included a voice-activated iPad app so banks can offer mobile corporate banking including balance delivery, payments and more. Although mobile corporate banking is yet to hit the big time, it is definitely on its way with some US banks now offering corporate banking apps for the iPhone. But bank-hosted portals, despite the low cost
consider having their core treasury solution run over the internet, and over 76 per cent would consider using a web-based trading platform or portal technology for some part of their financial operations. Wall Street Treasury managing director Paul Wheeler says: “Our survey results point to a trend we have been seeing in the marketplace. Across all sizes of companies, treasurers are becoming leading advocates of outsourced technology as they seek the benefits of a web-based solution without the IT headaches.” For larger and mid-sized companies using ERP treasury modules or some form of TMS, Swift connectivity is one way for companies to simplify and standardise communications with their banks. Swift allows companies to have one single platform with real-time visibility of all bank accounts, plus the ability for companies to add or remove banks as needed. That effectiveness is demonstrated by the fact that so far more than 800 companies, including Dell, Microsoft and GE, have joined Swift. Whatever technology solution a company chooses in its quest for cash visibility, it needs to be able to grow with the business. This is why hosted offerings like Saas and flexible solutions like Swift are so attractive. Companies don’t want to be tied to a vendor for corporate life whether to a bank or a TMS provider. The other often overlooked piece that comes with a change to technology is the project discipline required to map out and change process and policy well in advance.
Doing it for themselves For United Parcel Service, creating its own cash management system has helped to deliver both savings and efficiency As the crisis deepened, a second lesson was rammed home as banks withdrew cheap and easy credit, and more companies had to turn to internal liquidity to fund working capital. But where was the liquidity they needed when they wanted it? Tracking cash flow around the globe remains a priority, with technology playing an increasing role in managing money. Legacy technologies, outdated dedicated bank systems and spreadsheets are no longer enough for companies to ensure that their cash is visible and can be moved to where it is needed at a moment’s notice. Companies are gaining that visibility and flexibility in different ways, but more and more businesses are seeking a dashboard approach to keep track in real-time of where the cash is. “The days of decentralised ownership and management of cash are numbered,” says Sebastian di Paola, partner at PricewaterhouseCoopers in Geneva. “Post-crisis companies are looking at first visibility and then control of cash. This is no longer the premise of only the largest companies, with even mid-sized multinationals seeking to view cash as a corporate asset to be optimised regionally or globally. Advances in technology make this a genuinely viable option, even for those companies without the necessary technology in-house.”
Resources within the company, available budget and the IT strategy will often determine the system a company implements. “The starting point is with overall IT, and particularly the choice of single versus multiple ERPs,” says di Paola. “Finance staff need to be involved in the design to make sure the right information on cash balances and the liquidity forecast can be delivered.
Tracking cash flow around the globe remains a priority, with technology playing an increasing role in managing money If that’s not the case, the approach should be to look at alternatives delivered by a lead banking partner, or using treasury management systems potentially with the Society for Worldwide Interbank Telecommunication (Swift) connectivity piece to gather global information and remain independent of bank.” Clunky bank-hosted systems have been replaced by state-of-the-art alternatives which
and promise of new tools, are rarely suitable for companies with complex operations, particularly multiple banking partners. Pre-crisis, companies looking to simplify their cash management could opt for one bank globally giving total visibility of bank accounts worldwide and taking advantage of bank offerings that would pool or sweep funds to give a company consolidated yield on balances or to fund shortfalls in different parts of the business. The crisis put paid to that model and companies instead looked to spread their counterparty risk by working with a core set of banks. Larger companies with multi-bank relationships are far more comfortable either using an ERP treasury module or a dedicated treasury management system (TMS). TMS providers typically offer both clienthosted and vendor-hosted, internet-based solutions, with the latter finally taking off after a decade of security concerns. Called cash management in the cloud, outsourced treasury, ASP or software as a service (SaaS), these solutions offer multiple functions on demand that are cheaper, faster to deploy and easier for companies to manage as no downtime is required for upgrades. A survey of 300 members from the European Association of Corporate Treasurers by Wall Street Systems found that 55 per cent would
The justification for an in-house technology solution is usually that it will offer substantial cost savings or give a company a marked competitive advantage. In the case of United Parcel Service (UPS), it was both. UPS has operations in about 220 countries and territories. A series of acquisitions led to a restructuring of its cash and treasury management structures to help it keep a closer eye on its cash worldwide. As part and parcel of that programme, the company decided to build an internal treasury platform that would go beyond what commercial vendors could provide and be tailored to its unique requirements. Companies often resist building their own systems because of the supposed cost and work involved but, according to Ernie Caballero, vicepresident of Eurasia treasury and mergers and acquisitions, in-house development has paid for itself and has proved more economically viable than using third-party products. The UPS web-based application includes realtime cash visibility, full bank account administration, bank guarantee monitoring, an intercompany loan database, cash forecasting and interfaces with internal accounting. “Our in-house platform allows us to continually keep abreast of our ever changing international treasury requirements in an expeditious and costadvantageous manner,” Caballero says.
Business Reporter · June 2011
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an independent report from lyonsdown, distributed with the daily telegraph
Industry view
Getting ahead in the cloud Companies that have invested in cloud computing have found that their internal IT costs have fallen and they have more time to play with Awareness of cloud computing continues to grow as it is starting to move beyond pure hype and into mainstream practice. Cloud computing enables convenient, on-demand network access to shared configurable computing resources (eg networks, servers, storage, applications and
Sales and finance are benefiting from sharing the same customer pipeline detail. It seems madness that they didn’t have access to this information before services) that can be made readily available with minimal effort. This eliminates the need to install applications on in-house systems, thus reducing internal IT costs.
One finance professional recently said that moving to the cloud is helping his company to re-engineer time. What he meant was that by using a single cloud platform to host critical business applications online, like Salesforce CRM and FinancialForce Accounting, his business can monitor sales from the customer contact to realisation of revenue. The company used to spend an entire month getting revenue figures into its enterprise resource planning (ERP) system. Moving the business-critical systems to the cloud has freed up about 95 per cent of its time every month. By knocking down barriers between sales and finance, the organisation can ensure accuracy and steady cash flow, while delivering informed customer relations. A number of other FinancialForce.com customers report similar benefits: “Accountants love it because it does what an accounting package should do with the enterprise functionality required, but it is still easy to use,” says a spokesman for Quattro
Innovation. The Compliance Team reported that issuing invoices “used to take us about three weeks, but now we can do the entire month in just over a day. We’ve grown 125 per cent but only had to add 20 per cent more staff.” The business and management consultancy Nimbus Partners was similarly impressed by its cloud computing system: “Sales and finance are benefiting from sharing the same customer pipeline detail. It seems madness that they didn’t have access to this information before.” And a spokesman for White Springs said: “Our accounting team has saved at least 20 per cent of the time that was spent posting invoices manually. It’s all automated, from an opportunity being closed in Salesforce CRM to an invoice going out from FinancialForce Accounting.” Cloud computing is the next natural step in the evolution of on-demand information technology services and products. In times of recession, companies need to streamline their operations while improving customer relations. Those that have already embraced
“the cloud” have a head start. FinancialForce.com is the cloud applications company. We focus 100 per cent on building business applications for Force.com, the world’s leading cloud computing platform from Salesforce.com. The financial applications available from FinancialForce.com include accounting and billing. www.financialforce.com info@financialforce.com Tel: 0808 238 9791
Business Reporter · June 2011
an independent report from lyonsdown, distributed with the daily telegraph
Industry view
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Deliver dividends with financial performance management Financial performance management systems have become much more affordable, especially if adopted incrementally Financial performance management (FPM) function is a core responsibility of the finance department. But, despite placing increased demands on their financial operations, many companies are still reluctant to invest in FPM software, believing it to be too expensive, too complex and beyond their reach. “FPM software doesn’t have to be an all or nothing proposition,” says Faisal Nadeem, founder and CEO of UK-based TCM Infosys, a leading specialist in FPM software development. “Companies can see an almost immediate return on their investment by taking incremental steps to integrate information, technology and
Companies can see an almost immediate return on their investment by taking incremental steps to integrate information, technology and people people.” This gradual approach means that each business can reap the immediate benefits of FPM, expanding and adapting its capabilities as the company grows. Companies that use FPM software can plan the direction of their business and analyse
Collect, calculate, consolidate: total corporate management at your fingertips
information to understand underlying trends and spot anomalies. “If a company is going to grow and succeed it’s imperative to have immediate access to reliable, relevant information,” he says. Nadeem says that an FPM solution has components found in any management information system – software, business processes and people. With minimal investment, these components can interact more successfully to measure performance and improve operational effectiveness. Before investing in FPM software, however, Nadeem says that a number of factors must be weighed in the decision-making and selection process. The company’s key users and management must be part of the process right from the start: “It’s important to know the needs of your decision-makers – such as how, and where, they
Fresh thinking on cutting costs In tough economic times, 4c Associates has devised an innovative approach to reducing companies’ outgoings that is applicable to all business types What major cost methodology contributions were you personally involved with that have made a significant impact to the business community? We have developed an innovative approach to cost reduction. Our methodology analyses both the input and output costs of an organisation to determine a range of cost reduction opportunities. Input costs include wages and supplier costs. Output costs are typically based around key units such as cost per product or cost per customer. By analysing both we can implement programmes that will generate long-term changes in cost. For example, in marketing we look at how much you pay for an advert but also what your return is on investment and cost per customer acquisition. In logistics, we analyse your freight rates and also your cost per case delivered. We call our approach cost transformation and we have been able to deliver double digit savings to a range of organisations. Can you do this for any type of business? Yes, this approach is not tied to a particular sector. The questions we ask don’t depend on a particular kind of business. We find a considerable benefit from working across different business sectors. Each sector has a different norm for costs. For example, the economics of food manufacturing create an efficient cost structure that can provide lessons for an oil and gas company. In turn, the oil and gas industry provides benchmarks for efficient R&D. Cost is the only thing we do. We’ve been at it for more than ten years, completed thousands
of projects, and bring a vast knowledge base of benchmarks and learning. Looking at the finance function, are there aspects in which costs should be scrutinised? Our tools and methodologies give finance departments the mechanism to be able to identify then deliver savings in their business. Each business is in a different place in its evolution and the only way of being certain about opportunities is to have a structured process looking across the entire business. What do you think is the most debated question in the industry and why? All of our clients are wrestling with the challenge of how you manage costs in the current environment. Overall, inflation in the UK is now falling. However, this overall decline masks large swings in specific prices. Oil, energy and logistics costs are increasing but labour and people-based costs are remaining stable. Technology costs continue to decrease and costs of goods and services from “low-cost” countries are increasing. However, the current economic environment is making it difficult for organisations that sell services or manufactured products to raise their prices (last month manufactured food prices fell). It makes the development and implementation of cost mitigation strategies critical. Edward Ainsworth is managing director of 4c Associates www.4cassociates.com
use financial information, and what information they think is relevant and timely.” He also recommends that companies should clearly define their business and technical requirements before they select an FPM provider. “There’s a lot of choice on the market,” he says. “You really need to get the software that meets your needs, not just today, but as your business grows. Ask yourself, does the product give you the flexibility and agility that you need?” He also emphasises that “companies really need to consider how much implementation effort, training and ongoing administration are required with each product. A successful knowledge transfer to your users is the key to ensuring the success of your FPM project.” Another critical factor when choosing a software provider is service. “Look for a provider
that is committed to developing a strong business relationship with your organisation,” says Nadeem. “Reliable and exceptional after-sales service will get companies the maximum benefit from their investment in FPM.” Finally, Nadeem suggests that companies request a prototype of any solution, before making a final decision. “I’m a strong proponent of showing the solution instead of just talking about it. That way, everyone has an enhanced understanding of the solution and the people involved, and you’re on your way to developing a positive and profitable outcome.” For more information email faisal.nadeem@tcminfosys.com www.tcminfosys.com