The international treasury evolution.

Author:Baldoni, Robert J.
Position:Cover story

The treasury departments of many multinational companies have been on an evolutionary journey in recent years, but the next step could be the biggest yet: going truly global by making the leap to an international treasury center (ITC).


Whether on a regional or global basis, ITCs are being used to efficiently centralize and standardize many treasury functions--including liquidity and risk management, intercompany and external funding and investments--and housing them together within a tax-efficient legal entity.

The streamlining alone of these functions can save significant time and money, but an ITC is capable of much more than that as the visibility and access to liquidity it provides can reduce the impact of increasingly unpredictable turns of the global economy.

Financial market volatility, the complexity of financial instruments, far-reaching accounting and regulatory changes, the euro crisis, emerging market growth--these and other dynamic forces can pose sudden and urgent challenges to a company's earnings, market share, cost of capital and shareholder value. A properly designed, located and operationalized ITC can help supply the stability and flexibility needed to meet these challenges.

The transparency and coordination that an ITC brings to the typical multinational's sprawling network of operating units and subsidiaries can even fuel new possibilities for growth, by making financing, risk management and support functions more closely available to where they are most needed.

As attractive as the potential benefits from shifting to an international treasury center are, a company first needs to determine that it is ready for an ITC and to understand the key steps in the transformation.

The Current State of Affairs

As companies expanded internationally over the years, many of the processes for managing treasury operations arose independently to meet the needs of each new situation, market or country. For a time, these processes worked well in serving those needs. But in many cases, they operated separately from the needs of the rest of the company. Nor did they benefit from the efficiencies that come from scale or from possible offsetting intercompany positions.

As international markets matured and the parent company's operations spread and became more complicated, this patchwork quilt of treasury functions and processes has become ever more cumbersome to operate. The monitoring and processing of the resulting myriad of transactions--and the need to manage currency risk and cash flows--suffers not only from a lack of economies of scale but also from potential duplication and inconsistency.

What's more, subsidiaries with excess cash in one market often invest in their own country location while sister subs that are in need of cash in other markets may have to borrow externally. Similarly, subsidiaries that are short a particular currency do not benefit from subs that are long in that very same currency. In addition, information needed to support management decision-making may not always be accessible, delaying reactions to market shifts and possible liquidity shortages.

The disparate nature of many of these current processes can thus act as a barrier to transparency, become a drag on operating performance and hamper the pace of growth.

At some point, multinationals have to adopt a model that reflects the reality of operating in a truly interconnected global environment and accept the fact that they can no longer function as a loose federation of international entities. Accordingly, many multinational corporations could benefit from the ITC's approach of standardizing, centralizing and automating processes from both a treasury and a tax perspective.

Depending on how a company is structured and where it operates, one or more regional treasury centers might be the best solution for now. For increasing numbers of multinationals, though, a move to a single global center can make the most sense.

An Abundance of Benefits

The benefits achieved by a well-designed global center can span the full range of treasury activities. (See Sample Structure for a Treasury Center, on page 38.)

For openers, financial managers will gain increased visibility and access to cash across the organization, thanks to the use of pooling, standardized cash management techniques and the application of robust treasury technologies to consolidate cash management, investment...

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