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.”

Do you want to know more about risk management for corporations? If so, contact us.

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?”

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.

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.

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.”

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.”

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.

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.”

Would you like to know more about the challenges of implementing a global payment factory? Contact us.

One of the walls in its Amsterdam headquarters shows the evolution of the Philips business. Philips’ roots lie in Eindhoven, where, in 1891 Gerard Philips started producing light bulbs in an empty factory building. When he was later joined by his research-oriented brother Anton, the firm enjoyed its first major business stimulus. Through vertical operation, with their own factories and dependent suppliers, they took their first big steps towards success.

Continuing to develop through the production of radios and TVs, followed by Philishave electrical razors and inventions such as the Compact Cassette and the Compact Disc as new audio media, the company then expanded into professional products, such as medical equipment, studio mixers and computers. Today, Royal Philips is a diversified technology company that focuses on innovation in the healthcare sector.

Currency risks

The internal structure of this multinational comprises two axes, the business groups and the markets. The business groups are organized into product types: medical equipment, lighting and domestic appliances – along with variations on these themes. The business groups develop and produce the products and distribute them to their international markets where the products are sold. Together, in a matrix, these two form what’s known as the business-markets combination. Commercial employees (‘the business’) and financial managers (‘finance business partners’) are active in both axes and it’s their joint responsibility to ensure that a healthy and successful business can develop and thrive.

We are active in over 100 countries and we process EUR 100 billion in internal payments every year, so, clearly, we are highly exposed to currency risks.

Gabriel van de Luitgaarden, Senior VP, Head of Financial Risk & Pensions Management at Philips.

In the logistics, financial stream from factories to markets, all manner of invoices are sent back and forth and, eventually, money from customers flows through the market to the Treasury. Hedging currency risks is expensive and prevention is always better than cure, he muses: “If you don’t properly understand what the risk is and what effect it will have, there’s not a lot you can effectively do about it. But by quantifying risks you can get a handle on them and decide whether you want to take any action. You have to consider aspects such as what will happen to EBITA if you do nothing, how much lower will it be if you hedge, and how much will it all cost? It’s all about how much risk you are prepared to accept.”

Currencies fluctuate in relation to one another and this strongly influences a multinational’s earnings and financial reporting. “We deal with risk management every day,” says Van de Luitgaarden. “But the people who work in the business very rarely do so. They see it as a specialism, but that’s not really the case. People in the business should be much more involved with it, asking themselves what is acceptable and what should I do about it?”

Argentinian toothbrushes

Philips initiated a project to define a new FX policy and hedging strategy for currency risks. Above all, it had to give the people in the business much more insight into the impact that fluctuations in exchange rates have on their performance, and show them how important it is for them to understand and manage currency risks.

“In many multinationals the business part thinks that the Treasury will just hedge currency risks, despite the fact that these currency fluctuations cannot simply be neutralized,” says Zanders consultant Lisette Overmars, who was involved in the project. “You can manage it all, but eventually you’ll need to come up with other solutions.”

Van de Luitgaarden adds: “That’s why we explained to the business that we can provide more insight into the risks and buy them time through hedging, but we cannot completely protect them. There’s no magic formula that can shield you from the effects of currency fluctuations.”

This bespoke form of hedging is primarily directed at countries whose currencies typically lose value, sometimes suddenly performing really well, but eventually losing value relative to harder currencies like the euro and the dollar. “That’s because emerging market economies are less solid,” says Van de Luitgaarden. “There is often high inflation and less political stability. If you don’t do anything about the prices in the respective countries, than the fact that their currencies lose value against the euro will progressively erode your income. There are extreme cases where we can lose 30 to 40 per cent in value in a year, which cannot be remedied by hedging. In such cases you have no option but to constantly increase your product prices.” It means, for example, that the price of a toothbrush in Argentina can suddenly rise by 10 per cent from one month to the next. “But not everyone in the business does this, which is why education plays such an important role in the project; it has to be visible. For many people the effect that currencies have on results was far from clear. We therefore developed an FX model to make the currency footprint visible. It shows us which currencies our EBITA is derived from and the extent of our various exposures. Thanks to this new policy we can make EBITA more predictable and less volatile, although we still cannot completely cover the risks.”

The real risk management is mainly to be found in the market; for example, where can you best procure in order to reduce your susceptibility to currency risks? Van de Luitgaarden says: “Take Japan, for example, where we are huge in medical equipment, representing substantial income in Japanese yen. But we don’t spend anything there because we don’t buy there. Three years ago the Bank of Japan began to devaluate the yen to stimulate the country’s economy, and this had huge repercussions for us. A 20 per cent drop in the value of such a currency results in our sales and profit also falling by 20 per cent – that’s just how it works. And if you don’t do anything about it, the situation won’t change. In addition to short-term hedging, to reduce your vulnerability to such currency fluctuations you need to consider procuring more in yen, or even opening a factory in Japan.”

More consistency and efficiency

The old way of working, centered on a policy set up about 18 years ago, was based on a Philips that was both organized very differently and was much bigger than it is today. Van de Luitgaarden continues: “Back then we had 12 product divisions but our performance, in particular, was managed differently. Every factory had its own P&L account and budget. If a factory was exposed to currency risks it had to reduce them itself and if any hedging was necessary that too had to be done by the factory in question. Now we measure our performance at a higher level, via the business-markets combinations. The factory’s P&L is now less important – it’s about the result of the group as a whole. The exposures that you hedge are therefore the ones that affect the result of the group. It’s much more efficient. If you're in a ‘long position’ in a particular currency, you sell it, in a single transaction. In the past this was done factory-by-factory, in several transactions. Given the tens of thousands of transactions that we used to do, this now represents a huge efficiency boost. The spread is no longer paid multiple times by buying and selling the same currency. We hedge currencies in the same way. We’re looking for risk reduction, so it makes little sense if everyone follows their own policy – it has to be done consistently. That’s actually more important than the net group exposure.

It's a combination of the two: hedging at group level and the highly consistent application of our hedging policy. That has an enormous  impact on the risk reduction that’s achievable.”

Headwinds and tailwinds

The project was launched in September 2014 and the new FX policy went live in November 2015. Given that it involved the whole organization, which was used to doing things the way they’d been done for the past 18 years, it was a formidable challenge to make the necessary changes. Moreover, three weeks after the start of the project it was announced that the company was to be split into the lighting division (Lighting Solutions) and a combination of the Healthcare and Consumer Lifestyle divisions (Royal Philips). The organization’s focus, particularly at the IT and Treasury departments, was then obviously on the impending split. It affected much more than just the business; it also had repercussions for Tax – which had to be paid in 100 countries – and Accounting and how it would all be technically processed in the books with the use of hedge accounting. All-in-all, it was a sea change.

“Its implementation was indeed quite overwhelming,” concedes Van de Luitgaarden. “It was complex material for which there were no ready-made solutions. We were dealing with people in the business who did not fully understand the situation; they only took into account what they did themselves and didn’t look at the bigger picture. This sometimes made it difficult to explain. Take, for example, a factory in the UK making mother & child-care products.

A high exchange rate of the pound against the euro at the time decimated profitability because procurement and manufacturing costs just kept on rising. But looking at Philips as a whole, the rise in the value of the pound was a good thing; we earned more pounds than we spent. We didn’t have to buy pounds to cover costs; we sold pounds to cover our sales. But try explaining that to the UK factory – at the end of the day currencies influence bonus targets. Sometimes you have a tailwind and at other times a headwind.” Last year was a good year for those who sold in dollars; which rose against the euro. “Thanks to the dollar being so much stronger, our sales in 2015 were EUR 2 billion higher, which is an awful lot on a total of 24 billion. That’s something to take into account, because it was certainly a windfall. This new way of looking at things needs time.”

What else has Zanders done for Philips?

• Treasury management: the extrication of treasury operations and the setting up of new treasury functions for Philips’ former television business (TP Vision) and the lifestyle entertainment business (WOOX Innovations).
• Risk management: the development of a new commodity price risk management framework.

Do you want to know more about risk management for corporations? Contact us.

Cycling seems to be more popular than ever. In many countries cycling is the fastest growing sport, due to its sustainable character and the improving quality of bikes. The bicycle market is highly diverse in terms of characteristics, preferences and taste. The recent growth of electric bicycles (e-bikes) has clearly contributed to this. Europe’s market leader in e-bikes is Accell Group, headquartered in Heerenveen, a true sports-minded town in the North of the Netherlands.

Growing with e-bikes

Accell Group has recorded continuously growing net turnover numbers in the past few years. In 2014, its net turnover was EUR 882 million. In the third quarter of 2015, Accell Group recorded continued growth in turnover in most countries. The company is now market leader in Europe and among the largest players in North America in terms of sales via specialist bicycle and sports retailers. Accell Group is mainly known for its strong, national bicycle brands, like Batavus, Koga, Sparta, Loekie, Winora, Haibike, Ghost, Lapierre, Raleigh, Diamondback and Redline. Next to these, Accell Group has brands in the bicycle parts and accessories market, such as XLC – sold via the specialist bicycle and sports retail trade.

Approximately 50 per cent of the Accell Group bikes are sold in the Netherlands and Germany, with its strongest brands Koga, Sparta and Batavus. In Germany, Haibike is a very successful brand of high performance e-mountain bikes (e-mtb). Sparta was one of the first brands successfully selling e-bikes in the Netherlands, where now many have followed. The bicycle company always looks for opportunities in the market to expand its portfolio.

Most of the people working here are passionate cyclists

Jonas Fehlhaber, treasurer at Accell Group.

“Many therefore know the products and brands in our markets well. In 2013 and 2014, we have acquired two parts and accessories businesses in Spain and Denmark, in line with our internal and external growth strategy.” The main growth in turnover comes from e-bikes. “We sold 1.7 million bicycles in 2014, a slight decrease in units compared to the previous year, but an increase in turnover thanks to the higher price of e-bikes.”

Two risks to hedge

With 2,800 employees working in 18 countries, Accell Group has its own support facilities for the assembly and spray painting of bicycles. The company’s two segments – bicycles and bicycle parts & accessories – are very complementary, but each has its own dynamics. The more expensive, high quality bikes, such as Koga, are assembled and then heavily tested in the Netherlands. On the production and assembly side, Accell Group is supplied by suppliers from different countries. It has, for example, a Turkish steel frame maker, while the high-end frames come from Taiwan and China. “Our risk management objective is to mitigate all substantial risks arising from foreign currency cash flows in connection with the manufacturing and sales”, says Fehlhaber. “Additionally, we hedge the interest-rate risk on our borrowing. That part is relatively simple: we are financed by a banking syndicate of six international banks. The financing is made available through term loans and a revolving credit facility. The interest-rate risk on borrowings is hedged using interest-rate swaps – first of all because it’s a requirement in our financing agreement, and secondly to limit volatility in interest expenses.”

“Part of the group’s spending is in foreign currencies. The main currency that we are dealing in is the US dollar, which concerns mainly our suppliers of frames and components in Asia. Because of the Shimano components, the Japanese yen is also an important currency for us. The Chinese renminbi is becoming increasingly important too, as well as the Taiwanese dollar – the high-end parts come from Taiwan, while the mid-range mainly come from China. In order to protect our margins, we hedge to prevent any P&L volatility through foreign currency fluctuations.” Accell Group’s strategy is to cover most of the downside risk by protecting the margins against adverse exchange-rate fluctuations. Fehlhaber explains: “On the downside, we want to be protected against adverse rate movements, but be able to participate on the upside should the rates move in our favor.”

Zanders valuation desk

The valuation desk supports organizations with financial instrument valuations, hedge accounting and complex modeling. Zanders helped Accell Group with:

• Valuation of FX forwards, FX options and swaps in compliance with IFRS13 (including credit or debit valuation adjustments – CVA/DVA);
• Hedge effectiveness calculations in compliance with IAS39 (dollar offset test, regression test);
• Definition of the Accell spread for the DVA calculation.

Hedge accounting

To mitigate the profit and loss effect arising from derivatives used for hedging, Accell Group applies hedge accounting under international accounting standards covered by IFRS 9 (IAS 39). “We do cash flow hedges, which means that we have a hedging instrument in our books, while the exposure itself is not in our books yet”, Fehlhaber explains. “If you revaluate your hedging instruments you get a P&L impact without the offsetting impact of revaluating the underlying item, because the cash flow is in the future. The value changes in our hedge instruments
can be booked in equity instead of in the P&L. Therefore, hedge accounting is extremely important for us. Since the accounting standards in relation to hedge accounting are very challenging and the application time consuming, we were looking for a solution to have the whole process of hedge accounting outsourced to one partner. That’s why we asked Zanders’ valuation desk to help us.”

Zanders consultant Jaco Boere was involved in the testing of the hedge effectiveness. “Hedges are for economic purposes, so they lock in future cash flows”, he says. “Therefore you want to match the timing of the hedging instrument with the underlying item that affects the P&L.”

Future plans

In the years to come, Accell Group intends to focus on safeguarding and reinforcing the market positions of its strong national brands. “We will try to complete our portfolio and generate growth by maintaining our number one position in the growing e-bike market. We also put a lot of focus on the supply chain – there are a lot of synergies to be gained in streamlining that process, especially concerning our procurement.”

As an organization, Accell Group is fairly small, lean and mean, Fehlhaber explains. “We therefore don’t have the capacity to have our own valuation desk. Complying with the IFRS requirements demands a lot of work on the documentation side. We report twice a year, in June and December, and for these reporting dates Zanders prepares the full set of hedging documentation as well as the valuation and effectiveness testing.” Pierre Wernert, who has worked with Accell and represents the Zanders valuation desk, explains: “Each hedging instrument is part of one or more hedge relations and Accell Group has many foreign exchange instruments used for hedging. According to IAS 39, each hedge relation needs hedge documentation.”

“The efforts are both on the process and on the advisory side”, says Fehlhaber. “We had many meetings and calls to discuss our specific requirements and at the same time satisfy the IFRS requirements in all aspects. That’s where Zanders has been a great partner.”

As well as being a member of the board of the DACT (Dutch Association of Corporate Treasurers), Bart-Jan Roelofsz is mainly known as group treasurer and insurance manager at Endemol Shine. This entertainment group is the result of a merger between Endemol and Shine. The merger means that the Shine companies have now adopted Endemol’s holistic approach to risk management. But what does that mean in practice? We asked Bart-Jan to explain.

Endemol took over the Shine Group at the end of 2014. What exactly does the joint venture do?

“We now have our own offices in nearly 40 countries but there’s quite a market beyond those countries as well. There are three aspects to our operational activities: creating, producing and distributing formats. The production activities involve scripted and non-scripted productions. The scripted productions, such as Humans, Ripper Street and Black Mirror, have production budgets that can run to over EUR 5 million per episode. Some examples of non-scripted shows are reality TV series such as Big Brother and game shows such as Deal or No Deal. Once a production has been completed, we distribute these ‘finished programs’ around the globe. In addition to these distribution activities we also license formats or concepts to third parties. These are then allowed to produce a show in a country where we don’t have an office ourselves.”

To what extent has the operational side of the ‘old’ Endemol changed as a result?

“The scripted and non-scripted activities haven’t really changed since the merger with the Shine Group; they have primarily just multiplied considerably. What’s important is that the programs that come from Shine complement the programs that Endemol already had. That’s great, because our financing model is largely based on – indirect – advertising revenues. In the food world, there were brands that didn’t particularly advertise around Endemol’s programs, but the big food brands are very interested in advertising around a program such as Master Chef, one of Shine’s best known programs. So the two libraries of formats that we had didn’t result in any mutual cannibalism. Moreover, our distribution division was already big, but can now distribute Shine’s entire catalog as well – which triggered a huge growth spurt in 2015 compared with previous years.”

How are the two organizations integrated financially?

“The Shine Group’s revenues were half the amount of Endemol’s, so it was a relatively big takeover. There was a geographical overlap in seven countries, so we had to physically integrate the various local entities in those countries. It was only in the four Scandinavian countries that there was virtually no overlap. The accounting guidelines also had to be adapted. Shine reported using US GAAP, not IFRS, and it also had a split financial year. To minimize the liquidity risk within the group, it was also important to concentrate as much liquidity as possible. Endemol already did a lot of cash upstreaming, but that wasn’t the case in the Shine organization. Endemol had been using a manual, international cash concentration structure for many years. When operating companies make funding requests, our responsiveness as an in-house bank is so good that they’re confident in placing temporarily excess cash with group treasury. Because the Shine Group had a historical mistrust of the practice, it was difficult to introduce cash upstreaming, but the great thing is that we gained that trust. So we are able to increasingly align Shine’s liquidity targets with those of the Endemol organization.”

What’s the situation regarding the Endemol Shine Group’s currency exposure?

“Each operating company works more or less in its own local currency, so local FX exposure is limited. By grouping their data into the four main currencies in which we operate, we have a better insight into the FX exposure of the entire Endemol Shine Group. That exposure stems chiefly from our external financing which, in terms of currency mix, is not in line with our organization’s cumulative currency mix; our financing is relatively US dollar-heavy – outweighing the share that we earn in US dollar-denominated countries. There are three reasons why the long-term FX risk is important to us. First of all, because of our refinancing exposure in 2020 and 2021. Then there’s the FX exposure on our interest charges and, finally, the exposure on our leverage ratio, as per the definition in our financing documentation. We are trying to prevent currency fluctuations influencing the leverage ratio. As a non-listed organization, partly private equity owned, we have agreed with our shareholders that protecting this leverage ratio is the primary objective.”

Endemol has implemented a holistic approach to risk management. What exactly does that entail?

“Risk management demands an integral approach, because it’s not just about financial risks but also operational and reputational risks, for example. Last summer we set up a multidisciplinary risk committee with people who have certain responsibilities within the existing organization – such as treasury/insurance, compliance/legal, IT, tax, controlling and HR – and who pool their resources on the committee. I now coordinate this committee as risk officer.

As well as identifying, analyzing and mitigating risks in a cross-disciplinary manner, the risks are also reported. Reporting to our executive board doesn’t pass through one of its members, but directly to the full board. In my opinion, within any organization, treasury has the mindset and position needed to coordinate a more holistic risk approach that embraces more than just the financial risks, making it the best choice for that task.

Our risk committee looks at the risks we encounter from the perspective of various disciplines. We compare those risks with our risk bearing capacity (RBC), keeping in mind that components of that RBC have been allocated to previously identified risks. To give you a practical example of such a ‘broader’ risk, we are increasingly using drones, carrying airborne cameras, for our productions. In the insurance world, these are usually still classed as ‘aircraft’. But we aren’t using them to transport people or freight. What’s more, insurers see the use of drones for photography and video recording as high risk in light of the violation of privacy rights – especially among American insurers. We deal with this risk on a daily basis, around the world. Finding suitable coverage calls for flexibility in an insurer – and that takes time... What do you do as an organization while you don’t have that coverage? Have compliance draw up guidelines stating that drones may not be used? As ridiculous as that may sound, you have to estimate the risk involved. The scenario, for instance, of a drone causing a multiple vehicle accident is a possibility, but how great is that probability? Can we mitigate this? Should we organize training specifically for personnel, can the controls be hacked, how do you express that in monetary terms, and how does it relate to our RBC?

All of these issues involved a variety of departments – HR, IT, controls. When determining our RBC, we take into account aspects such as our liquidity, non-committal or even firm profit expectations, as well as financial ratios in our financing documentation, which is treasury’s domain. We even consider whether we have already assigned a portion of the RBC to other risks.”

Is the methodology adopted at insurance companies, which involves looking at probability and impact, also used in treasury? Are risks considered in the same way?

“Absolutely. There’s no difference between mapping treasury or operational risks (which may or may not be insurable), or determining their potential impact using scenario and sensitivity analyses. What you then do with that information may differ. For instance: an organization can accept the FX risk – or hedge it – but it may also try to pass it on to its customers. The liability risk of a potential infringement of third-party intellectual property rights is our core business and we can only accept it or insure it, but not pass it on to third parties. I believe that the process of accepting risks, deliberately allocating the RBC to those risks, and monitoring and reporting on them could be done much better by lots of companies. And that includes us, by the way.”

Looking at the company that was absorbed in 2000 by Telefónica, is the strategy nowadays very different from what it was then?

“Telefónica, which bought Endemol after a bidding war with KPN and World Online, was actually light years ahead of the game. Telefónica wanted to set itself apart from the other telecom companies, not just in terms of price, quality and network, but also in terms of content they wanted to offer their subscribers something extra: access to Endemol content. And the vision they had is now the reality: being able to view content on mobile devices. Both as a replacement for television – i.e. generally available content – but also specific, subscriber-only content. The only thing they were wrong about back then was the speed of the rollout of the 3G and then the 4G network.

In 2007, Endemol was sold to a consortium of three parties: Goldman Sachs, Mediaset and Cyrte Investments. What made this special was the fact that it was one of the last leveraged finance deals before the financial and economic crisis erupted. One of the mandated lead arrangers (MLAs) at the time was Lehman Brothers. We experienced the complications of the bankruptcy of an MLA first hand – absolutely fascinating!

Between 2008 and 2014 the Endemol organization practically had to reinvent itself. Our revenues plummeted as a direct consequence of the sharp decline in the advertising market. But by producing programs far more efficiently, our profit margins actually grew during that period. In 2015, with the new shareholders and capital structure, we focused on integrating Shine into the Endemol organization, and we are now ready for the future. We’re able to roll out new ideas really fast; we are ‘lean and mean’. With our shareholders’ support, we can continue investing at an accelerated pace in the further growth of our organization.”

Bart-Jan joined Endemol as cash manager in 2002. Prior to that, he worked as a cash & treasury management consultant at ING. As from 2007, he became responsible for group insurances as well as group treasury. Since mid-2015, as group risk officer, he is also responsible for the risk committee.

Would you like to know more about cash flow forecasting and/or risk management? Contact us today.

The International Organization for Migration (IOM) is the principal intergovernmental agency in the field of migration. Due to increasing migratory flows over the past decade, which have escalated in recent months, the organization realized that its treasury needed a transformation in order to continue supporting the organization and its cause.

The IOM is committed to the principle that humane and orderly migration benefits both migrants and society. The organization was established in 1951, then known as the Provisional Intergovernmental Committee for the Movement of Migrants from Europe (PICMME), which helped people resettle in Western Europe following the chaos and displacement of the Second World War.

In subsequent years, the organization underwent a succession of name changes to the Intergovernmental Committee for European Migration (ICEM) in 1952, the Intergovernmental Committee for Migration (ICM) in 1980, and the International Organization for Migration (IOM) in 1989. These name changes reflect the organization’s transition from a logistics operation to a migration agency. The IOM’s members currently include 157 states and 10 observer states. It has offices in more than 150 countries and at any one time has more than 2,500 active projects ongoing.

It works to help ensure the orderly and humane management of migration, to promote international cooperation on migration issues, to assist in the search for practical solutions to migration problems, and to provide humanitarian assistance to migrants in need, including refugees, displaced persons, or other uprooted people. The organization works closely with several partners in four broad areas of migration management: migration and development, facilitating migration, regulating migration, and addressing forced migration. The IOM assists in meeting the growing operational challenges of migration management. It aims to advance the understanding of migration issues and encourages social and economic development through migration, while upholding the human dignity and well-being of migrants.

Differing paces

In 2008 and 2009, the organization went through a major transformation. “As recently as 10 years ago, the organization was still executing payments manually at its headquarters – payment by payment,” says Malcolm Grant, head of treasury at the IOM. With a new enterprise resource planning (ERP) system, the IOM took its first step towards improving its treasury. But more change was needed. While migration activities were growing – leading to increases in staff, projects, and donation allocation – treasury didn’t grow at the same pace as the rest of the organization. On top of that, in the years thereafter, the financial crisis resulted in a sharp increase of compliance requirements. “Due to all these developments, our treasury was way behind where it should have been.

The impact of the organization’s growth in an outdated system environment was that people looked for solutions by firefighting; they built up several different systems and various ways of working. For example, new bank accounts were added, instead of using existing bank accounts and relationships. We found ourselves with more than 700 accounts and over 150 bank relationships. We needed to bring treasury back to the heart of the organization – a huge challenge, because we needed more people, more up-to-date technology and improved governance.”

Due to the tight funding in the years following 2009, it was a slow process, says Grant: “From a treasury point of view, we look like a corporate; we get money in, we pay it out and invest it. A corporate has a profit motive, a different set of values and different stakeholders. So there are cultural differences and due to political issues some things don’t happen as quickly.”

A treasury blueprint for the future

Eventually, the organization’s management was persuaded to review its treasury. Grant explains: “So in 2012, we initiated the ‘treasury review’ project. We wanted a comprehensive wide-reaching review that tackled just about all key areas of treasury. Therefore, we asked some consultant firms for treasury advice and after some meetings we hired Zanders to reinforce and challenge our assumptions. And it turned out to be a great step; they added deep knowledge of treasury, markets, and best practices, and together we built a very strong business case showing what needed to be done in our strategic planning to overhaul our treasury.”

Based on the organization’s strategy, Zanders helped IOM in writing a blueprint for the future, based on a number of areas such as treasury management, financial risk management, and treasury governance. “And a few months later we started our ‘global treasury design’ project, aimed at scaling up our treasury operations. But then the question was how to get there. So, how could all issues be improved?”

Treasury risk committee & governance

But before IOM’s treasury realized these three objectives on the technical side, it had already looked at some of the ‘no-cost’ recommendations. Grant says: “In terms of structure, we were very keen to make sure we had a written treasury policy – we now have one. We also lacked an annual treasury plan, which we have now introduced. And one of the most important aspects was setting up a treasury risk committee, which brings together some senior managers in finance and one from operations. They have now been meeting quarterly for two years and it has added enormously to treasury transparency. Moreover, it’s a two-way channel; it has also been a very effective channel for feedback into senior management – to show what treasury is doing and what we want to achieve in the near future. As a result of the review, some serious and valuable changes have been made.”

Grant’s treasury department worked hard to realize the targets as described in the roadmap. He needed some assistance in finding the organization’s banking partners for its cash management, to solve the problem of a too widely dispersed bank portfolio and bank account structure.

“We need to see what money is where,” says Grant. “We don’t see certain key collections in our accounts. Different field offices have different cultures; some are very proactive and engaged in centralized cash management, yet others aren’t. Therefore visibility is very important and a big challenge.”

Simplifying bank relationships

So, last year, IOM asked Zanders to conduct a European Cash Management RFP. Grant notes: “The number of bank relationships was over 150 across our organization. When we did the European RFP, we had 39 countries in scope with 38 different banking parties in those countries. Depending on the region, you could begin to centralize payments. We don’t need to have bank accounts all over Europe, for example. So instead of having 38 bank partners, in the future we may only have five or six.”

Based on IOM’s requirements, five banks were shortlisted for its cash management bank selection project with a pan-European scope. Zanders helped to write the RFP document, was part of the bank selection, managed the evaluation process, and supported the recommendation to senior management. IOM now has just two banking partners and has started the implementation with both banks. “And it’s going very well. We have good support from our internal IT team, which is extremely important. We did a lot of homework and research in Europe, mission by mission, to establish all treasury requirements and banking needs in detail.”

The strategic recommendations that Zanders gave were gathered in a roadmap for IOM’s treasury, with a prioritization of projects and focus areas. Grant adds: “We started by looking at three key achievable short-term objectives – things we could do within one year. The first was to bring on board the foreign exchange trading platform, 360T. The second was to bring on board a treasury management system (TMS). Third was to conduct a cash management RFP (request for proposal) in Europe for banking services. These objectives have been met; the systems are now live and working. There is still some additional TMS functionality to bring on board, but the initial level of functionality related to reporting and basic payment processing is available.”

The end of the beginning

“Our department is now about a third of the way to where we want to be. Centralizing payments and having payment factories, for example, is still years away for IOM; that demands a phased approach. In terms of payments, reconciliation, pooling, and technical architecture, we are improving our basic structures; we are looking at in-house banking (IHB) and payment factories. You need to walk before you can run. To illustrate it in an appropriate quote from Winston Churchill: ‘This is not the end, it may not even be the beginning of the end but it is the end of the beginning.’ I think that’s where we are now.”

Despite the many tough challenges for IOM’s treasury department, working for an organization in the field of migration gives Grant both energy and satisfaction. “Treasury is a humble servant of the dedicated workers doing the tough job in the field. We are just here to take a potential set of problems away from them. By, for example, ensuring that they have enough liquidity so they can do what they need to do, ensuring they do not get into trouble with local compliance, get best value in buying local currency, and ensuring they have proper banking partners and accounts. Our advice and expertise is a key area of support to the local missions, thereby ensuring that the mission activities in the field are not held up due to treasury issues.”

IOM’s key strategic focus areas:

• Migration management; helping migrants in any way possible regarding security.
• Operations and emergencies: ready to react rapidly to emergency events such as earthquakes or military actions. IOM is not a refugee agency – that work is done by the UN – however it works closely together with UNHCR.
• International cooperation and partnerships: including relationships with donors. IOM is very active in the development of international migration law. It has a team of lawyers and a department working on clarifying, establishing, and modifying international law, as far as it relates to migrants.

FMO provides financing for companies in Africa, South and Central America, Asia, and Eastern Europe, and its mission is to empower entrepreneurs to build a better world.

“And in the context of this mission we have two objectives,” says Paul Buijze, FMO’s director of finance & mid-office.

“We only finance those companies that we expect will make an impact. They must contribute to the type of development that maintains a balance between financial returns and environmental and social aspects. In other words, the investment must stimulate development. We don’t finance ventures that commercial banks already do. We invest only in private companies that would otherwise not be able to grow; it’s not our place to finance governments.”

Focus Areas

The development bank invests in sectors in which they expect the impact to be the greatest, such as financial institutions, energy, and the agrarian sector. “Many companies are too small to be served from The Hague,” reasons Buijze, “but a local bank is far better positioned to reach companies in a country on a smaller scale. “And without our second focus area, energy, development isn’t even possible. Without light, you can neither read, study nor run a factory. Energy facilitates a great deal of development. “Our third focus area is food and water. By 2050, our planet will be home to nine billion people and they will all have to eat and drink, within the realms of what’s possible, of course. There will probably be enough agricultural land, but at the moment it’s being used very inefficiently. “It’s about the complete chain, incidentally. If there is insufficient refrigeration capacity, food will spoil before it even reaches consumers.”

Finally, in addition to these focus areas, we serve a sector encompassing infrastructure, production and services. Kept deliberately broad, this ‘other’ sector owes its importance to distribution, and mainly because of risk considerations. Here, on specific issues we always collaborate with partners that have certain expertise, while in the first three focus areas we ourselves often lead the way.

Strong Corporate Governance

With an investment portfolio of €8 billion in more than 85 countries, on a global scale FMO is one of the biggest development banks serving the private sector. It finances entrepreneurs directly through funds, but the decision to invest in funds depends on more than just financial criteria. Buijze is a member of the credit commission that assesses the suitability of projects. “Over the years we’ve built up an extensive list of investment criteria. A bank must have a certain level of solvency. For an investment in energy, for example, we insist that the energy provider will be called on to supply a certain amount of energy over a certain period of time. “And we opt for renewable energy, as opposed to the fossil-fuel-generated variety. We have extensively documented conditions for each type of financing. This is a departure point. “If, on that basis, a request fails to meet our conditions in the areas of the environment, society, governance, or return, we’ll take it from there whether we can implement the development with the company in question. We’ll look at the impact the company can generate, such as employment, for example. Every situation is different, which is what makes working in these countries so complex.” In combination with a report set up by the investment officer, who will have checked out a few things onsite, it’s decided with the aid of the criteria whether financing is eventually granted.

Negative Travel Advice

But how does that work, for example, in countries governed by ‘dubious’ regimes? “We have very strict and influential corporate governance and compliance officers,” says Buijze. “In that respect, our demands are uncompromising, and we carry out thorough research beforehand. We check, for example, to ensure a company has no ties with the government.” And what about companies in high-risk areas, such as a country embroiled in a civil war? "It’s absolutely essential that we have access to the country in question,” he answers. “We must be able to keep our finger on the pulse. If our government advises against travel to a particular country, funding will not go ahead. “However, if it’s already been extended, we cannot change it. Such a situation was created by the recent Ebola crisis; at one point, we could no longer travel to Liberia or Sierra Leone. “Of course, there are countries in which you are exposed to more risk, but our portfolio has a good spread and includes many countries which are now making good progress and where there is no political tension. “You’ll find savvy entrepreneurs in the most difficult of countries.”

According to Buijze, FMO has had to write off very few investments so far. “Every company experiences a hiccup from time to time, such as local demonstrations or disturbances. But at the end of the day, the situation usually sorts itself out. “Everyone needs energy, just like they need banks and telecommunications, for example. “And, of course, water too, although this issue is somewhat politically sensitive.”

Setting up authorizations

In many respects, FMO has a completely different risk profile compared to a commercial bank. “We don’t employ traders, and we are not subject to unrealistic financial pressures from shareholders,” says Buijze. “It allows us to be very focused on what we do. In my view, this doesn’t make our risk greater than that of a commercial bank.” Despite vastly differing missions and approaches, FMO nonetheless faces the same demands. “For example, DNB makes sure that our ICT architecture and its system administration comply with certain standards,” says Rolf Daalder, director of ICT & facility services at FMO. “Security must be paramount. FMO is free in its choice of cloud, but it must comply with certain DNB conditions. “We only do things we know about, and if we cannot do something ourselves, we have a number of partners we can fall back on for specific expertise.” Every year, FMO is audited by KPMG, which, in 2014, stipulated that the development bank should take a long, hard look at its internal authorizations and diverse roles and functions.

“Everyone in the bank has a certain function, to which certain rights are allocated,” explains Daalder. “You must know what you are approving. Some 10 years ago, we set up the WSS Suite (Finance Kit) system exactly for this purpose, but it had to be brought up to date.” What FMO needed was an independent party that also had expertise in how others approached this kind of task. “We had no intention of convincing ourselves that everything was hunky-dory; there was no point in the left hand checking what the right hand was doing!”

Four-eyes principle

How can you effectively monitor an existing system? “FMO wanted to be challenged and asked us for advice on best practices,” explains Zanders consultant Bart Timmerman. “During a regular update to a newer version, Finance Kit gained a new authorization functionality called Security Centre. It’s a completely separate module in which the organizational structure can be set up. It offers more possibilities and works differently, but that doesn’t detract from the fact that it must be checked to ensure that everything is set up properly.” The questions then were: what are all the processes, and what are they used for? “Supposing, for example, that one person was responsible for two processes, Zanders indicated what improvements should be feasible,” answers Daalder. In this way, it was possible to assimilate authorization profiles to the current systems and requirements. “It’s the best way: start from scratch, investigate who does what, who must be able to do what, and then set up the system on that basis,” says Zanders consultant Annelies Labots. The size of the development bank also plays a role, according to Daalder.

“We are a relatively small bank in which, in certain areas, a few people do relatively quite a lot. It makes the four-eyes principle more challenging than it is for larger banks, which have more people for the diverse functions. If one presses the button, another – and maybe even a third – has to check whether it’s all correct.”This is indeed a challenge for relatively small organizations, agrees Timmerman: “Processes must be flexible and easy to carry out, and this implies that there must be a sufficient distinction between functions.”

Knowledge Sharing

The authorization project, which ran from August 2014 to the beginning of 2015, was complex and comprised numerous small elements that had to be harmonized with one another. “It was completed successfully and to the satisfaction of KPMG,” says Buijze.

And what about FMO’s plans for the future?

“Our strategy is that by 2020, we want to halve our footprint and double our impact. Food production must be maintained at the right level if it is to keep pace with the enormous growth in population, a huge challenge in itself. The population of Uganda, for example, is burgeoning—from just 5 million people in 1950 to 32 million currently, and it’s projected to exceed 100 million by 2050. Another example is Nigeria, whose population will eventually surpass that of the United States. And all these people need to be able to live worthy and dignified lives.” It’s about more than just money, insists Buijze. “Knowledge sharing is also an extremely important way of ensuring that people can grow their own food. All this, combined with being commercially and responsibly active, appeals greatly to the people who work here.” The sheer extent of social engagement at FMO is clearly evident and often critically discussed. “We want to facilitate growth in a country, but this is often accompanied by tension between development and environmental interests,” assures Buijze. “For example, can the installation of a wind farm in a poor region where there is no electricity be seen as a sustainable solution? There will always be people who feel their voice is not being heard. We are not dogmatic, but the result must be the correct one.”

What Did Zanders Do for FMO?

Since 2006, Zanders has carried out projects for FMO in various areas, including:

• Shaping investment policy
• Providing advice on its property investment portfolio
• ALM (Asset and Liability Management) studies
• IRS rating
• WSS Suite (Finance Kit) implementation
• Assessing an update of the capital planning model
• IRRBB (Interest Rate Risk in the Banking Book) validation

If you’d like to learn more about authorization issues or any of the above-mentioned topics, you can contact us.