The Benefits of ISO 20022 for Corporates and Banks

Publication: Global Treasury Briefing, Volume 2 Issue 2.

ISO 20022 is a universal payments standard that helps automate payment data flows. This article explains how it can bring efficiencies to corporates and financial institutions in terms of systems and processes, which in turn can lead to an improved bottom line. 

Payments messaging standards are not necessarily the most exciting sounding items on the financial radar, and yet developments here are having a profound effect on corporates, banks, in fact anyone with a stake in the payments business. The most talked about standard of current times is ISO 20022. This article looks at what ISO 20022 is, what it means for corporates and financial institutions, and the benefits it can bring. 

What is ISO 20022? 

The International Organization for Standardization (ISO) is a global organisation of national standards bodies. ISO 20022, the universal financial industry message scheme, aims to give the financial industry a standard platform for the development of messages in one eXtensible Markup Language (XML) rule. According to the ISO, this is achieved using: 

• A modelling methodology (based on Unified Modeling Language (UML)) to capture in a syntax-independent way financial business areas, business transactions and associated message flows. 
• A set of XML design rules to convert the messages described in UML into XML schemas. 

ISO catalogues all of the ISO 20022 messages on its website,1 in an effort to provide what it describes as a ‘flexible framework’, open for developers to categorise types of message according to a universally accepted approach. 

This is certainly something that both corporates and banks are becoming involved with, because of the cost benefits involved by integrating systems for electronic data delivery. Tom Buschman, founder, chairman and CEO of TWIST Process Innovations, makes the point that there is global support for these standards in his article, Open Standards for Payables and Receivables. 

Work is underway to incorporate other standards under ISO 20022, such as standards for derivative trading and the billing of bank services. A group of major banks is working on detailed implementation guidelines to avoid banks and their customers deviating from best practices. 

TWIST’s Buschman continues: “It is nice that open standards are becoming mature and solutions that support these are more widespread. But the key is whether a company is interested to start implementing new solutions that make use of such open standards.” 

Corporates that use payment services can start to benefit by actively engaging with their banks, as there is widespread knowledge among financial institutions as to how ISO 20022 standards can be deployed. TWIST’s Buschman suggests that corporates can simply start by using the following Australian list of user requirements for payment services in their discussion with banks. 

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Australia: High-level Expectations 

The Australian Payments Clearing Association (APCA) identified a comprehensive list of high-level expectations of customers of users of payment services. The items are similar to those expressed in Europe over the course of the last decade. 

High-level expectations of customers of payment services: 

Reliability 

• Payment services are available when customers want to use them. 
• Payment services tend to prevent or identify and correct mistakes by customers. 
• Payment services have established service levels and adhere to them. 

Security 

• Payment services will prevent unauthorised access to information or value. 
• Payment services will prevent unauthorised modification of information. 
• Payment services will manage the risk of fraud. 

Efficiency 

• The payments system supports ongoing innovation and enhancement of payment services. 
• Payment services are responsive and timely, both in confirmation of payment and delivery of value. 
• Customers get the payment information they need with each payment. 
• Payment services support customers’ own business processes (such as account reconciliation). 
• The payment system allows value for money services to be offered to customers. 

Convenience 

• Customers find it easy to use and access payment services. 
• The payment system is ubiquitous, allowing payments from anyone to anyone. 
• The payments system facilitates choice and competition in payment services offered to customers. 
• The payments system does not prevent or hinder the customer’s decision to change financial service providers (switch accounts). 

High-level expectations of participants in the payments system (payment service providers who are also users of inter-bank payment systems): 

Business potential 

• The payments system will support commercial, competitive and profitable offering of payment services by participants. 
• The payment system will facilitate the development of new business opportunities and processes. 
• The payments system will permit access on objective terms. 

Global alignment 

• In seeking to increase efficiency of payments activity, Australia’s payment systems will seek to align with and influence development of global payment standards. 

Risk management 

• The payments system will minimise or remove counterparty and operational risk in payments. 
• Regulatory risk (in particular from competition laws) in collaborative payment innovations will be appropriately managed. 
• The payments system will monitor and seek to minimise systemic risk. 

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ISO 20022 Boosted by SEPA 

Despite its international nature, ISO 20022 adoption is finding particular support within the single euro payments area (SEPA). Dr Markus Warncke, head of corporate finance at Villeroy & Boch, outlined this in a presentation he gave at SIBOS last year, a point that was picked up by Martine Goubert of BNP Paribas in her article, ISO 20022 - What's Driving Adoption?. Warncke used the SEPA subset of ISO 20022 because it’s best practice in Europe, in his opinion. "We wanted to implement a standard that we can use Europe-wide but that also gives us the possibility to go global in the second step," explains Warncke. He believes that ISO 20022 can be a profitable standard to use, as it makes it possible to avoid the daily use of various domestic formats in the euro countries, thereby reducing complexity and increasing efficiency. 

"We had many cash management banks before where we did a lot of payments transactions and we usually used their electronic banking systems. All the multiple systems had various security steps, which added to the complexity. We use a dual verification principle that was enforced by passwords, smartcards, tokens and even diskettes in some systems. Now we have a set of homogenous security standards and don't have to maintain all these types of programmes," Warncke explains. This highlights the advantage that his company has found through standardisation. By using the SEPA subset of ISO 20022, Villeroy & Boch could achieve the following: 

• Provision of a wider set of structured and enhanced message information along with the transaction, thereby raising the efficiency in end-to-end automation. 
• Reduce application development times. 
• Decrease number and complexity of interfaces. 
• Reduce support and maintenance costs by avoiding customised or proprietary formats. 
• Increase security. 
• Optimise processes. 

Villeroy & Boch tested its first ISO 20022 FileAct payments in August 2008 and, at the time of SIBOS in September 2008, the company had 90% of its supplier payments executed through SWIFT with a SEPA format. Looking to the future, Warncke said: "Now we will turn our attention to non-euro payments - starting with the US dollar. And by the end of next year, we will have the SEPA Direct Debit format ready." This example highlights how treasurers around the world, not just in the Eurozone, can make the case for ISO 20022 and the bottom-line value it can add to corporates who adopt it. 

Standards Support 

As already mentioned, standardised messaging affords corporates the chance to replace numerous domestic formats with a single ISO 20022-based standard. This makes the communication process with payments counterparties easier and allows integration with internal systems. Elie Lasker, senior market manager at SWIFT, points out that the number of corporates using ISO 20022 is increasing (on, and outside of, the SWIFT network) for sending payments to their different banks. “Going forward, SWIFT is focussed on assisting its corporate customers and banks in further adopting ISO 20022,” explains Lasker. SWIFT is one of a number of companies and associations that are actively involved in developing and advocating payments standards. A selection of the other main protagonists are listed in the box below. 

Conclusion 

As a universal payments standard, ISO 20022 helps automate payment data flows by using a wider collection of enhanced and structured message information, avoiding proprietary formats. This makes processes more efficient, helps reduce application development times, optimises the number of interfaces required and enhances security. All of these benefits can have a positive effect on the bottom line of corporates and financial institutions, which should give ISO 20022 the impetus to continue expanding its take-up and evolving as the global payments standard. 

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Standards Organisations and Associations

CEN 

The European Committee for Standardization (CEN) is a business facilitator in Europe, removing trade barriers for European industry and consumers. Its mission is to foster the European economy in global trading, the welfare of European citizens and the environment. Through its services it provides a platform for the development of European Standards and other technical specifications. 

CEN's 30 national members work together to develop voluntary European Standards (ENs). These standards have a unique status, since they also are national standards in each of its 30 member countries. With one common standard in all these countries, and every conflicting national standard withdrawn, a product can reach a far wider market with much lower development and testing costs. ENs help to build a European Internal Market for goods and services and to position Europe in the global economy. More than 60.000 technical experts as well as business federations, consumer and other societal interest organisations are involved in the CEN network that reaches over 480 million people. 

IFX Forum 

Founded in 1997, the Interactive Financial eXchange (IFX) Forum is an international not-for-profit industry association whose mission is to develop and promote the adoption of its open, interoperable standard for financial data exchange, suitable for use by all sectors of the financial services industry. 

Forum membership is open to organisations interested in contributing to the development of open financial standards. Forum members include financial institutions, hardware, software and service firms, and related non-profit groups. The IFX Forum also promotes interoperability of industry standards by working cooperatively with other standards organizations and consortia. 

ISO 

The International Organization for Standardization (ISO) is the world's largest developer and publisher of international standards. It is a network of the national standards institutes of 161 countries, one member per country, with a Central Secretariat in Geneva, Switzerland, that coordinates the system. 

ISO is a non-governmental organisation that forms a bridge between the public and private sectors. On the one hand, many of its member institutes are part of the governmental structure of their countries, or are mandated by their government. On the other hand, other members have their roots uniquely in the private sector, having been set up by national partnerships of industry associations. Therefore, ISO enables a consensus to be reached on solutions that meet both the requirements of business and the broader needs of society. 

SWIFT 

The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is a member-owned cooperative through which the financial world conducts its business operations with speed, certainty and confidence. Over 8,300 banking organisations, securities institutions and corporate customers in more than 208 countries trust SWIFT to exchange millions of standardised financial messages every day. 

SWIFT’s role is two-fold. It provides the proprietary communications platform, products and services that allow its customers to connect and exchange financial information securely and reliably. It also acts as the catalyst that brings the financial community together to work collaboratively to shape market practice, define standards and consider solutions to issues of mutual interest. 

SWIFT has its headquarters in Belgium and has offices in the world's major financial centres and developing markets. SWIFT is solely a carrier of messages. It does not hold funds nor does it manage accounts on behalf of customers, nor does it store financial information on an on-going basis. As a data carrier, SWIFT transports messages between two financial institutions. This activity involves the secure exchange of proprietary data while ensuring its confidentiality and integrity. 

TWIST 

The Transaction Workflow Innovation Standards Team (TWIST) is a not-for-profit industry group with representatives from corporates, public administrations, financial services providers and solutions providers. The primary aim of TWIST is to close the gaps in the physical and financial supply chain to release the enormous value locked up in disjointed paper-based processes. To achieve this, TWIST rationalises financial industry standards by creating user-driven, non-proprietary and internally consistent XML-based standards for the financial supply chain. 

This pertains to standards for the straight-through processing (STP) of wholesale trade transactions, working capital management and corporate payments. TWIST delivers global standards for business processes and technical integration that enable rapid and profitable change for its adaptors. Its core principle is to be open and inclusive to market participants and their service providers. TWIST's approach emphasises market collaboration, as demonstrated in its proactive role in developing standards in conjunction with other standards such as ISO/SWIFT, IFX, FpML, RosettaNet, MDDL market data standards and CRG-Edifact. These endeavours are led by the corporate treasury operations of Royal Dutch Shell Oil and are actively supported by 70 other participants. 

UN/CEFACT 

The United Nations Centre for Trade Facilitation and Electronic Business (UN/CEFACT), a United Nations body, has a global remit. It encourages close collaboration between governments and private business to secure the interoperability for the exchange of information between the public and private sector. It has developed: 

• The UN Layout Key for Trade Documents, which is the foundation for the EU's Single Administrative Document (SAD). 
• UN/EDIFACT, the international standard for electronic data interchanges numerous trade facilitation recommendations. 

It is now drawing up the next generation of trade facilitation and e-business standards and tools. 

Source: Conversations with the organisations themselves, and their official websites.

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The Quest for Accurate Cash Flow Forecasting

Publication: Global Treasury Briefing, Volume 2 Issue 2.

Always a key issue for treasurers, the current financial crisis has underlined the importance of cash flow forecasting. This article looks at how roadblocks to effective cash flow forecasting can be overcome.

Cash is the lifeblood of business, a fact that has been brought into sharp focus by the current economic climate. Cash flow forecasting is therefore a vital role of the treasury function - by being able to accurately map incoming and outgoing cash flows through collecting as much relevant information as possible, treasurers can ensure that their organisation is operating at maximum efficiency by putting in place the necessary short-term funding measures. 

This information isn’t anything new for treasurers, who frequently cite cash flow forecasting as a key area for improvement within their department. Despite this awareness, progress seems slow, judging by a recent survey from APQC (see Figure 1). With 25% of respondents finding problems with their company’s ability to forecast cash flow ‘very weak’ or ‘problematic’, and a further 25% describing it as ‘adequate’, hardly a ringing endorsement. What obstacles are preventing these treasurers rating their cash flow forecasting ability as ‘strong’ or ‘very strong’? This article will examine these causes, look at how treasurers can overcome these problems, and take a broader view of liquidity management. 

Figure 1: Corporate Cash Flow Forecasting Ability 

Common Roadblocks to Successful Cash Flow Forecasting 

There are certain common problems that treasurers can come across in their cash flow forecasting activities. One of the most cited reasons by treasurers for the lack of accuracy of their cash flow forecasts is that the information they receive from their business units can be late and inaccurate. However, Timo Hämäläinen, founder and CEO of Exidio, suggests that business units are the best and only experts on their cash flows. “It is a question of motivation, priority and guidance,” he advises in his article, The Cash Forecasting Challenge: Build a Business-to-Treasury Bridge. 

Another common complaint from treasurers is that they have not found a suitable cash forecasting system yet. On this point, Hämäläinen warns treasurers against seeing cash forecasting as a systems project. “Start by building the business-to-treasury (B2T) bridge and continue by finding practical, quickly deployable tools from your bank or technology providers,” he suggests. 

When cash flow data comes to treasury from a huge number of enterprise resource planning (ERP) systems, it can be problematic to come up with accurate forecasts. Despite this, Exidio’s Hämäläinen suggests that simply integrating systems may not be the full solution. “Integration of systems may be helpful but without the human touch of an expert within the business unit, the integrated data can still be unreliable if it comes from any other system than the TMS [treasury management system] where all cash flows are fully committed,” he says. 

Clearly the relationship between the treasury department and business units within the organisation is vital for accurate cash flow forecasting. It is fortuitous, then, that the role of the treasurer has risen in importance as a result of the credit crisis. Investment and funding is now one of the most important areas of corporate strategy at board level, which enhances a treasurer’s mandate to explain to business units the important role they play in providing accurate information and, even, ensure that they know why this is so vital and feel invested in the process. With the support of management, treasurers are in a much better position to establish or reinvigorate their department’s relationship with the business units it relies on. 

Adopting a Best Practice Approach to Maximise System Efficiency 

Once the business units are fully aware of their role and the importance of the quality of their data, the treasurer then has to ensure that they have the suitable forecasting system for their company and, just as importantly, that they are using it optimally. At a time when organisations are increasingly diversifying and moving into new markets in an attempt to make themselves bullet-proof in the face of the recession, old parameters that treasurers use to model cash flow forecasts may no longer be relevant and, in the worse case scenario, could lead to wildly inaccurate reading of the data. Taking a non-parametric approach is one way to avoid this potential pit-fall, which is something that Michael Arben, director of strategic initiatives for CSC Financial Services in Europe, Middle East and Africa, advocates in his article, Once Bitten... The Cautionary Tale of Cash Forecasting. This can involve using a system to take all relevant business data and add in real-time information, which is then fed into a non-parametric representation of the ‘real world’ to show the likely future outcomes along different decision paths. 

CSC’s Arben says that the key difference with this model is that it uses extremely powerful constructs for handling time so that the possibilities built into the model provide more factual and more rigorous forecasts. “So, instead of them working on ‘what might be’, they work more on ‘what is’ and ‘what will be’ in a real world scenario,” he explains. To make sense of the huge quantities of data required for accurate cash flow forecasting, it is vital that corporates understand the rules that govern this data in order to ensure that what they are analysing is of real value to the business. 

However, the strategic decision-making skills required for these types of models are quite rare. There is now a demand for what were previously thought of as individual ingredients, but which are now recognised as needing to be combined. “The resultant mix is very hard to find in the treasury sector,” comments Arben. Clearly there is no quick fix to problems such as this, which is why it is important that treasurers think carefully about which system is best suited for their organisation’s cash flow forecasting needs 

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Cash Flow Forecasting Systems 

Treasury management systems (TMS) 

• Tendency to focus more on financial risk management than on operational cash flow. 
• TMS tend to focus on real cash flows rather than cash flow forecasts. 
• However, they are improving in their support for the forecasting process and continual improvement in this area is expected. 

Enterprise resource planning (ERP) systems 

• Sometimes support cash forecasting, but problems can arise if a company uses many different ERP systems. 
• Corporates looking to migrate onto one common ERP system can find this to be the best option. 
• Can lack flexibility - if a company needs a special report, these normally need to be built as bespoke solutions. 
• Unlike TMS solutions, ERP systems are not designed to handle the financial cash flows, which can limit the system's ability to provide a comprehensive cash forecast. 

Specialised cash forecasting systems 

• As the label suggests, these are specifically designed to provide comprehensive operational and financial cash flows. 
• Cash forecast systems vary in how standardised they are and thereby how much you can tailor the system to your needs. 
• Abilities to automatically fetch data from different data sources, such as bank, TMS, and ERP systems, also vary. 

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As the cash flow forecasting systems box shows, there are a large number of factors that treasury departments need to consider when choosing a new or replacement system. To start with, the treasurer needs to be clear on what their specific requirements are, and then draw up a list of possible suppliers based on that. Then, by writing a request for proposal (RFP) for these suppliers, the company can get a greater insight into how each supplier can service their requirements, as well as find out the relevant costs involved. Despite the technical nature of this selection process, Krister Backlund, finance consultant at OpusCapita, points out in his article, How to Buy a Cash Forecasting System, important role the treasury department has to play here: “It is important for the treasury function to stay in the driver's seat during this process and not let this be run as an IT project.” After all, it is the treasury function that will be managing the system once it is in place, so their knowledge of what is required for their specific cash forecasting needs is vital in the selection of the system. 

Once the selection of a cash flow forecasting system has been made, the implementation process can begin. Again, this requires careful preparation and delivery, as the execution of the implementation process can have direct consequences for the final efficiency of the forecasting system. OpusCapita’s Backlund suggests the following template to achieve a successful implementation process: 

- Scoping - getting all details settled with the vendor: 

• How the forecast process should be set up. 
• Cash flow models. 
• Company structure. 
• User information and user rights. 
• Bank information. 
• Type of forecasts needed. 
• Calculations in forecasts. 
• Other elements. 

- Planning: The timetable for the project and planning of internal and external resources needed to implement the system. 

- Delivery: System implementation, including installation and tailoring of the system. 

- Pilot: Running the system with pilot entities, and making updates on the basis of input from the pilot. 

- Rollout: Starting the forecasting in the new system. 

If the treasury department has correctly identified their company’s key cash forecasting requirements and has ensured these are catered for in the cash flow forecasting system that has been commissioned, they should now be able to make improved forecasts. 

Conclusion 

Cash flow forecasting has long been an area that corporate treasurers have sought to improve upon. Today this quest has intensified due to the global economic recession and the enhanced focus on corporate cash that this has created. Access to credit has been limited and banks can ask to see a corporates’ cash forecasts before making any agreements. It is therefore important that treasurers tackle any roadblocks to efficient and accurate forecasting directly. 

If a treasurer is having problems with the data supplied by their business units, they should take the time to impress upon these units the importance of supplying timely and accurate data. Boards of directors are looking to their treasury departments to efficiently manage the forecasting process. Treasurers can use this mandate to manage their relationships with business units, as well as ensuring that they are at the forefront of any decisions taken over which cash forecasting system to use. With everything that has happened to the global economy in the past two years, treasurers should reassess the forecasting models they are using, because many old certainties no longer exist. Even if the data they receive from business units is accurate, putting that data through statistical models that are no longer relevant could have a negative effect on the overall results. Like in many areas of the treasury function these days, flexibility is key to a successful cash flow forecasting operation.

Volatility and Shrinking Liquidity: Positioning Treasury in a Financial Crisis

Publication: gtnews.com

The ACT Annual Conference in Manchester was not short of talking points. This gtnews commentary looks at the key speeches and presents the crucial information for treasurers and finance directors that emerged from the conference. 

The Association of Corporate Treasurers (ACT) Annual Conference took place in Manchester, UK last week, under the heading ‘Adapting, diversifying and sustaining - dealing with the new normal’. This is something that the UK Chancellor, Alistair Darling, was attempting to do as the conference started, when he made his Budget statement announcing the UK’s financial plans for the next year onwards. Initial reactions to the Budget from many commentators has focused on the vast levels of debt and public borrowing contained in it, as well as the ‘optimistic’ growth levels predicted. One option for a country in recession is to turn to its manufacturing sector for the growth stimulus, but the financial restructuring of the 1980s to turn the UK from a manufacturing economy to a service economy means this is now not an option. The fact that this conference was held in Manchester, a hotbed of the industrial revolution, added a tinge of irony to the proceedings. 

A Volatile Year 

The Chairman's opening remarks, from Gerry Bacon, deputy president of the ACT, looked back one year to the previous conference and noted how then no one was anticipating the severity and length of the massive financial crisis that treasurers and banks find themselves facing today. The UK Budget announcement was clearly aimed at calming the market volatility, but the method of increasing borrowing as a way out of the crisis is controversial, as many see borrowing as the main cause of the current problems. 

John Wood, head of balance sheet management EMEA at HSBC Holdings, then took to the stage to give a presentation that analysed how the financial crisis has unfolded, and how things may go on from here. Wood's main take on the 'new normal' of financial services is that things are going to get very boring for a long time if a route is to be negotiated out of the current turmoil - banks are turning inwards to get their houses in order before they can compete for new business, focusing on building up strong capital and liquidity bases. For treasurers too, Wood advised a back-to-basics approach - cash is king so make sure you know your cash position in every territory. Layered on top of this is the 'new normal' for treasury - practices such as global pooling that just two years ago may have seemed specialist are now mainstream, while corporates have to assess their banks as a counterparty risk. It's wrong to simply say that things can only get better, and treasurers need to act accordingly. 

Funding and Liquidity: the Latest Scarce Resource 

A panel discussion on the first day of the conference brought to light many common topics that would be cited by speakers over the following few days. Taking part in the discussion were Tom Fallon, treasurer for United Utilities Group; Neil Garrod, director of treasury at Vodafone; Andrew Kluth, group head of funding with National Grid; and Chris Whitman, treasurer from Deutsche Bank. 

Looking at current methods being employed to tackle the global downturn, Vodafone’s Garrod said that he thinks there’s a contradiction inherent with quantitative easing and higher issuance. “I’m glad they’re doing it, but it is morally wrong,” he commented, adding that the reduction in gilt yields is making things worse in the market. 

Many corporates could be forgiven for radically changing their business and funding strategy as bank charges increase on certain instruments. However, United Utilities Group’s Fallon argued that this is not best practice and corporates should not be panicked into short-term thinking. “We are sticking to the funding formula and business strategy we have - if prices go up we pay them, through gritted teeth, but we keep our strategic formula,” he explained. Whitman at Deutsche Bank also picked up the theme of the circle of decline in funding, stating that he doesn’t think there will be a return to rates of Libor+25, +50 or even +75 in the next few years. 

So what steps can be put in place to return a sense of normality or even a ‘new normal’ to the banking industry? Fallon suggested that separating investment banking activities from normal banking may well be the way forward, and raised the prospect of a return to the Glass-Steagall model or something similar. The US Glass-Steagall Act, enacted in 1933, legally separated the risk/reward activities of investment banking from basic commercial banking activities. This was repealed in 1999 by the Clinton administration with the introduction of the Gramm-Leach-Bliley Act, and some commentators have speculated that this is what is responsible for the current problems. While it is too simplistic to argue ‘yes it did’ or ‘no it didn’t’, it is clear that there is a lot of support among treasury professionals for wilfully risky banking activities to be taken out of their day-to-day corporate banking sphere. 

Banking With the Government 

The Royal Bank of Scotland (RBS) has been hard hit by the recession and, compounded by some questionable decisions made by its previous directors, the bank’s largest shareholder is currently the UK government. Paul Ward, head of EMEA, corporate coverage and advisory, global banking and markets at RBS, gave a presentation that looked at the financial crisis and also examined the recent history of his bank and where it goes from here. 

The overwhelming message of the first half of Ward’s presentation was to reassure UK treasurers present that RBS is still there for them to do business with - yes the bank’s balance sheet is being reduced, but the vast majority of this is not in corporate business and, specifically, not in the UK. 

The rest of the presentation offered some common sense suggestions for corporates and their risk, including: 

• Assess and measure all risks simultaneously and not in individual silos. 
• Take advantage of any funding opportunities when they arise. 
• Consider accessing multiple sources of financing to spread funding risk. 
• Avoid the cloud of refinancing and consider forward start facilities. 

The presentation ended with a few predictions from Ward about future market conditions. These included a hope that the recession should end in 2010 but that, after 15 years of growth in debt, the next decade will see a very different financial landscape as many observers agree that debt needs to be reduced. Finally, Ward suggested that the next year would see the continued retrenchment of international banks to their home markets. 

The Private Equities Perspective 

How is the UK economy positioned in relation to the rest of the world? This was a topic tackled by Jon Moulton, founder and managing partner of private equities firm Alchemy, in a session entitled 'The New Order in Finance'. The fact that Moulton’s slideshow was accompanied by images of the trenches of World War I, a sinking Titanic and UK riots from the 1980s does not bode well for the future, one suspects. 

Moulton explained how bonuses are now a critical risk factor for the regulators - for too long massive incentives have led to massive risk taking, regardless of the results. By targeting this culture of rewarding risk rather than results, the financial services industry may start to learn and recover from the huge errors that have found UK plc in its current predicament. 

He also attacked regulators and their calls for transparency by arguing that simply publishing complex statistical models and vast documents filled with accounts, operating strategies and core values does not work, because nobody in their right mind is actually going to read these statements, let alone understand much of the information they contain. Transparency as a concept is a nice idea, but the approach should be to keep it simple and understandable. Many of the activities in investment banks and funds that brought about this recession were not even understood by the Board members of these institutions, which is frightening to think of today. 

As mentioned earlier, the UK is bereft of any major industry (apart from financial services, which is not in a position to help out currently) and the country is heading towards a far greater level of public debt as a percentage of GDP than other similar struggling economies. Here are some possible suggestions from Moulton as to what the UK might find itself getting in response to the crisis: 

• A lot more regulation (especially for hedge funds and private equities). 
• Efforts to regulate the incomprehensible. 
• Banks may take years to get sensible balance sheets - meaning a credit shortage for a protracted period. 
• A serious loss of the Financial Services Authority (FSA), which provided 27% of UK tax revenues only a year ago. 
• More debt - repackaged as quantitative easing, or other ‘euphemisms’. 
• Inflation - to sort out the debt - but when? 
• Lots of small gimmicks from the government - Moulton cited the government ’s Budget as an example of this. 

Treasury's Added Value 

Against this bleak assessment of the UK economy, how can the treasurer add value? This was the topic picked up by Dev Sanyal, group vice president and group treasurer at BP, who faced the unenviable task of following Moulton onto the stage. 

Looking at the management of financial risk, Sanyal made the case that systemic liquidity is the biggest risk issue for treasurers today. In this case it is crucial for treasurers to hold a cash buffer, position their company to take advantage of funding opportunities when they arrive, and to think expansively by looking at a broader range of funding opportunities - be flexible in location as well as timing. 

In terms of operational risk, Sanyal made the case that there are two facets. Treasurers are at the heart of company’s decision-making processes. There’s a need for stability - a company’s response to events needs a stable foundation. Also, treasurers hold a unique position by seeing the totality of the company’s cash flows and early indicators of the pace of change. This position is elevated today. 

So what opportunities exist for treasurers in this crisis? Sanyal highlighted the following four points: 

1. Create flexibility. The treasurer can add value here. 
2. Delivering performance. Only efficient companies will come out of the crisis in a position to take advantage of the opportunities. 
3. Building capabilities. It is a good time to be investing in talent. 
4. Invest in driving efficiency. 

Sanyal gave an example: BP has been thinking about raising debt recently. The company has been active in the bond market, investing in kangaroo (Australian), samurai (Japanese) and dragon (Hong Kong) bonds, which is a good example of how a multinational should take a global approach to investment and funding, and looking at which markets around the world could be good for them. 

Treasury strategy is a servant of corporate strategy. This is affected by the industry that you are in. Treasurers must understand the corporate strategy before implementing the treasury strategy. In Sanyal’s example, BP is in the oil industry and has a strong balance sheet because of this - others may not be in such a position and therefore have to act accordingly. 

A panel discussion followed, with Bacon from ACT questioning both Alchemy’s Moulton and BP’s Sanyal. On the point of how the Securities and Exchange Commission (SEC) and other authorities can be pushed to get simplified disclosure, Moulton reiterated his point that there’s no point producing too much disclosure, and that if treasurers are faced with vast bank and corporate reports, they should just keep telling the authors that the report is too much/too complicated until a simpler and clear form of reporting emerges. Sanyal then began to make the argument that regulations are evolving, but was shut down quickly by Moulton, who argued that regulations are not evolving, rather growing at an accelerated rate like cancer. This is not a positive development - the clear message from Moulton is that there is a real danger of financial services becoming over-regulated as a reaction to the crisis, something that he believes must be avoided. 

So, what should the financial services industry do? The situation was highlighted by Moulton in one of the most memorable quotes from the conference: “We need innovative banks like we need innovative 747 pilots.” Echoing a previous presentation, he also speculated that perhaps something like Glass-Steagall or something similar is required - if you want collateralised debt obligations (CDOs), etc, go to a hedge fund or a spin-off investment bank. 

Despite the general mood of the conference, it was clear from this roundtable discussion that it is not all doom and gloom for corporates. Moulton made the point that corporates with large cash reserves are in a fantastic position currently. If they’ve got the nerve, it’s a good time to pick up other corporates that are not in a good position. 

Additionally, the current popular movement to attack the bonus culture in banks is having some unexpected ‘bonuses’ for corporates - as Sanyal gave the example that BP has been hiring personnel from the financial services sector. As banks downsize, there are talented people in the financial services sector that could do a good job for corporates as they seek to invest in talent for the future. 

Treasury Aspirations for the Coming Year 

A tracked session at the conference examined the current focus of treasurers. Taking part in the debate were Magnus Attoff, head of financial risk management and treasury controlling at Ericsson; Malcolm Cooper, group tax and treasury director, National Grid; and Bob Williams, group treasurer, Barratt Developments. 

The number one strategic focus at National Grid is a familiar issue to treasurers today: funding. National Grid currently has a debt level of £22bn, and this is rising by approximately £1bn every year. To accommodate this, Cooper needs funding of £2-2.5bn per year. The debt at its current level is manageable in this way, and Cooper also demonstrated how increasing the debt level could have a negative effect on funding - if National Grid increased its debt level by £5bn, this would have a negative effect on the organisation’s credit rating. In turn, this downgrade would limit the access he has to funding markets, making the prospect of deliberately increasing debt on a large scale unthinkable for National Grid. 

Cooper’s second strategic focus is on risk management. He explained that this issue is now so important at an organisational level that he’s finding himself making presentations to the Board every month. This is a good example of the rising profile of the treasury function within the organisational structure. The perception of treasury has changed within business, with executives now asking the question ‘what’s the impact on cash’ in their strategic planning, something that rarely, if ever, happened before. As was commented from the stage, if you can’t make a success in the role of treasurer in the current spotlight, there’s probably no hope for you. 

Williams from Barratt finds himself in an industry particularly hard hit by the current economic downturn, with the mortgage markets in the state they are in, house builders are cancelling or postponing a large amount of projects. Barratt also had a large refinancing programme last year as part of M&A activity. Williams’ main advice to treasurers is to work hard on your bank relationships. He provides quarterly reports to his key banking partners, as well as some monthly reports too, in an effort to ensure that the banks never face any surprises. By ensuring a high level of communication to core banking partners, treasurers can strengthen these relationships in the bad times and come out of the other end of this credit drought (whenever that may be) in a positive position. 

Ericsson’s Attoff made the following points about how treasury can keep a flexible risk strategy: 

• Separate commercial flows from trading. 
• Frequently carry out back-testing to identify exposures generating results. 
• Identify complimentary risk measures to compliment the VaR in order to monitor risks that are not covered. 
• Take the bigger picture and look at exposures outside of those that are actively managed.
• There are no ‘free lunches’, you need to understand the reasons for results (return on risk).

Flexibility was rightly one of the key themes of the conference. During the current volatility, treasurers need to be able to adapt their funding norms to take advantage of opportunities when they arise. 

Looking Outside the Norm - Transferable Lessons to Learn 

As corporates look for advice and best practice on how to navigate the current financial crisis, two presentations stood out as offering real examples of best practice from outside the mainstream of established business models. The first of these came from Martyn Wates, CFO of the The Co-operative Group (the Co-op), who gave a rousing presentation, outlining the alternative business model that his company follows, and how all corporates may be able to learn from this during the current crisis. The Co-op is headquartered in Manchester, so the speech gave a local flavour to the conference. To start proceedings, Wates outlined the differences in business models, which you can see in the following table. 

Wates stressed the point that the Co-op follows a ‘profit with a purpose’ mantra, that members won’t gain individual wealth from owning shares but rather that profits are ploughed back into local communities (no pun intended) and used to offer fair terms to suppliers. 

Wates aimed to show to the audience how, by being honest and transparent with shareholders, banks and business units, treasurers could enhance their standing within their organisation and, in turn, enhance their organisation’s reputation. Here’s a list of key points Wates believes we have learnt as a result of the financial crisis: 

• Relationship banking is win/win for both parties. 
• Provide timely management information, such as half-year and full-year events, budget and plan, and ensure there are no surprises waiting for your bank or shareholders to discover.
• The role of treasurer/CFO requires total transparency and trust/stewardship. Finance directors are the stewards of their organisation, holding the baton for a certain period of time before handing it on - don’t drop the baton. 
• Manage covenants/manage the business. Wates suggested that you could only make your business better if you make changes in real life, which requires getting into the details of how your company is operating. At a time when some senior bankers freely admit they had no idea regarding the types of financial instruments they were involved with, it’s plain to see what can happen if you abrogate your responsibility. 
• Be flexible. No one can predict the future, especially in the current financial landscape, so make sure you have a clear vision of where your business is going, and do the right thing. 

By taking on board these lessons, it is possible for treasurers and CFOs, even those from the plc environment, to protect their treasury function against the harsh economic conditions currently being endured. 

As well as learning from the co-operative business model, corporates in the audience were also given a personal example of the fraught conditions a start-up organisation has to operate under, and how lessons from this environment can be applied by mature corporates in the current crisis. This presentation came from Barbara Cassani, executive chairman at Jurys Inns, who founded Go airlines as a start-up business, having previously spent 10 years working in a mature, market-leading multinational, British Airways. As Cassani introduced it: “How do you recalibrate your business for the new reality?” 

Now that the good times are over, corporates need to manage their operations cleverly and examine what makes their own brands successful in order to negotiate the current turmoil and succeed. Using an example from her Go experience, Cassani told the audience that, in the start-up environment, it was critical to fix any mistakes fast and to keep a keen eye on the company’s cash position. There shouldn’t be a blame culture attached to strategic mistakes as long as they are identified early, put right and not made again. Go nearly went out of business and had to reposition its business, which meant that huge personal sacrifices for the staff. However, because the actions taken at management level had always been shared with staff in a transparent manner, the mistake was admitted honestly and the motivation behind the new direction was clearly explained, the airline was able to change it’s structure and strategy with the backing and great assistance of its staff. It’s very easy to be lax and let an organisation become a siloed entity, with every department covering its own back but, at times like these, it is corporates that move together with a defined purpose that will be in a stronger position. 

In terms of volatility, it’s unlikely many businesses will have been faced with what Go endured three years after it had started. Having launched in 1998, the airline had just begun to turn a profit at the beginning of the decade. Shortly after achieving this accomplishment, terrorists flew two aircraft into New York’s World Trade Center towers, and the bottom fell out of the airline industry. This was an event that would take out some huge national carriers, so the task to keep operating that Go faced was daunting in the extreme. However, even (or maybe, especially) in times this bad, Cassani urged the treasury and finance professionals in the auditorium to find a way to turn an advantage. At Go, they wrote to all of their suppliers and asked them to reduce their prices. Which, as an act on its own, would be dismissed out of hand by anyone in business. However, in the Go letter, they also shared their corporate vision for growth in the business going forward and how this could be accomplished. By supplying at a reduced rate in the short term, these suppliers would be looking at longer profits in the longer term. And, according to Cassani, this bold approached worked and around 50% came back with an improved price list. Other useful advice from Cassani included: 

• Slay ‘sacred cows’. If a function in the business is losing money, but the old argument that it is ‘strategically important’ is used, find a way to get rid of it, for the good of your business. 
• In these troubled times, try worrying about the clients and business you already have, not your own personal career. If your core business continues to be happy with you, they’ll keep coming back. 
• Fix your mistakes. People will follow you if you are honest about this. And don’t use management jargon - be direct with colleagues. They’ll respect you for this. 
• Let your staff take some risks - trust becomes reciprocal. 

Tackling the Financial Crisis - Today and Tomorrow 

The final session at the conference saw four senior finance professionals being questioned by BBC broadcaster John Humphrys about the current crisis and where it may lead. The panel in question was Barbara Cassani - executive chairman of Jurys Inns, Trevor Williams - chief economist at Lloyds TSB Corporate Markets, Paul Boyle - CEO of the Financial Reporting Council (FRC), and Alistair Clarke - former executive director and advisor to the governor at the Bank of England. 

First, Humphrys asked the panel what they had made of the recent UK Budget announcement, did they feel positive or negative about the details? Cassani from Jurys Inns said that while she was encouraged that the budget did show the government understood the scale of the downturn the UK economy is on, she was very dispirited by the growth predictions it makes. Williams from Lloyds TSB, agreeing with the minor positive from Cassani, pointed out that it was at least a realistic Budget in terms of UK debt levels, particularly the public debt. Boyle at FRC said people will have to face up to a lower standard of living because of the massive public debt, and added that the increase of the top rate of income tax for top earners to 50% was a mistake as it won’t raise much revenue, while at the same time it will dispirit the brightest and the best at the top of industry, particularly within corporations. Clarke, again trying to find some positives, said that there was really very little room for maneuver for UK chancellor Alistair Darling, but that the debt implications were alarming. When the audience was polled if they thought Darling had got it right with the Budget, just three people raised their hands, with the vast majority opposing this view. Clearly, as seen through history, incumbent governments face a collapse in popularity in times of recession. 

Another pertinent question, when thinking about the theme of the conference, asked what the key facets of the ‘new normal’ are in the corporate environment. Cassani from Jurys Inns said that she thinks corporates have to change the way that they strategically look at themselves, which won’t be much fun. Clarke highlighted his belief that there will be a shift in the power of borrowing between borrowers and lenders, as we move into times where lenders are increasingly cagey, borrowers are in for some very uncomfortable times. Lloyds TSB’s Williams stated that deleveraging is the ‘new normal’, but that gearing is ok as long as both the borrower and lender are happy with this. Boyle from the FRC highlighted the growth in focus on, and importance of, risk management: “Unlikely events are still unlikely, but not as unlikely as we thought.” However, he stated that the FRC does not want to see excessive regulations brought into the corporate sector. This question helped provoke a lot of theories, but as one of the panelists commented: “It’s hard to make predictions. Especially predictions about the future.” In times of great volatility such as these, treasurers need to be flexible and have a variety of contingency plans in place for many different scenarios. This preparedness should be the new normal, as the markets and global economies will not be ‘normal’ for a long time to come. 

To underline this point, one ominous question asked if pensions are the next ticking time bomb for corporates. This was met with an immediate “yes!” from Cassani, who argued that the only good thing to happen to the pensions market recently was that some companies have moved away from the defined benefits model. If the credit crisis had hit seven or eight years earlier, the pensions industry would have face an even greater catastrophe. Williams from Lloyds TSB put the simple equation on the table: “Is enough being set aside in the UK for people in their old age? No!” It is a fundamental flaw in the UK’s economy - we’ve not saved enough and have spent too much, and this is crystalised in the pensions issue. Boyle from the FRC brought a regulatory perspective to the debate, pointing out that there has been a lot of criticism of the accounting standards for pensions for being too tough. Well, Boyle agrees that they should be criticised, but for precisely the opposite reason - for being far too lax. He finished with the stark warning that, if corporates are not very careful, the huge risks associated with defined benefit pensions will sink many organisations. 

Conclusion 

The ACT Annual Conference 2009 took place during one of the worst financial crises of the past 80 years. The themes of many of the speeches at the conference were downbeat in terms of assessment of financial markets and predictions for the future - certainly very few speakers or delegates agreed with Alistair Darling’s predictions that the UK economy will see growth of 3.5% in 2011. 

However, it is certainly a much better time to be a treasurer than a banker, and this is where the positive action points of the conference came from. The conference demonstrated how can treasurers can implement best practice to enhance their operations by being vigilant and flexible, holding their nerve by maintaining a long-term strategy rather than flip-flopping into short-termism, while being prepared to take advantage of funding opportunities at any time and in unexpected geographies. By maintaining a strong treasury function, treasury professionals will help steer their organisation into a position to come out of the other side of the turmoil in a robust position. By focusing on key banking relationships, enhancing speed and quality of performance through targeted use of technology, and by making their voice heard at the board level and within the business, treasurers will play a critical role in business survival and recovery.

2009 ACT Annual Conference: Blog

Publication: gtnews.com

Post 1: Dealing with the 'New Normal (22 April 2009)
The UK Budget announcement and reflections on a turbulent 12 months dominate conversation at the opening of the Association of Corporate Treasurers (ACT) conference in Manchester.

The first session of the Association of Corporate Treasurers (ACT) Annual Conference, in Manchester, UK, has begun against the backdrop of a flurry of interest around the Budget announcement from the UK Chancellor, Alistair Darling. Initial reactions to the Budget from many commentators has seen much comment on the vast levels of debt and public borrowing contained in it, while today has also seen the IMF predicting a deeper global recession ahead.

It seems, in that case, good timing for the main headline of this conference, Adapting, diversifying and sustaining - dealing with the new normal. The Chairman's opening remarks, from Gerry Bacon, deputy president of the ACT and standing in for Matthew Hurn, group treasurer, Mubadala Development Company, looked back one year to the previous conference, and how then no-one was anticipating the severity and length of the massive financial volatility that treasurers and banks find themselves facing today. The UK Budget is clearly aimed at calming this volatility, but the method of increasing borrowing as a way out of the crisis is certainly not welcomed by some quarters, who see borrowing as the main cause of the current exacerbated problems in the UK.

Initial conversations I've had with treasurers at the conference revolve around a general point of bemusement - "When will it all end?" Every day a new set of statistics, a report or a study finds ways to show just how bad the financial crisis is, both in the UK and globally. John Wood, head of balance sheet management EMEA at HSBC Holdings, bravely tried to tackle this question in half an hour, although even he had to duck behind the podium and drink some water after mentioning the phrase 'the Great Depression". Wood's main take on the 'new normal' of financial services is that things are going to get very boring for a long time if a route is to be negotiated out of the current turmoil - banks are turning inwards to get their houses in order before they can compete for new business, focussing on building up strong capital and liquidity bases. For treasurers too, Woods advised a back to basics approach - cash is king so make sure you know your cash position in every territory. Layered on top of this is the 'new normal' for treasury - practices such as global pooling that just two years ago may have seemed specialist are now mainstream, while corporates have to assess their banks as a counterparty risk.

As mentioned in the HSBC session - it's wrong to simply say that things can only get better. Treasury professionals need to consider the option that the current depressed market conditions will continue into 2010 and beyond, and have a contingency plan accordingly.


Post 2: 'Physician, Heal Thyself!' (22 April 2009)
RBS lecturing corporates on risk management? While the irony was lost on no-one, this presentation showed that the bank may be on the road to rehabilitation.

The Royal Bank of Scotland (RBS), the bank now 70% in the hands of the UK government, would seem on the face of it to be a strange organisation to advise corporates on their risk strategy. That was the unenviable situation that Paul Ward, head of EMEA, corporate coverage and advisory, global banking and markets at RBS, found himself in, presenting a main afternoon session on risk at the ACT Annual Conference 2009. As Ward himself alluded to, it is a little reminiscent of a health professional being told to diagnose and treat his or her own maladies.

Or, alternatively, what better organisation to learn from - one that made so many fundamental and grave errors in risk management it can offer corporates a blow-by-blow list of What Not To Do. Individuals and organisations of this type that have gone through the looking glass tend to crop up at conferences quite regularly, with mixed success. As anyone that’s seen Nick Leeson speaking at financial crime conferences might testify, it can be quite galling to see someone living a quasi-celebrity lifestyle on the back of being such a spectacular failure. What next, the Bernard Madoff webinar, live from incarceration? Actually, don’t give him any ideas.

Of course, the case is different for Paul Ward and RBS, as the bank has a new management since the government bail-out, and so his presentation today was not focused on ‘here’s what we did wrong’, rather, ‘here’s how we’re planning to climb out of the huge hole the previous guys dug’. The overwhelming message of the first half of his presentation was to reassure UK treasurers present that RBS is still there for them to do business with - yes the bank’s balance sheet is being reduced, but the vast majority of this is not in corporate business and, specifically, not in the UK.

The rest of the presentation offered some good common sense suggestions for corporates and their risk, including:

• Assess and measure all risks simultaneously and not in individual siloes. 
• Take advantage of any funding opportunities when they arise. 
• Consider accessing multiple sources of financing to spread funding risk. 
• Avoid the cloud of refinancing and consider forward start facilities. 

The presentation ended with a few predictions from Ward about future market conditions. These included a hope that the recession should end in 2010 but that, after 15 years of growth in debt, the next decade will see a very different financial landscape as many observers agree that debt needs to be reduced. Finally, Ward suggested that the next year will see the continued retrenchment of international banks to their home markets.

The ‘predictions’ part of the presentation began with the disclaimer that “the RBS crystal ball isn’t perfect”, which raised some laughter in the conference hall. But, in reality, whose crystal ball is perfect in the current financial climate? The problem that RBS, and other banks bailed out by governments around the world, face is how to recover from that stigma and how to convincingly demonstrate to current and prospective corporate clients that they are competitive with banks that are free from state interference. Rebuilding reputations takes as long as the original reputational damage dictates and, while RBS still lives under the shadow of previous bad decisions, today at least demonstrated the bank is focused on stepping into the light, albeit one step at a time.

Post 3: 'New Order' Bleak for UK (23 April 2009)
A private equities perspective on the UK recession gives a dark assessment of past financial misdeeds and current political attempts at a solution.

Day two of the ACT Annual Conference in Manchester began with a look at the position of the UK’s financial position in relation to the global economy. Presented by Jon Moulton, founder and managing partner of Alchemy, the session entitled 'The New Order in Finance' gave Moulton’s view on events from his private equities background.

So, how is the UK doing? Well, judging by the images flashing up from Moulton’s slideshow - the trenches of World War I, the Titanic (post-collaboration with the iceberg) and UK riots from the 1980s - its safe to say he is seeing the ‘new order’ as a frightening and volatile place, somewhere that the excessive risk taking and reckless abandonment of core banking principles has led us too.

Moulton explained how bonuses are now a critical risk factor for the regulators, that for too long massive incentives have led to massive risk taking, regardless of the results. By targeting this culture of rewarding risk rather than results, the financial services industry may start to learn and recover from the huge errors that have found UK plc in its current predicament.

The regulators and their calls for transparency didn’t get off lightly from Moulton - Basel II is “bonkers,” the complex statistical models behind it are “mental masturbation,” and transparency in its current form “does NOT do it.” The point here is that it is all well and good to prove you are a transparent organisation by publishing a 300 page report on your accounts, your operating strategy, or your core values, but who in their right mind is actually going to read vast reams of statements and actually understand any of it by the time they reach the end? Transparency as a concept is a nice idea, but the approach should be to keep it simple and understandable. Many of the activities in investment banks and funds that brought about this recession were not even understood by the Board members of these institutions - a frightening reality of the time and a place we should not be seeking to return to.

As the UK is bereft of any major industry (apart from financial services, but they’re not really in a position to help out at the moment), the country is heading towards a far greater level of public debt as a percentage of GDP than other similar struggling economies. Here are some possible suggestions from Moulton as to what the UK might find itself getting in response to the crisis:

• Lots more regulation (especially for hedge funds and private equities). 
• Efforts to regulate the incomprehensible. 
• Banks to take years to get sensible balance sheets - meaning a credit shortage for a protracted period. 
• A serious loss of the Financial Services Authority (which provided 27% of UK tax revenues only a year ago). 
• More debt - repackaged as quantitative easing, or other ‘euphemisms’. 
• Inflation - to sort out the debt - but when? 
• Lots of small gimmicks from the government - Moulton cited yesterday’s Budget as an example of this. 

So, lots of fiddling round the edges, but certainly nothing to suggest a recovery any time soon and, if anything, the UK is still only at the beginning of a long period of economic woe. Chancellor Alistair Darling’s suggestion that the UK is on course for growth of 3.5% by 2011 was taken out and shot by Moulton shortly after the presentation.

Post 4: Treasurers' Focus in 2009 (23 April 2009)
Three senior European treasurers discuss their strategic focus for 2009.

One of the session tracks on the second day of the ACT Annual Conference examined the current focus of treasurers. Taking part in the debate were Magnus Attoff, head of financial risk management and treasury controlling at Ericsson, Malcolm Cooper, group tax and treasury director, National Grid, and Bob Williams, group treasurer, Barratt Developments.

The number one strategic focus at National Grid is a familiar issue to treasurers today: funding. National Grid currently has a debt level of £22bn, and this is rising by approximately £1bn every year. To accommodate this, Cooper needs funding of £2-2.5bn per year. The debt at its current level is manageable in this way, and Cooper also demonstrated how increasing the debt level could have a negative effect on funding - if National Grid increased its debt level by £5bn, this would have a negative effect on the organisation’s credit rating. In turn, this downgrade would limit the access he has to funding markets, making the prospect of deliberately increasing debt on a large scale unthinkable for National Grid.

Cooper’s second strategic focus is on risk management. He explained that this issue is now so important at an organisational level that he’s finding himself making presentations to the Board every month! This is a good example of the rising profile of the treasury function within the organisational structure. The perception of treasury has changed within business, with executives now asking the question ‘what’s the impact on cash’ in their strategic planning, something that rarely, if ever, happened before. As was commented from the stage, if you can’t make a success in the role of treasurer in the current spotlight, there’s probably no hope for you. 

Williams from Barratt finds himself in an industry particularly hard hit by the current economic downturn, with the mortgage markets in the state they are in, house builders are cancelling or postponing a large amount of projects. Barratt also had a large refinancing programme last year as part of M&A activity. Williams’s main advice to treasurers is to work hard on your bank relationships. He provides quarterly reports to his key banking partners, as well as some monthly reports too, in an effort to ensure that the banks never face any surprises. By ensuring a high level of communication to core banking partners, treasurers can strengthen these relationships in the bad times and come out of the other end of this credit drought (whenever that may be) in a positive position.

Ericsson’s Attoff made the following helpful points about how treasury can keep a flexible risk strategy:

• Separate commercial flows from trading. 
• Frequently carry out back testing to identify exposures generating results. 
• Identify complimentary risk measures to compliment VaR in order to monitor risks that are not covered. 
• Take the bigger picture and look at exposures outside of those that are actively managed. 
• There are no 'free lunches', you need to understand the reasons for results (return on risk). 

Flexibility is turning out to be one of the key themes of this conference, and the points above are just one example of this. In a time of volatility, treasurers need to be able to adapt to practices if needs dictate, as the financial landscape of the mid-1990s and, especially, since 2001 has been raised to the ground.


Post 5: Ethical Perspectives on the Changing Financial Landscape (23 April 2009)
What can public companies learn from the co-operative business model? Well, quite a lot actually, especially in the credit crisis.

Day two of the ACT Annual Conference in Manchester drew to a close with a presentation from Martyn Wates, CFO of the The Cooperative Group (the Co-op). The Co-op is headquartered in Manchester, so the speech gave a real local flavour to the event. To start proceedings, Wates outlined the differences in business models, which you can see in the following table.

Wates stressed the point that the Co-op follows a ‘profit with a purpose’ mantra, that members won’t gain individual wealth from owning shares but rather that profits are ploughed back into local communities (no pun intended) and used to offer fair terms to suppliers. And while that might not be exciting, it is worth remembering that one of the largest co-operative societies in the world is FC Barcelona, and nobody could accuse their members of lacking passion!

Not that Wates was trying to convince the treasurers in the room to go back to their offices and create a revolution in their strategic planning by implementing a ‘one member one vote’ shareholder scheme. Rather, he was using the example of the Co-op’s operating practices to show how by being honest and transparent with shareholders, banks and business units, treasurers can enhance their standing within their organisation and, in turn, enhance their organisation’s reputation. Here’s a list of key points Wates believes we have learnt as a result of the financial crisis:

• Relationship banking is win/win for both parties. 
• Provide timely management information, such as half-year and full-year events, budget and plan, and ensure there are no surprises waiting for your bank or shareholders to discover. 
• The role of treasurer/CFO requires total transparency and trust/stewardship. Finance directors are the stewards of their organisation, holding the baton for a certain period of time before handing it on - don’t drop the baton. 
• Manage covenants/manage the business. Wates suggested that you could only make your business better if you make changes in real life, which requires getting into the details of how your company is operating. At a time when some senior bankers freely admit they had no idea regarding the types of financial instruments they were involved with, it’s plain to see what can happen if you abrogate your responsibility. 
• Be flexible. No one can predict the future, especially in the current financial landscape, so make sure you have a clear vision of where your business is going, and do the right thing. 

Even a year ago, this message wouldn’t have had the resonance that it had today, and it was evident that Wates is a strong advocate in the business model of the Co-op. By taking on board these lessons, it is possible for treasurers and CFOs, even those from the plc environment, to protect their treasury function against the harsh economic conditions currently being endured.


Post 6: Adapting to a Start-up Environment (24 April 2009)
Start-up companies face a daily quest for survival before they are able to turn a profit. This situation is now starting to feel alarmingly familiar to mature corporates too. 

Barbara Cassani, executive chairman at Jurys Inns, used her presentation on day three of the ACT Annual Conference in Manchester to share the lessons she had learnt from founding Go Airlines as a start-up business, having previously spent 10 years working in a mature, market-leading multinational, British Airways. The point of the presentation was to show how the start-up environment - and the volatility and huge challenges it presents - is fairly similar to some of the conditions that mature and stable businesses and industries are facing today as a result of the credit crisis. As Cassani introduced it: “How do you recalibrate your business for the new reality?”

Now that the good times are over, corporates need to manage their operations cleverly and examine what makes their own brands successful in order to negotiate the current turmoil and succeed. Using an example from her Go experience, Cassani told the audience that, in the start-up environment, it was critical to fix any mistakes fast and to keep a keen eye on the company’s cash position. There shouldn’t be a blame culture attached to strategic mistakes as long as they are identified early, put right, and not made again. Go nearly went out of business and had to reposition its business, which meant that huge personal sacrifices for the staff (pilots having their longterm route plans changed entirely, marketing campaigns being scrapped). However, because the actions taken at management level had always been shared with staff in a transparent manner, the mistake was admitted honestly and the motivation behind the new direction was clearly explained, the airline was able to change it’s structure and strategy with the backing and great assistance of its staff. It’s very easy to be lax and let an organisation become a siloed entity, with every department covering its own back but, at times like these, it is corporates that move together with a defined purpose that will be in a stronger position.

So, everyone makes mistakes and these can be corrected if identified quickly. But in terms of volatility, it’s unlikely many businesses will have been faced with what landed on Go’s plate three years after it had started. Having launched in 1998, the airline had just begun to turn a profit at the beginning of the decade. Shortly after achieving this accomplishment, terrorists flew two aeroplanes into New York’s World Trade Center towers, and the bottom fell out of the airline industry. This was an event that would take out some huge national carriers, so the task to keep operating that Go faced was daunting in the extreme. However, even (or maybe, especially) in times this bad, Cassani urged the treasury and finance professionals in the auditorium to find a way to turn an advantage. At Go, they wrote to all of their suppliers and asked them to reduce their prices. Which, as an act on its own, would be dismissed out of hand by anyone in business. However, in the Go letter, they also shared their corporate vision for growth in the business going forward and how this could be accomplished. By supplying at a reduced rate in the short term, these suppliers would be looking at longer profits in the longer term. And, according to Cassani, this bold approached worked and around 50% came back with an improved price list. If you don’t ask, you don’t get! Some other useful advice from Cassani included:

• Slay ‘sacred cows’. If a function in the business is losing money, but the old argument that it is ‘strategically important’ is used, find a way to get rid of it, for the good of your business. 
• In these troubled times, try worrying about the clients and business you already have, not your own personal career. If your core business continues to be happy with you, they’ll keep coming back. 
• Fix your mistakes. People will follow you if you are honest about this. And don’t use management jargon - be direct with colleagues. They’ll respect you for this. 
• Let your staff take some risks - trust becomes reciprocal. 

Post 7: Question Time, Live from Manchester (24 April 2009)
Four treasury and finance professionals faced a grilling from broadcaster John Humphrys as he tried to tease out some details of where the UK economy is heading next.

To wrap up the ACT Annual Conference 2009, four senior finance professionals risked their reputations as they took to the stage to be probed by legendary BBC television and radio presenter, John Humphrys. The panel in question was Barbara Cassani - executive chairman of Jurys Inns, Trevor Williams - chief economist at Lloyds TSB Corporate Markets, Paul Boyle - CEO of the Financial Reporting Council (FRC), and Alistair Clarke - former executive director and advisor to the governor at the Bank of England.

First up, and a timely place to start, Humphrys asked the panel what they had made of the recent UK Budget announcement, did they feel positive or negative about the details? Cassani from Jurys Inn said that, while she was encouraged that the budget did show the government understood the scale of the downturn the UK economy is on, she was very dispirited by the growth predictions it makes. Williams from Lloyds TSB, agreeing with the minor positive from Cassani, pointed out that it was at least a realistic Budget in terms of UK debt levels, particularly the public debt. Boyle at FRC said people will have to face up to a lower standard of living because of the massive public debt, and added that the increase of the top rate of income tax for top earners to 50% was a mistake as it won’t raise much revenue, while at the same time it will dispirit the brightest and the best at the top of industry, particularly within corporations. Clarke, again trying to find some positives, said that there was really very little room for maneuver for UK chancellor Alistair Darling, but that the debt implications were alarming. When the audience was polled if they thought Darling had got it right with the Budget, just three people raised their hands, with the vast majority opposing this view.

Another pertinent question, when thinking about the theme of the conference, asked what the key facets of the ‘new normal’ are in the corporate environment. Cassani from Jurys Inns said that she thinks corporates have to change the way that they strategically look at themselves, which won’t be much fun. Clarke highlighted his belief that there will be a shift in the power of borrowing between borrowers and lenders, as we move into times where lenders are increasingly cagey, borrowers are in for some very uncomfortable times. Lloyds TSB’s Williams stated that deleveraging is the ‘new normal’, but that gearing is ok as long as both the borrower and lender are happy with this. Boyle from the FRC highlighted the growth in focus on, and importance of, risk management: “Unlikely events are still unlikely, but not as unlikely as we thought.” However, he stated that the FRC does not want to see excessive regulations brought into the corporate sector. This question helped provoke a lot of theories, but as one of the panelists commented, “It’s hard to make predictions. Especially predictions about the future.” In times of great volatility such as these, treasurers need to be flexible and have a variety of contingency plans in place for many different scenarios. This preparedness should be the new normal, as the markets and global economies will not be ‘normal’ for a long time to come.

To underline this point, one ominous question asked if pensions are the next ticking time bomb for corporates. This was met with an immediate “yes!” from Cassani, who argued that the only good thing to happen to the pensions market recently was that some companies have moved away from the defined benefits model. If the credit crisis had hit seven or eight years earlier, the pensions industry would have face an even greater catastrophe. Williams from Lloyds TSB put the simple equation on the table: “Is enough being set aside in the UK for people in their old age? No!” It is a fundamental flaw in the UK’s economy, we’ve not saved enough and have spent too much, and this is crystalised in the pensions issue. Boyle from the FRC brought a regulatory perspective to the debate, pointing out that there has been a lot of criticism for accounting standards of pensions for being too tough. Well, Boyle agrees that they should be criticised, but for precisely the opposite reason, for being far too lax. He finished with the stark warning that, if corporates are not very careful, the huge risks associated with defined benefit pensions will sink many organisations.

While the answers to many of these questions, and indeed the themes of many speeches this conference, were depressing at best and catastrophic at worst, the mood among many attendees and presenters was constructive, clear and positive - ok we’re in this enormous financial black hole, but how can we implement best practices to enhance our treasury operations, help our organisation, and prepare to come out of the other side of the turmoil in a robust position. By focusing on key banking relationships, enhancing speed and quality of performance through targeted use of technology, and by simply communicating - with each other, with the Board, with other business units - treasurers will play a critical role in business survival and recovery.