Digital disruption in the Treasury Management System space

There is a digital revolution going on in the treasury management system space, not that you would necessarily know.  For many there is still a stark choice – over-priced, over-complex and over-engineered treasury systems or good old Excel spreadsheets. But the world is changing and as with all things technology, it is happening at a rapid pace.

Globally, larger organisations are well catered for as far as treasury management systems are concerned, and in fact it is a crowded and mature market. The PwC Global Treasury Survey of 2014 showed that 80% of those companies surveyed were using some type of treasury management system. However, as with big ERP systems, the issue for the providers of large, expensive treasury systems is how to offer a cost-effective alternative to the massive SME market without detrimentally affecting their existing market. The challenge is to offer a slimmed down treasury management system without compromising the huge premium that they currently charge.

So where is the competition for these large, expensive systems coming from? The answer is the cloud app revolution which is sweeping the world. Platforms are being developed that aggregate a whole bunch of cloud apps, both financial and non-financial. The really clever bit is the integration of these different apps and bringing it all together through a variety of widgets and dashboards to give a complete, and often unique, view of a company’s position. It’s like a Fitbit for business.

Not only are these cloud app aggregators bringing leading edge technology to the SME market but they are doing so for small monthly fees. The apps cross the spectrum of business tools such as accounting systems, CRMs, social media tools and now treasury management systems. All of this for a few hundred dollars a month.

In the on-line accounting world, Xero is leading the charge in the digital disruption revolution with its New Zealand developed, $50 per month product. Treasury systems will need to follow suit with a much cheaper solution.

By leveraging cloud technology, treasury systems can be implemented for costs palatable to the underserviced SME market. There is an enormous amount of importers and exporters hedging their foreign cashflows with forward exchange contracts and possibly FX options. These companies probably aren’t hedge accounting, even if they are reporting under IFRS, but the impact of exchange rate movements is vitally important to their bottom line.

SMEs require the ability to record, report and value their transactions but just as importantly they want access to tools to help them make better hedging decisions. This is not too different from larger companies except SMEs are mostly using plain vanilla instruments. For a small monthly fee SMEs can benefit from a treasury management system with basic functionality, which integrates perfectly with other cloud based apps. So as we have seen with cloud based accounting systems, the power that was once reserved for large organisations can be put in the hands of a much larger group for a fraction of the cost.

Whether the current treasury management system providers have a solution for the SME market remains to be seen. It maybe that they do not care for this part of the market, however there are parallels with the large and expensive ERP systems which have successfully moved into the mid-market space and are now looking at the next tier down. The conundrum for treasury management system providers will be that SMEs will desire the core functionality of a larger system but without the price tag. The digital revolution for treasury management systems may only be in its infancy but it is set to have major ramifications regardless of the size of organisation.

First published on Treasury Insider (www.treasuryinsider.com)

PwC treasury survey reveals over-reliance on spreadsheets

PwC’s recently released “New Zealand treasury management survey” (http://pwc.to/1DCSdse) threw up some interesting results, especially in relation to treasury management systems.

It may come as no surprise to many, including us at Hedgebook, that there is a significant number of corporates who are still relying on good old spreadsheets to manage their treasury risks. In fact a whopping 73% of those surveyed still use spreadsheets, with only 13% using any type of treasury management system.

PwC Treasury Survey

Admittedly the 73% is mainly concentrated in small to medium sized organisations, however, the relative risks are the same for these business as they are for larger ones. The key difference is smaller businesses cannot afford, nor justify, the $50k plus price tag associated with these complex systems.

Therefore, it is not surprising that one of the main reasons for the high proportion of spreadsheet usage is price. However, as PwC pointed out in their survey, with low cost, cloud based systems entering the market, the excuse of treasury systems being too expensive is fast disappearing. We would also argue that a lower cost system does not have to mean loss of functionality.

Again as PwC’s survey showed “executives want detailed information in a timely, up-to-date, reliable and relevant manner.” This is becoming increasingly difficult to achieve with spreadsheets, as reporting requirements become more focused on information to make better decisions, as opposed to information for information sake.

Hedgebook certainly fits the bill of a low cost solution, not only providing the ability to better record, report and value treasury risks but also providing unique analysis combining cashflows, hedging and current market rates to help make better hedging decisions.

It will be interesting to see these same survey results this time next year. – we may start to see a significant change.

Five steps to more effective treasury management

I recently read an interesting report in the November 2011 McKinsey Quarterly that highlights the increasing complexities of managing the treasury function of a business and focuses on 5 key areas that should be given attention, no matter what size or type of business you are.

The article delivered a timely reminder that the costs of inadequate focus on this important function can be extremely costly for small and large businesses alike. “Companies pay incremental interest expenses when they overborrow as a result of inaccurate cash flow forecasting and often lose money when they don’t hedge exposures for currencies and for interest rates…”

Now clearly you don’t need to be a McKinsey analyst to work that out, however too many  businesses still take something of a laissez faire approach to the task of managing their currency and interest rate exposure.

The 5 areas the McKinsey report focuses on are:

  • Centralise the treasury function globally
  • Strengthen governance
  • Enhance treasury-management systems
  • Increase the accuracy of cash flow forecasting
  • Manage working capital in developing markets

Points 1 and 5 may only be relevant to organisations with a global footprint, however the other three are extremely pertinent to any business carrying currency and interest rate risk, and can all be improved through the introduction of a tool such as Hedgebook.

Hedgebook’s reporting module allows for stronger governance, enabling the implementation of robust procedures through the provision of good information, while bringing much greater visibility to policy management and adherance.

The same reporting gives decision makers much greater visibility of projected cashflows, while also modeling their sensitivity to market fluctuations, making forecasting much simpler and more accurate.

The McKinsey report was particularly harsh on organisations who still rely on spreadsheets to manage this mission-critical business function.  It found that a staggering number of businesses, including large multinationals, are still relying on error-prone spreadsheets.

“A single error in a single cell can ripple through an entire model, leading managers to borrow instead of invest, to hedge incorrectly, and to forget to fund operating accounts or make debt payments.”

The report identified cost as one of the most-stated barriers to investing in a treasury management solution, but went on to point out that the cost-benefit stacks up every time when you consider the potential cost of a single mistake.

“At one North American utility company a simple spreadsheet error for energy auction bids led managers to enter into nonreversible contracts the company didn’t need – a mistake that cost it half of its operating earning for the quarter.”

This may well be an egregious example, but with many businesses living and dying by their success in navigating a volatile currency market, a subscription to a tool like Hedgebook looks a small price to pay for confidence.

The original McKinsey article can be read here (note you have to register to view)

Some things never change – especially in financial risk management…

It always surprises me with treasury management how much changes and yet how much stays the same. Having been in the treasury game for almost 25 years the basics remain the same – it’s all about risk management stupid. And by risk management I really mean risk minimization. The hedging instruments haven’t changed very much over the years. We still favour the plain vanilla of forwards, swaps and options. Sure the exotic instruments have come and gone and some have learnt the hard way about understanding what you are getting into, but even large organisations favour the simple approach, especially after the events of the last few years.

The basic controls surrounding treasury haven’t changed much either, even if not everyone complies the way they should. No – you can’t do the deal, check the bank confirmation and then provide the reporting as well. And, yes you should have a treasury policy too outlines the rules you have to abide by (identify your exposures and have sensible parameters about when and how much you should cover.)

What has changed though, and not just in the treasury space, is those small and medium enterprises (SME’s) now have access to the same tools and the same technology that larger organizations have, at an affordable price.  Going back not so long, treasury management systems were expensive and the domain of only the very large organizations.

In more recent years we have seen a number of mid-tier systems come to market, many of which are saas (software as a service) solutions giving access to valuations, smart reporting and increasing the controls around the foreign exchange and interest rate management.

No longer can organizations argue that spreadsheets are their only option. Sure spreadsheets are great but we all know the issues with them – lack of controls, key man risk, backups, corruption of data, the list goes on. But everyone uses them for the flexibility and there is still a place for them when it comes to specific reporting reqirements. However now that there are systems like Hedgebook available, “SME” sized organizations have access to the tools that will allow then to record, report and value their treasury transactions and can manage their treasury exposures with the same technology and confidence that much larger organisations can – at an affordable price.

Because there’s one other thing that hasn’t changed over the years and that is financial markets are volatile and so knowing your position with confidence is the most important part of good risk management – and that won’t change either.

Richard Eaddy is the CEO and founder of Hedgebook and the Managing Director of ETOS Ltd, specialists in treasury outsourcing services. Richard has worked in the corporate treasury risk management industry for more than 20 years. He has held senior roles in large corporate treasury departments in both New Zealand and Europe, provided treasury risk management advice to major corporations and for the last ten years has headed up the largest treasury outsourcing company in Australasia. Richard can be contacted at richard.eaddy@myhedgebook.com.

 

Is your beloved spreadsheet costing you a fortune?

Why is it that we love our spreadsheets so much?

They are labour intensive, they’re often very complex and we all know about the risk of errors, yet we continue to nurture and protect our increasingly unwieldy spreadsheets like they are family.

In spite of the seriousness of the potential risks, including lost revenue and profits, mispricing and poor decision making, fraud due to malicious tampering, and difficulties in demonstrating fiduciary and regulatory compliance; New Zealand businesses have been reluctant to end their love affair with the trusty spreadsheet.

(I like this cartoon from Jocelyn Paine’s blog)

Don’t get us wrong, we can relate to the attachment to spreadsheets, but there is a time and a place for everything and we don’t think spreadsheets are the place for managing complex financial derivatives…

If you would like to entertain yourself reading about other people’s misfortune at the hands of their trusty spreadsheets you may enjoy reading this article from CIO magazine about “Eight of the worst spreadsheet blunders of all time”

If you are still convinced that spreadsheets are right for you, or just can’t bear to part with them, this article provides some good tips on how to minimise your risk (courtesy of www.louisepryor.com).

But if you think it’s time to move your organisation’s financial risk management into the 21st century, we would love to show you Hedgebook.