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FOR
international companies, netting is potentially the most profitable
corporate treasury tool available. Substantial foreign exchange
savings can be achieved if the cross-border payments and receipts
due from and to each subsidiary are netted out and settled as a
single, local currency amount on a regular basis. Netting is not
restricted to inter company transactions – third party payments
can also be included in a multilateral netting arrangement.
The payback from implementing a multilateral netting is quick to
arrive and easy to calculate. First there are the savings on cross-border
transaction fees and foreign exchange costs which are no longer
incurred due to currency matching. In addition, non-matched foreign
exchange requirements can be aggregated to larger volumes at better
rates. Concentration of payments will also lead to a reduction in
float.
In
general, the larger the flows, the greater the savings. For example,
a recent study for a company with annual inter company payments
in the region of $6,000m showed annual savings of $10m. But the
benefits of netting are no longer just for very large multinationals.
Companies with flows of less than $100m per annum can also achieve
worthwhile cost savings. Apart from financial savings, a well-implemented
multilateral netting offers important control and efficiency benefits:
A
standard process is created for all inter company payments. Payment
discipline is improved.
Details
of inter company payment flows are captured leading to improved
financial planning.
The
resulting cash management database provides opportunities to integrate
and 'mine' the data.
As
a result of developments in netting described in this article, administrative
work throughout the group can be substantially reduced.
What
puts treasurers off netting?
The value of multilateral netting to a company is hard to dispute.
And yet this most useful of corporate treasury tools is often overlooked
by corporate treasurers. There are several reasons for this. Firstly,
banks are, very naturally, reluctant to educate their customers
about a surefire technique to reduce foreign exchange and cross-border
charges. Even those banks that offer multilateral netting do not
always market their offerings as keenly as other products.
Secondly,
early encounters with cumbersome, semi-automated netting services
may have discouraged some treasurers from a process which once placed
a heavy administrative burden on central treasury: either the treasury
conducted the netting themselves, which involved dealing with multiple
format inputs from participants, re-keying data, distributing netting
reports and so on, or the task was outsourced to a third party,
in which case the lines of communication were even more complex
and timetables and procedures necessarily inflexible.
In
the past, treasurers have sometimes also rejected netting on the
basis of the cost of implementation and support. Installing and
maintaining software and training and supporting users across a
number of remote subsidiaries was expensive and also set up practical
barriers, particularly for smaller, leanly-staffed treasuries.
The
corporate intranet as treasury tool
The arrival of cheap and ubiquitous standard communications based
on Internet technologies solves these (and so many other) business
to business challenges.
Today
most international companies have a corporate intranet - a server-based
private information network which can be accessed by authorised
users from a standard browser installed on any desktop computer.
Leading edge treasuries, such as those at the industrial manufacturing
group Atlas Copco and the pharmaceuticals company Warner Lambert,
have been quick to turn the corporate intranet into a valuable treasury
tool. As they have found, the corporate intranet provides an excellent
communications channel for inter company treasury business and,
in particular, for netting.
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Netting on the corporate intranet
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- With new style netting systems, participants have online access
to their own data
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Why
intranetting is a powerful new option
The distribution, implementation and maintenance of software for
specialised applications such as netting can be easily and cost-effectively
achieved via the corporate intranet. The input program runs on a
server located at the netting or treasury centre and netting participants
access this program via a web browser such as Microsoft Internet
Explorer or Netscape Communicator. Because there is just one copy
of the program, participants are always using the correct version
and there are no local technical support issues such as Windows
regional settings, different operating systems and so on.
Netting
participants also now have direct access to their own data and can
take responsibility for maintaining it themselves. This gives participants
control and autonomy and reduces the administrative burden - and
the opportunities for errors and misunderstandings - at the netting
centre.
Throughout
the netting process, participants can look into the system to view
their own input data and ensure that expected receipts have been
properly entered by their intragroup counterparties.
Another
important benefit is that it is now very easy to add new participants
or new currencies to the netting. Additions and changes are immediately
available to all participants.
What
users say
John Miles, Director, European Treasury at Warner Lambert, and Lissi
Perseus, Head of Back-office at Atlas Copco Internal Bank, are responsible
for large-scale netting operations at their respective organisations
and both are well-placed to assess the advantages or otherwise of
an intranet-based netting system. Wamer Lambert has moved from a
bank-based netting service to running the netting in-house via the
corporate intranet, while Atlas Copco has replaced its old in-house
system with an intranetting solution.
At
Warner Lambert, the monthly netting involves some 100 participants
in 36 countries. "The participants just need to click on the menu
to input the payables information - currency, amount, beneficiary
and invoice number," says John Miles.
Depending
on their needs and the volumes of entries they have, participants
can input this data manually, attach a spreadsheet in the correct
format, or upload the data automatically via an interface from their
ERP systems. It is a similar story at Atlas Copco, where 190 participants,
including shared service centres, coordinate the input of payments
at invoice level. The 19 national netting-pools arrange for payments
and receipts within each country, which means that there will only
be one cross-border payment/receipt on settlement day to the Netting
Centre.
Both
John and Lissi stress the reduction in work for the Netting Centre
at this stage of the process. "We don't have to touch the data,"
says Lissi, while John remembers that, under the old system, adding
new payables to the netting increased the workload for the netting
centre by the same amount. The system is also flexible enough to
allow participants to correct or add data up until the netting cut-off
time.
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After
the netting calculations have been run by the software on the central
server, the advantages of the intranet as a communications channel
are again much in evidence - the participants can simply log on
to view their net positions. The Netting Centre can also send an
e-mail message to each participant confirming its net position,
thus obviating the need for the distribution of multiple reports.
Lissi Perseus calculates that the workload associated with the monthly
netting has reduced by as much as 50 per cent at the Netting Centre.
"It is also a cleaner, more standardised process - it is much easier
for new staff members to learn our netting procedures now" she adds.
Participants
also experience greater ease of use, visibility and control over
their data. "Our affiliates love our netting," says John Miles.
And he highlights an additional bonus for the treasury in the form
of easy access to a wealth of information about inter company flows.
"It used to be that the bank ran the netting and gave us the results,
but access to the source data was limited. Now we have all the raw
data and can mine it and model it as we need."
Atlas
Copco rolled out its large global netting region by region, running
it in parallel with the old system to begin with. A global support
team of eight people in Sweden, the US and Hong Kong was available
for training and to help with questions around netting time. This
effort proved well worthwhile, according to Lissi Perseus: "It's
working so well now that we are looking to run the netting twice
a month in the near future."
Both
treasuries are planning further integration of the netting process
with the inter company payables. The next step being reviewed by
Warner Lambert is to input the inter company payables information
directly into the netting from the ERP system. This could also include
selected third-party suppliers.
Extending
the benefits of netting
Netting is a long-established treasury technique and the benefits,
in terms of reduced transaction and FX charges, are well recognised.
There is nothing very new here. (Possibly the most complex and successful
netting in the world is ABB'S receivables-based service. They include
over 1,000 participants and settle 80,000 invoices in the bi-monthly
netting.)
What
is new is the control and ease of use that improved technology (and
in particular, browser-based technology) can bring to the process.
Control means the ability to change the way the existing system
works, to be bank-independent, and to store, analyse and report
on netting data in a way that suits the company - all in a secure,
access-controlled environment.
Ease
of use comes from improved multilateral communications, as well
as the flexibility in the netting process itself. For example, more
and more treasurers want the ability to take a spread in the netting
and thus function as a profit centre rather than a cost centre.
Using
the corporate intranet can also substantially reduce the hidden
costs of implementing and running a netting operation. For all these
reasons, netting is worth another look. Any company with more than
$5m of monthly inter company trade should consider it.
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