Managing Treasury Globally: Breaking the Mold

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1 Bank of America Merrill Lynch White Paper Managing Treasury Globally: Breaking the Mold July 2013 Executive summary Contents When is a global company not a global company? When it seeks to impose its existing treasury structure, processes and cultural practices on its international operations without taking regional differences into account. Replicating a model that works well domestically might seem like a logical approach but by doing so, companies may inadvertently introduce inefficiency and complexity while missing the opportunity to take advantage of best practice in local markets. Risks of operating globally Common mistakes... 3 Getting it right... 3 Out with the old... 4 Technology: Help or hindrance?... 5 Overcoming the obstacles... 5

2 Managing Treasury Globally: Breaking the Mold 2 There is a perception that many multinationals headquartered in the U.S. could best be described as U.S.-based companies with international operations, rather than as truly global companies. While this may sound like a technical distinction, the implications can be wide-ranging. From a treasury perspective, such companies may have a good structure in the U.S., which may also cover Latin America, as well as an international treasury operation in a tax-efficient location covering the rest of the world. In other cases all treasury decisions may be made from the U.S., albeit with treasury personnel located in other regions. While such structures are common, they do not take into account important regional differences that may have implications for treasury. In reality, managing treasury operations in the same way around the world adopting a single strategy to cover both Asia and EMEA is unlikely to be the most effective approach. Often the drawbacks of this model will be readily acknowledged by international treasury managers. However, it can be difficult for them to convince colleagues in the U.S. that the processes and structures that are well suited to a company s existing markets are not necessarily the best fit in other regions. Choosing the best global treasury structure is an important issue for companies embarking on international expansion, and is likewise important for companies with existing structures in place which are not performing as well as they should. In the current market, the drawbacks of an inefficient structure can be profound especially where risk management is concerned. Risks of operating globally Geographical risk is a particular concern for companies engaged in overseas expansion. In the current volatile markets few countries have a triple A credit rating and many are on negative watch. While Europe was once considered to be reasonably safe, today many companies are minimising their exposure to certain countries in the region. Country risk concerns are not limited to Europe, however: in the Middle East, for example, companies awareness of risk has increased as a result of recent political changes. Choosing the best global treasury structure is an important issue for companies embarking on international expansion, and is likewise important for companies with existing structures in place which are not performing as well as they should. The country risks that a company faces also have a regulatory aspect. In the faster growing economies regulations tend to change quite rapidly and those changes may be significant. As a result, companies tend to concentrate certain treasury and finance activities into countries with less challenging regulatory environments, such as Switzerland, Luxembourg, Singapore and Hong Kong. In order to manage country risks effectively, companies need to have a thorough understanding of the local markets a result which is less likely to be achieved if all treasury decisions are made from a single location. Country risk can be managed more effectively if the company has a comprehensive understanding of the risk exposure and practices in different markets. Often this is where banks can help by offering risk mitigation products which reduce the risks of specific areas of treasury, such as letters of credit, cash management, FX and advisory products.

3 Managing Treasury Globally: Breaking the Mold 3 Common mistakes For companies developing an international treasury structure, some common pitfalls must be avoided. One of the biggest mistakes that companies make is attempting to impose their own local culture on new entities that they set up overseas. By the same token, companies often make the mistake of regarding regional variations as a hindrance, rather than something that the company can leverage. Instead of viewing regional differences with suspicion, companies should be asking how they can incorporate them into their global structure. In practice, however, very few companies spend time deciding what sort of culture they wish to develop and foster in the new operation. Companies with major operations in Asia or Europe may find that changes taking place those regions have significant impact on their businesses and yet the CFO or treasurer may never have set foot in the regions. While such corporations typically regard themselves as global businesses, if treasury decisions relating to, for example, China are being made on the east coast of the U.S., these companies are not taking a global view and may therefore be missing opportunities to organise their structures and processes more effectively. One of the biggest mistakes that companies make is attempting to impose their own local culture wholesale on new entities that they set up overseas. In many cases, companies in-house experience of other regions is minimal at best it can be difficult to find someone who has worked in Asia as well as in EMEA and the U.S. But without this level of experience, people often underestimate the challenges of operating abroad and are not best placed to understand the complexities around payments and receipts in a multi-currency environment. Another common mistake is making decisions early on that will need to be reversed at a later stage. For example, companies expanding internationally at times tend to start off by setting up a new legal entity for every activity they do, with multiple bank relationships and bank accounts for each entity only to undertake a consolidation exercise later on when they realise the structure is overly complex and inefficient. Taking the time to create an efficient structure in the first place will avoid the need for additional work further down the line. Getting it right For companies looking to build a fully international treasury structure, the first step is to put aside any assumption that what works at home will necessarily work abroad. That s not to say that every single country requires a different approach: often companies will bundle countries together by region. However, it is still important to be aware of any key variations within that bundle. When it comes to devising a strategy, it isn t necessary for companies to reinvent the wheel it can be very useful to study the decisions taken by other companies and learn from their failures as well as their successes. In many cases, smaller and less mature

4 Managing Treasury Globally: Breaking the Mold 4 companies may be more conscious of the pitfalls associated with overseas expansion than their larger counterparts, and they are often keen to avoid the mistakes that bigger companies have made in the past. Before making any firm decisions, treasurers should undertake a thorough planning exercise and consult people with expertise in the specific countries and regions the company is focusing on. If the company doesn t have the necessary experience in-house it can be useful to consult banks or global consulting firms. The greater the knowledge and understanding the company has, the better placed it will be to make effective decisions. Understanding the scope and scale of the chosen strategy is also key. In some cases treasurers decide to set up an in-house bank or re-invoicing structure without fully understanding the amount of business change that is needed beyond treasury and finance in order to make these structures work effectively. Other specific issues that will need to be resolved include determining the best technology to use in different locations, given that some regions have multiple currencies and jurisdictions. Governance and reporting lines must also be addressed: should the CFO in China report to the local in-country head, or to the head office in the U.S.? The pros and cons to both approaches will need to be weighed up. Before making any firm decisions, treasurers should undertake a thorough planning exercise and consult people with expertise in the specific countries and regions the company is focusing on. Out with the old If a company is looking to overhaul an existing structure, rather than implement a new one from scratch, the challenges can be all the greater. The most suitable approach will depend on the nature of the business, its complexity and its appetite for change. The benefits of introducing a more efficient structure will not always outweigh the costs and difficulties that may arise, so a thorough analysis is required to make sure a redesign is the right approach. The starting point in this case should be to answer one simple question: what problem are we trying to solve? For any major undertaking of this nature, it is important to identify what the company wants to improve and why, and to prioritise objectives accordingly. In some cases the change programme needed to accomplish them will be so complex, and require so much drive within the business, that it is simply not worth attempting. In other cases, the benefits will be sufficiently strong to warrant such an exercise. There is no one-size-fits all approach when it comes to global treasury structures. The structure suitable for a particular company will depend on numerous factors, including the company s business model, culture and geographical footprint. In some cases, the optimal solution may be to keep certain areas autonomous via a separate legal entity, while incorporating others into the global structure.

5 Managing Treasury Globally: Breaking the Mold 5 Technology: Help or hindrance? Once a fully international structure is in place, the next challenge is ensuring that there is sufficient communication between regions. For international companies, communications technology can provide some clear benefits, particularly when treasury personnel are located in different time zones but such solutions also have their drawbacks, and it is important that companies weigh these up carefully before deciding on the right approach. Online chat, teleconference and texting can all help employees in different locations to keep the lines of communication open, as can tools such as SharePoint, which can be accessed globally and around the clock, allowing work to be accessed effectively. The more recent delivery mechanisms, such as Software as a Service (SaaS) and cloud technology, are enabling software vendors to package software in different forms, so that companies may be able deploy a solution that is tailored for different geographies and operational requirements. Once a fully international structure is in place, the next challenge is ensuring that there is sufficient communication between regions. The evolution of workflow tools and business process management capabilities has enabled work to be managed more effectively along end-to-end processes globally. The ability to seamlessly execute work across teams and geographies has provided the opportunity to align and control processes within global companies and their extended organization. However, to capitalize on this capability, processes and people need to be consciously designed and deployed within and across regions, driving automation, standardization and control while accommodating and leveraging regional differences and exceptions. All of these tools can be used to improve communication and workflow between geographically dispersed teams but if they are used incorrectly they can also have an adverse effect. Chat is a good example: if there are etiquettes in place around the topics that can and can t be discussed and the type of information that should not be circulated in this way, this can be a productive tool. But if the technology becomes a conduit for chatter, rather than chat, it is no longer productive. And regardless of the strategy in place, communication technology is never a substitute for good management or human interaction. Overcoming the obstacles While introducing a global treasury structure offers many advantages, this approach is not without its challenges. From a technology point of view, conflicts may arise between local and global processes as a company expands. In Asia, for example, the systems in place may well differ from the systems found in other regions. As a result, a company looking to roll out an ERP system globally will often tackle Asia last because local languages, time zones and cultural factors can all contribute to the complexity of the project.

6 Managing Treasury Globally: Breaking the Mold 6 Senior management support can be another obstacle for a programme of this nature. A longer term project is exposed to the risk that there will be a change in senior leadership a couple of years into the programme which will alter the company s strategic direction. Any programme that lasts longer than two years is in danger of being interrupted by changes of this nature. Finally, where risk is concerned, the uncertainties that the company faces at a country level will need to be taken into account whether the company is establishing overseas treasury operations, or whether an existing structure is to be overhauled. In today s volatile environment, companies need to re-assess the risks on a very regular basis and draw up contingency plans around eventualities such as a euro break-up. While this task is certainly challenging, a company that is approaching treasury as a global undertaking will be better placed to monitor and mitigate those risks. Bank of America Merrill Lynch is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., member FDIC. Securities, strategic advisory, and other investment banking activities are performed globally by investment banking affiliates of Bank of America Corporation ( Investment Banking Affiliates ), including, in the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp., both of which are registered broker-dealers and members of FINRA and SIPC, and, in other jurisdictions, by locally registered entities. Investment products offered by Investment Banking Affiliates: Are Not FDIC Insured May Lose Value Are Not Bank Guaranteed Bank of America Corporation