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Perspectives on world-class corporate treasury

McKinsey Corporate Finance Practice

May 2010

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Context and objectives of our corporate treasury survey

Objectives

• What best practices differentiate world-

class Treasury functions??

• What outcomes define success for the

modern corporate Treasury? ?

• How is the role and operation model of

the treasury evolving??

• What obstacles do Treasuries face and

how have companies overcome them??

Context

• In the wake of the

financial crisis,

McKinsey & Company’s

Corporate Finance

practice kicked off an

effort to study the

Corporate Treasury

function across leading

organizations

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Basis for our perspectives

External publications and white papers

15+ deep structured interviews with corporate

treasurers

McKinsey client experience and expert

interviews

2010 corporate treasury survey (~70 survey

respondents)

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Key opportunities for Corporate Treasury to create value

Emphasis on an enterprise approach to risk management

1

Focus on capability over size for creating value

5

Increased ‘seat at the table’with BU’s for strategic decision making

Streamlining use of tools and IT systems to focus on strategic decision making

Centralization of functions for quick decision making

Reducing complexity and

robustness of cash visibility and forecasting

Building the ‘treasury

dashboard’ for performance management

Increase role in working capital to drive free cash flow

2 6

3 7

4 8

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“ERM is crucial for reacting

quickly in a crisis – without a

wholesale understanding of

risk, you can’t react”

“We are migrating towards a

look at risk across all of our

functions in an integrated

way…developing new

processes is the biggest

hurdle”

Emphasis on an enterprise approach to risk management

Most value creating levers for Treasury % of respondents that had the lever in their top 5

“We manage our risk in silo’s

and are trying to bring it all

together…this may not report

into treasury but we will play a

big role in getting there”

SOURCE: McKinsey

Takeaways: • Managing risk is seen as the biggest lever for the Corporate Treasury • Many leading institutions are adopting an ERM approach

1

Managing financial risk is viewed as top Treasury lever……and ERM gaining increasing importance post-crisis

Optimizing capital allocation 50%

Optimizing Treasury headcount costs

55%

32%

Minimizing cash flow volatility 65%

Optimizing interest income/payments

Minimizing bank transaction fees

75%

45%

Optimizing capital structure/funding sources

Managing cash conversion cycle

85%

Managing financial risks 98%

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Building the treasury dashboard for performance management

Most popular KPIs % of total responses • Metrics are often

qualitative in nature

• Lack of weighting of relative importance leading to a high number of indicators being looked at

• Compensation often bears little relation to KPI performance

56

67

78

47

64

49

Effectiveness of FX/risk management program (i.e., amount of unexpected losses)

Ready access to capital to meet business needs

Funding cost/cost of capital (compared to benchmark rate)

Others

Best performers

Takeaways• World-class treasurers find the right balance of quantitative and qualitative

KPI’s rolled up to the critical few that comprise the “treasury dashboard”• A portion of compensation should be tied to performance of the treasury

function and achieving dashboard targets

2

While there is some consistency in KPI’s…

…performance management is still a pain point

SOURCE: McKinsey

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…but many treasuries are increasing linkage with BU’s

Linkage with treasury is still primarily within broader finance function…

Increased ‘seat at the table’ with BU’s for strategic decision making

11

22

44

89

89

12

28

35

74

75

Manufacturing/Production

Marketing & Sales

Procurement/Supply Chain

Controlling

Tax Management

Others

Best performers

Takeaways• Treasurers can create value by formalizing strategic linkages to BU’s (similar to linkages with finance)

3

32%

35%

59%

24%

20%

Strategic partnerships with other functions% of responses

Opportunity for tighter linkages% of responses

SOURCE: McKinsey

“BUs not always aware about the risk

– more training”

“We hold monthly reviews with “BU’s

and procurement for top 5 commodity

risks”

“We set policies, and work with BU’s,

but they make execution decisions

within those policies”

“Treasury once viewed as a necessary

evil, now a strategic partner”

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Centralization of functions for quick decision making

Number of centralized Treasury functions

% of responses

Takeaways• Many treasurers have increased centralization of functions for faster decision

making while keeping some local presence (e.g., Treasurer of Europe)

100

78

89

100

78

91

80

78

96

49

Capital planning,

adequacy and allocation

Bank/creditor relations

and management

Cash management and

transaction processing

Financial risk

management and hedging

Capital funding and

liquidity management

Best performers

Others

4

SOURCE: McKinsey

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Focus on capabilities over size for creating value

World-class5

Somewhat better than peers4

On par with peers3

Somewhat less than peers2

Underperforming1

Overall performance (Self-rated)

Self-reported performance does not correlate with size Quotes from select respondents:

“If you are in the top quartile in Treasury overhead, you are too lean; if you are in the

bottom half, you are not leveraging IT

enough”

“When you’re managing hundreds of millions

in cash, or more, trying to cut the staff from

10 people to 9 just doesn’t make sense.”

“When the company had to cut staff after the crisis, we actually added Treasury FTEs.”

“We operate in 100+ countries and are

consolidating bank accounts by 65% to

minimize complexity and tactical work”

“Having a top-notch IT system frees up our staff to focus on more strategic activities.”

Median

Takeaways• The most successful Treasuries are those who recognize that they can create value by developing

advanced strategic capabilities, while using top-rate IT systems and simplifying the function (e.g., consolidating bank accounts) to minimize tactical activities

5

SOURCE: McKinsey

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Bringing the ‘cash’ mindset to working capital

Treasuries role in working capital reduction varies significantly by company…

3%

14%

30%

33%

20%

Other (please describe)

Little/no involvement in optimizing working capital

Providing data/metrics

to BUs as required

Strategically engaged

with BU-led initiative

Leading working capital

reduction program

…However, most treasurers anticipate their role to increase in the future

Less involvement 0%

No change 33%

More involvement 67%

How would you describe your Treasury's role in optimizing working capital? % of responses

How do you anticipate your Treasury's role to change in the future with respect to optimizing working capital? % of responses

Takeaways• Treasury is often one of the few areas that has a ‘cash mindset’ and serves as an educator to the organization (historically

typical for companies in financial distress, but now broader post-crisis)

• Treasury can have an immediate impact on the organization by providing visibility and importance of working capital

management and asset management (e.g., establishing metrics, target setting and tracking working in conjunction with BU’s)

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SOURCE: McKinsey

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Streamlining use of tools and IT systems to focus on more strategic activities

Adequacy of tools and IT systems to create most value% of respondents

39% 32%Other 29%

Process and oversee electronic fund transfers 8% 67% 26%

Manage and reconcile cash positions

48%

Forecast cash flow

11%

24% 64%

Manage debt and equity positions

55%

21% 52% 27%

35%

Manage short- and long-term investments 12% 61%

Monitor financial risk exposure

27%

Monitor available capital against required capital 26%

11%

41% 33%

Evaluate capital requirement

41%

23% 33% 44%

Adequate w/o current tools/systems

Adequate with current tools/systems

Opportunity for improvement

SOURCE: McKinsey

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Significant opportunity for improvement in tools and IT systems…

“With my workstation, I can view all of my cash balances anywhere in the

world, instantly… this gives my team

capacity to focus on important tasks”

“Integrated web tools increased our efficiency and freed up the team to

work on more strategic issues ”

“We choose our banking

relationships based on compatibility

with our IT infrastructure”

“We use the treasury workstation for

FX management, cash, tracking

bank accounts, debt and investment

management”

Quotes

Takeaways• Workstation systems and standardized banking platforms (e.g., SWIFT) have the potential to allow

Treasury to free up capacity for strategic tasks

• Few Treasuries have tapped this opportunity to its full extent or are aware of success stories

…some have found success in workstations and bank account rationalization

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2%

8%

8%

To lower transaction costs

Other(s)

Size of operations

Transparency of cash

reconciliation processes12%

Legacy accounts 14%

Number of countries 18%

Legal entities 39%

Primary reason for complexity in bank accounts and cash visibility

Takeaways• Increasing demands of Treasury for cash

visibility despite increasingly complex

businesses. Opportunities include:– Consolidate accounts

– Standardized IT platforms with banks

and workstation approach to cash

management

– Increased coordination and robust processes with tax team

• To avoid surprises, cash forecasting has

increased in importance. Opportunities to increase robustness of process:

– Treasury moves from ‘aggregator’ to

more intimate role

– Treasury develops a top-down cash

flow forecast and convenes a monthly reconciliation meeting with

bottom up forecast from BU’s

(challenging assumptions)

– Error report by BU/region published

on a monthly basis to ‘shine the light’on chronic accuracy issues

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SOURCE: McKinsey

Reducing complexity and robustness of cash visibility and forecasting

Adequate without tools

and IT systems12%

Adequate with current toolsand IT systems

24%

Opportunity to improve 64%

Cash forecasting: Adequacy of tools and IT systems to create value

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Questions for discussion

• How do these perspectives compare with your treasury function?

• How closely does this match what your CFO expects

from your corporate treasury?

• What challenges did you encounter when addressing

any of these and how did you overcome?

• Other questions?