White Paper Treasury Landscape: The ERP Solution

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White Paper

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Onkar Liddar Accenture Onkar Liddar is an experienced manager in Accenture's Finance and Performance Manager Service Line. His focus is treasury and cash management solution excellence within corporate finance management. Nael R. Nasr Accenture Nael R. Nasr is a consultant in Accenture's Finance and Performance Manager Service Line. His focus is corporate treasury and cash management.

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Treasury Landscape: The ERP Solution

ERP system providers are becoming serious contenders in corporate treasury,offering operational and strategic capabilities.This puts heat on third-party, best-of-breed solution providers as ERPs eliminate the need to build additional interfaces. Treasurers looking to deploy a single instance global treasury architecture can choose from either ERP or best-of-breed solution providers today.

Background

Corporate treasuries practices can vary according to size, geographical reach, and process complexity.There are two broad focus areas against which corporate treasury models can be classified, depending on how treasury supports the company's operations. At one end there are treasuries that focus on managing daily cash flows and optimizing working capital through process excellence. At the other end of the spectrum, there are treasuries that are strategic to the business whose objective is to support the financial performance of the company.The key success factor for either model, or for models that sit between these classifications, is the application of appropriate technologies. Corporate treasurers traditionally look to best-of-breed (BoB) solutions to provide them with the tools required to operate their departments. However, ERP systems now offer treasury capabilities that can compete with BoB solutions at both operational and strategic levels.

What Do Treasurers Look for in Their Systems?

A key consideration for the corporate treasurer when selecting a treasury management system is the functional requirements that the organization needs to deliver. As depicted in figure 1, the technology platform for treasuries that are operationally focused must be capable of capturing data from various sources. This requires a system that is closely integrated to the planning, forecasting, and budgeting tools within the business and to external sources of data, such as banks and capital markets. However, for treasuries that are strategic to their business, data manipulation is the primary concern. Such treasuries are required to perform complex and sophisticated analysis on business information in order to support financial decision-making.

Typical application architecture deployed by multinationals combines the strengths of an ERP as

the finance engine, interfacing into a best-of-breed treasury application. The ERP tool is used for data collection and executing transactions, whereas the treasury platform is used to convert the raw data into information required to manage financial risk, execute deals, perform cash control, and hedge instruments.

The Treasury Landscape

The treasury software market represents significant wealth generating opportunities for both ERPs and BoBs. A recent IDC report predicts a revenue pull of slightly more than $463 million (2003) in software license and maintenance fees from treasury applications. Web-based technologies and bank sponsored spin-offs have further facilitated the growth of treasury solution providers in recent years. The IDC report suggests this market to grow by just under 25 percent compound annual growth rate (CAGR) from 2000 to 2006.1

ERP Treasury Developments

There is an obvious appeal by multinational companies to use ERP treasury solutions. For organizations with established ERP systems, choosing an ERP treasury module as a bolt-on solution would appear to be the natural path to take from an integration and cost perspective. Basic operationally focused cash management capabilities, such as reporting liquidity, tracking balances, identifying currency needs, staging, and executing treasury disbursements, have been in the ERP solution suite for some time. PeopleSoft, Oracle, and SAP are able to deliver baseline cash custody and control functionality for the majority of corporate cash needs.The ability to gather transactional data from remote locations through automated data feeds to the corporate finance engine without additional interface requirements is a significant win. A single instance global ERP solution enables treasurers to see movements in working



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capital as they occur. Real-time information is the core ERP system benefit for treasury. Based on this analysis, many CFOs remain convinced on integrating their companies through ERP software solutions, believing that full ERP integration is the only significant enabler required to perform effective corporate decisions around liquidity.

Advocates of BoB solutions, however, are quick to note that treasury is not a priority for ERPs. Customers remain last in line to future development as ERPs are slow to respond to changing circumstances that impact treasury; the slow uptake of new financial accounting standards (FAS) accounting rules over derivatives and hedges is one such example. Lack of flexibility around interfacing to external information sources, the need for strict interfacing rules, inflexible reporting capabilities, and the inability to perform complex treasury analysis are all arguments accusing ERPs of failing to offer a comprehensive treasury solution.

SAP Treasury Solution

As an example of an ERP solution let us consider SAP. The company has taken a proactive approach in developing a powerful treasury capability. It has extended the remit of ERPs in the treasury space beyond merely handling operational requirements to offering solutions that address the needs of strategic treasury organizations. SAP has approached the treasury market space in two distinct ways. The first offers operational integrity by ensuring treasury transactions are closely linked to enterprise financials. SAP's cash management tool handles inbound data from the sales and distribution and finance modules. Cash reporting, bank interfacing, transaction processing, and period-end closing are all handled within this module. Intrinsic to the design are automated transaction flows to reduce redundant keying. The focus is on exception processing of low-level transactions thus allowing corporate treasury groups to concentrate on value-added processes.

The second approach is through SAP's corporate finance management (CFM). Heralded as a comprehensive solution for the financial management process, from planning and transaction processing through risk analysis and control, the CFM module can be broken down into the following subcomponents:

figure 1 Treasury Operating Structures

? Liquidity Planner ? The tool that identifies liquidity positions by building currencybased cash flows, drawing from transactional information across other SAP modules with flexible forecasting horizons.

? In-House Cash ? SAPs' answer to in-house banking capabilities, allowing for payment netting for intercompany transactions and interest calculations.

? Transaction Manager ? Provides the means to manage financial market instruments with mapping tables to handle deal capture to financial accounting.

? Market Risk Analyzer ? Offers comprehensive position analysis reports, including mark-tomarket valuations, calculation of risk and return figures and sensitivities, future values, and value at risk.

? Credit Risk Analyzer ? A tool to monitor insolvency risk, measuring, analyzing and managing credit, counter party, and settlement risks.

? Portfolio Risk Analyzer ? Managing investments at aggregate levels calculating returns on investments (ROIs) and comparing to prescribed targets.

Functionality offered by SAP's cash and CFM modules challenges BoB treasury solutions as both operational and strategic treasury capabilities are offered; the modules provide control over data flow and manipulation at a group level to facilitate liquidity optimization and improve financial decision-making.Treasurers looking to deploy a single-instance global treasury architecture can now do so with SAP without having to build additional interfaces to third-party BoB solutions.

Conclusion

The treasury systems landscape has changed. ERP solutions have traditionally focused on working capital and transaction management. However, as SAP has shown with its CFM module, ERP system providers have now become serious contenders in the corporate treasury arena and have addressed many of the gaps typically associated with ERPs.

BoB solutions continue to offer extensive and detailed treasury analytical capabilities. Strategic treasurers who are looking to develop regional treasury center hubs with a drive to add financial value need to have the ability to make business critical decisions based on manipulated internal and external market information. BoB solutions are still best placed to address this need.

However, ERPs can no longer be pigeonholed as pure operational treasury tools. They are now in a position to offer a significant proportion of corporate treasury requirements. Treasurers are now able to make a choice between best-of-breed and ERP systems to meet functionality needs. s

Endnote

1 IDC Bulletin, Doc. No. 26982. "Worldwide Treasury Management Application Market Forecast and Analysis," 2002-2006 by Scott Tiazkun. April 2002

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