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Risk Drivers at the Heart of Change
Like the broader financial system, risk mitigation is at the heart of change for corporate treasury organizations. While treasury’s role has always been to keep a steady course, the global financial crisis changed the scope of what risk means to an organization. “If anything, the crisis in 2008 only exposed hollow lines of credit and shook up stakeholders’ trust. In fact, stakeholders are now demanding greater financial transparency and prudent investment practices, particularly responsible risk management,” says analyst firm Aberdeen Group in its 2013 report, Treasury and Risk Management: Top Financial Risks and Tools to Manage Them. Over half (58.8%) of the respondents Aberdeen surveyed globally across various corporate finance functions cited financial risks as the greatest market pressures they face today.
The breadth of risks within the remit of treasury is now so wide, that the organization can no longer function with a singular focus on cash-related activities or risk-related activities, but with a holistic focus on risk across the corporate enterprise. In essence, Treasury and Risk Management, or TRM, has come to function as two sides of the same coin.
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Source: Aberdeen Group, January 2013
14.7%
20.6%
26.5%
50.0%
58.8%
0.0% 13.0% 26.0% 39.0% 52.0% 65.0%
Inability to keep upwith market volatility
Low interest rate – difficultto find areas to invest
Inability to accuratelyforecast cash flows
Greater regulatory andcompliance oversight
Increased financial risk
Percentage of Respondents, n = 36
All Respondents
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Cash & Risk – Managing One and the Same
Gaining a holistic view of exposures across cash, debt and investments begins with an understanding that there is a cause-and-effect between cash and risk management activities. Any gaps or disconnects in workflow can create blind spots in how groups gather, analyze, manage and report on information. Consider the following scenarios where cash and risk activities are considered together:
Risk Type Definition Impact Holistic
Cash & Risk Management
Benefit
FX Exposure Risk
The risk associated with not capturing the full universe of FX exposures.
Given volatility of FX rates, unhedged FX positions can lead to massive swings in a company’s P&L.
By combining an organization’s cash positions with cash forecasts, exposure forecasts and subsidiary input and insight leads to a more holistic view of global FX exposures.
• Lower P&L volatility • Stronger credibility
around FX Risk Management policy enforcement
• Lower transaction fees based on optimized FX trades
Cash Location Risk
The risks associated with cash positions held worldwide.
Unhedged FX positions can lead to massive swings in a company’s P&L. Cash positions can also have tax impact. Improper mobilization can lead to ineffective use of liquidity resulting in higher borrowing costs. Unnecessary bank account holdings.
By combining global visibility of cash with currency identification, currency translation leads to harmonized execution of FX trades as well as optimized investing / borrowing execution.
• Lower P&L volatility • Lowered borrowing
costs • Higher investment
yields • Lowered bank fees
Cash Forecast Risk
The risks associated with nonexistent, incomplete or inaccurate cash forecast projections.
The lack of proper forecasting can have widespread impacts on hedging, liquidity levels, capital structure and strategic decision making.
By combining proper cash forecasting techniques with FX, liquidity and credit decision making, organizations can optimize liquidity levels and hedging execution.
• Lower P&L volatility • Lowered borrowing
costs • Higher investment
yields • Lowered transaction
fees
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Risk Type Definition Impact Holistic
Cash & Risk Management
Benefit
Payments Risk
The risks associated with ineffective, global payment structures such as netting, multi-lateral netting and payment factories. Also factoring in payment compliance risk associated with SEPA.
Ineffective, global payment execution can lead to inefficiencies and higher payment costs. Additionally, payments could have FX impact if not hedged.
By combining payment policies with netting and factory structures, organizations can streamline payment volume that leads to optimized cost mitigation and proper FX hedging.
• Lowered bank fees for payments
• Increased hedge positions leading to lowered P&L volatility
• Treasury staff efficiency and time savings
Liquidity & Credit Risk
The risks associated with not having proper liquidity visibility and access to capital to fund the company’s continuing operations as well as support the financial plan of the CFO.
Ineffective visibility and management of liquidity and credit could result in reactive and expensive measures required to secure working capital.
By combining cash positions, forecasts and visibility into available credit limits, organizations can proactively plan for potential liquidity shortfalls.
• Lowered borrowing costs
• Lower transaction fees and borrowing penalties
• Increased credibility in the treasury function
Operational Risk
Risks associated with inefficient operational processes and dated technology can increase the likelihood of costly errors and fraud.
Ineffective treasury processes and technology utilization often result in operational errors. These errors can have significant impact on costs and internal / external credibility.
By incorporating a proper technology backbone across treasury, cash and risk workflow, organizations can reduce the likelihood of operational errors and fraud.
• Lowered error, penalty costs.
• Lowered risk of costly fraud.
• Increased credibility • Increased staff morale • Lowered talent flee
risk
Settlement Risk
The risks associated with missed or inaccurate settlement of critical financial transactions.
Organizations often have large amounts of payment settlements related to investments, debt, FX and interest rate transactions. Missed or inaccurate settlement execution can result in costly fees and penalties as well as tarnished relationship with trading partners.
By leveraging treasury and risk management technology organizations are able to have auto-creation of settlements based on the proper capture of financial transactions. Settlements are queued up in a calendar with appropriate approval and execution framework.
• Lowered penalty fees • Lowered transaction
fees • Reduced credibility
risk • Higher staff efficiency
and accuracy
Counterparty Risk
The risks associated with improper assessment and mitigation of major counterparty exposures such as financial institutions, trading partners and key suppliers.
Assessing and mitigating counterparty risk is a new market reality. Improper assessment and risk mitigation can result in significant financial losses.
A holistic treasury and risk management platform has the ability to consolidate across asset class exposures and provide the foundation for effective counterparty risk decision making.
• Lower financial losses • Staff efficiency and
time savings
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Risk Type Definition Impact Holistic
Cash & Risk Management
Benefit
Commodity Risk
The risks associated with improper identification, analysis and hedging of volatile commodity prices for commodity suppliers or commodity consumers. Drivers of increased volatility:
• Political unrest in producing countries
• Population growth in emerging markets
• Growing prosperity • Climate change / erratic
weather • Speculation • Transportation and
storage uncertainty
Hedging commodity price risk is becoming more commonplace and falling under the joint responsibility of treasury and procurement. Improper or non-existent techniques can result in massive price fluctuation risk.
Blending commodity risk management practices into treasury provides the opportunity to assess and measure commodity risk and implement proper practices to hedge and reduce price risk.
• Lower price risk • Lower P&L volatility • Stronger working
relationship between Treasury and Procurement
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Challenges in Achieving a Holistic View
Despite the causes and effects between these activities, companies lack the technological solutions that can provide them with a holistic view of exposures across the enterprise. Aberdeen reports that for many organizations, cash and risk are “still two separate functions, where visibility in one doesn’t necessarily mean visibility into the other.” In addition, as companies become more global in their activities and structure – growing organically or through mergers and acquisitions – treasury becomes slave to an increasingly complicated IT infrastructure. With disparate and redundant legacy systems, multiple data sources, and lack of connectivity, workflow and information gathering is torturous, slow and limiting. For companies in emerging markets where there is no IT infrastructure to complicate matters, highly manual, low value approaches keep treasury operating as a cost center, rather than a nimble, strategic partner in the business. Neither a disparate legacy environment nor highly manual processes can help treasury organizations sustain future growth.
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Dawn of the All-in-One
Aberdeen’s survey cites forecasting, real-time reporting capabilities and integrated treasury and risk management systems and processes as being important in “reporting accuracy and visibility into current operations to gauge an organization’s financial health.” While 29.6 percent of those surveyed said that they currently have the capabilities in place to support an integrated treasury and risk management solution, 40.7 percent said they plan on implementing these capabilities over the next 12 months.
Below are the hallmarks of an all-in-one solution that would meet treasury’s changing requirements today and enable it to scale toward the future:
• Supports broad and deep functionality in both cash and risk areas on the same platform to enable various groups and functional levels to move easily along the workflow
• Serves as the foundation for optimized business processes across the enterprise
• Provides access to information across cash and risk-related activities to support strategic decision-making and analysis
• Enables robust risk analytics to aid functional groups in seeing exposures both individually and how they correlate with one another
• Provides easy and quick updates to accommodate global and local regulatory changes and responsiveness to market changes
These characteristics of an all-in-one solution become truly transformational for treasury when enabled by cloud-based Software-as-a-Service, or SaaS, delivery.
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SaaS — Enabling TRM, Treasury’s Next Generation Technology
In its most recent, third annual Future of Cloud Computing Survey, North Bridge Venture Partners reports that SaaS continues to lead in popularity of cloud services by 63%, up 55% from last year. What this means for treasury is a liberating leap toward the future, past the limitations of legacy systems and manual processes.
A true SaaS is built from the beginning as a single-version multi-tenant architecture, a one-to-many model. This model brings many benefits to its global community of users. In addition to enabling treasury’s all-in-one requirements, here’s how cloud-based SaaS technology advances treasury’s business priorities, bypassing IT:
• Nimble and flexible technology that caters to change in markets, in organizational growth
• Best practice functionality from the best brands in the world, shared among all users
• Upgrades available immediately to all users at once, enabling responsiveness to change
• Vendor focus and investment in a single, comprehensive and integrated offering, keeping innovation at the center of the provider engagement
• No capital outlay for hardware, software, security, upgrades, connectivity, etc., which are all included in a monthly subscription fee
• Lower total-cost-of-ownership (TCO), leveraging the vendor’s economies of scale While SaaS is not new, the broader recognition of its business value is on the rise. With agility (54.5%) and scalability (54.3%) cited by the North Bridge survey as the broad drivers of cloud services, “mobility and the ability for continuous innovation to drive competitive advantage through more integrated business processes are all key drivers for the future.”
Going forward towards the future has never looked so promising for treasury. With fundamental change underfoot for the financial world at large, the technological support for managing treasury and risk holistically, as one and the same, is already here.
