Unlocking treasury’s added value
Ever since Stern Stewart & Co. introduced the concept of Economic Value Added (EVA) in 1982, organizations have been striving to maximize Shareholder Value (SHV).
While EVA and treasury performance measurement have some common points of contact, Zanders believes a more comprehensive split between Business Value Added (BVA) and Treasury Value Added (TVA) is desired. Partner Laurens Tijdhof explains.
Could you describe what is currently ‘trending’ in treasury performance management?
While the value business adds by focusing on the core business activities is obviously the most important SHV component of a successful organization, no organization can be consistently successful without strategic and operational support from its treasury department. Although the TVA concept is relatively new, it is quickly moving up the priority ladder with large multinationals as traditionally they have been struggling to define meaningful measures of a treasury department’s success and ways to track such performance. Ultimately, the selection of relevant treasury metrics will differ depending on whether corporate treasury is viewed as a cost, value-added or profit center.
When viewed as a pure cost-centre, relevant metrics will ensure treasury stays within the agreed budget and policy guidelines. Performance management in this case has a clear focus on costs, whereas when considered as a profit center, the generated revenue becomes an important measure and profitability metrics will be selected. A third view looks at treasury from a value-added service center perspective, which implies the value treasury adds to the organization is the bottom line measure of performance. Despite the general agreement that performance should be measured, there is less consensus on how this should be done.
Today’s treasury management systems (TMSs) are able to provide a large array of metrics with a few simple clicks, but there is a risk of losing oversight if not only the most relevant metrics are selected. This is done by identifying key indicators (KIs), those metrics that are crucial for the organization. While treasury metrics can be on almost anything, KIs help to translate the treasury strategy into quantifiable items on which concrete actions can be taken. Furthermore, KIs can give an early warning signal about the risk, performance and value development of the different treasury areas.
What are the key challenges for a ‘best-in-class’ global treasury organization?
Zanders has developed a treasury value framework, a phased and proactive approach to achieving a best-inclass global treasury organization. The initial starting point are treasury’s strategic objectives, which need to be aligned with the business objectives and strategy of the entire organization. The treasury roadmap describes the timeframe and strategic actions to be taken in order to achieve treasury’s strategic objectives.
Once the roadmap is defined, treasury will focus on gaining control of its activities by reducing its operational complexity, which in turn enables the more proactive management of financial risks. The progress towards complexity reduction is monitored by key risk indicators (KRIs), which are risk limits within which treasury needs to operate and the overall risk reduction of the organization such as counterparty limits, risk bearing capacity or Earnings-at-Risk (EaR). After treasury has control and visibility on its operational activities, in the next phase it will strive for operational excellence via performance optimization. Best-in-class treasuries are extremely effective i.e.
they maximize the input available in order to achieve their objectives by using better-trained staff or a more effective management structure. At the same time, they are efficient performers as they can complete the required tasks with the smallest quantity of resources possible. The road towards operational excellence is monitored with key performance indicators (KPIs) such as cash flow forecasting accuracy, percentage of manual interventions in the reconciliation process or achieving the target weighted average cost of capital (WACC). In the final phase of the treasury value framework, the focus will be on strategic enablement and the valueadded services provided by treasury. The added value of the treasury function is measured by key value indicators (KVIs) such as the net promoter score (NPS).
Besides its traditional activities, treasury can act as an internal consulting partner to other staff departments and business units. The NPS provides an indication of how satisfied ‘internal customers’ are with the services treasury provides. The end of the third phase does not imply the end of the treasury value framework as the output and lessons learned from each phase are to be used again as input for updating and calibrating the strategic objectives and treasury roadmap. Therefore, it’s best to consider the treasury value framework as a process of continuous improvement.
As a final note, our treasury value framework should not be considered as a ‘one size fits all’ model. What suits one company may not suit another. Corporate culture often plays a big role. What organizations choose to highlight is a function of what is important to a particular company.
How can Zanders help?
Zanders has considerable experience and expertise in guiding organizations through the process mentioned, in other words, from ‘ideas to implementation’, not just focusing on the concept stage but also making it a reality. A comprehensive review and assessment of the current treasury organization will provide the basis for a solution design or blueprint of the three-to-five year treasury roadmap to achieve treasury’s strategic objectives. Zanders can help to identify opportunities for reducing operational complexity in all three areas: strategy & organization, processes & systems and governance & control.
In the performance optimization phase, we have helped clients to set up global centers of excellence for their treasury organization and develop a treasury dashboard to monitor progress. While the importance of traditional treasury activities is not to be underestimated, at the same time treasurers are pushed into playing a more strategic role to unlock the full value of treasury. Best-in-class global treasury organizations are those that can turn treasury insight into business impact.