To outsource or not to outsource? That is the question.
04 October 2016
For those of you old enough to remember back to the beginning of the century, you will no doubt recall that outsourcing was going to be the next big thing in the treasury world. Whilst this wasn’t quite the case, much has developed in this area over the past fifteen years and the market noise is growing again as businesses look for ways to increase the effectiveness and efficiency of their treasury activities.
With this in mind I thought it would be appropriate to explore the future of treasury outsourcing. We started this analysis at this year’s ACT conference, by asking the views of over one hundred corporate treasury professionals. The question was – “what activities would you consider outsourcing, given a clear cost advantage?” – and the results were divided. A material 41% would not outsource at all, whilst a further 55% might consider outsourcing certain back office activities and only 5% would consider outsourcing risk management, strategic or front office activities.
Such outcomes are in line with similar polls I’ve seen and reflect a widely held treasury view that despite direct or indirect cost advantages (allowing you to focus on key activities, providing more flexibility and quicker implementation of change etc.), the perceived loss of control of a key risk management activity negates the potential benefits of change. Some might also be sceptical of the merits if there is a perceived path to replacing treasury professionals with outsourced services.
The treasury outsourcing reality
In reality though, many of these treasury professionals actually outsource more of their activities than they perhaps realise:
- Firstly, the hosting of many treasury and banking system solutions is now outsourced to third parties, often the vendor. Only the biggest companies now have the IT resources to host internally;
- Secondly, certain discretionary risk management activities such as hedging analysis are often outsourced to independent third parties or banks. Indeed some in the banking industry say that up until 2008 banks provided virtually all of the requirements of many mid-tier businesses in this respect. Since the financial crisis, with a growing trend for bank agnostic solutions, certain independents have taken their place whilst others have brought this in house;
- Thirdly, a number of specialist automated cash management activities such as netting and cash pooling are often undertaken by banks on behalf of businesses. This has reduced both banking and headcount cost from treasury operations; and
- Fourthly, many large business have moved certain back office and cash activities to either internal shared service centres, or in some cases offshore outsourced suppliers. Such movements have almost always been part of wider finance change with the focus being to cut the cost of processing activities.
Outsourcing treasury operations
However, it’s day to day operational treasury which is often considered to be the true treasury function outsource. Within this area I have detected a number of trends since 2000. The market was initially led by the banks and many set up treasury centres particularly in Dublin to offer services that were seen as complementary to their products. However, their presence has declined somewhat as they were perceived to offer a standardised service whereas many businesses want a more bespoke offering allowing them to choose options best suited to their needs. Whilst a number of banks are still active in this market they also suffer from a general desire by businesses to be more bank-agnostic post the financial crisis.
This created a gap for the standalone independent operators, of which there are a growing number creating increasing noise in the market. Most aim to provide a range of treasury and cash services and activities, a full treasury systems environment with back up and appropriate controls and reporting. They aim to provide a range of front, middle, back and administrative services that are cheaper than an in-house option, focussed at businesses with treasury and cash complexity but not big enough to warrant the significant spend on their own operations. In almost all cases they operate on behalf of the customer but importantly within the agreed policy of the customer, meaning there is very little discretion for the outsourcer to take key risk management decisions.
So what of the future?
With the growth of outsourcing non-core activities, the trend will inevitably seep more and more into the treasury arena. I see treasury outsourcing most likely occurring as part of wider finance or IT outsourcing programmes. However, if more standalone, it could be embraced by companies that need to develop a treasury capability to support growth in Europe or in the UK in order to avoid the cost or hassle of doing this in-house. Banks will continue to have a part to play in the market, particularly in providing cash management solutions and, along with certain independents, in providing one off risk or product related offerings.
Whether or not the potential cost savings in more established treasury teams will be significant enough to pay for change, or to negate the perceived control issues that come with outsourcing, will be up for debate. Businesses may also be unwilling to rely on a bank or specialist independent supplier, notwithstanding that some are part of wider companies, for such important services – not to mention the general reluctance in the treasury community to outsource what they may see as their own jobs.
In short, it’s a mixed picture but an option that I believe all treasury and finance professionals should at least consider to make their treasury activities more effective.
David Stebbings, Director - Treasury Advisory