It's approaching consensus that optimized financial risk management processes should span all corporate activities. That’s being driven by new digital platforms that can aggregate data across operations (and borders) to provide consolidated measurement and management.
It's perhaps surprising, then, that many companies have not yet integrated—or only partially integrated—their Treasury Management System (TMS) with their Enterprise Resource Planning (ERP) system, which provides the required underlying business data to identify risk exposures.
Many companies also haven't yet integrated the TMS with broader risk control and reporting software. In many cases, they have yet to tackle the challenge of integrating their ERP and TMS infrastructure with mission-critical third parties, including banks and other financial services providers.
What does this mean in practice? Gaps.
For example: Many companies have implemented cash-flow forecasting methodologies to improve visibility into future multi-currency cash positions and help identify natural offsets and opportunities for more effective liquidity and currency risk management. And, depending on the specific business, this can be important, as Emerging Markets are an important source of growth for many small-and mid-sized enterprises This is a particularly challenging aspect of this type of geographical expansion.
However, failure to integrate with external providers of financial services (such as data companies) means that most companies still rely on manual inputs as part of the forecasting prices. Automating only part of TMS and ERP weakens the entire approach.
This failure to integrate and automate is also a challenge internally: if this approach becomes one of multiple silos (or individual risk management processes) and isn't part of an end-to-end risk and treasury management of specific issues, the organization can miss out on the advantages that arise from a more cohesive approach.
For example, intercompany netting is one step toward managing FX risk centrally, as part of a cohesive approach to driving treasury efficiency. With intercompany netting, the subsidiaries in a corporate group make payments to—and receive payments from—a clearing house or netting centre for net obligations due from other subsidiaries in the group.
Yet, even when a company has deployed intercompany netting, siloed processes mean it often doesn’t include all the intercompany flows. And that manual reconciliation and settlement between subsidiary companies can be a source of noise when treasury is trying to consolidate its true liquidity exposure.
Not All Bad News
A wave of fintechs and new banking products now offer cost-effective digital solutions. Companies are starting to embrace new technologies for efficiency and integration, use of Robotic Process Automation (RPA) Application Programming.
But, again, the critical challenge to optimise such innovation is to ensure it is holistic if technology is to—as is expected—drive fundamental changes in the treasury function.
To help with this, in terms of both developing strategy and practical implementation support, many companies are looking to banks as key partners in their journey to transform treasury, with many Fifth Third clients seeking innovative solutions from banks. This puts the onus on banking partners to be working just as hard at integrating with their clients as these clients are at integrating and aligning their internal systems and processes.
Prize Is Worth It
This is undoubtedly a complex and challenging area: integrating and aligning full risk management and reporting internally, and with mission critical third parties, can be an painful project upon which to embark.
A commercial banking partner like Fifth Third can advise on how to leverage technology to integrate treasury management processes within the broader risk management organization.
And in the end the prize is worth the effort: all stakeholders will appreciate the benefits in terms of governance and avoiding negative impacts from unmanaged "gaps" impacting the P&L. That’s especially true among the C-Suite, who will have added confidence in the risk function.