Treasury Outsourcing: A Strategic Transition

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Treasury Outsourcing A Strategic Transition

• Presented by
• Cathy Gregg Peter
  Sereda
• Partner VP
  Treasurer
• Treasury Strategies Telephone
  Data Systems, Inc.

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Agenda

• What is outsourcing?
• The outsourcing decision
• A treasury outsourcing case study
• Sources for outsourcing information and support

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What IS Outsourcing?
???

• Outsourcing is a strategic concept - a way to add
  value to a business - that converts an in-house
  cost center into a customer-focused service
  operation with you as the customer
• -- Arthur Andersen

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Why Do Organizations Outsource?

• Reduce and control operating costs
• Improve company focus
• Access to world-class capabilities
• Free resources for other purposes
• 5. Resources not available internally

Source Outsourcing Institute
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Current Outsourced Functions
Source Outsourcing Institute
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Outsourcing Market is Huge and Growing

• 36 of all companies over 50mm outsource some
  functions
• The market is growing by 15 (v. 3.5 for the
  economy)
• The fastest growth is in Business Process
  Outsourcing (BPO)
• Source Outsourcing Institute

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Major Categories of Outsourcing

• ASP - Application Service Provider
• BPO - Business Process Outsource

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ASP - Application Service Provider

• A method to outsource IT aspects of a business
  function
• Software resides on the outsource firms central
  servers rather than the customers
• Outsource firm also provides tech support,
  maintenance and upgrades
• Customer accesses software via web interfaces
• Costs spread over time, usually term contract
  with monthly payments

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ASP Incentives

• ASP
• Broadens the market for application sellers
• Leverages development costs spent on installed
  software applications
• Solidifies relationship - the customer
  relationship is ongoing

• Customer
• Lower upfront contractual costs
• Access to shared resources without need for
  dedicated staff
• Access to new technology without having to
  repurchase periodically

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BPO - Business Process Outsourcing

• Business process outsourcing enables companies to
  get rid of the cost and technical shackles of
  their traditional businesses, and to build
  strategic partnerships with outside professional
  services firms for managing in the new
  millennium.
• -- Pricewaterhouse Coopers

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BPO - Business Process Outsourcer

• Outsource firm assumes entire business function
• Examples receivables, payables, customer
  service, payroll
• Sprint outsources directory assistance!
• May / may not take facilities, staff, software
• Long-term contract
• Service Level Agreements (SLAs) are key
• Outsourcer may split productivity benefits with
  the customer

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BPO Incentives

• Outsourcer
• Leverage fixed investment
• Leverage process expertise
• Reap benefits of continual improvement
• The outsourcer is a profit center - not a cost
  center

• Customer
• Lower contractual costs
• Greater business focus
• Continual improvement
• Become the customer

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The Outsourcing Decision

• Determine which processes are core to your
  business operation - those that your company
  does more effectively than your competition which
  result in a competitive advantage
• Keep control over any process that is core
• Outsource any process that is not core

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Objections to Outsourcing

• Perceived loss of control
• Security issues
• Risk of process failure
• Less bank interaction

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Outsourcing Value Proposition

• Produces savings, and offers better backup,
  documentation, control
• Frees up management for strategic focus
• Provides superior tools
• Frees staff for other activities
• Gives access to experts / continuous improvement

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The Outsourcing Decision Process
Is the function core to the business?
Want more strategy analysis?
Need to do more with less?
Enough for technology?
NO
NO
NO
NO
YES
YES
YES
Do not outsource consider ASP solution
Consider outsourcing to improve contribution
Consider outsourcing to save , get profit
center focus
Consider ASP solution
NO
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Typical Outsourcing Situations

• Functions where scale economics are significant.
• Where technological or operational know-how gives
  the outsourcer a significant advantage over the
  firm.
• Where start-up costs of a function are
  significant.
• Where switching costs are low.
• Where measuring quality and cost are straight
  forward.
• Where buying economies, or buying market power or
  buying market information is important.
• Where conflicts of interest do not exist.
• Where a function might require only part of an
  FTE.

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Financial Outsourcing Examples

• Accounts receivable
• Billing
• T E reporting and reimbursement
• Risk management
• Telephone bill auditing
• Payroll
• Bad debt recovery
• Freight payment
• Lockbox

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Treasury Operations

• Treasury should be the financial brains of a
  corporation, analyzing risk and setting policy,
  yet so much of the headcount and cost in most
  treasuries are associated with treasury
  operations - execution v. decision making, hands
  rather than brains.
• -- The Asset, 4/00

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Treasury Functions What Is Core?
Nothing
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Treasury Functions Outsourcing Alternatives
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Categories of Treasury Ops Outsourcing
Temporary
Long Term
Sudden resignation Medical leave Other staff
shortage
Full Time
Back Up
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Categories of Treasury Ops Outsourcing
Temporary
Long Term
Strategic decision Avoid infrastructure Access to
resources
Sudden resignation Medical leave Other staff
shortage
Full Time
Back Up
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Categories of Treasury Ops Outsourcing
Temporary
Long Term
Strategic decision Avoid infrastructure Access to
resources
Sudden resignation Medical leave Other staff
shortage
Full Time
Part of Disaster Recovery (DR) strategy Thin staff
Back Up
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Categories of Treasury Ops Outsourcing
Temporary
Long Term
Strategic decision Avoid infrastructure Access to
resources
Sudden resignation Medical leave Other staff
shortage
Full Time
Part of Disaster Recovery (DR) strategy Thin staff
Back Up
NA
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Categories of Treasury Ops Outsourcing
Temporary
Long Term
Strategic decision Avoid infrastructure Access to
resources
Sudden resignation Medical leave Other staff
shortage
Full Time
Part of Disaster Recovery (DR) strategy Thin staff
Back Up
NA
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Categories of Treasury Ops Outsourcing
Temporary
Long Term
Strategic decision Avoid infrastructure Access to
resources
Sudden resignation Medical leave Other staff
shortage
Full Time
Part of Disaster Recovery (DR) strategy Thin staff
Back Up
NA
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A Treasury Outsourcing Case Study
TREASURY OUTSOURCINGSpecialty Foods Corp.LBO
Case Study
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Specialty Foods Corporation Background

• Formed in August, 1993 when various equity
  sponsors acquired eight separately managed
  companies from a European parent
• Corporate staff added in 1994 to integrate
  certain operations and exploit synergies
• Cash management handled by a bank for the first
  10 months - brought in-house in mid-1994
• Very thinly staffed treasury function
• Treasurer
• Cash Manager
• 1/2 Admin

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Specialty Foods Treasury Strategies Involvement

• Step 1 - Assist in consolidating concentration
  and disbursement systems
• Reduce from eight systems to one
• Prepare RFPs, evaluate bids
• Assist in transition
• Step 2 - Ongoing cash management backup support
• A dedicated individual once every two weeks to
  perform daily duties
• Purpose a backup for the regular cash manager
• Step 3 - Enable backup to perform function from
  off-site location
• Quicker response
• Disaster recovery
• Unfortunately, we never got up to this level

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Specialty Foods Treasury Workstation Experience

• Installed a banks non-Windows based system in
  fall, 1994
• Un-installed system shortly thereafter
• System incapable of handling
• Accounts receivable securitization
• Revolver
• Multiple Libor Tranches
• Prime Option
• LT Bonds
• Created spreadsheet system as a replacement
• Issues
• We did not have the ability to fully explore
  capabilities of the system
• The bank did not fully understand our processes
• We had no dedicated IT resources to make such a
  system reliable over time

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Specialty Foods Outsourcing Decision

• Why did we bring cash management back in-house?
• Was out of our control
• One bank had a lock on our business
• Why did we then outsource part of the function?
• Lack of internal resources
• Put it into a neutral partys hands

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Specialty Foods Outsourcing Criteria
Decision to
Decision to Bring Cash
Partially Out- Management
Source to Criteria
back in-house Treas. Strat.
ASP 1. Scale economies significant 2.
Tech/oper. know-how 3. High start-up costs 4.
Low switching costs 5. Measuring/cost
straightforward 6. Importance of buying
econ/ market power/info 7. No conflict of
interest 8. Partial FTE
Outsource Indifferent Keep in-house
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Is Treasury Outsourcing Right for You?

• Capabilities
• Is it cost effective to buy, install and maintain
  treasury software?
• Resources
• Are there important tasks not being done
  adequately, or often enough?
• Expertise
• Are you confident of maintaining a staff with
  strong expertise?

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Is Treasury Outsourcing Right for You?

• Focus
• Do you (or staff) spend more time doing than
  thinking?
• Do you trade off tomorrows strategy for todays
  crisis?
• Costs
• Are you in a cutback mode?
• Are you experiencing salary inflation?
• Do you have frequent turnover?
• Is adequate backup adding to your budget - or is
  backup inadequate?

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Sources of Outsourcing Information

• General information
• Web sites
• White papers, case studies
• Situation analysis and advice
• Treasury Strategies, Inc.
• Big 5 accounting firms
• Other consultants
• Vendors by outsource category
• Source guide

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Treasury Outsourcing A Strategic Transition