Coprocess SA is a Geneva-based software house specialising in corporate multilateral netting. The company has been selected as winners of the City of London Business News Annual Award for the Best Financial Management Product 1999. Andrew Goldie, Director of Coprocess was delighted to have been voted as best of category. From Coprocess’s Swiss headquarters located in the historic 'Vieille-Ville' in Geneva, he commented: "We are delighted to accept this award. Multilateral netting is frequently overlooked as treasurers search for more exotic forms of savings. This award reflects the growing awareness amongst corporate treasurers, that netting is a major, basic savings tool."

Award winning Coprocess, founded in 1991, provides a variety of netting solutions to major corporates, industry and banks. Facilitating every stage of the netting process from the general ledger through to payment automation, Coprocess markets its own highly acclaimed PC-based netting solutions. Initially a DOS based system, it has developed to PC Netting and now NT Netting - a true 32 bit version for Windows 95/98 and Windows NT. The company has also developed an Intranet interface to NT Netting, whereby participating companies in a netting group can input their transactions and view their statements via a standard browser such as Netscape or Internet Explorer. The company also provides consultancy and expertise in all netting-related matters.

Netting Explained

Inter-company Netting is a process by which companies within a corporate group can make substantial savings on foreign exchange payments and receipts. This is achieved by summing each participant's inter-company and (optionally) third party payments and receipts into a single local-currency amount. A properly implemented and run netting system can be the most profitable corporate treasury vehicle. Traditionally the domain of the larger corporate, Goldie comments: "We now see corporates with annual inter-company exposures of less that $100 million using our systems and seeing break-even within one or two netting cycles."

Before Netting

Each of the balls represents a subsidiary company in a corporate group. The companies may be located throughout the world and they may be invoicing each other in many different currencies. Before netting each company may have several payments to make to the other companies in the group. Each payment may cover many invoices. They will have to make the payments and then inform all the receivers of the specific invoices that are covered by the payment, which in turn need to be reconciled. This is expensive both in terms of administrative costs and in the cost of making the actual payment.

After Netting

Instead of making the payments directly, each company sends the payment information (or invoices themselves) to the Netting Centre. The Netting Centre calculates each subsidiaries net position in its home currency and makes the payment to the company or, in the case of a receipt, instructs the company to send the payment to the Netting Centre. The savings as a result of netting come from many factors including, reduction in number of payments, reduction in float, reduction in FX requirement, less spread on FX. NT Netting caters for netting pools (also known as Sub-Netting Centres). For a corporate with many subsidiaries in a given country, establishing a netting pool reduces the number of international payments.

Quantifiable Benefits of Netting

Transaction costs are reduced because fewer payments are made. Concentration of payments leads to reduction in float. Float is typically zero in a well run netting system. FX is matched, and less FX is purchased. Non-matched FX is aggregated to larger volumes at better rates.

Non-measurable Benefits of Netting

The key benefits of netting are: Simplified payment procedures throughout the whole group reduces administrative costs at each subsidiary. Improved payment discipline. Financial planning is made easier and improved. Creation of a useful cash management database and integration possibilities.

Netting Analysis

Goldie explained "Coprocess provides analysis of expected savings your company could make by adopting our netting strategy. If you can provide us with the basic data on your inter-company cross-border flows, number of transactions, the total volume, average size, number of countries etc. we can extrapolate this into a detailed report that shows net savings per month. One recent survey for a company with annual inter-company exposures in the region of $90 million showed savings of $20,000 per month."

The Costs

The cost of establishing a netting system within a group usually only amounts to the cost of the software and the treasury centre staff who will run the netting. The exact cost of staff at the treasury centre obviously depends on the size and complexity of the netting, but in a typical situation one might expect the netting to take 2 - 3 man days per month. In addition to this there are minimal message transmission expenses and the outlay of educating and training the participants.

The Savings

The benefits of netting fall into two categories: the quantifiable monetary savings and the less measurable effects of netting. A company which saves $15 million a year through netting recently tried to value the hidden benefits of netting and concluded that they "far outweighed the quantifiable monetary savings."