In the first hundred years of its existence, Boskalis was purely a dredging company. In 2010 the company – to give it its full name Royal Boskalis Westminster NV- acquired a number of other companies and, as a result, evolved from a dredging to maritime service company offering various services to different markets. Over the course of a few years, Boskalis acquired haulage company SMIT Internationale, Fairmount, Dockwise and the dredging business of the German Strabag Wasserbau.

Evolved according to needs

Boskalis has a huge project organization; the company operates in more than 90 countries across 6 continents. As a result of this expansion, the complexity of treasury work increased as well, due to various currencies, local bank accounts, financial structures and different ERP systems. “At a certain time they all have to be in sync,” says Frank Rousseau, Boskalis’ Group Treasurer. Treasury plays a remarkable hybrid role in it all: on the one hand as a ‘holding-treasury’ – namely in the area of corporate finance and everything concerning take-overs – and on the other hand closely involved with projects, mainly financial risk management. Rousseau: “Advising the Board and at the same time being close to the business locally means we play a very central role.”

Rousseau also thinks that the treasury function at Boskalis is special. His department now has 16 people who work on cash management, corporate finance, project financing, bank guarantees and credit risk management. “Our people are often directly involved with projects. The treasury organization has evolved according to the needs of the company. There is a need for strong financial and operational risk management and support for the business units, such as identifying and covering currency risks, credit risks and fuel price risks. At the time a contract is signed, all such risks have to be covered; when the project is underway you can’t intervene. Getting the order book filled is easy, but filling it with revenue-generating work is a bit harder. There is no advantage in taking on work and then doing it badly. Risk management is therefore very important in our business.”

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Quick involvement

Large projects involve the whole treasury department in one way or another. “For example, take the
construction of a new arm of the Suez canal, so that shipping can safely navigate in both directions. From 2014 onwards this has been a large project and we had to contend with local bank accounts; Egyptian pounds, which have a currency risk; and managing credit risks, financial securities, bank guarantee structures and fuel price risks. These sorts of things can lead to fluctuations in returns and costs and therefore Treasury is involved at many levels, which makes it really fascinating.”

Our people are often directly involved with projects. The treasury organization has evolved according to the needs of the company.

Frank Rousseau, Group Treasurer at Boskalis

1300 people in total work at Boskalis’ head office in Papendrecht, supporting the company’s large
international projects. The fleet, the pools with crew, the researchers and contractors are all managed centrally. Even the preparation and implementation of tenders is done centrally, by, amongst others,
Treasury, Legal and Tax. “We are involved from the moment potential work is on the horizon up to contract negotiations. But also when the order is under way, for example with payments, the management of cash”, Rousseau explains. Execution of such local projects has to be managed centrally. “We don’t have any local organizations that can develop the necessary competencies; when one project is finished the project organization moves on to the next one. After the Egyptian project, half of the people go on to the next project in, let’s say, Oman. It is, in a way, hit and run work. We only have locations in Amsterdam and Singapore that act as a permanent base for a region.”

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Atradius cover

Rousseau’s treasury organization reports to the CFO. Besides administrative and secretarial support, there is a team of four who deal with the daily cash management. Five others handle credit risk management and bank guarantees. Another team of five handles corporate finance, project finance and project development. Customer finance falls under project finance. “Public-Private Co-operation (PPS) is quite labor-intensive: if you tender for a Dutch PPS, you have to do so with a complete financing package. There are international clients – those outside the OECD countries – who have a project, but lack the financing or don’t know exactly how to develop the project. For example, in Panama we had Punta Pacifica, where a client wanted to put two islands off the coast of Panama city. As the client had insufficient funding for this, Boskalis participated with local banks. We were therefore not only contractor/guarantor for the complete execution of the project as far as the financers were concerned, but we also financed a part of the contract value. Treasury tries to add value in order to bring in a project.”

Another example is arranging a loan for clients with Atradius cover. “We did that last year in Colombia,” Rousseau explains. “We arranged bank financing for the client where the bank received credit insurance from the Dutch Export Credit Agency, covered by the Ministry of Finance. Credit risk for the bank is effectively carried by to the Dutch government. This is only possible in combination with a Dutch export product. In this way we try to do more projects by contributing to the economic feasibility of a project. In addition, we are broadening our approach to project development: we are offering parties who have a project in mind the chance to develop this together with Boskalis and make a business plan that is then financeable.” Although this is not a typical Treasury activity at first sight, it fits in the strategic scope of Treasury’s role in Boskalis.

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New direction for cash management

In 2014 RBS, an important international house bank to Boskalis, decided to stop offering cash management and trade finance services outside the UK. This forced Boskalis to change direction. Rousseau: “We had decided some time ago to take a close look at our cash management, but when RBS pulled out we were triggered into taking action. And we realized then, in spring 2015, that we needed external help.” That’s how the relationship with Zanders came about.

Zanders' added value was in visualizing solutions and thinking strategically about where we wanted to be as company. They helped us to make choices, and with the set up of the whole organization.

Frank Rousseau, Group Treasurer at Boskalis

An important step was selecting a new bank for cash management services. Boskalis and Zanders issued an RfP and, via a short list and various analyses, we finally chose BNP Paribas for international cash management and ABN AMRO for Dutch cash management. At the same time, the cash management structure and the payment process were improved by implementing a bank-independent, central payment hub, which provided more insight into our cash flows. Rousseau: “We can now send a report of our net financial position to the Board every day: where is our money? We have drastically reduced the approximately 700 bank accounts we had and we now have structures abroad to better centralize our cash. Furthermore: we previously had payments from all sorts of different electronic banking systems. That too is now centralized in a standard solution.”

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Asian prize

Parallel to these changes, Zanders supported Boskalis with an upgrade and outsourcing of the treasury management system (TMS). “We had three balls in the air at the same time,” says Rousseau. “It was a big strategic project, certainly for our Treasury. It has improved our bank account structure, the payment process and the information flow. Every morning we now receive all balances for about 500 bank accounts electronically via MT940. Our TMS then generates a report which gives the CFO and me insight into our net financial position. In the UK we have just set up a cash pool and we are doing the same in Germany. In our central cash pool we have 19 currencies. Last year we took over VBMS, the former offshore wind company of Volker Wessels, and this component has also been included in the new structure. In these type of processes, Treasury used to be a follower, but now we are leading. We tell the business unit how its cash management should be structured.”

This year Boskalis won a prize from The Asset, a well known Asian trade journal, for ‘Best Cash Management Solution in Asia.’ Rousseau: “In Singapore, one of the few places where we have a permanent base, we have set up a structure with target balancing, so that every day a limited amount remains in the account whilst surplus funds are automatically transferred to the central cash pool in the Netherlands. This solution has won a nice prize and sector-wide recognition.”

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Future expectations

Which plans and developments does Rousseau foresee in the future? “We obviously look at where
we can make more improvements, but we have made great inroads over the past two years. For Treasury, support for the business units - the wider role in project finance and project development – is most important. We have a new 3 year business plan for 2017-2019, in which we show that we want to grow in dredging activities and offshore energy, the new components which we have had for several years and in which we expect high growth. As far as credit risk is concerned, we are keeping an eye on the oil and gas sector.” The Board of Directors is close to the organization and to its projects. This means that all departments have a short communication line with them. “They have insight into all projects’ financial risks and how we can cover them,” Rousseau explains. “The people we have here are really good professionals, who can handle derivatives. If you see what we have set up for our cash management and with which people we meet new challenges, then we really are ready for the future.”

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In 2014, the International Union for Conservation of Nature (IUCN) launched their Global Cash Management Project in order to improve cash management policies and processes throughout the organization. IUCN chose Zanders as their trusted advisor to support them on the journey.

IUCN was founded in 1948 and is composed of 1,300 members, including governments and non-governmental organizations. The ability to convene diverse stakeholders and provide the latest science and on-the-ground expertise drives IUCN’s mission of informing and empowering conservation efforts worldwide. IUCN’s work is centered on three key areas: promoting effective and equitable governance of nature’s use, nature-based solutions to global challenges, and valuing and conserving nature.

Combatting the Challenges

From their 40 locations around the world, IUCN works together with local partners to use nature-based solutions to combat the challenges arising from climate change, loss of biodiversity, and food and water security. IUCN is active on an international level, seeking to influence policymakers and governance mechanisms. On a national and local level, they advise governments and stakeholders on translating international commitments into applicable policies and frameworks. Through a network of some 16,000 experts, IUCN gathers and generates knowledge for publicly available databases managed by IUCN. One such database is the IUCN Red List of Threatened Species, which gives an assessment of the extent a species is threatened and an indication of the extinction risk, thereby promoting conservation.

Fragmented Treasury Management Approach

The local nature of IUCN’s project work is reflected in their organizational structure with 32 country offices and 9 regional offices. This has historically given a great deal of independence to the local finance departments in IUCN. “Our regional offices and local offices have a great deal of autonomy, and as a result, finance has followed that autonomy, so each office essentially has its own finance function,” Mike Davis, chief financial officer for the Global IUCN Secretariat, explains.

The decentralized and autonomous nature of the finance department led to a fragmented treasury management approach with each local office taking on cash management and foreign exchange activities themselves. This resulted in a lack of visibility of the global cash position, decentralized collections of donations, and inefficient foreign exchange management performed locally.

Transformation

During the last few years, IUCN transitioned from directing the disparate operations and initiatives across the organization towards a more global and unified approach. “We are moving towards a more integrated organization,” says Davis. “For example, when considering climate change, a global approach is taken with initiatives translating into global programs implemented in several countries, as opposed to each region or each country developing its own projects on a local level. This also impacts how you then organize and manage your resources, which then has an impact on the treasury function as well.”

To support this transformation, IUCN implemented one common Enterprise Resource Planning (ERP) system across their entire organization, which replaced the stand-alone systems used in the local offices around the world. From a treasury perspective, the rollout of the ERP system was the first step towards creating better visibility of the total cash position in the organization.

Global Cash Management Project

Further integration between the global finance operations was initiated when IUCN launched their global cash management project. Zanders supported IUCN by charting a new cash management course to provide insights into market best practices and strategic guidance on future-proofing bank relationship management. Zanders began by conducting a thorough study of the cash management processes at IUCN to create a report of improvement initiatives. The primary recommendations were for the IUCN Finance Department to implement a uniform cash management policy across the organization and to rationalize their broad, diverse, and costly banking portfolio. Davis: “We chose Zanders because of their expertise in treasury and good reputation among other international organizations.”

Bank Rationalization Initiatives

The IUCN banking portfolio consisted of 46 banks and a dispersed bank account structure with approximately 160 bank accounts. The growing bank portfolio inhibited the visibility and control of cash. Furthermore, the dominance of local autonomy and a decentralized organization left IUCN with an inability to leverage banking relationships between the global secretariat, regional, and country offices. IUCN had an ineffective banking structure with regards to the number of bank accounts, service level, and competitiveness on fees provided by the banking partners. Additionally, the magnitude of bank accounts had operational maintenance and management implications because they required excessive manual time and effort to maintain. Introducing a banking landscape that supports efficient processes and reduces internal costs spent on maintaining bank accounts were key objectives for the bank rationalization initiatives. “Our main objective was to have efficient processes and to rationalize our banking structure because with that you can reduce risk, the amount of time in your organization spent on managing different relationships and also reduce the number of bank accounts. As each bank account has an internal cost, I would say the internal costs were far more important to us than the external costs,” Davis says.

Request for Information

By the end of 2015, IUCN issued, with the support of Zanders, a Request for Information (RFI) to eight banks identified to either have a global reach and footprint matching IUCN requirements or otherwise be material for IUCN. In total, 51 countries were included in the RFI. The RFI invited banks with global and regional capabilities to elaborate on their cash management offerings which were relevant for the business and geographical areas of IUCN. This included the services offered for cash management, payment processing, foreign currency disbursement, reporting capabilities, and connectivity solutions. Davis explains: “The Zanders team was very helpful throughout the whole process and very willing to adapt their services to what we needed and to think about different approaches before advising on what would be the best approach for us. We chose a more agile path with the RFI route, as opposed to a more formal RFP, which was then adjusted so it best met our needs and budget.”

Local Offering, Global Presence

To best facilitate and run nature conservation projects around the world, IUCN organizes itself in 9 regions; Asia, West Asia, Eastern & Southern Africa, West & Central Africa, Europe, Eastern Europe and Central Asia, Mexico Central America & Caribbean, Oceania, and South America. This localized, regional structure played a significant role in determining IUCN’s new banking landscape.

“Compared to other international organizations, IUCN has formed their regions in a much more localized manner, which then also becomes key when rationalizing and selecting new global banking partners as one has to balance the local offering with the global presence,” says Liam Ó Caoimh, director at Zanders.

Preferred Banking Partners

IUCN received RFI responses from five international banks. A six-sigma scoring and evaluation tool assessed the five proposals, which IUCN and Zanders evaluated together. IUCN used the results of the assessment to select three banks as the preferred choice for international banking partners. These three banks together cover 70 percent of the countries in scope for IUCN. For the secretariat’s headquarters in Switzerland, the bank relationship was kept with IUCN’s existing Swiss banking partner. By reducing the broad banking landscape to a manageable portfolio of relationships, IUCN’s treasury focuses more on supporting the field offices around the world under the guidance of a lean yet strong global cash management framework.

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British American Tobacco (BAT), headquartered in the UK and listed on the London Stock Exchange, is well known as the manufacturer of traditional cigarette brands as well as next generation products such as e-cigarettes. The company, which had a gross turnover of £42 billion in 2015 and employs 50,000 people across its manufacturing operations in 41 countries, is known for its commitment to operating responsibly and with transparency.

BAT recently completed the deployment of project ‘TaO’ which introduced a new target operating model enabled by one instance of SAP across all markets within the group. TaO is the enabler to migrate more processes to financial shared service centers and for the operation of a more centralized treasury function, resulting in greater visibility and control over the group’s cash resources.

Throughout the TaO project, Zanders advised BAT on how to restructure its treasury processes, which were overhauled and pushed towards a centralized model. And, as the company invested in its treasury and cash management infrastructure, the logical next step was to build on the foundation TaO provided to move from elements of best practice to world class cash management.

The TaO project highlighted the potential to increase efficiencies in payables and receivables by channeling payments through ‘on behalf of’ (OBO) structures, Phil Stewart, global head of cash and banking at BAT, says: “The ‘payments/receivables on behalf of’ (POBO/ROBO) structure was a key component of the cash management optimization initiative. These structures leveraged the in-house bank implemented during TaO, allowing for greater transparency, control and risk management while using established SAP channels for the most efficient and cost effective transaction routing.”

The ROBO challenge

BAT is an early adopter for best practices in the cash management and payments space, and in the case of OBO, BAT needed a bank that supported them in this relatively new area. Zanders director Arn Knol says: “POBO isn’t a new concept but this project focused on using virtual accounts to enable ROBO, replacing actual bank accounts with virtual accounts. This meant that each customer had to be assigned a unique virtual account – enabling BAT to see exactly when customers have paid and to replace physical bank accounts with virtual ones.”

One benefit of a ROBO structure is a clear reference for each receivable in central treasury, with data about the payment, which smooths the reconciliation process for receivables. The company also drastically reduces the number of bank accounts for further cost savings and more efficient use of staff time. The efficient processing and reconciliation of receivables also improves the day’s sales outstanding (DSO) process.

There was, however, a challenging aspect to the project: not all banks BAT spoke to were ready to meet the company’s requirements. Stewart says: “One of the challenges we faced was that the banks’ virtual account offerings were at different stages of maturity with very few able to support the model we wanted to deploy. We were able to overcome this to achieve a bespoke solution that worked for us on a consistent basis across all markets in scope. The virtual account space continues to evolve at pace, it is worth noting that a number of banks have made significant strides and are now better placed to meet our requirements.”

Concept and implementation

BAT started the OBO project in January 2016, initially working on a conceptual design for a number of pilot markets. The company’s Asia-Pacific business took on the pilot phase and chose to implement OBO in Hong Kong, Singapore, Australia and New Zealand. These countries had already rolled out the TaO project successfully and, from a regulatory perspective, had few barriers to adopting the structure.

BAT had already carried out due diligence in these markets prior to the start of the TaO project, including in-depth discussions with tax and legal experts, as well as with central banks. During the impact analysis for the OBO project, the company built on this knowledge, adding further technical analysis to identify what information SAP needed. Stewart says: “The conversations we had with Zanders at this stage were invaluable in shaping how BAT wanted to use virtual accounts to simplify account structure and enhance receivables process. They provided a high level of expertise, which enabled us to finalize the design at an early stage. This was key to the project’s success and timely implementation.”

BAT chose Deutsche Bank as the main banking partner for the Asia-Pacific pilot project. Communication between the company and the bank was crucial at this stage and facilitated the discussions. Knol explains: “The onsite meetings during the pilot phase helped to make sure that Deutsche Bank really understood what BAT wanted from a technical perspective. We played an important role in bridging any gaps between the bank and BAT.” Once the team was satisfied that the pilot phase was a success, they implemented the OBO structure with Deutsche Bank in Western Europe in the second half of 2016. Stewart says: “SEPA was the catalyst to effectively deploy OBO across Western Europe and, while the payments environment is more standardized than Asia-Pacific, the number of countries involved in the roll-out brought additional complexity to the project. We had to be clear in communicating the change in conjunction with getting the necessary legal and tax sign off from all markets. Although it’s to be expected that there will be some challenges, particularly from an IT point of view, all areas of the company were actually very supportive and fully bought into the new way of working.”

Business case for OBO

The business drivers for the project were centralization, simplification through standardization, rationalization, transparency, consistency and cost/risk reduction. The OBO structure supports treasury by increasing shared service efficiency and enhancing reconciliation processes, improving bank relationship management, consolidating banks and bank accounts, reducing fees, increasing yields and simplifying liquidity structures.

“The end result surpassed our expectations,” says Stewart. “One key factor was that our stakeholders were very aware of what impact the project would have from the outset. We ensured that our treasury, procure-to-pay and order-to-cash objectives were fully aligned. All corners of the business understood the benefits of the implementation and rather than wondering why we were doing it, they actually wondered why we hadn’t done it sooner.”

Working with the business units enabled the various stakeholders within BAT to understand the value of the project. According to Knol, BAT explored additional opportunities because it was clear that treasury was a valued partner for parts of the organization, such as procurement and the financial shared service center.

This acceptance allowed BAT to continue with the OBO project and roll it out in other markets. Stewart adds: “We certainly saw this as a wider cross-functional project supporting a number of other group wide centralization and working capital initiatives, rather than looking at it solely through a treasury lens.”

Handling complexity

BAT is a large organization; to affect change within the complexity of the OBO structure meant that the team had to cooperate closely with internal BAT business units and external players. Stewart says: “There was a huge collaborative effort from Zanders, Deutsche Bank and BAT. From the bank’s point of view, it was a particularly challenging project but they did a fantastic job in making it happen. We made it clear at the outset that we needed a bank that could effectively partner and deliver to our aggressive timelines. They were able to fulfil this and benefited as the project demonstrated what could be achieved; BAT became a showcase for them. What you need is a bank that’s able to think globally, building relationships with the shared service center in Bucharest, as well as with the team in London and to coordinate across borders.”

Is there any advice BAT would give to companies considering a similar POBO transformation? Stewart says: “Companies have to decide if the structure is right for them, what are they hoping to achieve and does it fit into company-wide objectives, is the technical infrastructure robust and secure enough to support? Is the relevant technical expertise available in-house or are consultants required? In addition, it is important to have buy-in from key stakeholders from the outset particularly from a tax and legal perspective. They need to ensure they have banking partners able to effectively support a project of this scale. It’s a huge step from conducting a request for proposal (RFP) to actually implementing the OBO structure, so choose a bank with some experience in this field. A project of this scope can seem daunting but don’t be put off by complexity: in many ways, the more complex the project, the greater the benefits.”

Future plans

BAT completed the POBO/ROBO implementation at the end of 2016 and is now looking to extend the structure to other markets where there is a solid business case to do so. They intend to roll out the project in Malaysia and they are currently in discussions with the Malaysian authorities and central bank to finalize approval. In Africa and the Americas, BAT is also looking to achieve a more streamlined bank account structure using virtual accounts on a non-OBO basis. Stewart concludes: “Overall, virtual accounts have brought us huge benefits and they would also work well in the payments space particularly for payroll and tax. Considering the progress we’ve made with OBO and the TaO project, BAT is now in a very strong position from a cash management perspective to enter a cycle of continuous improvement with simplified and efficient structures providing sufficient flexibility to adapt as technology develops and the business and regulatory requirements dictate.”

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Delta Lloyd Bank is the only bank within the Delta Lloyd Group with a business model which offers mortgages and attracts savings. With a balance sheet of approximately € 5 billion, the bank is a relatively small player in the Dutch banking arena. Delta Lloyd Bank operates in the ever-changing legal and regulatory environment and there is a clear interest to consistently demonstrate how a bank can maintain compliance over the next few years.

Balance sheet projection tool

Delta Lloyd Bank has an asset liability management (ALM) tool which maps out expected mortgage and savings flows. The bank sees how much interest income mortgages generate over a certain time period and when they will be paid back. “We can forecast this for years ahead,” says Andries Broekhuijsen, Teamleader Financial Risk with Delta Lloyd Bank. “Mortgages are calculated at contract level and by using our ALM tool we can also decide if we will grant new mortgages. You get a projection of how the balance sheet will develop. In conjunction with the Business Control department you can calculate a P&L (profit and loss account) for the next five years.” Broekhuijsen adds that the bank then goes a step further. “We have capital ratios, liquidity ratios and several other requirements stemming from the regulatory body. On the basis of the P&L and balance developments we can plot these over time. We have developed an environment where you can see which assumption or development satisfies which regulatory requirement. Also where you don’t comply, and how you can do something about it. For us, within the company, this has become a well-structured process which we use every quarter to forecast one or more years – standard balance sheet forecasting. In the balance sheet projection tool it was not possible to work out different macro-economic scenarios.”

Macro-economic developments

Delta Lloyd Bank wanted to add stress tests to the tool and asked Zanders to help. “The balance sheet projection tool formed the basis for the stress test model which Zanders developed,” Koen Vogels, Actuarial Analyst with Delta Lloyd Bank explains. “There is a sort of extra layer added to the existing tool so when we input certain developments the impact of different scenarios are then presented up clearly and comprehensibly.” Macro-economic developments, like interest rate increases, a drop in house prices or a rise in unemployment, after all, affect the value of the bank’s investments. Vogels: “We needed the insight afforded by the stress tests; what happens with this projection and what are the sensitive issues? Which ratios, for example, change within a certain scenario?”

The balance sheet forecast made by the bank assumes a stable economic situation. “We don’t have an economic office which takes a structural view of economic developments,” Broekhuijsen says. “For our ALM we assume that most economic variables remain constant. In some cases that is not realistic. Using the report Zanders produced, we have been able to develop a number of scenarios based on various economic developments. Unemployment and house prices are very important for us as a mortgage lender. House prices determine how much security we have, while high unemployment can increase the chance of people not being able to pay back their mortgage. Picturing such developments gives us greater insight in our risk profile. We have a relatively high number of NHG mortgages (mortgages which fall under the National Mortgage Guarantee, ed.) and it appears that even if house prices drop substantially we run relatively low risk.”

A more dynamic risk situation

Even though Delta Lloyd Bank has several years of experience carrying out stress tests, they saw room to improve accuracy and efficiency. “How certain macro-economic variables impact relevant risk factors and then the balance sheet is set out in the stress test model. In that way an estimate can be made as to the outcome of the capital and liquidity ratios in specific market circumstances,” says consultant Steyn Verhoeven, who, on behalf of Zanders, helped develop the model. “The model translates certain developments in unemployment figures for example, as an effect on the possibility of payment default by clients. The balance sheet projection tool previously only highlighted one basic scenario, while the stress test model can cover various macro-economic scenarios. This provides the bank with a much wider and more dynamic risk picture. Stress tests not only quantify a minimal capital supply, they instigate discussion on how to deal with negative developments, Verhoeven thinks: “Results from a stress test give management valuable insight into the risk profile of the bank. Which conditions should they be paying the most attention to and what means do they have to turn the tide?”

Scenarios and new assumptions

How do you determine exactly the scenarios you want to understand? Broekhuijsen: “Our basis was the stress test from the EBA (European Banking Authority, ed) and from that we refined the number of scenarios. There is, for example, a ‘baseline scenario’, which is a positive scenario that assumes an increase in house prices. We don’t just look at how bad it can get, but also at improvement.” The problem with developing scenarios is that they have to have enough stress but also tell a useful story, Verhoeven says. “You can make a scenario as extreme as you like, but it does not necessarily furnish the most valuable insights. When developing the stress test model we deliberately opted to work out several scenarios with different stress levels.” A second challenge is the so-called second level effect of a scenario, Broekhuijsen adds. “Take rising interest rates. This results in repricing mortgages; after a certain time the fixed interest period comes to an end and the mortgage rate goes up. But this could also mean that people will want to pay back their mortgage more quickly, because otherwise their costs will increase too much. We have not taken that sort of interactive effect into account, and this is a point needs improvement.”

Reverse stress tests

Over the past few years, regulators have put more focus on stress tests. “Stress tests identify the circumstances when business as usual is no longer enough to keep your organization from dangerous territory,” Broekhuijsen explains. “But if all goes well, this only happens in very extreme circumstances.” As well as a sensitivity analysis and the scenario analysis, many banks carry out reverse stress testing. “You use this to make a recovery plan for a near default, in which you evaluate whether you have taken enough measures to be able to recover. You reason backwards; you determine the ratio of capital unlikely to recover and then investigate which development could cause this to happen. It could be that the credit risk when house prices drop is much lower than the interest rate risk resulting from a drop in interest. Each risk has a different impact,” according to Broekhuijsen.

Complex material

With the aid of the stress test model, Delta Lloyd Bank produces a comprehensive stress test report in a short period of time. Broekhuijsen: “It comprises 15 pages with 5 scenarios and sometimes 20 sensitivity analyses. That is a complete package which we run as soon as we have the quarterly update of our strategic plan. We can show all the issues. The Asset and Liability Commission (ALCO) uses the information to determine if the planned ratio is not too low or too high. That again has an impact on our strategy.” The stress test model also enables the bank to anticipate new regulations. “It is a complex subject,” says Broekhuijsen. “Because there are so many demands made on banks by legal and regulatory bodies, it is difficult to develop a long-term strategy which fulfills these demands. It is therefore very important that we have this tool. We can add all new regulations to the tool and as a result change our strategy; therefore scenarios are restricted to everything which is actually possible and on that basis we can decide on our selection. For example, from IFRS 9, prognoses are more relevant. Elements from the stress test environment are also requested by the regulatory bodies.”

Further integration

Broekhuijsen is happy with the result and the teamwork. “Even the user interface which Zanders built was an eye opener; it is extremely user friendly. We had very little insight and now we have a great starting point. You can do a sensitivity analysis very quickly by using one single variable from the various scenarios in the stress test. We also have other points we can develop, but our emphasis is now on further integration of the stress tests. At the same time we are trying to make the risk picture more dynamic and more interactive.”

As the country’s ‘Quadruple Player’, Türk Telekom offers a complete range of mobile, fixed voice, broadband, and TV services. With the vision of introducing new technologies and accelerating Turkey’s transformation into a true ‘knowledge society’, it offers services to over 38 million subscribers. Türk Telekom provides the information technologies that drive sustainable economic growth and community development. By investing heavily in fiber and mobile networks, Türk Telecom provides people with access to knowledge that, due to economic, social or physical reasons, may otherwise not be a part of this community. As such, Türk Telekom is truly a leading company in Turkey. Türk Telecom split its ownership after its privatization in 2005 and initial public offering in 2008: 15% free float on the Borsa İstanbul, 55% owned by Oger Telecom, and 30% owned by Turkish Government.

The challenge

Türk Telekom is exposed to material foreign exchange exposures due to its sizeable long-term foreign currency funding portfolio, denominated primarily in EUR and USD. Due to insufficient long-term Turkish lira liquidity in the domestic debt market and the high Turkish lira interest cost, access to foreign currency denominated funding is essential for the company. However, this simultaneously exposes the company to foreign currency risk because adverse foreign currency movements inflate Türk Telekom’s debt position and interest expenses significantly. In turn, this detrimentally effects the company’s overall financial position, credit profile, and ability to raise future liquidity to fund its large CAPEX program. “Türk Telekom had established a number of internal mechanisms to manage foreign currency risk, but a formalized risk management policy was still missing,” says Salih Fatih Güneş, Director of Treasury, Türk Telekom.

This was the starting point to define the scope and objectives of the Financial Risk Management Transformation Project in collaboration with the Enterprise Risk Management department.

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The project

Türk Telekom decided to embark on a FRM Transformation Project, with the ambitious goal to create an ‘integrated’ and ‘holistic’ solution across the various risk relevant categories: market risk, credit risk towards financial counterparties, and overall company liquidity risk.

Given the complexity and involvement of multiple stakeholders, Türk Telekom required a multistage approach, each with distinct pre-defined deliverables. Türk Telekom invited a limited number of consulting firms to respond to their request for proposal. Salih Fatih Güneş:” We specifically wanted to work with a consulting boutique specialized in treasury and risk management.” Zanders translated Türk Telekom’s requirements into the following tailored project approach.

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Best practices and innovation

Türk Telekom Treasury received an Adam Smith Award as a highly commended winner in the Best Foreign Exchange Solution category. The award recognized the following best practices and innovations:

• A holistic approach towards risk management incorporating different risk categories
• Use of a sophisticated, state-of-the-art risk quantification tool
• The incorporation of a risk decision-support tool in which long-term funding/rating criteria are the main drivers
• Joint effort between Treasury function and the Enterprise Risk Management function
• Adoption of a Monte Carlo simulation model

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The solution

Zanders delivered a state-of-the-art risk quantification tool, tailor made to capture Türk Telekom’s ‘risk bearing capacity’ in relation to its financial profile. The tool captures financial position data, relevant market risk variables (FX, interest), and appropriate risk models, and incorporates further customized stress, scenario, and simulation tests, including an at risk methodology that uses Monte Carlo simulation. It provides Türk Telekom with 5-year, forward-looking management information, which Türk Telekom uses to decode signals of adverse events at an early stage through key risk indicators and management consults to proactively steer the company’s credit profile. Türk Telecom based the tool on the overall financial strength and risk bearing capacity of the company as the central metrics to set risk limits and bandwidths linked to the outcome of the calculated financial risks.

In addition, Türk Telekom drafted a new Group Financial Risk Management Policy. This policy incorporates strategic and operational guidelines for Türk Telekom’s Financial Risk Management activities and clearly describes the key FRM principles and objectives, steering both strategic and operational decision-making. The new policy clearly states primary and secondary risk management objectives, with liquidity risk the key risk that other risk categories align to and resulting actions derive from.

Developing a state-of-the-art holistic risk quantification model along with new treasury policies, procedures, strategy, and governance is quite unique. In theory, it may sound straightforward, but in practice it is quite difficult to deal with multiple interlinked financial risks in a holistic manner.

Salih Fatih Güneş, Director of Treasury, Türk Telekom.

Next to the industry recognition and Adam Smith Award, the project also improved internal visibility and recognition of treasury’s added value by senior management and other corporate functions. Salih Fatih Güneş concludes: “We have achieved this project in close cooperation with our consulting partner Zanders. It added value with its outside-in views, knowledge of best practice and especially with its pragmatic approach to delivering a concept into a practical, tailor-made solution.”

“In which fields is it still possible to add value from a treasury point of view?” That was one of the questions LyondellBasell’s director of financial risk management, Frank van Es, asked himself when he reviewed the activities of the treasury department. As a result of his question, LyondellBasell analyzed its commodity and currency risk exposure with a Cash Flow at Risk (CFaR) study, which was conducted by Zanders.

Unprecedented volatility in financial markets has made corporates more aware of the importance of sound risk management. Events such as the so called ‘Brexit’ referendum on the 23 June 2016, after which stocks, commodities and currencies fluctuated by about 10 percent, could be harmful for the daily business operations of corporates.

Potential Cash Flow

While managing credit and market risk is a core competence for financial institutions, corporates are exposed to a myriad of financial risks (including FX, interest rate, and commodity price risk) as a result of their business operations. An important difference between financial institutions and corporates in terms of risk management is that financial institutions consider the risk in terms of portfolio value and balance sheet fluctuations, whereas corporates prefer to measure the risk in potential cash flow and profit downfall. Some corporates accept financial risks and have a reactive approach, while others create a competitive advantage by mitigating risk with strategic corporate risk management. With financial derivatives and risk transfer contracts, corporates can reduce risk and create value from a business perspective.

Commodity and Currency Risk

LyondellBasell is one of the world’s largest plastics, chemical, and refining companies and a member of the S&P 500. It is a traditional manufacturing company with a wide range of production possibilities at its 57 sites globally. For risk management purposes, the business of LyondellBasell can be simplified to the procurement of feedstocks needed in multiple manufacturing processes and the sale of finished products to its clients, i.e. mainly the purchasing of oil derivative products and selling intermediate chemicals and plastics. Coming with the purchase and sales, market price risk is introduced in the form of commodity and currency risk.

LyondellBasell has conducted several risk studies in the past to quantify the risks in their business model. Due to changes in the company and the petrochemical market, such as the change in pricing structure from quarterly to monthly price quotation, as well as changes in assets and products produced, LyondellBasell decided to conduct a limited CFaR study to better reflect its current business models. Besides quantifying the financial risks, the company wanted to explore further applications for strategic decision-making in order to reduce risk by hedging exposures or revising business models.

Worst Case Scenario

CFaR is a widely adopted method to quantify risk and is highly suitable for corporates. The CFaR measures, with a given probability, the unexpected negative movement of the cash flow. While being used to measure the potential cash flow downfall, the CFaR can be interpreted as a ‘worst case scenario’. By forming a risk appetite, a corporate could decide if the measured risk is acceptable or if it exceeds its risk allowance. To reduce risk, hedging strategies can be evaluated using scenario analysis. Hedging involves corporates purchasing financial derivatives to insure against unfavorable price movements.

To test the impact of such a decision, the risk measurements could be calculated in a ‘what if’ scenario under the strategic decision. The comparison between the scenarios with and without the hedge provides insight into the risk profile and costs of the strategic decision. The corporate could then decide if it is worth the costs to reduce the risk.

Key Risk Factors

The project at LyondellBasell started by mapping out a portion of the business to determine how cash flows are formed and how they interact with each other. Zanders translated purchases and sales systems to a measurable cash flow. Such mapping is useful for many corporates as these links are not immediately clear and are hidden within the organization. This is often caused because operations at corporates are divided into several divisions, such as purchase and sales divisions. Therefore, it is easy to lose visibility of the company’s cash flows.

Once this insight is created, the key risk factors which mainly impact the cash flows can be identified. It is important to distinguish the key risk factors since it is not feasible to model the entire company. After deciding which risk factors are incorporated, the CFaR can be measured using a Monte-Carlo simulation method. This method models the commodity prices and exchange rates with an econometric model and simulates future price paths.

By simulating many price paths, say 10,000 times, a large dataset is created where the worst-case scenario is evaluated to determine the risk and correlations between individual risks. The analysis was in line with Van Es’s expectation about LyondellBasell’s risk exposure. He says: “The model confirmed our gut feeling about our risk exposure and validated the correlations between commodity prices and exchange rates.”

Applications for Strategic Decision-Making

Together with LyondellBasell, Zanders took the next step towards strategic decision-making using its own customized risk model. In general, stakeholders are always initially skeptical about the idea of treasury getting actively engaged in the business. However, at LyondellBasell, they learned that although the model is a simplification of reality and should not be followed blindly, it can be used as an indication for business decisions. There is now more support and acceptance at LyondellBasell since the model helps the company to understand their figures and it verifies their ideas about correlation.

The business now has a tool that can help calculate the effect of production decisions on cash flows and risk, and can determine if they have to shift the business to create more cash flow stability. Zanders created applications for strategic decision-making for hedging strategies. For exposures that needed to be hedged, Van Es was interested in determining which percentage needed hedging, and whether exchange rate and commodity price should be hedged in tandem or could be hedged separately.

Correlations between market prices play an important role in making these decisions since they form a natural offset in risks. Zanders evaluated combined hedging strategies of commodity and currency and calculated the optimal hedging ratio in terms of risk reductions and costs.

Step by Step

Supported by the CFaR study, LyondellBasell is shifting its risk management into a higher gear. “There is an integration of ERM in treasury and we are creating a financial risk management department that will focus on modeling risks and developing financial strategies,” says Van Es. “We will implement hedging strategies step by step: better walk before you run. The implementation process will be challenging as we have to cross several barriers. For example, we need to execute currency and commodity trades and maybe have to set up a separate trading structure for this. There are many risks we have to manage, but we are the champions of risk management at treasury! We have shown our additional value with this project.”

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How does a pension company prepare for the risks and uncertainties inherent in financial markets?

“One of the best ways to prepare is by practicing. The financial industry is actually poorly prepared for the unknown, and can even be surprised by something entirely uncertain. The leading economists at the beginning of the 20th century did not have the big data or computer power we have today, but this has grown enormously over time; we are now able to simulate, optimize, and much more. We are now so enslaved to data and models that we are under the illusion that we have everything under control. Lehman had the most advanced risk management system in the world and it still went bankrupt. The biggest problem with risks is that they concern matters that are actually already known to you. A risk is a measurable uncertainty, yet uncertainty is an immeasurable risk. So when you are struck by an uncertain event, all those models are utterly useless. And when that happens, we are left dumbfounded; we do not know how to act and we forget to communicate - the most poisonous cocktail for trust in the financial sector. We can learn a lot from other professional groups. Pilots, for example, are trained how to act in unexpected, unfamiliar situations. Financial models are our autopilot, but a pilot must also be able to fly the plane when unexpected circumstances occur that the autopilot is unable to handle.”

Was the scenario for the Brexit already known at PGGM

“The Brexit scenario was one of our top five priority risk scenarios. We regularly meet with all investors and economists within the organization to discuss these types of scenarios. Last year, we already had a Grexit scenario which we made even more specific this year to prepare for a possible Brexit. Calculating probabilities is at that point completely futile; you must accept that events are going to occur which you never could have predicted. We assumed that the consequences of a Brexit would initially result in volatility in the stock markets in particular, which can be simulated easily, but the greatest uncertainty was what influence Brexit would have on the rest of Europe. We had previously discussed this ‘butterfly effect’ at length. Of course, the question that also remained was how this will affect our wallets; moreover, we examined our UK and British pound exposure. Our exposure to the pound is covered for nearly all of our clients, but other currencies could well be affected. That is why we also looked at European banks in terms of counterparty risks and credit risks. As for our immediate investments, we mostly looked at the infrastructure projects, because for these you are highly dependent upon the British government – regulatory risk is one the biggest risks there.”

But how can you practice for something that is mostly uncertain?

“We practice with a financial crisis team (which includes the board of PGGM, ed.) that is unexpectedly confronted with an uncertain situation. This is how you learn what can go wrong in a situation. You cannot, of course, devise scenarios for the unknown, but you can practice how you generally handle of unexpected situations.”

Is maintaining buffers the only way to provide some sort of hedge against these uncertainties?

“Based on the Value-at-Risk approach, you must maintain a buffer for something that may occur once every 200 years. When you do get hit, you will have sufficient capital to survive any blow. But the greatest weakness here is that the probability calculation on which this is based is flawed. Nassim Nicholas Taleb also referred to this in his book The Black Swan. Many risk management systems work well, but only when the market circumstances are similar to what they are designed for.”

And what role does interest play in this?

“We have not taken additional measures for interest. The hedges for it are completely tied up in ALM (asset and liability management) for most funds. When you think in terms of financial returns, with the current negative interest situation, it is strange that interest risk must be covered. But seen from the perspective of the Financial Assessment Framework (FAF), hedging the interest risk is necessary because interest rate changes could have major effects on the value of the obligations.”

But when you invest against 0% interest, any pension company surely must know that it won’t achieve that right?

“The FAF is not designed with a very low interest in mind; that is undisputedly true. Many funds are now also suffering under the enormous increase in obligations, which is still mostly an accounting effect. Pension funds must achieve a return of well over 0%, and they normally do, but no investment returns can match the interest effect. The funds with the best cover ratio are those that have hedged their interest risk in time; not necessarily the funds with the best returns on their investment portfolio. I believe these developments will now also bring about the necessary changes in the pension system at a rapid tempo. I don’t have the ultimate answer, but I think it’s good that the discussion about the sustainability of our system with a vastly changing job market is now really gaining momentum.”

What does this mean as seen from a risk management perspective?

“As pension fund management, you have a dual problem. On one hand you have to deal with a FAF and a short term risk of becoming hedged - the reduction of rights. While on the other hand, for the average pension fund, the long term risk you won’t achieve your organization’s objectives is much more relevant. Investing in government bonds with a negative return is then incredibly risky. An average pension fund, with members that are generally not very old, should primarily focus on the long term.”

JP Morgan published a study in which the interest rate could possibly come out at minus 4.5%. What would you advise your clients in this case?

“That is an example of thinking in scenarios. Such economic scenarios are also included in our models these are partly deterministic and partly stochastic. They do assume a low interest - even a negative interest in the short term in certain scenarios, but not in the long term. What I noticed about interest scenarios in many ALM models is the speed at which mean reversion occurs: the return to a long term average. In the short term you can assume any number of things, but if the model for long term interest takes on 4% after 5 years, you can ask yourself - certainly these days - how realistic can this be?”

Does PGGM also employ swap options, for example, against such interest risks?

“We have in the past, but most clients are not keen to invest in swap options. They are not easy to explain and you pay a large premium. In addition, you also have counterparty risk and liquidity risk - it is unmanageable. Smaller funds have a much easier time hedging on the short term than larger funds.”

Is there not enough room on the market?

“Well, there are some insurance companies with equally large balance sheets that are able to hedge themselves. So it is possible, apparently. But you do see signs - the buy-back programs also don’t help here - that market liquidity is declining, certainly for long-term government paper. You can also do a lot with interest swaps, but the developments there, too, make for a difficult market due to, among other factors, EMIR and the capital requirements for the banks that we deal with. What’s more, derivatives are not at all popular in public opinion and are still being dismissed by the media as dangerous and speculative instruments. Pension funds have to deal with this, too. You work in a kind of glass house; everyone has an opinion about it. I don’t envy the average manager.”

During the seminar, you said that pension funds have relatively little to do with legislation. Should this change in future?

“No, you can compare it to banks and insurance companies. In principle, legislation is useful: it ensures a level playing field among the market parties and is meant to protect the participants.”

PGGM also invests in illiquid products. How does PGGM control the reputation risk of this?

“We have been investing in illiquid products for a very long time and this has brought great results for our clients. We currently invest approximately one quarter of the portfolio in illiquid assets - a relatively high percentage. This is comprised of private equity, infrastructure, private real estate, structured credit and the like. A drawback is that such assets are not immediately tradeable, but for a fund with a long investment horizon, that’s less relevant. The costs are normally higher, but even after these costs, the investments make a substantial contribution to overall returns. The great advantage of private investments is that we can directly influence them. We can exercise influence on the ESG (environmental, social & governance) profile, especially for projects where sustainability plays a role. You might even say that I know more about an average private equity investment than I do about an average investment in a quoted company which we also invest in. But due to this big influence, we also have to deal with reputation risk, because there are always some projects where something is wrong, such as a renter that has
gone bankrupt. Our strategy is to always explain precisely what we do and what our role is.”

In closing: given all the uncertainties, how can we improve the level of trust in the financial sector?

“It is crucial that we as a sector learn to deal with ambiguity better. Organizations should write a concrete risk appetite, where you accept that events are going occur that all of you together have not foreseen. And we should start practicing how to handle unexpected events, just like the pilot example cited earlier. We must also recognize that existing models and processes may not be of any help. In doing so, you will be more transparent and trustworthy in your (crisis) communication. Because after all, who is going to believe the man who claims to have everything under control under any and all circumstances right down to fifth decimal place?”

Bucher Industries is the world leader in its field – yet the company may not be a household name for most of us. Surprisingly, we have all probably encountered one of the company’s products in a European city or in the country. On five continents, this Swiss company manufactures machinery and vehicles, used for a variety of purposes, such as harvesting, producing and packaging foods, or as hydraulic drive systems for high-performance equipment. Moreover, Bucher is the world-leading supplier of municipal vehicles for cleaning and clearing operations in urban areas. In 2015, Bucher Industries generated sales of CHF 2.5 billion with its 11,500 employees located worldwide. The Swiss-listed multinational operates in five divisions, each manufacturing a range of specialized products: municipal cleaning vehicles (Bucher Municipal), agricultural machinery (Kuhn Group), hydraulic systems (Bucher Hydraulics), glass containers (Bucher Emhart Glass) and Bucher Specials (comprising Bucher Vaslin, Bucher Unipektin, Bucher Landtechnik and Jetter), which produces systems for winemaking, fruit juice, instant products and beer.

“Our objective there is to keep the streets clean”, says Frank Rust, head of treasury at Bucher Industries with respect to Bucher Municipal. With the further expansion of the group’s businesses, Bucher is more active in India, China and Turkey.

“The expansion into Asia is interesting, both from an operational and a financial point of view. To say it in laymen terms: the streets in certain Asian cities have another dirt intensity compared to the streets of European cities. So for the group’s Asian expansion, we need to re-engineer our products to deal with the new environment in which they operate. With the re-engineering, new market-specific techniques are developed too.”

Procurement of local components also becomes a topic to ensure the overall product fit with the local market. Not only technical challenges arise, also the negotiation process with potential business or banking partners is different in India, China or Brazil as compared to the developed markets. In China, for example, a joint venture approach to market entry might be opportune, instead of starting with a greenfield project.

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NAV exposure

From a corporate financing and risk management point of view too, the expansion offers new challenges. Bucher has been active with international acquisitions for a long time. In Brazil the first material acquisition was in 2005, the group acquired METASA S/A, which enabled the Kuhn division to establish a local base with engineering, production, sales and service capabilities. In 2014, Bucher acquired Montana, a company that specializes in self-propelled crop protection sprayers and fertilizer spreaders. After this second substantial Brazilian acquisition, the Brazilian real (BRL) exposure became material; after the euro and the US dollar, it was the third largest currency exposure. The choice on either local real funding or Swiss franc funding has an impact on the net asset value (NAV) exposure from a consolidated level. The NAV, in its turn, has an impact on Bucher’s translation risk. A strong appreciation of the Swiss franc, compared to other currencies in which Bucher has a NAV exposure, would impact the equity of the company and the related equity and leverage ratio.

With further international expansion, the NAV exposure would increase, hence the potential impact on the equity of the company and its ratios. The risk bearing capacity for further acquisitions has to be in place. Previously, Bucher calculated its NAV exposure and translation risk via its IT2 treasury management system, but this concept was never really validated.

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Key risk indicator

The existing model used a scenario analysis to simulate the NAV given different factors. A pragmatic hedging approach was used, by which 50 per cent of the funding requirement was funded locally; 50 per cent in the local currency and 50 per cent via Swiss franc intercompany funding. It paid off quite well, but given the significant fluctuations of currencies in scope, the need grew for a more sophisticated approach. “We didn’t know the risk on the equity piece.

At the time of the acquisitions, we needed to decide on the funding structure: a choice between local funding in Brazilian real, or central intercompany funding via Switzerland in Swiss francs.

Frank Rust, head of treasury at Bucher Industries

And so, in order to pro-actively manage these translation risks better on the balance sheet, we asked Zanders to review and validate our current approach and to be a sparring partner for NAV exposure measurement and management”, says Rust Another objective was to define a risk framework linked to the risk bearing capacity of the company.

“Zanders developed a dynamic way of looking at NAV by establishing a key risk indicator linked to the equity ratio – that was the key for having a sound solution. The new approach gives more insight into the potential impact of translation risk on the equity of the company. Furthermore, instead of looking at this risk from a static point of view in which a maximum risk limit is defined, the new model has linked the NAV exposure to the dynamic and time-varying risk bearing capacity of our company.”

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Fully integrated

The interplay between Bucher and Zanders was very successful, according to Rust, due to the balance of business consultancy skills, content and technical capabilities. “The delivery of the project was excellent, I would say. It has given us trust”, he says. “Zanders was the external sparring partner to have our ideas validated and they asked us the critical questions on our modus operandi.”

The new risk model also had to be approved by the audit committee and the company’s board, Rust says: “At first, the audit committee was a bit reluctant to accept the new concept, because it has an approach that is more quantitative and therefore more difficult to apprehend. But now it is completely accepted. The outcomes of the model form part of the quarterly reporting package and were also used for Bucher’s latest annual accounts, disclosing risk factors according to the IFRS requirements. Not only has the new model been used in the financial reports, it also helped our company in the decision-making process for our ongoing funding requirements. It is therefore fully integrated in supporting our corporate finance plan.”

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Outlook

For the next few years the expansion into Asia will remain the biggest strategic challenge. The new challenges for treasury are the additional risks in international assets, as well as more complex financing structures. “In the end a new European financing can be done in a matter of days, while the same financing structure in India can take months”, according to Rust. “The NAV model and risk bearing capacity framework will continue to assist Bucher with our financing decisions. We could include an interest optimization element in the model, but that would over-engineer the model, which makes it not fit for purpose anymore.” After all, this innovative Swiss company knows exactly how to engineer something to serve its clients.

VIVAT is a commercial financial service provider with insurance brands whose names are more familiar than that of the parent company: REAAL, Zwitserleven, Zelf, Route Mobiel (roadside assistance), and Proteq Dier & Zorg (insurance for pets). ACTIAM is the asset manager. On its website, the insurance company gives the impression of being a strong socially-motivated company; the very different brands together have the goal of helping people increase their empowerment. In the summer of 2015, VIVAT was taken over by Anbang Insurance Group, which is well known for its strong technology-based services.

In 2009, the Solvency II directive was implemented as a harmonious European regulatory framework for insurers, with the goal of insurers having enough capital in reserve to prevent bankruptcy. Since 2011, the European Authority for Insurance and Company Pensions (EIOPA) regulates these insurance companies. The starting date at which the Solvency II directives actually came into force was changed several times. Finally, the directives became effective on 1 January 2016.

ALM tool

VIVAT is a commercial financial service provider with insurance brands whose names are more familiar than that of the parent company: REAAL, Zwitserleven, Zelf, Route Mobiel (roadside assistance), and Proteq Dier & Zorg (insurance for pets). ACTIAM is the asset manager. On its website, the insurance company gives the impression of being a strong socially-motivated company; the very different brands together have the goal of helping people increase their empowerment. In the summer of 2015, VIVAT was taken over by Anbang Insurance Group, which is well known for its strong technology-based services.

In 2009, the Solvency II directive was implemented as a harmonious European regulatory framework for insurers, with the goal of insurers having enough capital in reserve to prevent bankruptcy. Since 2011, the European Authority for Insurance and Company Pensions (EIOPA) regulates these insurance companies. The starting date at which the Solvency II directives actually came into force was changed several times. Finally, the directives became effective on 1 January 2016.

From that date, VIVAT Insurances also had to be Solvency II-compliant. The company needed a flexible tool with which it could calculate required capital in line with the Solvency II directive. The solution was found in an existing risk-initiated asset & liability management (ALM) tool. “From a risk standpoint, we wanted certain management information such as interest risk sensitivity,” recounts Erwin Charlier, head of modeling at VIVAT. “With the ALM tool, we were able to access information which gave us better insight into the risks. Then we thought: since we already have the tool, let’s expand it to the Solvency II-standard model. So we now use it to calculate the figures which go to the DNB and which are in our annual report.”

The insurance company VIVAT was looking for a flexible tool to perform standard model calculations according to Solvency II directives. It decided to use the existing risk-initiated ALM tool which led to some challenges but which now offers various advantages.

Stakeholder management

With this increased scope, the tool has become a bigger and more widely applicable model for VIVAT. Besides the different components for risk reporting, other departments now also use the tool. “For example, for valuation of certain assets by our asset manager and by Balance Sheet Management, for controlling the balance sheet,” says Kees Smit, manager of risk balance sheet reporting at VIVAT and thereby senior user and ‘owner’ of the tool. “The tool is used for management as well as for accountability and therefore fulfills a central role in the model landscape for risk management.”

With one owner and several ‘clients’, the ALM tool demands a great deal of internal co-ordination and good ‘stakeholder management’. “Priorities for the tool are carefully agreed and weighed up with the various departments”, says Smit. “Sometimes that leads to difficult decisions, but since we manage the tool ourselves and a small dedicated team handles it, we always find a solution.” At the same time there also arose a need for structure and process management. Charlier says: “We had insufficient capacity for this internally and so we looked around externally and came across Zanders.”

Request for change

Adding extra functions to the ALM tool starts with a Request for Change (RfC). The tool’s functionalities have to be documented in this as clearly as possible. “

Zanders played an important role in this process.

Erwin Charlier, head of modeling at VIVAT.

“It is important that the RfC is of high quality, so that we know what we can do with it and what has to happen to the tool. We need people who know down to the last detail what its intention is, people who model or implement, and if all goes to plan it is part of a release process and then users can actually start using it.”

Where the tool is solely used within the risk function to generate certain information, it can be set up according to your own pragmatic ideas. “But as soon as it becomes a formal tool – which is used for external reporting – then you have to formalize all sorts of things,” says Charlier. “To be in control you no longer want that degree of flexibility. And that then means other people get involved.” On top of this, the department that delivered the Solvency II-reporting then became the senior user. This led to other demands and wishes because the intent of the tool changed. “Initially, the tool was not set up to be our Solvency II-tool. If you decide to do that later, the organization has to ensure it has the people and the means to achieve a high standard,” says Charlier.

Process in phases

“One of the goals of the project was to have the change process take place in a very structured way,” says Zanders consultant Mark van Maaren. “This means a clear standardized process which is then followed.” Changes that other users don’t know about can cause problems. “The process comprises different phases,” adds Zanders’ Stef van Wessel. “From development, testing, acceptance, and production. In order for everything to run smoothly, the previous phase has to be completed before you start the next one. In the production phase only the owner and his team are involved. In other words: the people who have written the code can no longer change it when it’s in production – to avoid different changes by people in different places having a negative impact on one another.”

In the first phase of the project, the challenge was to make the tool Solvency II-compliant. Then the wish-list, which was not dependent on the required Solvency directives, was added to the tool. Completion is planned for the end of 2016. Charlier explains: “Solvency, though, has been faced with quite a few forward-looking perceptions, and these also have had to be taken into consideration.” Van Wessel adds: “But by standardizing the process, separating the roles within it, and setting up authorizations, many problems can be mitigated.” Over the past year that has been accomplished: a control framework which complies with the Solvency II-directives.

Division of labor

Initially, the management of the tool was the responsibility of Charlier’s modeling department. In the second phase of the project, it was decided to transfer a number of components to the IT department. “Each application has its own conditions and requirements, but we do not come up to the mark in all areas and to the standard IT would like,” Charlier related. “We have a great model, but perhaps we could improve a few things under the bonnet. For example: employees have certain skills, but the question is if this is an efficient use of resources. On the one hand, there is a heavy data component; via communication with other databases you retrieve all sorts of information to calculate with and then transfer to various areas. Setting up the data and reporting side takes a lot of time and could easily be done by IT. But the core, the calculation center, is for me typically something for the modeling department: how do you value the assets on your balance sheet, how do you handle yield curves in interest-rate risk measurement?” IT is positive about the division of roles. And we want to use our human capital as efficiently as possible.

Double focus

A huge advantage of a tool developed in-house is that it offers VIVAT a lot of flexibility. “In addition, the tool is now completely in tune with our own wishes,” says Smit. “Under our own management, changes in the tool can be made quickly. That’s nice, since the required functionalities within risk management are constantly changing.” It also offers ‘double focus’ in one functionality. Charlier says: “That way we have developed the knowledge and ability to be able to take a detailed look under the hood. If something unexpected comes out of the model, we can see where it comes from. The only thing is that it takes some effort from the organization.”

The alternative for the insurer was to use separate tools for the various reports. “But the disadvantage of this is that you can have inconsistency problems which you have to reconcile,” Van Maaren explains. “For example, sometimes companies buy platforms and then expand on them – you see all sorts on the market. The ready-made package you buy which you can use straight away just doesn’t exist.”

Future challenges

Will the model be further expanded with more functions? Charlier is unsure: “As a real ALM tool I would like to be able to do more on the liability side. The liability side is included, but is covered by other sources of data. The focus of the tool is now more on the asset side; the L in ALM is not so prominent in the tool.”

In the future, Charlier foresees a number of great challenges. “I find the role split and efficient sharing of resources a very important focus point. Moreover, regulations won’t stand still and we will have to adapt to them,” he says. In the first year that insurers have to comply with the requirements of Solvency II, the solvency ratios are quite volatile. “But new demands give you, as an organization, the chance to adapt to the latest insights. It would be a lost opportunity to not act upon these. What would be really nice is if you could use the tool to project a number of years into the future. For example with stress tests or an operational plan to look further into the future.”

How has Zanders supported VIVAT?

• Project management of the implementation of the ALM tool, including stakeholder management and the coordination of transferring tasks and responsibilities to the IT organization.
• Supporting and coordinating the development of functional specifications.
• Supporting user acceptance testing and the testing of functional specifications.
• Documenting the ALM tool.
• Reviewing and improving the risk appetite statement.
• Enhancing interest-rate hedging policies, methodology, and processes.
• Developing a Solvency II compliant investment policy.

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When the multinational pharma company Sanofi set out to implement a global payment factory based on SAP, the sheer size and scope of the project made it seem a Herculean task. But with meticulous planning, the right expertise and skilled team-building, the treasury team achieved a very successful outcome.

After a decade of expansion through M&A, Sanofi, the pharmaceuticals company headquartered in Paris, France, with part of its group treasury – the in-house bank team – based in Brussels, decided it was time to bring greater centralization to its payments function. With sales of €37 billion in 2015 and operations in more than 100 countries, the company, active in the research & development, manufacturing, and marketing of pharmaceutical drugs, vaccines, and animal health products, began its journey towards a global payment factory based on SAP.

Need for control and security

This decision was part of an overall initiative to increase centralization in the finance function, according to the company’s head of in-house bank, finance & treasury, Wolfgang Weber. He says: “The reasons for the project went beyond the pharmaceutical industry – the need for control over cash flow, greater security and the pressure for increased efficiency are global trends.”

He explains that Sanofi hoped to gain several benefits from the centralization project, including: lower bank fees and bank connectivity cost; greater transparency over outgoing payments; and an increased level of compliance and control.

Following a selection process to appoint an external consultant, Zanders was asked to work on the SAP global payment factory project at the end of 2012. Mark van Ommen, director at Zanders, explains that the firm used its proprietary design methodology, based on best market practices and years of implementation experience, to design the global payment factory, which included a ‘payments on behalf of’ (PoBo) structure.

Sanofi’s decentralized payments structure presented risks that required attention. The company operated with multiple payment processes, leading to inefficiencies and potential security vulnerabilities. This highlighted the need for global standards and a centralized, harmonized payments system. The project involved issuing a request for proposals (RfP) to select four banking partners.

PoBo and PiNo

The global SAP-based payment factory, currently implemented in the largest countries in Europe and with roll-out almost complete in the US, includes PoBo functionality. This allows Sanofi to channel its payments through a single legal entity, which has obvious benefits for a multinational with a presence in numerous countries. The structure enables treasury to rationalize its bank accounts and simplify cash management structures. Zanders consultant Pieter Sermeus explains that PoBo was a key factor for Sanofi in achieving efficiency and business security. He says: “Payments are now routed to one or (in the case of the euro) very few centralized bank accounts, which are mostly in-country so that cross-border fees can be avoided.”

However, PoBo isn’t practical or possible in some jurisdictions with more complex payments environments, so another solution was needed. Together, Sanofi and Zanders worked on what was internally known as the ‘central forwarding model’, which in effect was a ‘Payments in the Name of’ (PiNo) structure. This model is mainly used in countries with monetary restrictions, such as China, Malaysia and Thailand, as well as in African and Latin American and some eastern European countries. Such countries require the payee to initiate payments from its own bank account. While this does not result in a reduction in the number of bank accounts, the company is able to process payments through a single platform, which brings compliance/security benefits and also allows the harmonization of processes to an extent that makes them more efficient.

The additional security provided by the PiNo structure means there are compelling reasons to extend the use of the payment factory to more countries. Sanofi is currently working on implementing a pilot PiNo structure in Turkey. Weber adds: “Based on Zanders expertise they were well equipped to help us on setting up and designing the PiNo structure.”

Knowledge tranfer and team building

One of the key parts of the project was the transfer of knowledge from the small group of consultants appointed to work on the project to the members of staff in Sanofi’s central treasury and IT departments. Laurens Tijdhof, a partner at Zanders, explains: “Our main goal was to transfer knowledge to key members of staff. We set up training sessions and provided training on the job. This enabled them to really develop their in-house capabilities.”

During the project, there was an emphasis on collaboration between the consultant and the client and preparing Sanofi to become self-sufficient.

Zanders used a ‘train the trainer’ approach, providing training in this way for upwards of 30 key members of staff. The training aspect of the project was a success – an outcome that Weber ascribes in part to the expertise and teaching methods and in part to having the ‘right people’ on Sanofi’s team. He points out that the timing of the training was also important: “We needed to transfer knowledge and IT/SAP expertise to the different departments. This was valuable from two angles: it guarantees stability of the operations and reduces consulting costs over time. The timing of this was crucial because, in a project of this size and scope, you spend a lot of time simply ‘firefighting’ – and you forget about the training. This didn’t happen and Zanders did a good job.” While training was an important part of the project, Sanofi also had to focus on building up its internal team. Weber says: “When hiring for the project, we looked for project management skills and SAP In-House Cash technical skills. We found some very good people. We looked internally – Sanofi has 110,000 employees – as well as externally. We now have a team of 22 hard-working, committed experts. It took a while to get the right team together but I am very pleased with the result.”

Handling the complexity

The nature of the project and the sheer size of Sanofi’s organization meant that planning and coordinating the approach to the global payment factory implementation was no mean feat. Weber says: “It’s easy to underestimate the complexity and size of such a project in such a large organization. The major difficulty is to coordinate internal resources so that people don’t get lost in the complexity of the project.”

There were three defining factors to the project, namely: the size of Sanofi’s organization; the geographical scope of the project (worldwide); and the complexity of Sanofi’s requirements.

Weber underlines that, along with meticulous planning and a very capable team, a flexible approach is also needed to manage an endeavor of this size: “The initial roadmap needs to be adjustable because you may have to reset priorities. Resources may have to be shifted to another area of the project.”

Van Ommen agrees that taking care of the details can be one of the most important aspects of such a complex project: “Sanofi did this really well and they recognized their need for change management – they took a realistic view on the planning and timelines. Wolfgang and his colleague Isabelle really brought the project to the ground, providing a lot of practical input.”

Weber adds: “It’s important to have proper project governance, including senior management support up to board level, in our case represented by the group CFO.”

Security and compliance

The implementation of the payment factory also enables Sanofi to keep tighter control and visibility over its global payments. Regulations around payments are continually changing as problems and conflicts arise or dissipate in different parts of the world. Companies need to be able to react to the ever-evolving regulatory environment. Having a global payment factory in place helps to address these challenges. Cybercrime is also an increasing problem for treasury and the payment factory enables corporates to react quickly, with a centralized, secure platform.

Weber notes that the project will also help his company to keep abreast of regulatory requirements for monitoring third parties: “The implementation of ‘restricted party screening’ – an essential compliance requirement to ensure that Sanofi does not make payments to blacklisted parties – was added to the team’s responsibilities in late 2014. Although it covers master data screening and therefore is only partly related to the payment factory activities, in the Sanofi context the in-house bank team has been identified as the most appropriate place in the organization to both implement the screening as well as carry out the ongoing operations. I believe that we will hear a lot more about restricted party screening in the corporate world going forward.”

Successful outcome

Since the global payment factory was rolled out in Europe and the US, it now processes more than 30,000 fully automated payments each month, from more than 50 affiliates, with an equivalent value of more than €1 billion per month, in 30 different currencies. To help reduce the number of payment rejections, Sanofi also centralized the management of the bank key tables: the master data is constantly updated to avoid rejection due to wrong bank master data.

Weber concludes by expressing his satisfaction with the outcome of the project: “We have really succeeded in implementing a sustainable process that is safer, cheaper, more efficient, providing higher transparency, and which we can roll out across our different areas of operation.”

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