Treasury in Transformation

Transcription

1 Treasury in Transformation Results of Treasury Strategies 2008 Global Corporate Treasury and Liquidity Research Program Insights from North America, Europe and Asia-Pacific across Middle Market, Mid-Corporate and Large Corporate turnover segments

2 Treasury Strategies, Inc. is the leading Treasury consulting firm working with corporations and financial institutions. Our experience and thought leadership in treasury management, working capital management, liquidity and payments, combined with our comprehensive view of the market, reward you with a unique perspective, unparalleled insights and actionable solutions. For more information, please visit Treasury Strategies 2008

3 Treasury in Transformation Results of Treasury Strategies 2008 Global Corporate Treasury and Liquidity Research Program Contents Study Objectives...3 Introduction...4 Key Treasury Issues and Initiatives...5 Treasury Staffing....9 Liquidity Treasury Technology Financial Services Providers Research Program Background

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5 Study Objectives The goal of the Corporate Treasury and Liquidity Research Program is to help corporate treasurers and financial services providers better understand the market. Treasury Strategies believes that by understanding the issues that are top of mind for corporate treasurers, financial services providers will be better positioned to deliver value to their corporate customers and, in turn, retain and acquire new business in this dynamic, rapidly changing environment. The research also provides our corporate clients around the globe with a benchmark of current treasury practices and issues. The research program explores the corporate treasury function broadly, encompassing treasury key issues and initiatives, organization and staffing, liquidity management practices, treasury technology and financial services providers. Segment Definitions For the purposes of analyzing segment differences, respondents were grouped by annual turnover, as shown below. Segment Annual Middle Market Less than $1 Billion USD Mid-Corporate $1 to $5 Billion USD Large Corporate Over $5 Billion USD Region Definitions North America comprises the US and Canada Europe comprises Western Europe (Belgium, Denmark, France, Germany, Italy, Netherlands, Norway, Luxembourg, Spain, Sweden, Switzerland and the United Kingdom) Asia-Pacific comprises select key Treasury centers within the region (Australia, Hong Kong, India, Malaysia and Singapore) 3

6 Introduction Treasury is undergoing a profound transformation around the globe. In response to market turmoil, globalization, banking consolidation and the increasingly strategic nature of payments, Treasury is expanding its scope of activities and becoming a change agent within the firm. Our research and consulting work reveal Treasury is continuing to evolve, characterized by several key themes. By understanding and crafting effective responses to these themes, financial services providers can win share and differentiate themselves in the marketplace. Treasury is becoming a strategic business partner, developing cross-functional relationships to help business units globalize as well as execute and accept new payment media. In some cases, Treasury is helping to integrate the physical and financial supply chains to accelerate the speed of business. As part of this effort, Treasury is examining counterparty relationships with financial institutions and trading partners for their ability to support this integration and drive efficiencies. More aggressive firms are adopting innovative new solutions that deliver buyer financing, simplify and electronify the exchange of payment documents, improve workflow around working capital, and deliver enhanced information throughout the lifecycle of a transaction. Treasury is managing a broader set of risks, expanding beyond foreign exchange (FX) and interest-rate risk, to assume responsibility for commodity risk and, in some cases, non-financial risks such as non-insurable business risk as part of a comprehensive enterprise risk management responsibility. Treasurers are rethinking their approaches to identifying, measuring and managing risk, offering financial services providers unprecedented opportunities to differentiate their ideas and solutions. In response to changing financial accounting standards governing measurement and reporting of risk, as well as heightened sensitivity to counter-party risk, Treasurers are seeking assistance in the form of technology solutions and advisory services from financial partners. Treasury is deploying technology and centralizing activities to strengthen controls and risk management, maximize efficiency and improve access to liquidity a critical objective in today s tight credit markets. While many firms are implementing or considering Treasury Systems (TMS), Treasurers are also evaluating a broader array of technology. They ve expanded their focus beyond TMS to assess an array of technology solutions that can be integrated into their TMS or enterprise resource planning (ERP) such as multi-provider execution platforms, digital dashboards, bank relationship management software, online investment portals, payment factories and corporate access to SWIFTNet. Technology solutions are helping companies centralize key activities such as FX and investments. As a result, Treasurers are seeking integrated, global treasury solutions; and the banking community is responding. Banks are consolidating globally and also better integrating their solutions across regions. Reflecting these moves, our research indicates that more banks are emerging with leading market positions in multiple countries. In particular, there has been a rise in both pan-european and true global banks. Through technology and more tightly integrated global banking solutions, Treasury is improving efficiency not to reduce staff, but to free up resources to take on expanded strategic activities. Across all regions, at least 1 of respondents noted that they increased treasury staff in 2008, underscoring the strategic importance of Treasury. In response to market turmoil, Treasury is rebalancing its cash portfolios and restructuring its banking relationships. Market turmoil has led Treasurers to reduce portfolio risk, often by moving money out of active investments and into lower risk, passive investments such as money market funds. In most regions, Treasury is planning to rely more heavily on banking providers, expanding service usage with a core group of strategic partners. In 2005, Treasury Strategies outlined the Next Generation of Treasury Services, arguing that the traditional treasury management business had matured and providers could grow by redefining the business to encompass deeper working capital and liquidity solutions. Now, in 2008, we are seeing the emergence of select banks that are yielding double digit growth by delivering deeper, more tightly integrated solutions to their corporate clients. The remainder of this document outlines the above themes in greater detail. 4

7 Key Treasury Issues and Initiatives Key Issues At the outset of 2007, Treasury Strategies called upon Treasurers to Bulletproof Treasury to safeguard every dollar of cash flow throughout its lifecycle via appropriate controls, policies and procedures that identify, measure, monitor and manage risk. Treasurers that heeded this advice were well served and were able to continue their pursuit of a strategic agenda while minimizing the distraction from market turmoil. As can be seen by the survey results, however, many corporate treasurers are now revisiting their risk, liquidity and funding capabilities in light of recent market events. In Europe and Asia-Pacific, FX risk management is the other recurring, top-three treasury issue cited by respondents. FX risk management is a key issue in both Europe and Asia-Pacific in part because of the significant decline of the US dollar relative to the euro, the yen and other Asian currencies. Concerns around FX, risk, liquidity and funding can be seen throughout the survey results. Liquidity management, risk management and credit / funding dominate the 2008 rankings of issues that are keeping Treasurers up at night no matter what time zone they live in. These three treasury issues dominate all turnover segments in North America and reflect the impact of tight credit conditions following the US mortgage meltdown, as well as extreme US dollar volatility, a struggling economy and heightened regulatory oversight. Europe Asia-Pacific 1. FX Risk 2. Risk 3. Liquidity 1. FX Risk 2. Liquidity 3. Risk 1. Risk 2. FX Risk 3. Liquidity 1. FX Risk 2. Credit/Funding 3. Market Conditions 1. FX Risk 2. Credit/Funding 3. Liquidity 1. FX Risk 2. Credit/Funding 3. Liquidity North America 1. Risk 2. Credit/Funding 3. Liquidity 1. Liquidity 2. Risk 3. Credit/Funding 1. Liquidity 2. Risk 3. Credit/Funding 5

8 Emerging Industry Issues Participants were also asked to evaluate the relative importance of key industry issues. Shown below is a sample of responses from Large Corporate Treasurers. Detail on each of these issues is provided on the following page. 6 a Large Corporate Company Interest in Bank Issues % Respondents Rated Issue 4 or 5 = High Priority a 6 a Large Corporate Company Interest in Bank Issues (by Select Country) % Respondents Rated Issue 4 or 5 = High Priority a 5 5 % Respondents 3 1 % Respondents 3 1 Corporate Access to SWIFT Outsourcing Treasury Functions XML Standards for Treasury Activity SEPA Initiatives Trade Finance Corporate Access to SWIFT Outsourcing Treasury Functions XML Standards for Treasury Activity SEPA Initiatives Trade Finance 6 a Mid-Corporate Company Interest in Bank Issues % Respondents Rated Issue 4 or 5 = High Priority a 6 a Middle Market Company Interest in Bank Issues % Respondents Rated Issue 4 or 5 = High Priority a 5 5 % Respondents 3 1 % Respondents 3 1 Corporate Access to SWIFT Outsourcing Treasury Functions XML Standards for Treasury Activity SEPA Initiatives Trade Finance Corporate Access to SWIFT Outsourcing Treasury Functions XML Standards for Treasury Activity SEPA Initiatives Trade Finance 6

9 Corporate Access to SWIFT Many firms have directly connected to SWIFT to achieve straight-through processing of payments and financial information. Straight-through processing not only improves efficiency and control, but also helps optimize working capital and risk management by accelerating access to critical information. Interest in Corporate Access to SWIFT remains strong across all regions, but is of particular interest in Canada, Asia-Pacific and Europe, where roughly one in three Large Corporate Treasurers noted that this topic was a high or very high priority. This level of interest suggests that banks can differentiate themselves by helping firms understand the costs and benefits of SWIFT connectivity and, if appropriate, assist them in achieving straight-through processing. Outsourcing of Treasury Functions Many Treasurers are reluctant to outsource treasury functions given the strategic nature of Treasury, the level of risk inherent in outsourcing and the one-time resources needed to migrate to an outsourcing arrangement. Despite these obstacles, Large Corporate Treasurers in Asia-Pacific and Canada expressed strong interest in outsourcing, suggesting opportunities for providers to deliver broader solutions that free up resources for Treasurers. SEPA Initiatives The Single European Payment Area is of great interest to Treasurers in Europe, which is no surprise. However, a material percentage of Treasurers in Asia-Pacific, Canada and the US also ranked SEPA as a high priority issue. In its final form, SEPA should enable Treasurers to streamline banking structures and the execution of payments. The Treasurers in these regions that cited SEPA as a high priority issue likely have, or plan to have, financial activities across multiple countries in the SEPA zone. Financial institutions should ensure that they clearly communicate the impact of SEPA on corporate low value payments into the Eurozone and the associated pricing dynamics of low value payments. North American corporates appear to be expecting that payments under SEPA will carry the same pricing structure as low value payments in North America, which will not likely be the case. As a result, banks will need to develop and articulate pricing strategies that position the value of their global payments capabilities and which also avoid customer dissatisfaction or confusion. For some customer segments, complex pricing schemes that vary by country and region may be effective, while for others, a more uniform pricing structure may maximize revenues while also aligning pricing structure to customer needs. XML Standards While some Treasurers have aggressively called for standards, only a modest percentage of respondents expressed interest in XML standards. To some extent, this dynamic likely reflects the emerging nature of industry standards. While efforts are ongoing under the umbrella of ISO 20022, many Treasurers are unclear as to how these standards will operate and how they can benefit from them. Industry associations, technology providers and leading bankers must continue to advance standards not only to ensure their interoperability, but also to communicate how such standards will operate and the benefits corporations and providers can achieve as a result of these standards. Trade Finance A perfect storm has raised interest in trade finance solutions across all regions. First, trade flows continue to grow and expand, with many companies now trading with emerging economies in Africa and Latin America, where banking infrastructures are less mature and risks are harder to identify and manage. These conditions make open account structures less feasible, leading to a resurgent interest in traditional trade solutions. Secondly, tightening credit markets have led firms both to seek alternative sources of financing as well as to re-evaluate their own credit exposures with their customers. In response to these trends, we are witnessing creative new trade solutions and a more aggressive cross-sale of trade finance services. 7

10 Planned Initiatives The initiatives Treasurers have planned for the next 12 months reflect both current concerns and the emerging strategic nature of Treasury. A significant number of firms are either selecting or implementing treasury technology or are working to enhance their current treasury technology. In many cases, the focus on technology is driven by a desire to address the key issues cited earlier improved risk and liquidity management. By automating functions and improving access to information, Treasury can better control and monitor the financial activities of the firm. Technology also provides a platform for centralization, a critical component in controlling risk and gaining visibility to liquidity. Lastly, through automation and access to information, technology helps Treasurers free up resources for strategic activities and gain access to key information needed to support strategic decision making. The one exception to the focus on technology is the Asia-Pacific region this dynamic is somewhat surprising as firms in this region exhibit a low rate of adoption of treasury technology and have relatively high treasury staffing levels. Many Treasurers also cited process and policy reviews as key initiatives, including: Centralization of key treasury functions and the merging of disparate treasury units Migration to electronic payments and electronic invoicing Imaging of physical documents and checks to streamline collections Establishment of shared service centers Documentation of existing procedures Efficiency initiatives to automate or expand reporting Financial services providers can assist companies with many of these initiatives through enhanced reporting, consultative advice on optimal banking account structure, and new payment solutions such as electronic invoice presentment / receipt, accounts payable processing, and check / document imaging solutions. Projects During the Next 12 Months: Large Corporate Projects During the Next 12 Months: Large Corporate (by Select Country) Risk Credit/Funding Cash Internal Process/ Policy Review Business Development/ Expansion Technology Selection/ Implementation Technology Enhancement Re-Bid/Review Bank Services Risk Credit/Funding Liquidity Cash Internal Process/ Policy Review Business Development/ Expansion Technology Selection/ Implementation Technology Enhancement Re-Bid/Review Bank Services

11 Treasury Staffing Treasury staffing levels remain lean. In each of the three major regions covered by the study, median treasury staffs are less than 10 full-time equivalent (FTE) employees for both the Middle Market and Mid-Corporate segments. This lean staffing continues to prevail despite treasury departments being tasked to do more than ever across a range of operational, analytical and strategic activities Median Worldwide Treasury FTE Treasury staffing exhibits the least variance by firm size in Asia-Pacific. The consistency of staffing levels in Asia-Pacific across firms of varying size results largely from the complexity of the banking and treasury environment as well as the expanded scope of such Treasuries. The Asia-Pacific region is characterized by multiple currencies, varied banking practices, and complex legal and regulatory requirements. This complexity tends to introduce a fixed cost component to Treasury as even relatively modest-sized firms must grapple with resource demands related to multiple currencies and legal / regulatory environments. Furthermore, it is not uncommon for treasury units in Asia-Pacific to be responsible for financing and even sales and operating activities Median Worldwide Treasury FTE (by Select Country) Given the dynamics outlined above, the relatively modest size of Large Corporate Treasuries in Asia-Pacific is surprising. Because Asia-Pacific Treasuries have lower levels of adoption of treasury technology, many are burdened with higher levels of manual activities. At the same time, many Treasurers in the Asia-Pacific region cited business development initiatives as key issues. These dynamics point to a disconnect, as Asia-Pacific Treasuries are being asked to do more in a complex environment with relatively lean staff levels and without the benefit of technology. Consistent with this dynamic, we have encountered in our corporate consulting engagements that treasury staffs in Asia-Pacific work considerable overtime Faced with limited resources and expanding responsibilities, financial services providers have opportunities to expand the scope of services delivered to Treasury. For those Treasuries lacking access to technology, the bank web platform can serve as a limited TMS, delivering enhanced information, execution and decision-support around cash management. Providers can also serve as an outsource provider for various Treasury activities, including reporting, reconciliation, liquidity management, investment, policy attestation, payment decisioning and management of various functions across the accounts payable and accounts receivable value chain. 9

12 While the vast majority of respondents in all three regions reported that treasury staffing remained stable for the past year, a significant number of firms reported increases in treasury staffing levels. In many cases, Treasury has been able to acquire additional staff in response to risk concerns or business expansion Companies Reporting an Increase in FTE Companies Reporting an Increase in FTE (by Select Country) A significant percentage of Canadian firms across all market segments increased treasury staff levels. Many Canadian firms added staff as part of an effort to increase their risk management capabilities in light of a weakening US dollar, volatile and increasing commodity price levels, and heightened risk in the financial markets. Because government entities in Canada have generated surpluses, which reduced the inventory of government securities, Canadian Treasurers have increasingly purchased direct instruments. In some cases, they purchased structured investment vehicles and other instruments that later became credit and liquidity-impaired. The recent market disruption has led many Canadian Treasurers to strengthen their risk management infrastructure and capabilities. Globalization and the pace of regulatory / banking change in Europe has led many Large Corporate firms to expand treasury staff. In particular, nearly one in three UK Large Corporates reported an increase in treasury staff levels. Notably, the region with the most apparent staffing pressures, Asia-Pacific, exhibited relatively modest growth in staff levels. In contrast, while very few firms in France increased treasury staff levels, treasury units in France enjoy some of the highest levels of adoption of treasury technology, minimizing the need for additional staff

13 Liquidity As noted earlier, liquidity management is a top concern for Treasurers across most regions and turnover segments. In both our consulting work and our research, we ve seen that Treasurers have not only rebalanced their portfolios in response to market conditions, but they have also continued to develop their internal liquidity practices to better monitor, aggregate and manage liquidity. Going forward, Treasurers note they will further rebalance their portfolios, which presents opportunities and threats to financial services providers. Portfolio Composition Reflecting varied regulatory environments and traditional market practices, portfolio compositions vary widely by region and country. Corporations in Asia-Pacific proportionally invest the greatest amount in bank deposits, reflecting strong relationships with their banks, less developed secondary markets for fixed income instruments, and the lack of penetration in money market funds. The fact that treasury technology is not widely deployed in the region also accounts for the choice of less complex investment instruments. 10 Liquidity Portfolio by Instrument Large Corporate Conversely, Canadian corporations hold the lowest Instruments percentage of their portfolios Bank Deposits and Sweep DDA / Current Accounts in bank deposits. Despite Offshore Deposits having the ability to offer Time Deposits / CDs Savings / MMDAs interest on operating Sweep Off Accounts accounts, as well as the ability Actively Managed to market term deposits and Portfolios other instruments to their Money Market Mutual Funds corporate clients, Canadian Direct Instruments financial institutions have not Commercial Paper been aggressive in marketing Repo s Government / Sovereign liquidity solutions to their Instruments corporate customers. As a Notes / Bonds result, Canadian Treasurers Other Enhanced Cash Funds have turned to direct Banker s Acceptances instruments, despite the costs Overnight Investments Equities / Mutual Funds and risks inherent in such an Loans approach. While the Canadian market has seemed to be a natural fit for money market funds which offer efficiency, convenience and risk minimization Canadian Treasurers do not heavily invest in funds. We suspect this is due to the focus of the fund companies on the larger market opportunity in the US. 10 Liquidity Portfolio by Instrument Large Corporate (by Select Country) Bank Deposits Actively Managed Money Market Funds Bank Deposits Actively Managed Money Market Funds Direct Instruments Other Direct Instruments Other 11

14 Money market funds represent a growing and significant percentage of Treasury portfolios, as these instruments offer an attractive yield while diversifying or minimizing credit risk exposures. Long a mainstay of cash portfolios of French corporations, money market funds have gained an increasing share of corporate cash throughout the US and Europe, particularly in the UK. In most cases, where money funds have been adopted they displaced direct instruments. The reasons for this are multiple. First, money market funds, due to their scale, can aggregate multiple investments into a large portfolio and thus diversify credit and other risk. Secondly, the largest and most competitive money funds can offer attractive yields. Lastly, money funds are a convenient investment option many are now easily accessible through both proprietary and non-proprietary online portals and most offer corporations the ability to make purchases and redemptions later in the day, when they have greater certainty as to their cash position. Several banks have taken advantage of the recent market turmoil to market deposit products aggressively. Time deposits have enjoyed a resurgence and there has also been a movement from direct commercial paper investments into repurchase agreements, in order to minimize risk. Money Fund Selection Treasurers select money funds based on risk, value-added services, advice and convenience. 1. Advisory Services 2. Underlying Instruments 3. Value-Added Services 1. Offered through Concentration Bank 2. Underlying Instruments 3. Value-Added Services 1. Underlying Instruments 2. Offered through Concentration Bank 3. Size of Fund Risk: Unsurprisingly, given the recent troubles with mortgagebacked and auction rate securities, corporations in all regions cited underlying instruments as a top-2 criterion for determining which money fund they select. Underlying instruments was the top criterion in North America and the second most popular determinant in Europe and Asia-Pacific. Also reflecting a focus on risk minimization and stability, North American Treasurers cited the size of the fund as a selection criterion. Value-Added Services: Treasurers in Europe and Asia-Pacific cited value-added services as a primary selection criterion. Increasingly, money funds are being sold not only as instruments, but also as part of the internal liquidity processes of a corporation. Fund providers are delivering value to their customers through enhanced reporting, ease of execution, and alignment of the fund with policy guidelines combined with transparency of reporting on underlying instruments. Advice: Given the relatively emerging nature of money funds in Asia-Pacific, it is unsurprising that advisory services is the number one selection criterion for Corporate Treasurers in Asia- Pacific. Because bank deposits have dominated the Asia-Pacific market, fund providers must articulate the benefits of money funds, anticipate and overcome potential purchase objections, and educate the market on the use of such products. Notably, advisory services ranked as a high priority in Canada, which has limited experience with funds, but a low priority in Europe and the US, reflecting the relatively high level of comfort with funds. Convenience: Consistent with prior research and our experience in consulting engagements, we find that the concentration bank is king. All things being equal, the concentration bank captures the majority of a corporations liquidity because they provide a convenient channel for investments. Furthermore, corporations especially those with large cash portfolios are increasingly selecting their concentration banks on the basis of their liquidity management capabilities. By understanding their customers liquidity needs and offering value-added tools such as investment portals, online policy management, cash pooling management and investment advice providers can command a position as the primary concentration bank and gain share of money funds and other cash investments. 12

15 Portfolio Rebalancing Corporate Treasurers plan to shift the compositions of their cash portfolios in response to market conditions. To understand how portfolios might shift, we asked participants to identify the instruments they planned to increase or decrease by or more. In general, firms are reducing risk while looking to enhance yield, primarily via shifts into interestbearing vehicles such as time deposits and money funds. French Corporate Treasurers show distinctive differences by firm size. While all segments show an intention to direct additional liquidity into money funds and time deposits, the segments vary in how they intend to invest in short-term cash. Middle Market firms, possibly due to the lack of scale, will invest this liquidity in non-interest bearing current accounts and Mid-Corporates plan to direct incremental liquidity into interest-bearing current accounts. In contrast, Large Corporate firms plan to invest in repurchase agreements. Consistent with their prior investing behavior, Asia-Pacific firms that project a or more increase in their instrument profile plan to direct these funds into deposits. A small number of Middle Market firms noted an intention to invest increased liquidity in repurchase agreements. Across the Middle Market and Mid-Corporate segments, a material number of firms noted a plan to increase holdings in foreign currency time deposits, reflecting the global nature of these firms treasury activities. Asia-Pacific 1. Foreign Currency Time Deposits 2. Interest-Bearing Current Accounts 3. Repurchase Agreements 1. Time Deposits 2. Foreign Currency Time Deposits 3. Interest-Bearing Current Accounts 1. Time Deposits Within Europe, we see two key trends firms are planning to invest money further out on the yield curve via time deposits, and all segments show an interest in directing additional liquidity into money market funds. This dynamic underscores the increasing adoption of money funds by European Treasurers. France Within the UK, firms that plan to increase liquidity instruments project increases in time deposits, interest-bearing current accounts and money funds. Large Corporate Treasurers expecting increased liquidity also cited commercial paper as a planned area of increase. UK 1. Money Market Funds 2. Non-interest Bearing Current Accounts 3. Time Deposits 1. Time Deposits 2. Money Market Funds 3. Interest-Bearing Current Accounts 1. Money Market Funds 2. Time Deposits 3. Interest- Bearing Current Accounts 1. Time Deposits 2. Money Market Funds 3. Interest-Bearing Current Accounts 1. Time Deposits 2. Money Market Funds 3. Repurchase Agreements 1. Time Deposits 2. Interest-Bearing Current Accounts 3. Commercial Paper Europe 1. Time Deposits 1. Time Deposits 1. Time Deposits 2. Interest-Bearing Current Accounts 3. Money Market Funds 2. Money Market Funds 3. Interest-Bearing Current Accounts 2. Interest-Bearing Current Accounts 3. Money Market Funds 13

16 Pooling Of those corporations that pool their investments, the majority manage their pooling internally. Most of the remaining respondents pool through banks, and only a very few respondents in Europe and North America pool through a third party. The exception to this dynamic is Canada, where the majority of firms that pool reported the use of a bank or third party while less than one-third of those firms that pool manage the pool internally. Canadian respondents in all turnover segments were most likely to have their banks manage pooling and also most likely to turn to a third-party non-bank to manage their pooling. Pooling Large Corporate Pooling Large Corporate (by Select Country) Internal Third Party Bank Internal Third Party Bank 14

17 Bank Relationship Structure Large Corporate Bank Relationship Structure Large Corporate (by Select Country) Local Banks in each Region One Regional Bank across Regions Local Banks in each Region One Regional Bank across Regions Single Global Bank Mix Single Global Bank Mix Bank Relationship Structure by Region While most respondents use a mix of local, regional and global banks for their financial needs, a surprising percentage of Large Corporate firms in each region use only local banks. This trend signals a tremendous opportunity for companies to consolidate their activities to a regional or global banking structure to make it easier to control and manage cash. Banks have an opportunity to provide the services those clients need to realize these efficiencies. Within the Large Corporate segment, Canadian firms are most likely to use local banks and most likely to use a single global bank across all regions. US firms are most likely to report the use of a regionally consolidated banking structure. Within North America, this dynamic suggests an opportunity for Canadian banks to expand their local relationships to regional or global delivery of services. The use of local banks is consistently the lowest among large corporations and the highest among Middle Market firms. Nearly twice as many Middle Market firms with global banking needs report the exclusive use of local banks Bank Relationship Structure Middle Market Local Banks in each Region One Regional Bank across Regions Single Global Bank Mix 15

18 Treasury Technology Technology continues to be viewed as a critical tool by which corporations can improve treasury processes. In fact, our research suggests that more corporations are broadening their use of treasury technology. The two clear favorite types of treasury technology among respondents are stand-alone, best-of-breed TMS applications and bank account reconciliation technology. Adoption of treasury technology continues to increase, driven by the demand by Treasury for solutions that improve efficiency, better control risk, and deliver critical information and insights needed to support strategic decision making. Most Popular Forms TMS applications continue to be more popular than treasury management system modules of ERP systems. While ERP treasury modules continue to improve, TMS technology is still viewed by many treasurers as being more robust and worth the additional effort needed to integrate the TMS into the ERP. Almost half (47%) of North American respondents use TMS technology. Dedicated, stand-alone TMS platforms are nearly as popular with European companies (36%) and have been adopted by about one in five (22%) Asia-Pacific companies. Far fewer North American companies, only about 11%, are using ERP Treasury modules, which are more popular in Europe (32%) and Asia-Pacific (27%). TMS Usage ERP Treasury Module Usage % Respondents % Respondents 16

19 TMS Usage TMS Usage (by Select Country) France stands out as a major user of both TMS and ERP Module technology. One reason for this dynamic is that French firms historically did not have access to interest-bearing current accounts. As a result, these firms had to monitor liquidity balances in order to efficiently mobilize cash. As can be seen in the charts below, the usage of Treasury Systems is more common with larger firms. (Note: some firms noted the use of both stand-alone TMS and ERP Treasury Modules). ERP Treasury Module Usage ERP Treasury Module Usage (by Select Country)

20 The usage numbers for bank account reconciliation technology are similar to those for TMS technology across regions. North America is the top user (5), followed by Europe (41%) and Asia-Pacific (21%). France again is noteworthy, having a higher percentage of users of this technology than the United States, Canada and the United Kingdom. % Respondents 8 6 Bank Account Reconciliation Usage 8 Bank Account Reconciliation Usage 8 Bank Account Reconciliation Usage (by Select Country) 6 6 Beyond Treasury Systems Treasurers are taking a more holistic view of technology. As they pursue goals such as increasing cash visibility, improving control over transactions and producing more flexible reporting, more Treasurers are evaluating an array of technology options with an eye toward integrating those technologies with their TMS. For instance, or more of respondents across all regions are using inter-company netting technology. In Europe, netting and financial risk management technology is emerging due to the abundance of intercompany transactions and the classification of FX as the biggest risk management issue in treasury operations. % Respondents 8 6 Inter-Company Netting Usage 18

21 Another example of increasing adoption of broader technology solutions is the fact that more than a third of Mid-Corporates in Canada report using financial risk management technology. This trend reflects the need of many firms to analyze and manage commodity exposures. About of Mid- and Large Corporates in the UK are using FX execution systems, and about one-quarter of Mid- and Large Corporates in the US are using online investment portals. The growth of online investment portals has been rapid reflecting demand for efficiency, improved advice and ease of execution. Inter-Company Netting Usage FX Execution Systems Usage Inter-Company Netting Usage (by Select Country) FX Execution Systems Usage (by Select Country)

22 Investment portals are growing in popularity as greater functionality is being added to these Web sites in the form of performance analytics, more fund choices, more timely performance reporting and investment policy management, including parameter controls on tenor and instrument limits. 8 6 Online Investment Portal Usage Plans through 2009 Over the next 12 to 18 months, a significant number of firms plan to select treasury technology, with most looking to a dedicated TMS and, in Asia-Pacific, bank account reconciliation technology platforms. Many firms are also exploring enhanced technology tools, including electronic bank account management systems, with which firms can better monitor and manage bank account mandates and authorized signers Treasury Technology Selection Online Investment Portal Usage (by Select Country) 1 ERP Treasury Module FX Execution TMS Account Reconciliation Netting Financial Risk Mgmt 20

23 Treasury Technology Implementation Treasury Technology Enhancement ERP Treasury Module FX Execution TMS Account Reconciliation Netting Financial Risk Mgmt ERP Treasury Module FX Execution TMS Account Reconciliation Netting Financial Risk Mgmt Among those firms planning to implement treasury technology in that time frame, TMS is by far the leading form they plan to implement across all regions. As we have found in our corporate consulting experience, most firms are not using the full capabilities of their TMS, whether it is a dedicated system or an ERP treasury module. Unsurprisingly, of those firms planning to enhance existing technology, the vast majority is focusing on the use of their TMS. These activities include integrating additional banking relationships into the TMS reporting structure, automating additional treasury activities, and using additional modules such as debt management and investment management. 21

24 Financial Services Providers With lean staffing and a growing list of challenges, particularly in the areas of risk and liquidity management, many corporations are looking to deepen their relationships with their primary banking providers. While many Large Corporate firms have sizable Treasury staffs, the majority of Middle Market and Mid-Corporate firms operate with relatively small Treasury staffs. As a result, these firms lack functional specialization in key areas such as global cash management, financial risk management and optimization of global liquidity. Accordingly, these firms are turning to their financial services providers for assistance as they grow and optimize their treasury operations. Changes in Transaction Services Providers A significant number of companies in all regions project changes in their transaction services providers. Nearly four in ten companies in North America expect changes to their transaction banking rosters, and roughly 25% in Europe also expect change. Even in the Asia-Pacific region, which is characterized by long-standing banking relationships, one in seven companies expect changes to its banking roster Transaction Services Provider # Expectations 3% 85% 15% 76% 26% 62% Because firms in North America and Europe primarily plan to reduce the number of transaction providers, banks in these regions must make a concerted effort to become more important to their clients. One key trend we have seen is the tendency of firms to consolidate more of their business with banks that can deliver a global solution. For regional banks that have tended to cede global business to larger banks, it is clear that this strategy will result in significant client loss in the years to come unless they expand their global capabilities. In the United States, the need to deepen relationships is most apparent, as over of large corporates noted an intention to reduce the number of transaction banking providers. Historically, the US market was characterized by significant fragmentation so that companies with a national footprint required multiple collection banks. Recently, many banks have developed national capabilities through virtual vault (currency) services and remote deposit capture solutions. As a result, firms are now able to consolidate their collection activities with a single, national provider. The turnover segments most likely to reduce their number of banking relationships in the coming year are the Middle Market in the United Kingdom (66%) and the Mid-Corporate (47%) and Large Corporate (42%) segments in the United States. Conversely, the market segments with the greatest percentages of companies expecting to increase banking relationships are Asia-Pacific Mid-Corporate (26%) and Large Corporate (25%) and United Kingdom Middle Market (22%). The latter is the least stable market segment, with only 13% expecting to remain the same with their banking relationships. 12% 9% 12% Increase Remain the same Decrease 22

25 10 8 Large Corporate Transaction Services Provider # Expectations 24% 37% 10 8 Large Corporate Transaction Services Provider # Expectations (by Select Country) 16% 29% 42% 6 75% 6 71% 56% 79% 68% % 4% 7% 5% 3% 8% Increase Remain the same Decrease Increase Remain the same Decrease 10 Mid-Corporate Transaction Services Provider # Expectations 10 Mid-Corporate Transaction Services Provider # Expectations (by Select Country) 8 28% 45% 8 22% 29% 47% 6 74% 6 65% 77% 7 71% 55% 53% 26% 7% 3% 7% Increase Remain the same Decrease Increase Remain the same Decrease 23

26 Middle Market Transaction Services Provider # Expectations Middle Market Transaction Services Provider # Expectations (by Select Country) 10 4% 14% 18% 10 7% 7% % 6 87% 76% 82% 6 88% 93% 8 13% 22% 9% 1 5% Increase Remain the same Decrease Increase Remain the same Decrease Transaction Services Spend & Usage Transaction services spend is widely distributed across the three regions, indicating that spend is driven more by company size and transaction volumes than by location or industry. For example, in the United States, the largest percentage of Middle Market respondents are spending $51,000 to $250,000 a year on transaction services, while the top category is $251,000 to $1 million a year for Mid-Corporate firms and over $1 million for Large Corporates. Transaction Services Spend in 2008 (USD) Over 1mm 251k - 1mm 51k -250k Under 50k 5% 1 15% 25% 3 35% 45% 5 North America Europe Asia-Pacific 24

27 Large Corporate Transaction Services Spend in 2008 (USD) Large Corporate Transaction Services Spend in 2008 (USD) (by Select Country) Over 1mm Over 1mm 251k - 1mm 51k -250k Under 50k k - 1mm 51k -250k Under 50k North America Europe Asia-Pacific US Canada UK France Mid-Corporate Transaction Services Spend in 2008 (USD) Mid-Corporate Transaction Services Spend in 2008 (USD) (by Select Country) Over 1mm Over 1mm 251k - 1mm 51k -250k Under 50k k - 1mm 51k -250k Under 50k North America Europe Asia-Pacific US Canada UK France Middle Market Transaction Services Spend in 2008 (USD) Middle Market Transaction Services Spend in 2008 (USD) (by Select Country) Over 1mm Over 1mm 251k - 1mm 51k -250k Under 50k k - 1mm 51k -250k Under 50k North America Europe Asia-Pacific US Canada UK France 25

28 In each region, half to three-quarters of respondents expect transaction services usage to remain the same over the next 12 months. But in all three regions there are more respondents who expect to increase usage in the next year than there are respondents who expect to decrease usage. and consolidation of internal processes / systems as the most popular reason. Transaction Services Usage Expectations North America is the region with the highest percentage of respondents expecting to increase usage (28%), followed by Europe (21%). This is interesting because these are the same regions where more companies expect to drop banking relationships rather than add them. The net effect of these two dynamics is that primary banks will see significant gains in revenue. The call to action for banks in all regions, particularly North America, is clear deepen and strengthen your relationship position to protect against attrition and enjoy the benefits of increased spend. Across all regions, firms expecting to increase their transaction services spend over the next 12 months cited M&A activity % 11% 78% 68% 19% 54% 28% 17% 21% Increase Remain the same Decrease Liquidity Services Providers Relative to plans to change transaction banking providers, a smaller number of firms are expecting to add or drop liquidity service providers; this is a significant change from prior years, when change in liquidity provider was typically the highest frequency response. This shift reflects the current market environment. Burned by credit and liquidity disruptions, more companies may be sticking with proven and trusted providers. In Asia-Pacific, 9 of respondents expect to make no change, in Europe 83%, and in North America 73% Liquidity Services Providers Expectations # 9 5% 83% 13% 73% 1 13% 14% Increase Remain the same Decrease 26

29 One notable finding about the companies that reported plans to make a change in liquidity providers is that they are also more likely to consider a change in transaction providers than those companies that have no plans to make a change in their liquidity providers. Thus, it appears that to win new relationships, banks must promote integrated solutions that address both Large Corporate Liquidity Services Providers Expectations # transaction banking and liquidity management needs. The market segments most likely to add liquidity services providers are Large Corporates in Canada (29%) and the United States (26%), as well as Middle Market companies in the United Kingdom (22%). Large Corporate Liquidity Services Provider # Expectations (by Select Country) 10 8% 9% 10 16% 3% % 65% 6 84% 84% 71% 64% 26% 1 29% 26% 13% Increase Remain the same Decrease Increase Remain the same Decrease Mid-Corporate Liquidity Services Providers Expectations # Mid-Corporate Liquidity Services Provider # Expectations (by Select Country) 10 8% 13% 10 7% 4% 5% 14% % 83% 71% 6 93% 78% 85% 69% 13% 1 17% 19% 18% 1 Increase Remain the same Decrease Increase Remain the same Decrease 27

30 Middle Market Liquidity Services Providers Expectations # Middle Market Liquidity Services Provider # Expectations (by Select Country) 10 5% 13% 10 9% 6% 14% % 74% 6 95% 69% 81% 73% 1 13% 13% 22% 5% 13% 13% Increase Remain the same Decrease Increase Remain the same Decrease Bank Service Linkages Approximately two-thirds of corporations in all regions use a single bank for their primary concentration, disbursement and collections provider. This strong majority is driven by the large portion of Middle Market firms in the survey that only have one or two banking relationships. However, a noteworthy percentage of corporations select a dedicated concentration bank particularly in Asia-Pacific and Europe, where one in five firms selects a stand-alone concentration provider. These firms tend to have more complex liquidity needs and larger portfolios Companies Using Their Concentration Banks for Other Cash Services 65% 9% 5% 21% 62% 1 8% 21% 68% 7% 1 15% Neither Collection Only Disbursement Only Collection and Disbursement 28

31 Trade Services Spend As firms migrate to open account solutions, many in the industry project a decline in trade spend. However, the respondents in our survey plan increased trade spend, likely reflecting the continued globalization of economies. Over 1mm 251k - 1mm Trade Services Spend in 2008 (USD) Trade spend is significantly lower than transaction spend, as would be expected. Only 1 of corporations in Europe and Asia-Pacific, and less than half that in North America, expect to spend more than $1 million on trade services in In fact, between and 65% of companies in each region are planning to spend less than $50,000 this year on trade services. 51k -250k Under 50k North America Europe Asia-Pacific Large corporations in Asia-Pacific expect to be the biggest spenders, with more than planning to spend more than $1 million on trade services in Trade Services Spend in 2008 (USD) Large Corporate Trade Services Spend in 2008 (USD) Large Corporate (by Select Country) Over 1mm Over 1mm 251k - 1mm 51k -250k 251k - 1mm 51k -250k Under 50k Under 50k North America Europe Asia-Pacific US Canada UK France Trade Services Spend in 2008 (USD) Mid-Corporate Trade Services Spend in 2008 (USD) Mid-Corporate (by Select Country) Over 1mm Over 1mm 251k - 1mm 251k - 1mm 51k -250k Under 50k k -250k Under 50k North America Europe Asia-Pacific US Canada UK France 29

32 Trade Services Spend in 2008 (USD) Middle Market Trade Services Spend in 2008 (USD) Middle Market (by Select Country) Over 1mm Over 1mm 251k - 1mm 251k - 1mm 51k -250k 51k -250k Under 50k Under 50k North America Europe Asia-Pacific US Canada UK France A significant percentage of firms in each region are expecting to increase their spend and very few firms plan decreases in trade spend. Planned increases in trade spend are most common in the Asia-Pacific region, where nearly one-fifth of firms, including of the Large Corporate respondents, expect to increase their trade services spend this year. Firms in the Asia-Pacific region have generally outpaced other regions in their drive toward globalization, and many of our clients are seeing significant trade flows between Asia-Pacific and emerging markets such as Africa and Latin America. M&A activity is the primary driver for increased trade services spend in all regions. Additionally, more than half of North American firms that expect to increase spend also cited increased volumes or business expansion as a reason for the increase. Expected Change in Trade Spend Expected Change in Trade Spend Large Corporate 10 2% 4% 3% 10 4% 7% % 82% 83% % 19% 14% 14% 16% 1 Increase Remain the same Decrease Increase Remain the same Decrease 30

33 Pan-European and Global Banks Our research highlights the continuing consolidation of the banking industry. The geographic consolidation that has been occurring in North America for several years is taking hold in Europe, leading to the emergence of Pan-European banks. Whereas five years ago we saw different lead banks in most countries, now there are a handful of banks with a top 5 position in the Large Corporate segment in every region across every product but Liquidity. Royal Bank of Scotland, for instance, has become a top tier provider, as measured by client penetration, in every service (trade, transaction, credit and liquidity) in Europe. Additionally, global banks are beginning to emerge, which should help corporations address their need for more integrated global solutions. HSBC, for instance, now ranks in the top 10 for every service across every region we studied North America, Asia-Pacific and Europe. Citibank, meanwhile, ranks in the top 20 for every service in every region and has a top position in the Large Corporate sector in both Asia-Pacific and North America. Evidencing the increasingly global nature of the banking industry, this year, Barclays, BNP Paribas, Deutsche Bank, JPMorgan and RBS all posted a top 10 position in at least one product line in two or more regions. Other key findings regarding the roles of major banking providers include: Credit is still a driver of relationships 8 of the top 10 European short-term credit providers are also top-10 transaction, trade and liquidity service providers. Similarly, 9 of the top 10 Canadian short-term credit providers are also top-10 providers of transaction, trade and liquidity services. Global banks are major players in North America of short-term credit service providers in the United States are foreign banks. On the other hand, no US bank ranks among the top 10 European providers of short-term credit. 31

34 Research Program Background To understand the market, we surveyed senior treasury leaders from over 970 unique firms across North America, Western Europe and the Asia-Pacific region. To illustrate region-wide dynamics, responses were rebalanced by country and turnover segment to approximate the actual distribution of firms within each region. Treasury Strategies interviewed corporate treasury professionals at nearly 1,000 companies, including 369 in North America, 500 in Europe and 104 in Asia-Pacific. About 25% of respondents were from large corporations, defined as companies with annual turnover exceeding $5 billion (or the local currency equivalent); 31% were Mid-Corporate firms, with annual turnover ranging from $1 billion to $5 billion; and 44% were Middle Market companies with turnover between $250 million and $1 billion. Treasury Strategies interviewed Asia-Pacific and European Treasurers by telephone, while surveys of North American Treasurers were conducted online and by fax. All surveys were conducted during the second quarter of To learn more about the research program, discuss the ideas in this paper, or to purchase the full, detailed study, please contact Treasury Strategies at

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