Strategic and operational decentralisation has been a core target for scaling multinationals over recent decades. In many cases, a decentralised approach makes perfect sense, as it enables large organisations to be more responsive to rapidly changing consumer needs in starkly contrasting markets. Yet while a huge number of core business activities are being increasingly localised, treasury management has actually been trending in the opposite direction.
According to PwC’s Global Corporate Treasury Benchmarking Survey 2017, 83% of more than 200 corporates surveyed told researchers they’d introduced a dedicated central treasury department to better manage cash, investment, foreign exchange (FX) and other key strategic financial decisions. Despite this core focus on centralisation, 65% of teams involved in treasury processes said they’re still distributed across a variety of departments within their respective enterprise – meaning most treasurers are now being forced to manage a virtual treasury organisation.
Centralised virtual treasury solutions are wide-ranging, with European companies being the most likely to involve centralised structures such as shared service centres (SSCs) than their peers, and 64% of respondents telling researchers that their company treasury operated as the central counterparty of group in-house bank (IHB).
Yet while there are several key advantages multinational companies (MNCs) tend to enjoy by centralising treasury function, increasing socio-political uncertainty surrounding events like Brexit, rapid regulatory change in Asia and the rise of protectionist legislative policy across various markets has also extended credibility for a more decentralised treasury model for particular industries and regions.
In some cases, business forecasters are even calling upon treasurers to implement strategies that incorporate elements of both centralisation and decentralisation. Yet, in order to explain why, we’ll first unpack the key advantages and disadvantages of centralisation versus decentralisation in treasury and touch upon examples of best practice.
What are the differences between centralisation and decentralisation?
Decentralised treasuries have historically been the most common cash management organisational structures for multinationals operating in emerging markets – particularly in Asia. This model enables local management control of cash operations across regional bases, while corporate control and group-wide reporting responsibilities rest elsewhere. The key benefit of a decentralised treasury structure is that it empowers teams with local knowledge to make quick, on-the-spot decisions without getting tied up or hindered by cumbersome corporate processes.
Decentralisation is ideal for MNCs offering a diverse set of business activities or for organisations with stronger geographic needs that depend on local talent making decisions in complicated markets. This model also helps conglomerates to establish a degree of executive layering and hierarchy and is popular amongst pharmaceutical multinationals and property companies because it facilitates convenient and frictionless asset trading activities by knowledgeable locals.
Yet over the course of the last decade, centralised treasuries have become a far more popular choice among multinationals, as they’re designed to insulate corporations from stagnating regional economies. A central treasury utilises a regional headquarters structure in which MNCs actively monitor and control cash across the entire region as opposed to individual markets or localities. That being said, there are a variety of centralised treasury models available, and each has its own merits.
The key goal of a centralised treasury function is to rationalise in-country cash management. This is then subsequently used as a stepping stone towards a consolidated, regional headquarters structure with which a large organisation can improve its overall visibility of funds, corporate control and governance, achieve economies of scale to cut costs and develop centralised centres of excellence.
By centralising treasury function and concentrating funds across fewer banks, organisations should then theoretically reduce costly bank charges and fees while simultaneously improving their ability to leverage regional volumes and negotiate better deals with remaining banking partners.
Another key point worth considering is that to establish a centralised cash management function across an entire region, companies must heavily invest in new management information systems and initiate redesigns of existing management protocols and procedures.
What are the most effective centralised treasury structures?
Before deciding whether your organisation should take on a centralised or decentralised treasury approach, you’ll need to evaluate your overall business strategy and model. After all, your strategy will inherently determine your business needs, hurdles and key questions to be addressed. Those essential questions could range from target market and competition, to suppliers, geography, regulation, taxes, disruptive fintech and more.
Likewise, organisations exploring a centralised versus decentralised treasury approach must develop a firm understanding of precisely what constitutes the optimal level of efficiency for their business – namely, local knowledge for rapid decisions, or economies of scale to cut costs.
For those keen on exploring more centralised models of treasury management, there are a range of options. While decentralised treasury structures are typically varied to fit a multinational’s bespoke and localised needs, the most efficient centralised treasury structures tend to slot within at least one of three categories.
The first category is reinvoicing centres. These centres are established with a view to invoice local entities centrally, and then handle purchasing from a larger parent company located elsewhere. When using the reinvoicing centre model, purchases are ordinarily made in the currency of the parent entity, while sales to local entities are subsequently made in either a parent currency or through localised currencies.
This structure involves quite a bit of process automation, and is often the first step a scaling multinational will take in order to begin implementing a centralised treasury department.
The second type of centralised structure organisations choose to pursue is to establish regional treasury and finance centres. These centres are typically established with a view to allow a single centre to manage the FX exposure for all regional entities. Using this structure, FX trading can be carried out centrally or in the name of the local entity within each particular market – which potentially makes this structure a bit of a halfway house between centralisation and decentralisation in treasury.
Regardless of where trading takes place, regional centres will hold all of the treasury accounts for each currency centrally. Likewise, all pooling, cash concentration, investment of surplus funds and other liquidity management activities will be carried out on a regional basis.
The third centralised treasury structure organisations opt for is the SSC. Shared service centres are effectively a top tier model as they not only centralise treasury function, but also key accounting functions like payables and receivables for all regional and global entities. Using SSCs, organisations outsource domestic collections and payments to a cash management bank, or monitor and execute them internally.
For those keen on exploring the SSC centralisation model, Royal Dutch Shell offers a compelling example of best practice.
Shell began its centralisation journey more than a decade ago with the establishment of five cash management focused SSCs based in Glasgow, Manila, Chennai, Kuala Lumpur and Krakow. The oil and gas giant then deployed a single standard process approach with a three-tier model of metrics for each process and associated target across all SSCs to create a new company culture of ‘connected finance’.
In November, Shell and Bloomberg announced the next leap in that connected finance culture with the launch of a new central treasury system connecting the company’s central corporate office to its SSCs and all 718 operating units in 22 countries. Leveraging the power of the Bloomberg Terminal system for added automated execution and risk mitigation – as well as Bloomberg’s FX electronic trading platform FXGO – the freshly deployed single solution should allow Shell to centrally manage its group risk with more than 200 distinct bank counterparties.
It’s worth pointing out the heavily automated and streamlined SSC treasury structure is typically accompanied by the deployment of an in-house bank, and as with Shell’s long centralisation journey, requires the establishment of a standardised and flexible ERP or TMS solution capable of interfacing with a company’s back office systems to effectively manage a wide range of regional or global treasury and accounting functions. In fact, even MNCs opting for a decentralised treasury model would do well to monitor devolved activity via a groupwide ERP or TMS platform.
Combining centralisation and decentralisation in treasury
Although treasury has experienced a massive shift towards centralisation over the course of the last decade, changing market conditions and evolving business needs mean some MNCs aren’t necessarily able to pick and choose between centralisation or decentralisation. Instead, some organisations are opting for a ‘centrally decentralised’ method of treasury management that empowers local teams to make rapid decisions, while also enhancing group-wide security and compliance through centralised monitoring.
One example of a successful execution of this hybrid method is the German manufacturer Wacker Neuson, which teamed up with treasury solutions provider Bellin to develop a structure enabling the firm to mitigate global challenges as well as meet specific local requirements to boost efficiency and treasury visibility around payments and reporting.
To do this, Wacker Neuson invested in a global treasury platform capable of standardising payments formats and communication channels, while simultaneously consolidating localised solutions and channels being utilised by knowledgeable regional teams. By removing specific payment format dialects for each country and bank, and integrating domestic and international payments via its new group platform, Wacker Neuson now benefits from the power of a centralised treasury platform while still preserving the semi-autonomous efficiencies local teams had previously enjoyed as part of a more decentralised treasury model.
No two businesses are alike – and at the end of the day, multinationals must establish a firm idea of their business goals, cash management expectations and what it is they’re actually hoping to achieve in treasury before implementing any process transition. Yet by investing in a flexible ERP or TMS solution and developing an informed structural approach that matches the company’s business model and strategy, there is undeniably room for both centralisation and decentralisation in treasury.