Beyond Benchmarks

Treasury is far more than a processing center, as companies that can measure its true value are learning.

Bill Schumann, finance chief at FMC Technologies, tracks how many times a month his treasury team is able to settle the company’s cash position in Europe before 9 a.m. But such process-oriented benchmarks pale in importance to one aspect of treasury operations that the oil-and-gas equipment manufacturer really needs to manage well: $1 billion worth of foreign-currency exchange risk.

Undoubtedly it’s important for treasury to be efficient at constructing a cash position, but honing its expertise in hedging FX is where the bigger reward lies. FMC’s treasury team is so good, in fact, that it now gets involved in planning for anticipated transactions — such as assessing the FX risk the company may be exposed to between the time it bids on an international project and the date the contract is awarded.

Schumann is one of many CFOs who have come to realize that treasury benchmarking needs to be brought into the 21st century. The low-level, process-centric corporate treasury benchmarking typically touted in industry surveys and published by associations no longer delivers the insight that companies need.

Why? As the recession dragged on, executive management and boards of directors began to look to treasury for critical information, such as high-level data on the status of outstanding risks and market positions, says Paul Higdon, chief technology officer at IT2, a treasury management software and service provider.

“Workflows, segregation of duties, and key controls are important, but the board wants to know whether our capital is being preserved and if we are maximizing our use of cash,” says Higdon.

In addition, CFOs have finally realized that slavishly tracking efficiency rarely produces actionable information. Many treasury benchmarking surveys measure the number of bank accounts reconciled per full-time employee, for example. One survey found that “best in class” was 87 bank accounts reconciled. But a better question, since the advent of automated reporting and reconcilement software, is whether the company needs that many accounts in the first place, says Mark Webster, a partner at consultancy Treasury Alliance Group. Companies that consolidate may find that it takes longer to reconcile the accounts because they are higher-volume, however, so an efficient treasury department could underperform on the accounts-reconciled-per-FTE metric.

In short, the metric suffers even as the business process improves. Benchmark data can also be misleading without the context — if a company outsources payroll, for example, its processing efficiency measured by number of treasury employees would rank very high.

“Best practice has been important for the last decade, but what did best practice bring us?” asks Higdon.

Raising the Bar

Getting away from low-level benchmarks means “reframing treasury to focus on results rather than processes,” says Higdon. Financial institution counterparty risk is one example. A board concerned with capital preservation, for instance, wants to know how well treasury gauges counterparty risk and keeps exposures within policy targets.

Tracking treasury effectively now hinges as much on looking forward as looking back. Craig Jeffery, managing partner of Strategic Treasurer, a treasury consultancy, says companies must think of performance measurement from three perspectives: hindsight, insight, and foresight. Hindsight is learning from the past — how treasury can be more efficient and cut costs, for example. Insight is a current view, such as how many bank accounts the company has and what it uses them for, or, whether the company is in compliance with investment-concentration risk policies. And foresight is looking into the future and being more predictive.

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