In a world of persistent market and economic volatility, the Corporate Treasury function is increasingly taking on a more strategic role in navigating the uncertainties and driving corporate success.

Even in the most mature organizations, the involvement of the Treasury center in FX risk management often begins with collecting forecasted exposures from subsidiaries. However, to fundamentally enhance the performance of the FX risk management process, it is crucial to understand the nature of these FX exposures and their impacts on the upstream business processes where they originate.

Enabling this requires the optimization of the end-to-end FX hedging lifecycle, from subsidiary financial planning and analysis (FP&A) that identifies the exposure to Treasury hedging. Improvements in the exposure identification process and FX impact analytics necessitate the use of intelligent systems and closer cooperation between Treasury and business functions.

Traditional models

While the primary goal of local business units is to enhance the performance of their respective operations, fluctuating FX rates will always directly impact the overall financial results and, in many cases, obscure the true business performance of the entity. A common strategy to separate business performance from FX impacts is to use constant budgeting and planning rates for management reporting, where the FX impact is nullified. These budgeting and planning rates typically reflect the most likely hedged rates achieved by Treasury, considering the hedging policies and forecasted hedging horizons. However, this strategy can lead to unexpected shocks in financial reporting and obscure the impacts of FX exposure forecasting and hedging performance.

When these shocks occur, conclusions about their causes, such as over or under-hedging or unrealistic planning rates, can only be drawn through retrospective analysis of the results. Unfortunately, this analysis often comes too late to address the underlying issues.

The most common Treasury tools used to measure the accuracy of business forecasting are Forecast vs. Forecast and Actual vs. Forecast accuracy reporting. These tools help identify recurring trouble areas that may need improvement. However, while these metrics indicate where forecasting accuracy can be improved, they do not easily translate into a quantification of the predicted or actual financial impact required for business planning purposes.

End-to-End FX risk management in a Treasury 4.x environment

Finance transformation projects, paired with system centralization and standardization, may offer an opportunity to create better integration between Treasury and its business partners, bridging the information gap and providing better insight and early analysis of future FX results. Treasury systems data related to hedging performance, together with improved up-to-date exposure forecasting, can paint a clearer picture of the up-to-date performance against the plan.

While some principles may remain the same, such as using planning and budgeting rates to isolate the business performance for analysis, the expected FX impacts at a business level can equally be analyzed and accounted for as part of the regular FP&A processes, answering questions such as:

• What is the expected impact of over- or under-hedging on the P&L?
• What is the expected impact from late hedging of exposures?
• What is the expected impact from misaligned budgeting and planning rates compared to the achieved hedging rates?

The Zanders Whitepaper, "Treasury 4.x – The Age of Productivity, Performance, and Steering," outlines the enablers for Treasury to fulfill its strategic potential, identifying Productivity, Performance, and Steering as key areas of focus.

In the area of Performance, the benefits of enhanced insights and up-to-date metrics for forecasting the P&L impacts of FX are clear. Early identification of expected FX impacts in the FP&A processes provides both time and opportunity to respond to risks sooner. Improved insights into the causes of FX impacts offer direction on where issues should be addressed. The outcome should be enhanced predictability of the overall financial results.

In addition to increased Performance, there are additional benefits in clearer accountability for the results. In the three questions above, the first two address timely forecasting accuracy, while the third pertains to the Treasury team's ability to achieve the rates set by the organization. With transparent accountability for the FX impact, Treasury gains an additional tool to steer the organization toward improved budgeting processes and create KPIs to ensure effective strategy implementation. This provides a valuable addition to the commonly used forecast vs. forecast exposure analysis, as the FX impacts resulting from that performance can be easily identified.

Conclusion

Although FP&A processes are crucial for clear strategic decision-making around business operations and financial planning, the FX impact—potentially a significant driver of financial results—is not commonly monitored with the same extent and detail as business operations metrics.

Improving the FX analytics of these processes can largely bridge the information gap between business performance and financial performance. This also allows Treasury to be utilized as a more engaged business partner to the rest of the operations in the prediction and explanation of FX impact, while providing strategic direction on how these impacts can be minimized, both globally and at local operations levels.

Implementing such an end-to-end process may be intimidating, but data and technology improvements embraced in the context of finance transformation projects may open the door to exploring these ideas. With cooperation between Treasury and the business, a true end-to-end FX risk management process may be within reach.

What are the main changes influencing treasury’s added value within corporates?

Laurens Tijdhof (LT): “Business models are changing. In the decades since the introduction of the internet, ‘digital natives’ - new multinational companies such as Uber and Google - have emerged to disrupt all industry sectors. These companies have less legacy than traditional multinationals. Treasury plays an important role in that digital native environment, for example with payment innovation in ecommerce. Traditional multinationals are typically dealing with a lot of legacy because of mergers and acquisitions throughout their history. For them, the change is more transformational in nature, as they are doing something different than they have done in the past decades or even in the past century. This is one of the elements where treasury can add significant value; to understand from a financial point of view where the business is in the current cycle and to see what things need to be changed, updated or optimized to add value.”

Ron Chakravarti (RC): “Firstly, the pace of change in commerce has picked up, driven by new technologies and new ways of doing business. These are shifting the timing, value, and volume of cash flows and, of course, that impacts treasury. Secondly, while treasury always has to manage regulations and the cash flow impact of changes in global taxation, the pace of change in these have also picked up. Finally, geopolitical uncertainty has created additional considerations at this point in time. Corporate treasurers, therefore, need to ensure their teams are increasingly nimble to deal with all of these issues. The good news is that the availability of new technologies, data and artificial intelligence have the potential to change how treasury works and to create added value.”

At which point are companies ready for new technology?

LT: “Before a company can enter the next stage of treasury maturity, it first needs to get the basics right. This means having a focus on centralization, standardization and automation, typically using traditional technology like a TMS or an ERP system. And if you have these systems in place, be sure you’re using and benefiting them optimally from that environment first. Once you have the basics right, you can go to the next stage of a smart treasury, using the new digital or exponential technologies. Then you can benefit from the good basis and use more of the data in analytical ways, with algorithms or newer technologies like robotic process automation (RPA) or artificial intelligence (AI).”

RC: “I completely agree that getting the basics right, by completing the journey to an efficient treasury comes first. Treasury is on an evolution path of becoming first efficient, then smart, and finally integrated. Getting to efficient means that you must standardize, centralize, and automate. Even among multinational companies, not all have mature, centralized treasury models. Getting to a best in class model is key. In most industries that includes a functionally centralized regionally distributed treasury model, with operational treasury on a common infrastructure and processes. Once you are substantially there, you can work on the next step change, in making the move to a smart treasury. And ultimately to an integrated treasury.”

How should a treasurer deal with the continuous change driven by these exponential technologies?

RC: “Well, an issue is that – as The Future of Treasury whitepaper indicates - only 14 percent of corporates have a digital strategy at the treasury level. Why is this so low? One reason is the availability of the right resources. While treasurers have previously adapted to technology change, this change is all happening a lot faster now - for treasury and the broader business. Ultimately, treasury is all about information. Today, more than ever, the treasury function needs to include people who are technologically savvy. People who are able to comprehend what is changing and how to best deploy technology. That will become increasingly important to create value for the business. Treasury teams recognize that they need to have a digital strategy, but many of them are not fully equipped to define one. They are looking for help from industry leaders with a treasury framework to define their digital treasury strategy. That is one of the reasons for this collaboration between Citi and Zanders; in many cases we recognize that we can better do it together, creating added value for our mutual clients.”

LT: “If you compare the current situation to ten years ago, a treasurer would only buy new technology if there was a real requirement. Today, there’s new technology that many treasurers do not fully understand – in terms of what problems it could potentially solve for the company. What you often see now is that treasurers start with small projects, proofs of concepts, to test some innovative ideas. You can compare it with the iPhone; when Steve Jobs invented it, it took some time before people really understood what to do with it, what value it would add in their life. First you need to see what it is, what it can do for you, whether it can solve a real problem. That’s the exiting stage in which we are now. Some treasurers are trail blazers, others are more followers that first want to learn from others about how it has brought them forward.”

Where can these latest technologies really improve treasury? Are there any issues they cannot solve?

LT: “Treasury is all about information and data. There’s a lot of information available in a treasury environment and you sometimes need new technologies and standardized processes to unlock the value out of these data. Treasury covers a large amount of structured data in all kinds of systems. If you want to translate that data insight into valuable conclusions, then technology is probably the right enabler to help; with data analytics and visualization, for example. But, if you don’t have your data centrally available in a data warehouse or data lake, then that’s the first part you should work on; you first need to have your data centrally available to be able to do something with it. Unfortunately, many large multinational companies are still in that stage, they still have data that’s very fragmented and decentralized. For those companies, you could say that the newest technologies have come too early.”

RC: “What will improve treasury? We should first consider what treasurers are seeking to do. Today, we are seeing an increasing appetite from corporate treasurers for integrated decision support tools going beyond what treasury management systems can provide. To that end, we at Citi are running a number of experiments, collaborating with our clients and fintechs, and enabling our clients’ journey towards smart treasury. This is about moving beyond descriptive analytics to decision support and decision automation, and offering opportunity to realize the full automation of operational treasury. What won’t be solved? Well, we won’t get there in 2020 but we will certainly soon start seeing the foundational steps in this transition to a fully automated operational treasury and that’s what is so exciting.”

The St Jacob Foundation provides care and services to the elderly in the Dutch South Kennermerland area, aiming to give them control over their own lives for as long as possible.

Quality of life is key to home care concepts, as St Jacob showed in their business case which was presented in March 2012. The traditional ‘old people’s home’ has given way to a totally different form of care for the elderly. “Most of our premises stem from the early 1970s,” says Rob van der Hulst, program director of Real Estate and Development at the St Jacob Foundation. “With the type of client we have nowadays this is not sustainable. When the premises were built our target client base was the over 65s who liked to be cared for. In the prosperous areas of Haarlem and the surrounding areas there were often no health issues but rather a preference for a worry-free existence coupled with keeping the luxury they were used to. The domestic assistant sometimes moved with them, for example to an attic in the same building.”

External partners

The foundation’s history goes back a long way, as far as the Middle Ages. The current St Jacob arose from the merger of a number of independent residential and care homes in the Haarlem, Heemstede, and Bloemendaal areas. The latest amalgamation dates from early 2000 and today the foundation has nine premises. Anita Louwers has been the director of the St Jacob’s board of trustees since 2006, when they took their first steps towards a marketing approach to care. “From that time on, care and nursing of the elderly has become faster, more intense and more complicated,” she says. “For that reason, we have opted to find partners to deal with everything which is not directly connected to that complex care, such as help within the home and cleaning, but also the expertise we need in the areas of finance and property. We are becoming a leaner organization: in-depth care with a thin layer of overhead for the relevant support personnel.”

This is a significant difference between St Jacob and other institutions in the country, many of which are more autonomous. Van der Hulst adds: “As an organization we want to stay close to our core function; we are good at intramural and extramural complex care, but other parties are better at what has to be done on the sidelines. The target group has changed considerably over the past few years. The senior citizens, those above 65 years, still live at home, travel and play golf twice a week. Those who now occupy our premises are the over-85s, who are also less mobile, but even in this age group we are noticing changes and, with support, a number of them can still live at home. This group of ‘light clients’ no longer use intramural care facilities, so only the clients who require dedicated nursing remain. “And this group is increasing constantly. People are getting older and the numbers with dementia are increasing as well. We are focused on this growth, but also on recovery and revalidation of the aged,” says Van der Hulst.

Living career

The fact that the aged are requiring more complex care has consequences for the employees of care agencies. “We used to be able to employ semi-skilled people but nowadays care is no longer so lightweight,” says Louwers. “Last year we retrained 500 employees to a higher level of competence. Today, employees have to have specific knowledge about various illnesses and they have more to do with psychiatric problems. Also, care at home is much better organized; people who have had treatment in a geriatric revalidation center go home far earlier and doctors and physiotherapists can also provide care at home.” The trend towards more specialized care was already evident to the foundation in 2007.

Louwers explains: “Since then we already started thinking in terms of housing ladders for our clients. Renovations are often more expensive than new buildings so we began to look at properties more as investors; the properties had to keep their value, we had to build to fulfill market demands and we didn’t want to run any risk. We want to own all properties geared for specialized care, whereas for homes with their own care facilities we want to find investors or co-operate with housing corporations.” These objectives were set out in the Strategic Property Plan which was written in 2007 but which has been modified in certain areas in the meantime. All types of accommodation have to be flexible so that if one target group declines in number another group can live in the same building.

Business case

Between 2007 and 2010, St Jacob developed a multiyear management model in which all future income, property transitions and care programs were covered, from the current to the new situation. Following the real estate plan, St Jacob decided to (re)develop several locations for revalidation care, small-scale group housing and care flats. For the benefit of the financing application, the foundation also prepared a detailed business case which was completed at the beginning of 2012. In the meantime, the foundation started looking for an external expert. “A recommendation and a number of positive references led us to Zanders,” says Louwers.

We already have quite good financial know-how in-house for presenting a business case, but they (Zanders) were able to fine-tune it.

Anita Louwers, Director of the St Jacob’s board of trustees

According to Zanders consultant Hendrik Pons, St Jacob’s business case was convincing. “And above all it was explained very clearly by the foundation. Together this immediately gave the banks a positive impression,” he says. Van der Hulst adds: “Zanders reviewed the multiyear management model and sat down with us round the table during discussions with financial institutions. I am convinced this helped considerably and of course being safely in the black helped as well. We own almost all of the properties and were also able to sell one at quite a favorable moment in time. From three banks and the Guarantee Fund we finally got positive reactions.” The Care Guarantee Fund (Wfz) gave us a 100% guarantee on our new application,” added Pons “and that gave us a significant interest advantage.”

Differentiation

The financing application resulted in St Jacob obtaining a loan of €30 million. Louwers says: “This is rather unusual at the moment for a turnover of €60 million. And it is fantastic since we need property for new clients – often those with severe dementia – to be housed in a way that best suits them.”

Financing is agreed and will be used in 2014. A number of building plans are ready, including Overbos and a building with room for 100 clients with dementia and a revalidation center. Van der Hulst explains: “We are spread over three different towns and that means that we have to have different types of facilities available. With homes where people pay their own living costs they can start working on their own housing ladder earlier and can stay in their own home if their need for care increases. A good example is Nieuw Overbos, which will be opened in a year’s time. Here there are lovely flats for people aged 75 and above. There are many care facilities, such as a doctor and round-the-clock services. But we are here for all senior citizens; on the Aziëweg we are building a complex for council rental.”

By separating housing and care there is a lot more differentiation, according to Louwers. “Many people are prepared to pay for what they want. The Netherlands is a country where the AWBZ (National Act on Exceptional Medical Expenses) is too general and uniform in its coverage and this doesn’t suit everyone. I think it’s good we are a forerunner in the developments.”

More efficient

Louwers also thinks that this new approach will mean resources are used more efficiently. “We started the transition phase with a turnover of €60 million for a large category of quite easy clients. When we are finished we will have a turnover of just under €50 million for a group of difficult clients and we will have €10 million left over for care at home – which is quite a lot. Someone who lives at home is still responsible for the accommodation component and that makes long-term care more affordable.”

So the St Jacob Foundation is becoming more like a company, adapting to and playing on the market forces we are experiencing. However, St Jacob is suffering from the consequences of governmental intervention and the health insurers’ shortsighted policies. Louwers adds: “You can’t really talk about market forces because they are controlled by legislators and insurers. However, if we function well as a care provider by adapting to the needs of our client base, then our buildings will fill up of their own accord.”

How did Zanders work with the St Jacob Foundation?

• Help in preparing the business case
• Participation in talks with the banks and the Care Guarantee Fund (Wfz)
• Various memos on internal decision making
• Continuous treasury support in the form of a service subscription from early 2013; preparation of the annual treasury plan, participation in the treasury committee (strategic), participation in the monthly treasury meeting, treasury tools (loan module, liquidity forecast model).