The efficient use of working capital can generate considerable savings for companies. For Panalpina, the freight forwarding and logistics provider, centralising treasury functions region-by-region is doing just that as the company has few fixed assets and working capital forms a substantial part of the balance sheet. Panalpina is now embarked on a journey that appears likely to end with the establishment of a global shared service centre (SSC).
The company took its first steps down this road in March 2003 when it started to introduce treasury centralisation and integrate payments across Europe. It followed that up with similar initiatives in Asia/Pacific, Latin America, the Middle East and finally the United States - all of which are expected to become fully effective in the course of 2006. In each case, Panalpina looked for a single bank to streamline its cash management activities.
Panalpina is already reaping big benefits from the exercise. Group treasurer Daniele Vecchi estimates that the productivity gains achieved through automation to date are close to 50 per cent. He calculates total savings in Europe at around €2.25m a year. Once the new structures are implemented in the other regions, the savings are expected to rise to around €6.5m a year.
The Drive to Working Capital Management
Typically, companies have a global strategy for treasury in place, with treasury activity centralised at a regional level. In its role as provider of funding to the business across multiple countries and operating units, treasury is frequently well placed to identify inefficiencies in the supply chain and to propose regional or global solutions.
Such projects can yield benefits at several levels. For example, re-engineering inefficient accounts payable and/or accounts receivable processes can feed into more efficient liquidity management structures, giving the treasurer better visibility of overall financial flows and better control of cash. As a result, treasury can achieve a lower cost of funding to the business, in addition to savings made in the financial processes themselves.
Although treasury may be the catalyst for projects to improve working capital management, these will usually be multi-departmental, multi-disciplinary undertakings of some complexity. They also exhibit what we consider to be the key characteristics, or pillars, of a successful strategy for working capital management.
The Six Pillars of Working Capital Management
1. Centralisation
The advantages of centralising financial processing are well understood. Centralisation ends the duplication of similar tasks in different environments as well as providing a consolidated view of that activity. Centralising processing also enables the company to take advantage of scale and should result in lower per item processing costs.
Financial processes can be centralised, in an SSC environment for example. Another option that is increasingly finding favour is one-step centralisation and outsourcing of a complete financial process or processes to a trusted banking partner. In the case of Panalpina, centralisation was a key goal.
2. Standardisation
Achieving the full benefits of a centralised solution requires standardization. There are two important aspects to this. Firstly, the processes themselves need to be standardised. For example, you may choose to iron out differences in country payables processes by creating a standard file output from your company's enterprise resource planning (ERP) system, linked to payment terms and details for each payee.
Then, let your banking partner sort individual payment messages for execution via country clearings, via cheque, draft or wire transfer according to the value date requested and the local conditions. This approach will insulate you from the complexity of different environments and allow you to keep in-house processes standard. Technology standardisation is also important. Our case study shows how using one EDI group of messaging standards gives Panalpina portability of data across its regional offices while straight-through processing (STP) avoids the difficulties of manual bank reconciliations.
3. Automation
At the heart of centralised working capital management solutions is the sophisticated use of today's technology, from the type of ERP and host-to-host solutions, to the web-based services that meet a range of needs from straightforward information reporting to managing the fully outsourced treasury. Many companies have made costly investments in ERP systems, but not all are exploiting the full potential of their investment to deliver working capital management solutions. Panalpina, by contrast, is making increasing use of its ERP system.
4. Control
Gaining control of financial flows requires accurate, up-to-the-minute information about those flows. In the case of Panalpina, reducing operational risk through automating the reconciliation process was one of the aims - while putting the cash manager in charge of centralised liquidity management was another.
5. Outsourcing
We have mentioned above that outsourcing is an obvious extension of any centralisation and rationalisation activity, and consequently an important element of working capital management solutions. If an organisation is looking to keep its infrastructure lean and productive, it makes sense to outsource any elements of financial processing to an expert partner who can provide the scale, technology investment and the depth of expertise needed to manage that task to maximum efficiency.
The natural conclusion of such a development might be to outsource all operational tasks, effectively creating the fully outsourced treasury back office, functioning to rules and procedures defined by the treasury.
6. Partnership banking
Getting the best from your working capital invariably means building medium-term solutions which are deeply integrated: geographically, across multiple countries, organisationally within the structure of the company, and technically with a few key strategic corporate and banking systems. This in turn requires technical integration with your banking provider, and a working partnership both during design and implementation and in the day-to-day operation.
Keeping these six pillars in mind, let us look in detail at how Panalpina has put the theory of working capital management into practice, and is reaping the benefits.
Panalpina
Panalpina is a global forwarding and logistics services provider with 500 branches in 80 countries and employs 13,000 people worldwide. With working capital making up the largest component of its balance sheet, it is applying the principles of the six pillars of working capital management through the progressive centralisation of regional treasury operations.
In March 2003, group treasurer Daniele Vecchi gained approval from the executive board for a project with four central tasks: to centralise liquidity management, to reduce the number of banking relationships, to move to automated processing, and to streamline the accounts payable/accounts receivable process. In particular, there was an opportunity to create significant value by establishing a series of centralised cash pools. Local company cash surpluses could be used to fund companies with cash deficits and by managing liquidity centrally, treasury would be able to gain significantly better bank terms.
Centralising Treasury and Implementing Cash Pooling
In 2003, Panalpina had a largely decentralised treasury organisation. The company dealt with 25 banks across Europe and managed liquidity locally. Local subsidiaries received poor pricing from their banks and had limited access to liquidity. There was no professional trading and inter-company dealing was extremely time-consuming.
Furthermore, treasury functions were organised on a country-by-country basis, many processes remained manual, and the accounts payable/accounts receivable process was inefficient. There was a significant technology challenge. From a positive perspective, Vecchi had introduced a new treasury management system the previous year, and the company had a single ERP system. But the project involved introducing a uniform EDI format across all countries, as well as STP. Critically, it also involved establishing a secure environment for communications between all of Panalpina's European entities and the bank chosen to be Panalpina's cash management partner, Citigroup. Finally, there was the challenge of winning support from management and the staff in Panalpina's local offices. This was perceived as critical to a project that would change many peoples' jobs.
Challenges to Overcome
One of the key elements companies face when implementing a centralised working capital set-up is internal resistance from the subsidiary, which can sometimes feel that head office is taking away some of its responsibility and independence in choosing a local banking partner. Furthermore, when a cash pool is established, head office takes control of the subsidiary's accounts and can also check their activities. One of the questions often asked during this process is: 'Why should we change now? Everything works perfectly!'
Some strategies for overcoming these resistance factors are:
The Solution
On receipt of board approval, Vecchi set about centralising liquidity management under Fabio Sarao, corporate cash manager, who works out of the head office in Basel, Switzerland. The goal was to concentrate liquidity in two currency pools: euros and US dollars. The route chosen to do so was zero balancing rather than notional pooling. "The fact that with zero balancing there is a physical movement of funds on a daily basis to a single pool narrows down the balance sheet," explains Vecchi. "It increases inter-company lending, but eliminates debt at a local level."
Some 16 local entities now have euro and US dollar accounts that are swept at the end of each day into the two cash concentration pools managed from Basel. The existing treasury management system traces flows of funds across the company, supplying the necessary information to the relevant finance functions. In all, the liquidity management solution was almost entirely completed within six months.
The next step was to establish the payment factory, and streamline the accounts payables/receivables process. The company has moved from making and receiving cheque payments towards electronic transfer of funds, with each country handling this from a central point. Panalpina chose Citibank File Services to be the file delivery backbone of its cash payments network and CitiDirect for information.
Benefits
According to Vecchi, Panalpina's European treasury operations are now fully automated. "All bank data is uploaded automatically, there is STP throughout, and with the payment factory one single bank pipeline has replaced multilateral connections to a multitude of different banks," he says. The STP ratio for payments is 99.4 per cent. Some 56 per cent of customer collections are automatically matched. The central treasury team now has much more control over payment terms.
Management of liquidity has been transformed. Before, the local subsidiaries managed their liquidity and communicated with treasury on an irregular basis. Now there is daily communication of forecast cash flows. "We have 360-degree visibility of cash with all euros concentrated into one pool in London, which is managed by a team in Basel," says Vecchi. "We have full control of the process."
Getting support for the changes from local subsidiaries was relatively easy, he says, since Panalpina did not have local treasurers in each country. Automation has made life easier at the local level while centralisation has brought major efficiencies. There are no more than five people managing the entire treasury function across Europe. "I see us as an internal service provider," he says.
Panalpina is intent on replicating the process worldwide. Clearly, there are regulatory limitations on the pooling of cash in parts of Asia Pacific and Latin America. "But we are seeking to establish an overview of all accounts at a regional level, operate through a single overlay bank, streamline the accounts payable/accounts receivable process, and standardise and automate with payment factories where possible," says Vecchi.
Eventually, Panalpina hopes to establish a single global pool for each major currency. These pools could be managed around the clock with further considerable benefits to both the balance sheet and profitability. There has already been progress on this front with some dollar balances from Asia Pacific and the Middle East being concentrated into the London dollar pool. Similarly, where it is possible, dollar surpluses in Latin America are being concentrated in New York. Worldwide Panalpina now has no more than 10 people involved in managing liquidity.
The Verdict
Panalpina has embarked on an ambitious project to centralise treasury on a global basis. The process is now complete in Europe, where the savings are in the order of €2.25m. By the middle of 2006, treasury centralisation and payments integration will be a reality in all other parts of the world except Canada, Eastern Europe and Africa. Once fully effective, the new structure is expected to generate a global saving of close to €6.5m annually.
Source : www.citigroup.com
The company took its first steps down this road in March 2003 when it started to introduce treasury centralisation and integrate payments across Europe. It followed that up with similar initiatives in Asia/Pacific, Latin America, the Middle East and finally the United States - all of which are expected to become fully effective in the course of 2006. In each case, Panalpina looked for a single bank to streamline its cash management activities.
Panalpina is already reaping big benefits from the exercise. Group treasurer Daniele Vecchi estimates that the productivity gains achieved through automation to date are close to 50 per cent. He calculates total savings in Europe at around €2.25m a year. Once the new structures are implemented in the other regions, the savings are expected to rise to around €6.5m a year.
The Drive to Working Capital Management
Typically, companies have a global strategy for treasury in place, with treasury activity centralised at a regional level. In its role as provider of funding to the business across multiple countries and operating units, treasury is frequently well placed to identify inefficiencies in the supply chain and to propose regional or global solutions.
Such projects can yield benefits at several levels. For example, re-engineering inefficient accounts payable and/or accounts receivable processes can feed into more efficient liquidity management structures, giving the treasurer better visibility of overall financial flows and better control of cash. As a result, treasury can achieve a lower cost of funding to the business, in addition to savings made in the financial processes themselves.
Although treasury may be the catalyst for projects to improve working capital management, these will usually be multi-departmental, multi-disciplinary undertakings of some complexity. They also exhibit what we consider to be the key characteristics, or pillars, of a successful strategy for working capital management.
The Six Pillars of Working Capital Management
1. Centralisation
The advantages of centralising financial processing are well understood. Centralisation ends the duplication of similar tasks in different environments as well as providing a consolidated view of that activity. Centralising processing also enables the company to take advantage of scale and should result in lower per item processing costs.
Financial processes can be centralised, in an SSC environment for example. Another option that is increasingly finding favour is one-step centralisation and outsourcing of a complete financial process or processes to a trusted banking partner. In the case of Panalpina, centralisation was a key goal.
2. Standardisation
Achieving the full benefits of a centralised solution requires standardization. There are two important aspects to this. Firstly, the processes themselves need to be standardised. For example, you may choose to iron out differences in country payables processes by creating a standard file output from your company's enterprise resource planning (ERP) system, linked to payment terms and details for each payee.
Then, let your banking partner sort individual payment messages for execution via country clearings, via cheque, draft or wire transfer according to the value date requested and the local conditions. This approach will insulate you from the complexity of different environments and allow you to keep in-house processes standard. Technology standardisation is also important. Our case study shows how using one EDI group of messaging standards gives Panalpina portability of data across its regional offices while straight-through processing (STP) avoids the difficulties of manual bank reconciliations.
3. Automation
At the heart of centralised working capital management solutions is the sophisticated use of today's technology, from the type of ERP and host-to-host solutions, to the web-based services that meet a range of needs from straightforward information reporting to managing the fully outsourced treasury. Many companies have made costly investments in ERP systems, but not all are exploiting the full potential of their investment to deliver working capital management solutions. Panalpina, by contrast, is making increasing use of its ERP system.
4. Control
Gaining control of financial flows requires accurate, up-to-the-minute information about those flows. In the case of Panalpina, reducing operational risk through automating the reconciliation process was one of the aims - while putting the cash manager in charge of centralised liquidity management was another.
5. Outsourcing
We have mentioned above that outsourcing is an obvious extension of any centralisation and rationalisation activity, and consequently an important element of working capital management solutions. If an organisation is looking to keep its infrastructure lean and productive, it makes sense to outsource any elements of financial processing to an expert partner who can provide the scale, technology investment and the depth of expertise needed to manage that task to maximum efficiency.
The natural conclusion of such a development might be to outsource all operational tasks, effectively creating the fully outsourced treasury back office, functioning to rules and procedures defined by the treasury.
6. Partnership banking
Getting the best from your working capital invariably means building medium-term solutions which are deeply integrated: geographically, across multiple countries, organisationally within the structure of the company, and technically with a few key strategic corporate and banking systems. This in turn requires technical integration with your banking provider, and a working partnership both during design and implementation and in the day-to-day operation.
Keeping these six pillars in mind, let us look in detail at how Panalpina has put the theory of working capital management into practice, and is reaping the benefits.
Panalpina
Panalpina is a global forwarding and logistics services provider with 500 branches in 80 countries and employs 13,000 people worldwide. With working capital making up the largest component of its balance sheet, it is applying the principles of the six pillars of working capital management through the progressive centralisation of regional treasury operations.
In March 2003, group treasurer Daniele Vecchi gained approval from the executive board for a project with four central tasks: to centralise liquidity management, to reduce the number of banking relationships, to move to automated processing, and to streamline the accounts payable/accounts receivable process. In particular, there was an opportunity to create significant value by establishing a series of centralised cash pools. Local company cash surpluses could be used to fund companies with cash deficits and by managing liquidity centrally, treasury would be able to gain significantly better bank terms.
Centralising Treasury and Implementing Cash Pooling
In 2003, Panalpina had a largely decentralised treasury organisation. The company dealt with 25 banks across Europe and managed liquidity locally. Local subsidiaries received poor pricing from their banks and had limited access to liquidity. There was no professional trading and inter-company dealing was extremely time-consuming.
Furthermore, treasury functions were organised on a country-by-country basis, many processes remained manual, and the accounts payable/accounts receivable process was inefficient. There was a significant technology challenge. From a positive perspective, Vecchi had introduced a new treasury management system the previous year, and the company had a single ERP system. But the project involved introducing a uniform EDI format across all countries, as well as STP. Critically, it also involved establishing a secure environment for communications between all of Panalpina's European entities and the bank chosen to be Panalpina's cash management partner, Citigroup. Finally, there was the challenge of winning support from management and the staff in Panalpina's local offices. This was perceived as critical to a project that would change many peoples' jobs.
Challenges to Overcome
One of the key elements companies face when implementing a centralised working capital set-up is internal resistance from the subsidiary, which can sometimes feel that head office is taking away some of its responsibility and independence in choosing a local banking partner. Furthermore, when a cash pool is established, head office takes control of the subsidiary's accounts and can also check their activities. One of the questions often asked during this process is: 'Why should we change now? Everything works perfectly!'
Some strategies for overcoming these resistance factors are:
- The central treasury team needs to ensure strong support from the senior management (i.e. CFO).
- Central treasury should arrange a meeting where all the finance directors of the subsidiaries in which they discuss the solution and its advantages (i.e. less manual process, less admin work, local finance directors can re-focus on their business and do not need to deal with treasury related tasks, headcounts can be used more efficiently.)
- The relationship bank should also be invited to this meeting to explain the solution from the banking side and so that the local CFOs also see the face behind the name.
- The main goal for the group treasury is to show their subsidiaries that its main task is to support them.
The Solution
On receipt of board approval, Vecchi set about centralising liquidity management under Fabio Sarao, corporate cash manager, who works out of the head office in Basel, Switzerland. The goal was to concentrate liquidity in two currency pools: euros and US dollars. The route chosen to do so was zero balancing rather than notional pooling. "The fact that with zero balancing there is a physical movement of funds on a daily basis to a single pool narrows down the balance sheet," explains Vecchi. "It increases inter-company lending, but eliminates debt at a local level."
Some 16 local entities now have euro and US dollar accounts that are swept at the end of each day into the two cash concentration pools managed from Basel. The existing treasury management system traces flows of funds across the company, supplying the necessary information to the relevant finance functions. In all, the liquidity management solution was almost entirely completed within six months.
The next step was to establish the payment factory, and streamline the accounts payables/receivables process. The company has moved from making and receiving cheque payments towards electronic transfer of funds, with each country handling this from a central point. Panalpina chose Citibank File Services to be the file delivery backbone of its cash payments network and CitiDirect for information.
Benefits
According to Vecchi, Panalpina's European treasury operations are now fully automated. "All bank data is uploaded automatically, there is STP throughout, and with the payment factory one single bank pipeline has replaced multilateral connections to a multitude of different banks," he says. The STP ratio for payments is 99.4 per cent. Some 56 per cent of customer collections are automatically matched. The central treasury team now has much more control over payment terms.
Management of liquidity has been transformed. Before, the local subsidiaries managed their liquidity and communicated with treasury on an irregular basis. Now there is daily communication of forecast cash flows. "We have 360-degree visibility of cash with all euros concentrated into one pool in London, which is managed by a team in Basel," says Vecchi. "We have full control of the process."
Getting support for the changes from local subsidiaries was relatively easy, he says, since Panalpina did not have local treasurers in each country. Automation has made life easier at the local level while centralisation has brought major efficiencies. There are no more than five people managing the entire treasury function across Europe. "I see us as an internal service provider," he says.
Panalpina is intent on replicating the process worldwide. Clearly, there are regulatory limitations on the pooling of cash in parts of Asia Pacific and Latin America. "But we are seeking to establish an overview of all accounts at a regional level, operate through a single overlay bank, streamline the accounts payable/accounts receivable process, and standardise and automate with payment factories where possible," says Vecchi.
Eventually, Panalpina hopes to establish a single global pool for each major currency. These pools could be managed around the clock with further considerable benefits to both the balance sheet and profitability. There has already been progress on this front with some dollar balances from Asia Pacific and the Middle East being concentrated into the London dollar pool. Similarly, where it is possible, dollar surpluses in Latin America are being concentrated in New York. Worldwide Panalpina now has no more than 10 people involved in managing liquidity.
The Verdict
Panalpina has embarked on an ambitious project to centralise treasury on a global basis. The process is now complete in Europe, where the savings are in the order of €2.25m. By the middle of 2006, treasury centralisation and payments integration will be a reality in all other parts of the world except Canada, Eastern Europe and Africa. Once fully effective, the new structure is expected to generate a global saving of close to €6.5m annually.
Source : www.citigroup.com
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