Sony decided to start Digital Transformation (DX) of global treasury functions by launching the METRO Project officially in May 2018 and completed it by October 2020, working remotely under the COVID-19 global pandemic.

One of the biggest achievements of this project is the automation of the FX trading process. It is impressive to see how Sony’s FX dealers can trade large volume of FX deals with banks efficiently and effectively within a few minutes by using SAP S/4HANA Treasury and SAP’s TPI (Trading Platform Integration) connecting automatically with 360T Trading platform.
In this article, Sony’s project management team and Zanders partners will explain about this project.

Power of creativity and technology

Sony strives to fulfil its purpose to “fill the world with emotion, through the power of creativity and technology”, under its corporate direction of “getting closer to people”. To evolve and grow further, Sony strives to provide innovative products and contents full of emotional experiences in order to enrich people’s lives through the power of technology, across its six business segments consist of Game & Network Services, Music, Pictures, Electronics Products & Solutions, Imaging & Sensing Solutions, and Financial Services.

New-generation technologies made it possible for Sony Group to improve the global treasury platforms such as Payment-On-Behalf Of (POBO), Zero Balance Accounts (ZBA) sweeping, and Internal cash-less payments, Internal FX and Money Market deals settled via In-House-Cash accounts.

To improve FX hedging process, Sony introduced cutting-edge technologies such as SAP S/4HANA Treasury, SAP’s TPI connecting automatically with 360T Trading platform, to achieve the end-to-end automation of FX trading process.

To improve banking connectivity, Sony adopted the most advanced generation of banking technologies such as SWIFT for Corporates and ISO 20022 standards to connect with global banks smoothly for payment requests and bank statements via SWIFT network, which makes it possible for Sony’s cash management teams to grasp the latest status of cash position in a timely manner, even when the employees are forced to work from home in a tele-commuting era under COVID-19.

Additionally, Sony has implemented SAP In-House-Cash (IHC) for its treasury centers as In-House-Banks to support Sony subsidiaries in each region.

Sony’s journey for global treasury transformation

Sony Group has been making impressive efforts in the field of finance and treasury for a long time. Since 2000, Sony Global Treasury Services Plc (SGTS UK) has been established and operated in the United Kingdom as a global treasury center for Sony Group. SGTS UK has been providing POBO, ZBA sweeping, Internal cash-less payments, Internal FX and MM deals settled via internal accounts for Sony Group companies based on in-house treasury system developed by the Sony IS team. Cash and FX risk management were centralized in SGTS UK.

As Sony’s business grew in various business segments globally, it was necessary and rational to centralize funds and foreign exchange risks into SGTS UK. Before 1999, each regional finance/treasury center had managed FX and cash management individually, so it was a significant improvement by centralizing into SGTS UK. SGTS UK was deemed to be one of the most advanced in-house-bank of its kind around the world.

In 2016, SGTS UK transferred cash management functions for group companies in the USA to Sony Capital Corporation (SCC), to strengthen access to the US capital market, and to enhance flexibility to any changes in laws and regulations in the USA.

We departed from single global treasury center model and transformed into three main treasury center models by standardizing, simplifying, and automating treasury operations across all the treasury centers.

Hiroyuki Ishiguro, General Manager of Sony Group Corporation HQ Finance

Challenge

Decision to transform

In October 2017, Sony started a project planning to rebuild its global treasury management structures across the globe. By December 2017, after an RFP process among the shortlisted SAP consultants, Sony decided that Zanders would be the best SAP Treasury expert to advise and support in this project. Together with Zanders, Sony opted for SAP S/4HANA Treasury based on ‘Fit & Gap’ analysis.

In May 2018, Sony decided to start the METRO Project officially.

Mr. Hiroyuki Ishiguro, General Manager of Sony Group Corporation HQ Finance (‘SGC HQ Fin’), explains: “We decided to start DX in Sony’s global treasury operations, considering more diversified business segments in Sony Group, rapid changes of corporate treasury and banking activities in each region, innovations of financial technologies, and limitations of legacy treasury systems that could not so effectively support Sony’s group companies especially in the USA and Japan. We departed from single global treasury center model and transformed into three main treasury center models by standardizing, simplifying, and automating treasury operations across all the treasury centers.”

Mr. Ishiguro served as the project owner, led the project management team, and worked together with the project members from overseas based in eight countries. With the introduction of the METRO Project, Sony Group built a Treasury Management System (TMS) that supports all segments of the Sony Group’s business domain, excluding finance segment, providing treasury services for nearly 350 companies worldwide in Sony Group. The METRO Project was set in motion.

Technology risk

The legacy in-house systems had a technology risk, because it was developed with old programming languages and had been in operation since 2000.

Mr. Ishiguro also comments: “In the project planning phase, it was a challenge to justify the importance of METRO Project and to justify IT investment for TMS. Technology risk urged us to start the planning phase to kick off the METRO Project. Our previous legacy treasury systems were in-house systems developed long time ago. The technology risk would be a real risk at the end of December 2020, so we needed to take urgent action to transform the existing legacy systems into a new TMS. We needed to have a very solid and stable TMS to manage the cash management and FX risk management for Sony’s global businesses. This meant a large scale of IT investment.”

Solution

Choosing SAP and Zanders

Sony decided to choose SAP S/4HANA Treasury, as the “best” TMS fitting well with Sony’s requirements based on the FIT & GAP analysis.

Mr. Takehiro Yagi, Senior Project Manager of SGC HQ Fin, explains why: “We performed a fit-gap analysis on various options, including ERP type treasury systems like SAP, treasury-specialized TMS, and an inhouse developments. Zanders gave us a lot of valuable insights into each TMS at the FIT&GAP analysis. SAP S/4HANA Treasury was chosen as the best fit for Sony’s Treasury as a result. SAP S/4 HANA Treasury would ‘FIT’ with most of our requirements to cover Sony’s global treasury services with multiple treasury centers model. SAP had flexibility to achieve Sony’s unique requirements with custom enhancements. Furthermore, SAP S/4HANA Treasury could achieve integration with accounting systems effectively, because a lot of Sony group companies have been using SAP as an accounting platform.”

The most important condition was to choose SAP Treasury experts who have deep knowledge and wide experiences in global implementation of SAP S/4 HANA Treasury for both TRM and IHC modules for regional treasury centers. Zanders won the RFP process in a shortlist of world-famous SAP partner companies. As a result, Sony decided to select Zanders as the SAP implementation partner.

Sony faced serious shortage of SAP Treasury experts. In fact, the lack of SAP experts was one of the biggest challenges for METRO Project. It caused significant delays from the original master schedule, and it caused quality issues from the lack of knowledge and expertise in SAP Treasury. The close collaboration between Sony and Zanders proved to be a key success factor of the METRO Project.

Mr. Ishiguro adds: “As of 2017, there were only few experts in Japan who could develop SAP Treasury related modules in global implementation projects. We evaluated several global consulting firms and analyzed their proposals and considered if they can deliver what we wanted to achieve. However, in many cases their proposals were limited to a general update. Zanders comprehensively understood our treasury requirements in each key operation area and provided appropriate and concrete proposals.”

SAP global implementation in two waves

Then the project started with the planning phase. Mr. Takaaki Miura, Finance Manager in SGC HQ Fin, explains: “In order to obtain official approval, we developed comprehensive project plans. To minimize any impacts to Sony group companies at the ‘Go-Live’, we decided to implement SAP Treasury in two waves, as recommended by Zanders. We started explaining our project plan and built good consensus across the major stakeholders within Sony Group HQ. ROI was the most important factor when discussing with the Sony’s management. METRO Project obtained the official approval from Sony management in May 2018.”

In February 2020, the SAP IHC module was implemented in Sony Group globally as Wave 1. In August 2020, the TRM module was implemented globally as Wave 2.

To finalize user requirements, all the key members gathered in Tokyo from around the world to discuss on a face-to-face basis. Project team also visited Sony IS teams in India to discuss business requirements directly and to resolve critical issues effectively in Wave 1. To kick-start User Acceptance Tests, the project team visited each office of treasury centers for deep-dive discussions and user trainings, also in Wave 1.

Mr. Ishiguro explains: “Wave 1 go-live was just before the COVID-19 global pandemic. Up to the Wave 1 implementation we could do all the work in face-to-face meetings in Tokyo, the Netherlands, USA, UK or India. So, we have accumulated our experiences by implementing Wave 1 on a face-to-face basis. The COVID-19 virus spread around the world, affecting Wave 2 of METRO Project. It was a tough time for us to proceed with all the preparation activities on a remote basis. But by making the best use of our comprehensive implementation experiences from Wave 1, we could successfully proceed with all the activities for Wave 2, even on a remote basis.”

Zanders gave us a lot of valuable insights into each TMS at the FIT&GAP analysis.

Takehiro Yagi, Senior Project Manager of Sony Group Corporation HQ Finance

Performance

More sophisticated treasury operations

Now, Sony’s Treasury team is looking back with satisfaction on the project.

Mr. Yagi explains: “Now, we have visibility into global treasury activities from all regions, which is a real improvement. The treasury management system, METRO, was implemented as our global treasury platform with sophisticated technologies, greatly improved from the previous legacy in-house TMS systems. Our project members gained huge insights and experiences during the project, by working closely together with the Zanders team, all the partner banks, our IT teams and all the treasury members. That proved to be significant contributions to the development of human resources who can globally promote DX projects in the finance and treasury fields, which will continue to be needed in the future.”

Mr. Ishiguro agrees: “It is very important for both finance/treasury members and IT members to collaborate closely. It is also very important to promote young and mid-career employees actively, to provide opportunities for good trainings and for good ‘learning’ by direct and active participation to the project tasks.”

Mr. Miura adds: “One of the benefits of implementing METRO is that we can operate straight-through-processing (STP) in the FX trading process. Previously a lot of manual inputs needed to execute an FX trade with a bank, here and there, for the same deal. Now FX dealers can execute FX deals with banks who quoted best price effectively in a fully automated manner. We experience the improvements every day.”

Mr. Yagi agrees: “Our new SAP S/4HANA Treasury is much more advanced than our previous legacy treasury systems. SAP is much faster, more transparent and designed more effectively and efficiently, fully automated in various operations. Our previous application did not have any payment functionalities, so we had to enter payments separately manually into a separate E-banking system. SAP makes payment runs automatically, with timely status update of payment files. We have fewer issues or errors in METRO, all operations are run in a transparent manner, which prevents from fraud and other risks. The treasury system makes it possible to disclose financial information quickly to Sony management, the external auditor or investors if necessary.”

Mr. Ishiguro: “I strongly feel that we have been enjoying benefits of standardized treasury operations across regional treasury centers after the implementation of SAP Treasury. All three main treasury centers – in Japan, USA and UK – have been using the same treasury platform, and achieved a very good and stable operation, from various perspectives.”

A unique project

Apart from the pandemic restrictions, several elements made this project unique.

Firstly, the METRO Project was the first global IT system implementation project involving all business segments (except the Financial Services segment) of Sony Group. The project was unique because both Wave 1 and Wave 2 went live in a Big-Bang go-live approach around the world.

Secondly, it is unique because it was a ‘GLOBAL’ treasury transformation project with project members from eight countries. Treasury teams were in Tokyo, Singapore, Malaysia, UK, Poland and USA, and IT teams were in Bangalore, India, and the Zanders team was mainly in the Netherlands. As a result, the members of various nationalities have established a truly global project structure in which each project member was in charge of each task across the countries.

Ms Laura Koekkoek, partner at Zanders: “That global approach of this project, in which all regions and their personnel were combined, was really unique. And the whole collaboration between the different regions was really successful.”

Zanders partner, Ms Judith van Paassen adds: “The old systems already had the ambition of best practices processes in them but contained a technology risk. Now that there is a system to fully centralize, standardize and automate all processes is a big achievement.”

Mr. Ishiguro: “Whenever we discuss with Zanders, I remember we had very useful information available on key items, sometimes to deliver to the Sony senior management, or sometimes to resolve critical issues with a reasonable and solid solution, so we were able to proceed with the project with deep insights from SAP treasury experts.”

Next steps: From its new stable treasury basis, Sony's treasury is now ready for further steps for the future. In 2021, the system will be rolled out to Sony Group Corporation in Tokyo. Mr. Ishiguro lastly adds: “SAP S/4 HANA Treasury proved to be a very good TMS application for us. We would like to promote DX further, with close collaborations across our own Treasury members in each treasury center and our own SAP IT members, taking advantage of our experiences cultivated through METRO Project, in line with the mission of Sony Group Corporation, to ’lead and support the evolution of business through people and technology’."

Bank accounts can now be created and maintained by the cash and banking responsible team, giving them more control over the timing of opening or closing of an account as well as expediting the overall process and limiting the number of users involved in the maintenance of the accounts.

As part of an SAP Treasury system implementation or enhancement, we review existing business processes, define bottlenecks and issues, and propose (further) enhancements. Once we have applied these enhancements in your SAP system, we create a series of trainings and user manuals which layout the business process actions needed to correctly use the system.

SAP IHC is a module that facilitates a full suite of payment factory processes. It can be seen as an intercompany position subledger with a set of fancy features like POBO payment routing, bank statement allocation, arms-length intercompany interest calculations, out of the box payment and bank statement interfaces with participants (Opco’s) etcetera.

Intraday Bank Statements offers a cash manager additional insight in estimated closing balances of external bank accounts and therefore provides the information to manage the cash more tightly on the company’s bank accounts.

Since 1970, FMO has been investing in the private sector of developing countries and upcoming markets. It does this in sectors in which it believes the long-term impact will be the greatest: financial institutions, energy and agricultural sector. With regard to lending, FMO applies a number of criteria. Is the initiative bankable? Does it contribute to a better world? Is it dependent on FMO or can another bank do it as well?

IFRS 9 concerns a number of new accounting requirements for financial instruments and contains three pillars: classification and measurement of financial instruments, provision for possible credit losses on financial assets (impairment) and hedge accounting. The adjustments within the organization fall under the responsibility of the financial division, which is Buijze’s department. “As far as hedge accounting is concerned, the impact is not so relevant for us, but definitely for the other two,” says Buijze. For example, the rules require the bank to look at expected loan losses differently, including taking into account macroeconomic scenarios.

Auditable and executable

During the credit crunch, banks found that the value of assets or liabilities entered on the balance sheet were often too low. In addition, there was also a delay in adjusting the value in response to market developments. The idea that the value of assets or liabilities should reflect the market more closely only seems logical. The question, however, is whether this regulation will achieve this. “It probably will,” thinks Buijze. “But since it arose from a political discussion, it makes it that much more complex. In order to get a grasp on this complexity, we have appointed an external manager to this project. It affects every part of our organization and is a lot of work to not only process it through all the procedures, systems and reports, but also to make sure it is preserved.”

In 2015, FMO began to prepare at a relatively early stage. “That’s why we were able to take all the necessary steps in a constructive way,” explains Buijze. “That process started with the question: what exactly is IFRS 9 and what are we actually facing? After that we needed to verify which elements were already in place. The probability of default (PD), or the probability that a company will go bankrupt, was something we already had a good idea about. As well as the loss given default (LGD), which is loss through default. You need to build your entire framework on these basic elements. IFRS 9 requires a calculation of expected loss (EL) in the next 12 months. However, if the client’s creditworthiness deteriorates, you are responsible for the EL over the entire life cycle of that credit. But what does ‘deteriorate’ actually mean? Such things must be clear; it’s important that it’s auditable and executable.” That raises the question of how one determines the creditworthiness of a local bank in Zimbabwe, for example. No ratings exist for such a bank. Buijze says: “We do that with all the specialists here, through a ranking of the entire portfolio based on the estimated risks. So it’s a relative rating which we subsequently ‘map out’ from the well-known rating scores of Moody’s and Standard & Poor’s.”

Portfolio diversity

Compared with the Basel guidelines, IFRS 9 requires more a point in time, according to Martijn de Groot, director at Zanders. “We had to take a number of measures, especially when using the existing PDs as proof for IFRS 9. Nothing too major, but it must be well founded to obtain approval from the auditor and to be able to take part in the process.” Buijze nods in agreement, saying: “You have to thoroughly explain why certain decisions were made. A lot of banks have very specific problems. As a bank, we can’t do a lot of back testing because we have relatively few clients, and luckily we don’t lose many. To show the expected loss with only historical figures is difficult. You must also substantiate your findings theoretically.” FMO’s portfolio is much smaller but more diverse than that of the average bank. The balance sheet total exceeds €8 billion, with loans amounting to over €4 billion. However, this is distributed among approximately 700 clients in 80 countries.

“There are countries with a high-risk rating, where we’ve never lost a cent, although the expected loss is higher than zero,” explains Buijze. FMO’s expansive agriculture sector does have some consequences. De Groot says: “It means that you have to find a solution for everything for IFRS 9. Because the portfolio is so diverse, so are the effects. A life cycle or credit cycle needs to be modeled, but the FMO credit cycle, based on the total balance, is muted, less volatile, due to the diversity.”

Classification

In the world of FMO, modeling quickly results in highly theoretical levels, says Buijze. “There are no trustworthy figures from a lot of the countries in which we do business. How do you determine the credit cycle in Ukraine, for example? In any case, we try to find the balance: while complying with the standards of IFRS 9, we don’t want to fall into something which appears great in theory, but hardly relates to what’s happening in a country.” All financial instruments must be classified according to the IFRS 9 guidelines. On the liabilities side, there is no impact for FMO but there are implications for the bank’s financial assets. Buijze explains: “We have to separately determine the classification for each loan.” This classification means that loans are entered at cost price or at market value on the balance sheet. However, the market value decreases as the repayment capacity decreases. Because there is also an interest component, in addition to a credit component, the market value is more complex. “Luckily we haven’t needed to price that many loans at market value. We work with normal loans, mezzanine loans and private equity. And for the latter, very different rules apply.”

Fluctuations

One of the most miraculous things about IFRS 9, according to Buijze, is that you are obliged to make a choice for private equity investments. “Either everything goes through the balance sheet, so you never see anything in your profit and loss account (P&L), with the exception of paid dividends, even if you sell the investment at a nice profit, or everything goes through the P&L. That leads to some uncertainty, because valuations can fluctuate and are not always as accurate as possible. Consequently, you get huge fluctuations in your income statement. We finance
almost no listed companies, and should therefore, in valuation, mainly look at theoretical values based on what other companies are doing. If we finance a bank and all banks in that region are assessed at a lower value, then we will also asses the bank at a lower value. During the crisis, the large Dutch banks significantly decreased in value, while we were actually doing quite well. If FMO was valuated in the same way as ING at the time… Therefore, it is an approach, but it’s not spot-on. And that’s all because of your P&L.”

De Groot believes there’s something else involved: “The bulk of private equity isn’t in euros, which means that currency volatility also has an effect on the balance sheet value, which in turn is in euros. Previously, that result only went through selling by the P&L, meaning if it were actually realized. Under IFRS 9, it either never goes through the P&L, or every period your unrealized result also goes through the P&L.” In fact, this all means a higher volatility on the P&L.

That will apply to a lot of banks, but with us, it’s even more extreme because we have a relatively large portfolio in private equity.

Paul Buijze of FMO

FMO has chosen to have put everything go through the P&L. “That was a difficult decision, but it involves almost a third of our activity;, so for reasons of transparency, this was too much not to include in the P&L.”

A glance at 2025

Finance is ultimately the most involved department in implementing the new reporting standards. “Zanders had the ‘spider-in-the-web’ job,” says Buijze. “They brought together collaborators within the organization and developed a tool to calculate the credit facilities and market values of loans. This tool also implemented shadow calculations to get a better sense of the choices made for IFRS 9. What does this mean for the periodic numbers? This provides better insight and we can intervene if necessary. We prefer to have the tool in the system itself, but the systems don’t offer this at the moment. In the next three years, the tool must at least have a sufficient level to make our P&L, and be signed off by the auditor. And after that, we hope that our source systems will have the capacity to do this themselves.”

In recent years, FMO has grown both in size and profitability. “Through the years, we’ve had a lot of up-swings,” says Buijze. “Because of the dollar, but fortunately, also because developments in a large part of the world we work in are going so well.”

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.”

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.”

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.

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.”

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.”

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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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.

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.

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

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.”

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?”

Canada’s largest railway set out to simplify its payments and improve reconciliation with enhanced remittance data, while also reducing IT support costs. The project will run parallel with the Canadian Payments Association’s (CPA’s) initiative to modernize the system and introduce ISO 20022 formats. So, following a thorough request for information (RFI) and request for proposal (RFP) process with the banks, the Canadian National Railway Company (CN) now has its future vision for bank connectivity and global-standard payments, as well as a multi-year roadmap to establish best practices.

‘North America’s Railroad’

CN operates approximately 20,000 route miles of transcontinental railroad from Vancouver in the west to Halifax in the east, and all the way down to New Orleans on America’s southern coast. Its market cap of US$43bn (C$57bn), as of February 2016, makes ‘North America’s Railroad’, as it’s known, the biggest rail company in Canada in terms of both network and value. The majority of business, consisting of freight, takes place in North America, but CN’s reach extends much further, with operations and transport services in Asia and South America.

The group treasury, centralized in Montreal, takes care of cash management functions and does all FX hedging and cash pooling with the two main operating currencies, Canadian dollar and US dollar. This business model meant that CN needed a bank with a strong presence in the US and Canada, as well as an international footprint. In 2015, therefore, the company started to look into streamlining its banking relationships.

European perspective on Canada

Zanders was asked to provide guidance on both the RFI and RFP phases of the bank selection process. The aim was to choose one or two relationship banks for domestic and global operations. Due to the specifics of the Canadian market, the company chose one bank for its North American operations and one for the rest of the world. Zanders was an active ‘sparring’ partner in this process and supported CN throughout the RFP, during the evaluation of responses, decision-making, and selection phases.

The vision

Paul Tawel, who was senior manager of treasury operations at CN during the RFI and RFP process, explains how the project began: “Our main goal was to get a vision of best practices in different areas of treasury, so it originally started as a ‘quest for knowledge’. On our side, we had a lot of good processes in place but we wanted to learn more about protocols for bank communication.”

The project group at CN went through a questioning process, looking at all outsourced services and how it communicated with its banks. While they recognized that many of the protocols in place were already working well, there were areas that could be improved. Tawel, who has now retired from CN, adds: “We really wanted an internal vision and we now have that – we have put in place a cross-functional task force, including treasury, accounting, procurement, marketing, and IT to implement the vision and roadmap that we have developed. We have a timeline of three years to put these changes into practice. There are separate plans for AP, collections, and treasury. On the payables side, the vision can be implemented quite quickly.”

The job is ongoing, and CN is currently drawing up an action plan for three areas: payments and collections, payment format harmonization, and bank connectivity.

World-class payments and collections

During the research phase, which took place in mid-2015, running alongside the bank RFI and RFP, it became apparent that there were areas of payments and collections that could be optimized. Cheques are still a mainstay of CN’s collections in both Canada and the US, representing 43 per cent and 62 per cent of collections volume, respectively. Meanwhile, on the payments side, there was far less reliance on cheques (seven per cent of volume of payments in Canada, 10 per cent in the US), although there was still an opportunity to reduce volumes. Another factor on the collections side was the wide variability of remittance data sent by customers. “We want to eliminate cheques as much as possible. However, in North America, they are part of the culture, and suppliers demand them. The right communications strategy will be a key part of successfully encouraging suppliers and customers to accept another digital payment,” says Tawel.

Another important consideration was the unique payments environment in Canada, explains Mark van Ommen, associate director at Zanders: “We had to take the nature of the Canadian payments system into account. One of the challenges is that they are still very much cheque-driven, mainly on the receivables side, so that is a big difference in the Canadian environment.”

CN’s overall vision for payments and collections is to rationalize payment/collection methods and reduce cheques in receivables, while also increasing the level of pre-authorized debits. On the outbound payables side, as well as further reducing cheque usage, it was decided to leverage SAP technology.

Formats harmonization

CN also wished to simplify the way it communicates transaction data with its banks. The company currently uses a large number of formats, some of which were customized, and this increases payment and IT costs. Moreover, the Canadian clearing system doesn’t permit payment messages to contain all the data necessary, so that separate files are required for remittance.

However, the Canadian Payments Association (CPA) has now launched an initiative to modernize Canada’s core payments infrastructure, gradually replacing multiple formats – often based on Electronic Data Interchange (EDI) formats – with the international ISO 20022 standard payment formats. The design phase of the initiative is expected to be completed by the end of 2016, but implementation will take several years. The CPA will also adopt Extended Remittance Information (ERI), which will enable the reconciliation of payment remittances to be automated, saving companies such as CN significant resources.

Despite the CPA’s initiative to introduce standardized XML payment formats by 2020, CN had to consider the best option in the current environment. They chose to adopt CGI payment formats that provide combined payment and remittance info, enabling more efficient reconciliation and less complexity from an IT point of view. Van Ommen adds: “We were able to provide advice based on our experience of European XML standardized payment formats. Although the non-standard payments environment in Canada is a challenge, the CPA is intent on bringing this in line with global standards.”

Bank connectivity

The multiple payment format types, along with the company’s multiple host-to-host interfaces with various e-banking systems, mean there is a raised cost in terms of IT support – the so-called ‘cost of ownership’. The more systems and types of format are used, the greater the cost of making any modification to each system. CN wanted more independence.

Zanders partner Judith van Paassen worked closely with CN on this issue. She explains that: “The ‘cost of ownership’ of maintaining the current multiple types of file formats and bank connectivity was too high. CN needed more standardization to reduce this cost and to ‘future-proof’ its treasury and payments operations. But first, treasury and IT needed to convince other departments that this would be both necessary and beneficial.”

The solution put forward in CN’s vision and roadmap was to simplify the systems landscape and number of interfaces. CN already had Swift’s Alliance Lite2.0 in place but this was only used for treasury payments and wires and, in any case, was unsuitable for the volume of commercial payments for a company of CN’s size.

Tawel explained that the aim is to adopt a standardized, bank-agnostic communication channel for all bank communications: “We want to leverage our Swift communication platform, but in future we may need a Swift Service Bureau. This will take time, and as we are already on Swift, we see it as primarily an IT project.”

A communication strategy was needed across the organization to get all departments aligned with the best practice identified by treasury and IT in the areas of bank connectivity and payment formats harmonization. Van Paassen adds: “We advised the treasury and IT teams to view this project as a long-term strategy. It was a challenge to get departments such as A/R and A/P to support this vision, but CN’s treasury succeeded.”

CN was vindicated in its long-term strategy for banking relationships, bank connectivity, and payment formats. It has already been able to reduce its banking fees significantly via the bank RFI and RFP phase and in future expects to improve security and simplify the process of making commercial payments.

Vision and roadmap

Having already selected two relationship banks and with its vision for future bank connectivity and payments firmly established, CN is now planning the initial steps along its roadmap, which will take it up to 2021. In early 2016, treasury began looking at document solution design and payment formats. Van Paassen says: “The challenge will be in the implementation, but we are confident that we helped treasury see the bigger picture, which will enable them to make the necessary changes.”

A factor that was vital to the project’s success was getting buy-in from several different teams. While some departments initially questioned the need for the proposed changes, they reached a consensus, helped by the objective, fact-based methodology used during the RFI and RFP phase and the bank communication standardization project. Irene Kwan, senior manager, treasury operations, at CN, said that at the end of the project, treasury’s vision was shared and supported across all departments. She says: “The project was well received in the company. Everyone was on board and everyone was clear about what we wanted to achieve. In my view, it would be really beneficial to carry out projects on best practices more frequently.”

Would you like to know more about bank connectivity or other treasury challenges? Contact us today.