Treading new terrain

Feature | 13 October 2016
New.terrain

In the wake of the 2008 financial crisis, the treasurer's remit was extended to include elements of procurement and payment terms negotiations - have they become overstretched? Denise Bedell reports

Treasurers are increasingly taking a strategic approach to their roles and working more closely with other functions, especially procurement. While this trend has been in place for a while, the drivers behind it are changing and the industry segments where treasury is taking such a role is expanding beyond just manufacturing. And while new technology is an enabler, treasurers continue to deal with the struggle of doing more with less.

The role of the treasurer in many industry segments has vastly changed in the past few years. Now, the treasurer often holds a much more strategic role, working collaboratively with different parts of the organisation - including procurement. This move to create a strategic treasury had its origins in the 2007-2008 financial crisis, when treasurers suddenly became the centre of attention for the 'C-Suite' and board.

Crisis breeds change

When the crisis first hit and external liquidity was scarce, companies turned inward, looking to find sources of internal liquidity and improve working capital efficiency. At many companies, the first initiatives that treasurers became involved in were procurements focused on simply pushing out payment terms with suppliers: increasing days payables outstanding (DPO).

Collaboration between treasury and procurement necessarily became critical - as it was procurement that was on the front line with suppliers. "You still have that tendency of companies to push on payments," says Enrico Camerinelli, senior research analyst at Aite Group. "But now treasurers are more aware of the risk for suppliers of increasing payment terms." So many treasurers are now working more collaboratively with their procurement colleagues to find solutions that are productive for everyone - from suppliers through to their big buyers.

The goal is still basically the same - increasing working capital efficiency. But optimisation programs have become much more sophisticated, "and this definitely includes the need to review or consider suppliers", notes Camerinelli. "So the treasurer must get involved in negotiations and discussions with suppliers." If a company wants to run, for example, an invoice-discounting, payables-discounting or payables-finance program, supplier buy-in is key. And since SCF programs are normally initiated by treasury, as they have become more popular, so too have treasurers begun to look more deeply into their company's supply chains.

In terms of working capital efficiency, best-in-class companies have a cash-to-cash cycle that is half as long as that of their competition, according to the report, 'The Importance of Working Capital in the Supply Chain', by the Aberdeen Group .

"This accelerated access to working capital from operations can provide funding for acquisitions or capital equipment [and] reduce the dependence on borrowing, resulting in fewer interest payments and a positive P&L impact," notes report author Bryan Ball, vice president and group director, supply chain and global supply management, at Aberdeen Group.

SMEs know the drill

Beyond simply improving working capital in companies and industries where there is a strong interconnection between suppliers and buyers - such as automotive, aerospace and electronics - strategic suppliers can also help companies improve the way they manufacture goods, for example through co-design or co-engineering. So for these industries, having financially secure suppliers is even more important. This is where treasury and procurement might negotiate with key suppliers for better payment conditions.

The increasing collaboration with and oversight of procurement by the treasurer has been around for a while, but as the financial crisis morphed into this ongoing challenging global economic environment, it has only accelerated. "Now it is smaller companies with difficulty getting access to liquidity that are trying to build better terms with clients," says Camerinelli. "Normally, this is a dialogue that the supplier begins with the procurement manager - and procurement brings in treasury."

It has progressed from being pushed by large manufacturing-heavy multinational corporations seeking sources of cash to SMEs, with US$1bn in revenue and below, who are starting to look at ways to strike better deals with their clients to improve their access to finance.

Eric Burge, accounting manager for logistics company Network Imaging Solutions, explains, "It seems like companies are trying to alter their payment terms… extending them out as far as they can get them." While it was common for companies to push DPO out from 60 to 90 days after the storms of 2007-2008, now many companies are going as far out as 120 days. This makes it that much more critical for suppliers to have some alternatives in terms of their own working capital management - whatever form that may come in. And in some cases, these suppliers are now taking the bull by the horns and driving the conversation with their major customers.

In addition to moving further down the value chain in the manufacturing sector, the collaboration between procurement and treasury to reduce spend and improve working capital efficiency is also moving to other industry segments, albeit slowly.

Win win?

Todd Yoder, director of global treasury and head of derivatives and hedging strategy at F200 engineering, construction and project management company Fluor Corporation, says that creating a strategic treasury by working collaboratively with procurement and focusing on strengthening supply chain relationships has been transformative for his organisation.

"There is a lot of win/win with this. But there are still companies out there that look at pushing DPO, and all that does is cause friction with suppliers, increases risk and hurts relationships." This is completely the wrong way to approach it, he says. "If you take a smart approach and can find cheaper ways to fund some of your business partners down the line, you build stronger relationships."

As an example, he cites the procurement for materials and equipment for a major capital project. Fluor is primarily project-based and handles upwards of 1,000 projects globally each year - often in very challenging places to do business. "If you go to a [construction supply] yard, the bids you get when there are three people in front of you are not nearly as competitive as if you are coming first in line because of the relationship you build."

But many companies still fail to take advantage of the opportunities presented by taking a more strategic approach to treasury. "When I talk to different bankers that work in FX or on the commodities desk in energy and metals, they say that it is extremely rare that treasury shows up to the meeting with the head of strategy and the head of supply chain. People still have that old mindset in our industry that 'this is how we have done things for 50 years, so we are not going to change'.

"There is a lot of opportunity within the supply chain," says Yoder. "You've got the strategic part of it - going into a multi-million-dollar lump-sum bid - then the risk mitigation part of it. Then there is the whole efficiency part of it, getting a little deeper into your supply chain and working with your top suppliers to create efficiency."

Technology enables interaction

Aside from the changes in who is driving strategic treasury, there is also a fundamental shift happening in how that change is being enabled. "Technology today makes this even more possible," enthuses Camerinelli.

In fact, this is one of the key areas where blockchain-based technologies are proving their worth in better-enabling supply-chain management and finance - and ultimately the integration of the two. One of the big promises of blockchain is that it provides an immutable record of transactions - the distributed ledger. "The potential for blockchain is in possessing the provenance of goods on one side, and on the other side tracking invoices, bills of lading, etc," says Camerinelli. It also should ultimately allow better access to finance, as banks are able to easily access and verify trade data and documents.

Companies such as Provenance, Everledger and Cognizant are all working on supply chain-related solutions with a distributed ledger technology (DLT) backbone, and IBM's hyperledger project (which aims to create a cross-industry open standard for blockchain) could be transformative for trade and the supply chain. Provenance, for example, provides digital product 'passports' to "prove authenticity and origin, creating an auditable record of the journey behind all physical products," according to the company. Everledger offers 'smart contracts' and Cognizant is working on a number of fronts, including a solution for secure document record-keeping with a blockchain backbone.

But according to Camerinelli, many of these projects lack one vital ingredient - corporate involvement early and intensely in their development. Both tech companies and their partners (often banks) are still working in silos and are not getting corporate buy-in early enough in the development process. "If vendors and banks want to move the potential for these solutions in a real way, then they have to get corporations involved." There is still a hugely insufficient level of awareness among corporates about just what the potential is for new technologies in the procurement space.

Lack of resources

All the most advanced tech platforms in the world won't do a thing to better-enable strategic supply chains if companies cannot get approval for their implementation. One of the key challenges that treasurers face in trying to make their functions more strategic is a lack of resources. Despite the increasing attention from the C-Suite and above that treasurers have faced since 2008, many are still being forced to simply do more with less.

And although technology can help with streamlining and automation (assuming treasury can get approval for such a project) treasurers are also dealing with a dearth of skills in both treasury and procurement.

"The company is listening and being more responsive from the top in terms of credibility and information being passed through," says Camerinelli. "But in terms of investment in technology or HR for treasury and procurement, it is really the opposite. Treasury and procurement lament the lack of funding and skills. And this doesn't mean there is less attention from above." It simply creates something of a catch-22 for the treasurer - along with longer hours and more headaches.

Denise Bedell is a freelance financial journalist

References: 

Reference

  1. The Importance of Working Capital in the Supply Chain: http://bit.ly/2dG8QOJ

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