“Almost any corporate function will be ‘at risk’ of being outsourced, whether internally (SSC) or externally”
Here is this week’s new #CFOBrain interview (check out the other pieces from this series). From how technology is affecting the finance department to its implications from the strategy standpoint, our conversation with Patrick Verspecht is definitely worth reading.
Patrick is the former Global Treasurer at General Electrics (GE) Measurement & Controls and a Member of the Board of the Association of Corporate Treasurers in Belgium.
Arturo: So Patrick, could you tell us a little bit about your background?
Patrick: I have a professional career of more than 35 years, and I would say it is quite an atypical one. I spent the first half (almost 18 years) in the corporate IT field, working for a company called Dresser Industries Inc. I then had the opportunity to switch to finance as a controller for UK subsidiaries and EMEA Corporates entities, within the same group. In 2005, I was given the chance to start in a new position as European treasurer and then got promoted as EMEA Treasurer shortly after. In February 2011, we were acquired by General Electric and I became the global treasurer for their Measurement & Controls 4bn business.
I have a bachelor’s degree in IT and an executive master’s in Finance. The fact of having a good IT background, associated to a controllership experience, helped and still helps me a lot in my treasury life. I left GE in 2016 and since then I have been working with a Swiss FinTech company (FinMetrics), who specializes in finance risk management, and as an external interim treasury resource for Accudyne Industries. I am also still working for GE (as an external resource) and am giving a number of treasury training sessions (for the Chamber of Commerce in Luxembourg and TMI Academy). Last but not least, I am a board member of the Belgian Association of Corporate Treasurers, which keeps me quite busy!
Is technology the main factor disrupting the finance department?
In my opinion, it’s a fact that technology is changing the way the treasury department works. However, these changes in turn also have implications from a strategy standpoint. Take, for instance, large companies such as Boeing, IBM, General Electric (GE) and others. Many of these large firms are decentralising all low-value, high transactions volume functions –i.e. what we used to call back-office operations- to Shared Services Centres (SSCs).
In the beginning, this outsourcing to SSCs was mostly about Accounts Payable (AP), in the form of a “payments factory.” But today, it implies non-back-office-related activities, like banking relationships, FX Risk management and to some extent, trade finance.
The fact that more and more activities that traditionally have been almost 100% part of the corporate treasury department are being migrated to a SSC –that could be by region or global – will have implications for the current tasks of the treasurer, meaning that it will add to or eliminate some of his responsibilities.
What are the implications for the Treasury role?
Let me give you an example. Nowadays, the approval of payments is often still done in the Treasury department so that the treasurer has all the tools he needs to fulfil his monitoring and compliance responsibilities. In case management decides to outsource it to a SSC in Eastern Europe, Asia or Africa, his responsibilities would most probably still include monitoring and compliance, but he would need another technology tool to be able to control all this switch of activities to the SSC. So, the question is: what will the corporate treasurer going to do in his office in London, Paris or New York under this new scenario?
However, in parallel, the risk role of the treasurer has also evolved from back-office function -to being a key business partner not only for the finance team but also for the commercial team and the business itself. For instance, the treasurer is going to be involved in the Capital Approval Process (Capex) and is going to be involved in various projects such as M&A at an earlier stage than they were in the past. His role will become a lot more associated with the business strategy, than purely doing “cash management.”
Beyond pure accounting, what are the other finance functions that might be affected? And what are the main reasons behind this outsourcing strategy?
In my view, almost any corporate functions will be “at risk” of being outsourced, whether internally (SSC) or externally. For example, we are starting to see part of the tax functions being outsourced to external firms, such as indirect tax activities (VAT, Customs…). Basically, you would keep the full ownership of your core business activities, letting you separate the operational from the non-operational.
And what are the motives behind such strategy? The answer is simple: simplification and cost savings. And there is nothing negative about it. At the end of the day, the return to shareholders is fundamental for listed companies. However, you require strict SLAs (Service Level Agreement) to be put in place and closely monitored to avoid some lack of “interest” on the SSCs side for the Business day-to-day life.
Does this imply a gradual reduction of finance departments?
I will speak for the Treasury area. We have a generic benchmark: “the Treasury’s resources should be one person per billion euro of revenue”. Obviously, if you have one billion revenue you might have two or three members in the treasury team, but if you are a 50 billion company, as a centralised corporate treasurer, you should be OK with 50 people if you have the right structure and the right organization in place.
I believe that in the future, the corporate treasury team will be downsized to a small team, composed of high calibre professionals, who will use the resources from the SSCs. But they will still be responsible for key topics such as Fraud, Compliance, and Risk Management. So, my prediction is that in five to ten years from now, the Corporate Treasury in the multinational environment will look totally different than it did 5 years ago, unless of course there is a big event similar to September 15th, 2008 (Lehman Brothers collapse and AIG bailout) that forces everyone to rethink their strategy.
Which parts of FX management may be outsourced?
I distinguish 8 steps in the process: the identification of the risks, the gathering process and compilation of the FX risk data, the hedging, the back-office tasks (ie trade tickets reconciliation), the MtM (mark-to-market) calculation, the accounting, the communication to the various entities and the reporting of Hedging Efficiency.
The first step (risk identification) will largely remain with the local entity, while the other steps can be easily outsourced. The most important one – the implementation of the hedges – is just an execution of the strategy (based on the policy) decided by the Treasury and the senior management.
Why were all these strategic changes not done 20 years ago?
There are several reasons. For instance, in the payments area, if you wanted to get the SSC working well, you would be obliged to have one identical version of your ERP. Today you have tools which are on the market that allow you to take whatever format you have, and to convert it into a standardised one even if you have many different ERPs.
In my opinion, apart from technological advances, the 15th of September 2008 marked a before and after in treasury. I was in New York during that weekend, glued to my hotel TV with a colleague, watching all the live news on Lehman and AIG as if we were in a theatre. I was working for a 2bn revenue American company at that time and the CFO called us at the end of the day saying, “I need to have a counterparty risk report by Monday morning” i.e. a list with the exposures to all the banks that we were using, and he was also asking my opinion on the risks that we might face. I had to tell him that we did not have that kind of report and that our teams needed many days to get those data. Today, it is unthinkable that a treasurer is not able to produce this counterparty risk report on the spot. It has become a standard report.
So, previously, the Treasury was seen more as a cash and debt management function, and as such, a “necessary cost” for the company. Today, the risk element of the function (which was always hidden) is becoming more and more important in the role of the treasurer. The visibility of the treasury department has exploded after the 2008 crisis and the function is today perceived as an added value to the whole enterprise.
Does this new role require a new set of capabilities?
That’s one of the problems that many multinational companies face. I know some people that started as the treasurer of a business of, let’s say, 1 billion revenues, and now when the business is at 20 billion, that same guy is still the head of treasury. Does he have the most expertise or is the most competent for the job? Not necessarily. Many times, he was just the first one.
Nowadays, the treasurer must be not only technically-versed in treasury and cash management, but he must be a leader too. In fact, he must be prepared to interact with the senior management on a daily basis. Actually, he may even be even technically less of an expert , so perhaps he doesn’t need to know what is an MT101 Swift Message. He must be able to adjust the Treasury strategy to the long-term strategic plan of the company.
He needs to be able to get out of his office and to converse with new actors such as Fintech companies along with more traditional players like the banks. He needs to participate in peer roundtables. He must interact with other finance functions, like FP&A, Commercial Finance, etc… And for many of these changes, the 15th of September 2008 was a milestone.
What are the most relevant advances in the international payments space affecting the treasury department?
In the last few months, there’s been quite a buzz around so-called “instant payments,” but honestly speaking, if a payment takes 5 seconds, 2 minutes or 1 hour to happen, in most cases, I don’t really care. In my opinion, the only time when instant payments is going to be of importance is in M&A transactions.
I’m actually more interested in a project that Swift is developing, called Swift GPI (Global Payments Innovation) that, amongst others, allows companies to track where their payments are from the initial input to the time it hits the beneficiary account So, when you have a difficult payment, where maybe two or three correspondent banks are involved, and if three or four days later the beneficiary calls you saying “I don’t have my cash,” it will be easy for you to check where the payment is stuck.
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