Of course, not every company has the cross-border liquidity needs of a Sony or the wherewithal to take centralization to such a limit. For some, such as Flowserve, a $2 billion Irving, Texas-based maker of pumps, valves, and seals, outsourcing treasury for an entire region makes the most sense.
For Flowserve, an acquisition was the catalyst for reorganization. In order to fund its $775 million purchase of Ingersoll Dresser Pumps in August 2000, Flowserve had to issue substantial debt. And given the highly leveraged position that followed, efficient cash management became more important than ever; hence the need to centralize. As a result, Flowserve is reducing its bank relationships and awarding its cash-management business in each region to just one or two of its credit banks.
While this regional centralization is under way in Asia and Latin America, Europe was reorganized before the acquisition, when Flowserve’s treasury operations were outsourced to ABN Amro in Dublin. For Jeff Eastmead, manager of cash management, outsourcing delivers operational control and cost efficiency. “Previously, we had a Belgian coordination center that was expensive to run. The manager in charge had no systems support, and was overwhelmed by the manual workload,” explains Eastmead. But when the euro arrived, he says, outsourcing made more sense. Now he has a zero-balancing structure for euros that concentrates funds in Amsterdam, and the administration of the resulting intercompany loans is handled from Dublin.
“The zero-balancing structure has allowed Flowserve to reduce borrowing costs for the whole company,” says Eastmead. Also centralized in Dublin and outsourced are the management of intercompany netting for 87 Flowserve entities, and most of its European divisions’ forex processing. Eastmead monitors it all from his Dallas office via ABN’s electronic banking software.
However centralization is achieved, says deCaux, “the biggest barrier to creating an optimal structure is internal corporate politics.” Typically, he and other experts point out, taking control away from longtime in-country treasurers or controllers is a hard sell. And sometimes it comes with a price. Griffiths, for example, cites one firm that centralized its global operations in Germany, only to find its days sales outstanding in Italy go from 90 days to over 300 because of the lack of a local liaison.
Still, given the instability in the world economy, further centralization makes sense, say experts. “If you have global operations,” says Griffiths, “the most important thing is not systems or banks, but knowing what you have got, where you’ve got it, and how you are going to use it.” Whether firms will enhance that knowledge is not guaranteed. Treasurers’ focus on increasing shareholder value may “sharpen during a recession,” says Craig Weeks, managing director, J.P. Morgan Chase & Co. The question is, “Will they be given the resources necessary to be effective?”
Anne Querée is a writer for CFO Europe. Abe De Ramos is a senior writer at CFO Asia.