Features: Treasury & Cash Management – Liquidity Management


Businesses are increasingly seeking to outsource parts of their accounting processes and discovering that contingency planning is becoming more important than ever.

By Denise Bedell


With external liquidity tight over the past two years, many corporations have been driving to increase internal liquidity and to better manage cash. As the economy worsened, companies globally looked to increased efficiency and cost savings to effect this.

Many firms instituted considerable staff reductions in payables, receivables, treasury and other parts of the finance function, and those remaining are trying to do more with less. At the same time they are getting more demands from the board and executive management to provide better information and act more strategically than in the past. As such, they are increasingly looking to others to handle the basic functions of payables and receivables in order to free them to act more strategically.

As a result, interest in outsourcing parts of the accounts payable (A/P) and accounts receivable (A/R) process has grown dramatically. Companies worked to find all the costs that they could take out, and especially to remove costs that are not core to the business, says Nancy Atkinson, a senior analyst at Aite Group. This has been going on for decades, but the drive has clearly heightened in the economy of the last two years.


Murray: Planning an exit strategy due to non-performance is critical

When deciding whether to outsource, it is all about scale, quality and risk mitigation. Craig Vaream, a senior product manager at JPMorgan Chase Treasury Services, says businesses should ask: At what point is it no longer cost effective to do it yourself? In addition, you must look at the quality of your service provision. Are you able to maintain the quality of service within your organization? He adds: Lastly, it is about risk mitigation. If something occurs, what is your fallback, and does it make sense for you to expend resources on that?

One of the biggest risks that came to the fore during the crisis was the counterparty risk that companies face from their service providers. This has driven some companies to bring things back in-house. Those that chose to continue using outsourced services have undertaken serious reviews of their service level agreements (SLAs) to ensure not only that they are protected with back-up plans from their providers but also that they know exactly what will happen in the case of anything from a disaster to counterparty failure. In most cases when banks failed, the government stepped in pretty rapidly to ensure significant losses werent incurred for firms with processing arrangements, but you do face disruption of service, says Mike Gallanis, a partner at consultant Treasury Strategies.

As a result, companies began to look at having either good contingency plans in-housefor example, covering the hiring of temporary staff and the availability of systemsor having a contingent provider available to take over processing in the event of a problem.

Cindy Murray, global corporate banking e-commerce executive at Bank of America Merrill Lynch, explains: If the service company is no longer in operation, the outsourced activities are either suddenly in-sourced again or another vendor identified. Companies should define the appropriate structure necessary to accommodate work activities being done internally across all businesses or use an existing shared service center to absorb the work activities. Planning an exit strategy due to non-performance also is critical.

Having good technology supporting those processes can help. C.J. Wimley, vice president for global order-to-cash solutions at SunGard AvantGard, says that having in-house systems that can connect out to providers can make a big difference in security and ease back-up planning. You want portability, he notes. You want to be able to flip a switch and have your back-up provider supply all the services that your primary was providing. By using the right technology provider and using software available nowthrough virtualization and software-as-a-serviceyou can quickly change providers.

In addition, companies are increasing their periodic reviews of current providers to ensure they are getting the level of service they wanted and to get to know what other companies are offering and the options they could have should they decide to make changes.

Should a company choose to enlist the services of a secondary provider as part of their back-up planning, they must have a clear picture of what exactly they need in a contingent provider and how to manage those relationships. Of course, each situation will be unique, but there are a few forms that back-up plans can take. Most providers, particularly banks, will require a portion of the business to flow regularly through their operationssay, 5% to 10% of overall flowsin order to make it worthwhile for them to maintain connections. Just paying a small regular fee and testing periodically is generally not enough for bank outsourcing. Third-party service providers outside the banking realm may be more open to the regular fee and occasional testing type of arrangement.

We require full testing prior to the client going live, notes Diane Reyes, global head of payments at Citi Global Transaction Services. We also require periodic system testing and that our site be a warm site, meaning were not lying dormant, to ensure that everything is functioning properly in the event contingency is needed.

Another option is to simply use two or more service providers for the service and find a comfortable balance in terms of where volumes flowbe it 50-50 or otherwise. This provides the greatest security in terms of having a well-functioning back-up solution, as both firms regularly handle significant flows and thus are dedicated to ensuring systems and services run smoothly. Any way you look at it, outsourcing firms are going to expend more time and energy on managing arrangements for those clients providing more business than those providing nominal volumes to maintain a back-up arrangement.

Delving into the Financial Supply Chain

Whereas companies were once reluctant to outsource A/R activities, this is changing. Don Schule, global head of receivables at Citi Global Transaction Services, says: On the A/R front you are less in control of the input process, as each of your clients may have different methods for paying you. These variations cause high internal costs, even if they are repetitive in your overall base of collections. On the collections side, banks and other service providers are working to get more entrenched in their customers businesses, extending where they start in the collections process and where they stop, and are offering deeper services to handle functions farther along the value chain.

On the A/P side, there are big regional differences in what companies are looking for. In the US, a major driver is the desire to migrate from checks to electronic payments, explains Marcus Hughes, director of global marketing at Bottomline Technologies. Traditionally, US suppliers were reluctant to reveal their bank account details, for fear of fraud, and were concerned they would not get adequate remittance advice detail on electronic payments for reconciliation. Outsourcing to a trusted and externally hosted counterparty removes this concern by securely masking a suppliers bank account details from customers while enabling efficient and low-cost electronic payments, with full remittance advice data that can be downloaded in a format that suits each supplier.

In Europe, on the other hand, electronic payments have already been widely adopted, so drivers for outsourcing are quite different. In addition to the importance of cost savings, visibility and efficient remittance advice services, says Hughes, corporates are looking for outsourced payment and e-invoicing services which enable enhanced collaboration between buyers and suppliers for more efficient working capital management.


Hkmies: People are looking to optimize working capital

Corporates are outsourcing more and more parts of the supply chain to improve the efficiency of invoice processing and to help their suppliers get paid more quickly through bank-funded supplier finance solutions, while also retaining the flexibility to capture early payment discounts for themselves when surplus cash permits. There is some take-up of supply chain finance initiatives in North America, but European banks opened the doors.

Companies are also looking beyond the traditional areas for outsourcing opportunities. Now we are starting to see the actual prep work both on collections and disbursements being evaluated for outsourcing as well, Gallanis at Treasury Strategies says. The initial preparation of the file for processing was once done by A/P in the company, but now companies are looking at whether to have that outsourced as well.

Right-sourcing May Be the Answer

Instead of fully outsourcing a function, companies are increasingly considering a partially outsourced relationshipalso called right-sourcing or co-sourcing. When there is a close partnership between provider and company, this may be an option, says Atkinson at Aite. The company still retains certain functions but utilizes a bank or other provider for some functions. Because the two entities must be more closely integrated to manage this, a tight relationship is important. It allows for more flexibility for some companies that might want to have greater visibility over the processes, Atkinson adds.

Moving to an internal shared service environment is also of growing interest to companies with the scale to make it worthwhile. There is a greater push to shared service centers for both receivables and certainly payables and payments, SunGard AvantGards Wimley says.

Businesses Focus on Receivables

While it began with payables, as the payables workflow lent itself to a shared service environment and it made sense to centralize that functionality, now companies are also looking to move parts of the accounts receivable process to a shared service environment. It is about reducing or better using existing resources and increasing automation, says Juha Hkmies, vice president for market development at Basware. It is also of growing interest as a way to gain better control over processes for compliance purposes. It allows companies to apply consistency throughout their operations and have a standard framework in place. In addition, it provides agility to the operations and helps companies to match market demand by having all data in one location. Adds Hkmies: People are looking to optimize working capital, and by centralizing in a shared service center they are able to get one view of what is going on.

As liquidity becomes less of an issue, the drivers for outsourcing or centralizing A/P and A/R are changing. Companies have seen the benefits that increased efficiency can providethese processes are often ripe for improvementand are starting to look at benchmarking and working toward best practice. As such, the drive to outsource or centralize will only get stronger.