Don’t be left in the dark

October 31st, 2011 Timo Hämäläinen Comments off

Here in the northern reaches of the globe, we are getting ready to enter the dark of Winter when the sun does not rise at all above the Arctic Circle. The Kaamos period (Kaamos is an untranslatable Finnish word for the dark period) lasts up to 51 days in the very north of the country. In other words, this is a perfect time to write darker, precautionary blog entries.

Europe is awaiting with trepidation a new dark period in the financial markets. The recent credit crunch hit banks hard and only rapid capital infusions into the afflicted banks in the US saved the markets from a collapse. This time around, many experts are even more pessimistic. Banks are considerably more debt-laden than three years ago and if the defaults really hit the fan, the trouble that started from Southern Europe can spread into a full-blown financial mayhem.

Should this happen, it means tough times for corporate treasuries; decreased availability or, at worst, complete drying up of capital can drive the cost of borrowing through the roof. There is precious little companies can do about rising cost of capital, but what they can do is regulate the amount of financing they need. By managing liquidity effectively, the treasury can play a major role in decreasing the amount of financing needed. But this requires not only effective liquidity management but also reliable cash forecasting.

Corporate Treasurers and CFOs have considered improving cash forecasting a high-priority development item for the past decade. Yet the majority of corporations are still stuck with unreliable forecasts. I cannot say how much work companies have really done to improve cash forecasting, but I can tell you that many a wrong thing has been done. Instead of concentrating on rapid and cost-effective solutions that repay themselves quickly, far too many corporations undertake their development initiatives as flexibly as the former Soviet Union developed their infamous five-year plans. No matter the size or the importance of the project, it is undertaken in the same style – with time-sensitivity or cost-consciousness not a part of the vocabulary.

In a fast-changing situation we are facing, the treasury should make streamlined decisions and select best-practices based SaaS (software as a service) solution that can be deployed quickly. The decisions needs to be quick so that the solution can be deployed in time should the worst case scenarios realize. Even if the solution lacks some seemingly important features, this problem is an order of magnitude smaller than the alternative – not being able to effectively manage and utilize liquidity because of insufficient forecasts.

The Beer-Bellied Treasury

September 15th, 2011 Timo Hämäläinen Comments off

The beer belly (or obesity as the doctors like to call it) is one of the main health issues in most western countries. The resulting metabolic syndrome increases the risk of cardiovascular diseases and type 2 diabetes.

Corporate treasuries can also develop a beer belly. The main visible sign of this is bloated middle management. The risk of a severe syndrome increases when the management does not participate in operative work but solely concentrate in managing the operations of their teams.

I know corporations that have as many managers as they have staff doing the actual work. This means that for every operative staff member there is one supervisor whose main task is to participate in treasury management meetings, require reports from the “team”, and have meetings with banks.

The beer belly makes a treasury prone to the following “diseases”: high costs due to inefficient operation, bureaucracy and slow decision-making, as well as enormous resistance to any initiatives that may create real change. The reasons for this are also clear:

- The middle management typically has high salaries but their productivity is very low as they do not participate in operative work
- The middle management has learned to love meetings because they are a seemingly efficient way of spending time. And if decisions are made quickly, there cannot be enough meetings…
- The middle management has had plenty of time to dig their defensive positions. They are certainly not voluntarily going to undertake initiatives that would undermine their own position.

The human beer belly is caused by eating too much and/or not getting enough exercise. These bad habits borne out of complacency and laziness are also the root cause of the treasury beer belly. It is the job of the Treasurer and ultimately the CFO to prevent the beer belly from growing.

Below are three key things that can improve the treasury habits:

1. Keep your organisation on the move

Don’t let your specialists settle in one function for too long – instead regularly rotate them in different functions. This makes developing the different functions much easier. This may cause some griping at first, but you can take satisfaction that you are actually doing your staff a big favour by increasing their professional skill sets. Ambitious staff members spontaneously challenge themselves by seeking new duties every few years. By giving a go-getter like this the opportunity to rotate between positions, you can increase your chances of them not changing firms.

2. Keep your organisation lean

Make a point of managers fully participating in operative treasury tasks. This way you can keep your head count reasonable and salaries competitive, which ensures your staff do not have to look for other opportunities only because of money. This way you can also look your superiors in the eye and tell your organisation does not have any blubber when the next round of redundancies hits.

3. Encourage healthy habits

Don’t let a “this is the way it has always been done” culture to form in your organisation. This culture fosters laziness. Instead, encourage your specialists to always challenge the status quo. Emphasise continuous development and give incentives for development initiatives – even if they seem daft at first. This way you can foster healthier treasury habits and lifestyle.

The silver lining is that beer belly is not as great a problem for treasuries as it is for us middle-aged men. In my experience, most treasuries are rather lean and efficient. But even if you don’t have an acute case of beer-bellyitis quite yet, this advice can help you prevent it from ever becoming an issue.

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Say NO to Treasury IT-projects

May 25th, 2011 Timo Hämäläinen Comments off

We sell SaaS-based (i.e. hosted solutions with just a monthly fee) solutions to corporate treasuries for cash forecasting, netting, intra-company dealing and guarantee management. Even though SaaS (or cloud solutions) has been accepted in many areas that deal with sensitive data – a good example is in customer relationship management – many treasuries still don’t recognize the advantages of SaaS.

When a corporate treasury needs a new solution, they regrettably often start thinking of an IT project. In many cases, it is Game Over already at this point, as IT projects are synonymous with long duration (and long delays), truckloads of wasted money, and no guarantee of success. Even if the need is as simple (simple can be important) as finding a cash forecasting solution, many treasuries take an approach better suited for building a safety system for a nuclear power plant.

The traditional IT project model is not a good fit for a treasury under pressure to develop its processes quickly and cost-effectively with scarce resources. The SaaS approach, on the other hand, is perfectly suited for this scenario. Consider these advantages of SaaS compared to traditional projects:

• Speed
• Affordability
• Safety
• Flexibility

Since a SaaS based solution does not entail hardware and software purchases and installations, the solution can be deployed immediately without large up-front investments. The fixed monthly fee covers everything unlike traditional IT projects where every single thing is invoiced separately. Furthermore, the traditional project model has hidden costs that are often overlooked: internal IT investments for hardware and supporting software, system maintenance, and internal support. From experience I can assure you a focused SaaS vendor can offer far better service to the treasury than the over loaded in-house IT department.

A SaaS solution is also a safer choice than an IT project – if the system does not meet expectations, the agreement can typically be terminated very quickly and the cost of the mistake remains low. In IT projects, the problems often surface only after the system has been finalized and fully deployed, which can mean a delay of years. At this point, the vendor has gotten their money (or at least most of it) and their motivation to fix problems is not as strong as the motivation of a SaaS firm that must earn customer trust and fees every month. It is all too common that companies that have made a wrong choice in an IT project just have to live with the unsatisfactory solution as there is no money to replace it.

If you are currently considering acquiring a new system or have already made an unsuccessful project investment, I’d suggest you think the following points through very carefully:

1. What are the key requirements for the system?
2. What is the ROI requirement and realistic ROI of the project?
3. What is the cost of every month you don’t have the solution?

I will again use cash forecasting as an example as this is an area I am very familiar with.
Key requirements are the must-have features that the solution needs to have before it can be deployed. From the perspective of the treasury, the key requirement is reliable consolidation of cash flows on a account level. Many companies, however, make the classic mistake of believing that transaction-level tracking, comprehensive PDF reports and fancy graphs are must have although they are really nice to have features that are neither mandatory nor contribute to the project ROI – feature creep, in fact, often damages overall ROI.

After all, ROI (return of investment) should be the justification of all projects. But when making your ROI comparisons, just remember one often overlooked cost: the price of every month waiting for the system to be deployed. If a cash forecasting system can reduce idle cash and the use of overdrafts and the savings are 100 k€ per month, there is a very big difference whether the development and deployment takes one month or 18 months.

With these points in mind, you might see the benefits of SaaS in a whole new light.

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Beware of Software Vendors Bearing Gifts

April 26th, 2011 Timo Hämäläinen Comments off

I recently participated in a Treasury seminar where the CIO of a bank urged the audience not to believe what software vendors tell them. This CIO really knew what she was talking about as she had previously worked in software sales.

Even though I sell software myself, I agree with her whole-heartedly. The only objective of many sales person is to break down your resistance and get you to buy his solution whether it actually meets your needs or not. If you are not paying close attention, a good sales person can talk you into buying something you should actually avoid like the plague.

A common example of this is the required “minor customisation” of a software package to exactly meet your needs. These customisations are often sold as small addenda to the solution, but they can end up transferring a great deal of currency from your account to the vendor’s account in the following ways:

1. Deployment is delayed by several months – keep in mind that every lost day also decreases your project ROI
2. You WILL get a hefty bill for the customisation – the software vendor is not doing you a favour; they are doing very good business (in fact, they sometimes offer an artificially low license price because they know they get guaranteed extra revenue from the customisation)
3. You need to constantly call the vendor’s help desk about the customisations; and, lo and behold, the support comes with a hefty fee
4. With the first version upgrade (or the next one, at the very least), you are informed that some more customisation is needed to ensure compatibility (now go back to point #2)
5. Finally you realise you have sunk so much money into the project that it is impossible to back out of it gracefully.

This is why you need to make a few things crystal clear before you let any sales person dazzle you with their verbal acrobatics.

First of all, carefully consider how large a project you are willing to commit to. Calculate your exact ROI target (and remember that time is money; you need to consider the savings you lose while the project drags on). Analyse your needs and consider your processes: in my experience it is almost always more efficient to make small changes to your internal processes than to try to change a third-party system to exactly match your existing processes.

And if you have a feeling that the sales person is not telling you the whole truth, you can check for some common warning signs.

The warning lights should turn on if the vendor cannot give you a fixed price for the deployment project but keeps mumbling about how difficult it is to give a precise figure because of customisations or some such other circumstance.

Another clear warning sign is a help desk service that is not free of charge. Quite often this means the help desk is jammed – and if the application works well, the help desk should not be jammed.

I have previously written about the importance of references when acquiring a solution from a new vendor. Just don’t let the vendor get off the hook too easily; instead use the procedure I have described in my previous blog entry.

We recently learned another good reference strategy from a Norwegian buyer: they asked for the name of a customer that had stopped using our product. This was, in my opinion, an excellent question. A former customer is not likely to give a sanitized version of their experiences, especially if they have gone through anything like the merry-go-round I described earlier.

In the same seminar, a representative of a different bank described how they had acquired a business critical solution under a very tight deadline. Because of a corporate acquisition the bank had to find and implement a new system for managing their loans portfolio in under a year (which is usually a mere blink of an eye for a bank). Because of the tight deadline, the bank had taken a Guerilla Treasurer approach and selected a SaaS (Software as a Service) based solution. I was happy – but not surprised – to hear they were very satisfied with the choice they had made.

Pretend You Are a Small Company

March 23rd, 2011 Timo Hämäläinen Comments off

Small companies have one clear advantage over large corporations: they can act flexibly and innovatively without much bureacuracy. Successful small companies try new things, make a lot of mistakes, and learn from them. This enables them to quickly react to a changing environment.

From the Secret Guerilla Treasurer Academy

I know the difference as I worked in large corporations – in banks and corporate treasuries – from the late 80′s until the turn of the millennium when I started as an entrepreneur. We can now make decisions in one afternoon that would have taken countless meetings, memos, and arguments over several months in a large corporation.

This can be crucial when things change fast. For instance, at the onset of the credit crunch in 2007, we saw more than half of our budgeted revenue for the next 12 months just vanish within weeks (a lot of our revenue came from work for major banks at the time). Our ability to make fast decisions is the only reason for us being able to stay in business and now be back in growth mode.

Many corporate treasuries are now in a situation that requires agility and the capability to act fast. Top management is monitoring cash flows with a very keen eye. A treasurer is expected to be able to accurately predict any and all future cash flows – unfortunately, few treasuries can easily do this.

This is why it makes sense for a treasury to adopt a small company mindset in many things:

  • It is the results that count, not how you arrive at them
  • Speed is of essence; things cannot be pondered to death
  • One should not be afraid of making mistakes, but learn to correct them quickly and learn from them
  • Developing new things requires constant small steps that eventually translate into the right solution; you simply cannot expect to directly jump to perfection

This means that a traditional software project in which the problem is documented, requirements are specified, the RFI-RFP-RFQ merry-go-round is run for a several months, and so on, is simply not a functional solution. A much better alternative is a small steps approach. Make constant small improvements, study the results, and correct the inevitable mistakes quickly while it is still easy and inexpensive. Using a traditional software project model, the mistakes are found two years later when the solution is fully deployed and correcting them is no longer financially feasible.

If the immediate problem is unreliable (or non-existent) cash forecasting, you should select a solution that can be deployed in a few days – and that can be easily dumped if it does not turn out to be a good choice. It will not meet all your needs, but the key issue is fast improvement so that you can move on to the next important project.

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