The Value of Treasury Benchmarking

Ton Verbeek, Deloitte - Fieke Verhoeff, Deloitte - 22 Jan 2008 This article argues the case for treasury benchmarking - what does it mean and what will it contribute to your organisation?

Every large organisation operating in a dynamic landscape has to deal with considerable internal and external financial and operational challenges in the areas of cash management, financial risk management and balance sheet management. As a result, financing - and its impact on the business - becomes more complex as the organisation grows.

Treasury departments therefore seek to optimise the daily handling of debt-exposures, liquidity considerations, cash management and financial risk management. Actual dealing and the resulting confirmations and settlements capture these activities. While conducting these primary duties, treasury departments are under continuous pressure to deliver value and the ability to account for every decision made. Processes need to be transparent, preferably delivered in 'digestible' reporting-structures, not only for external stakeholders, but also to a greater extent, for the company itself (top to bottom). Over time, this has proved to be challenging, as actual treasury performance measurement is not as straightforward as it sounds.

Benchmarking Treasury The challenge lies in choosing the 'right' measurements of company-specific exposures to exemplify an organisation's treasury performance and its 'fit' within the organisation as a whole in the best way. But because the treasury function operates so closely to the core of the company, how can these measures support the added value of treasury departments as an essential part of the organisation when they are regarded in isolation? Thus, an even greater challenge lies in delivering constructive reports that address both the qualitative and quantitative aspects of treasury's contribution to the business or, in other words, its interaction with its environment. Figure 1: Defining Treasury Department Strategy

source: Deloitte An organisation needs a frame of reference to see where it is headed and how it can optimise its treasury operations. For highly experienced firms, in particular, it can be difficult to identify the critical factors that determine success of the treasury department because an objective view is often missing. In many cases, organisations tend to focus on the weakest point within the organisation while less pressing issues tend to be overlooked more easily. Nevertheless, such issues can still offer opportunities and current treasury activities can be improved.

A frame of reference can be created through benchmarking. Benchmarking is a tool used in management particularly for strategic purposes whereby organisations evaluate the performance measurements of their processes in relation to best practices within their own sector.

Knowledge about the quality of one's treasury practices can be gained by comparing your treasury processes with others in and outside the industry. This allows you to improve your processes, leading to a more efficient and higher quality treasury function while being more in control. Organisations can identify bottlenecks in their performance measurements through benchmarking, which are vital for more effective management when compared to their peer group and in taking affirmative action to optimise their performance.

Why Should my Organisation Benchmark its Treasury Function? Large complex organisations with a complete and functioning treasury department, such as medium-sized or large corporates and financial services institutions, feel the need to improve/invest in their daily treasury operations or functions, as it contributes to cutting costs and reducing resources. Furthermore, they also seek to validate and - if possible - improve some of the internal measurements. This is done through the creation of a balanced scorecard to 'translate' current mission and strategic objectives into measurable benchmarks in line with the company's overall vision and strategy.

In daily operations, the primary task of a treasury function is to manage interest and foreign exchange exposures, long-term funding, cash, group bank relations and corporate finance activities. It is important to be aware of the positioning of the treasury department within the company and with whom its main interactions are in managing market risk. Figure 2: Determining Exposure Characteristics of Integrated Treasury Processes

source: Deloitte Benchmarking all related aspects to the treasury function, such as current collaboration with other departments (e.g. front-office, accounting and corporate finance), current balance of power and main communication flows within the company, will help to create a more structured approach to treasury performance management and allow management to have a clear view of existing strengths, weaknesses and untapped opportunities.

It is important to bear in mind that the objective is not to break down all existing treasury processes and simply replace them with new ones. It should be seen as an exercise that broadens and challenges existing procedures within the organisation, enabling a company to scrutinise its own effectiveness.

Benchmarking the treasury function can provide fresh input for improvements within any organisation, even highly professional companies with well-established treasury functions and highly qualified staff.

What Will Treasury Benchmarking Contribute to My Organisation? In a treasury benchmark report, the emphasis is on a high-level review where results of the benchmarking are available in a relatively short time period and where the amount of detail is dictated by the organisation. It provides more clarity on required information as well as greater insight. In addition, benchmarking will provide insight into the level of risk tolerance and more transparency across requirements for internal treasury measurement projects. This means that an independent external third party reviews the current mission, vision and ambitions of a company's management, and what is actually happening within the treasury function objectively. As a result, possible changes to treasury management processes will be suggested. If these changes are implemented, they can lead to improved process performance, a higher level of accuracy and efficiency in shorter timelines.

In order to gain knowledge of the positioning of a company's treasury department and its environment, a benchmark provides perspective into factors, such as the company's organisational structure, its existing procedures, its people and lines of communication. Value drivers are also singled out and are key to identifying critical gaps.

Consequently, these critical gaps need to be subjected to an interactive and critical audience in order to create possible benchmarks. Being aware of the fact that benchmarking can only improve a co-operative environment, where full understanding of best practices in process performance can be obtained and shared at reasonable cost, means taking affirmative action to identify the 'best in class' treasury management processes in the industry, map them and determine a company's position in its industry. GTnews.com