Introduction
Treasury functions have evolved far beyond traditional cash management. Today, treasurers navigate intricate networks of cash flows, risk management, and regulatory compliance. Treasury outsourcing has emerged as a practical solution to help companies adapt to these growing demands, offering a flexible approach that balances cost-effectiveness with access to specialised expertise and cutting-edge technology.
In this article, we’ll explore treasury outsourcing, the operational models available, and how businesses of all sizes can use it to strengthen their financial management capabilities.
What is treasury outsourcing?
Treasury outsourcing involves delegating some or all treasury functions to an external provider. Outsourcing can span everything from transaction processing and liquidity management to complex tasks like risk mitigation and policy governance. It’s a versatile solution that can be tailored to each company’s unique needs, whether through partial outsourcing or complete reliance on a third-party provider.
The rise of Treasury Management Systems (TMS) has driven much of the interest in outsourcing, as these systems automate and streamline treasury operations, reduce manual tasks, and increase visibility into cash and risk. Outsourcing can allow companies to access a TMS without the substantial investment in software, maintenance, or training, making it a cost-effective way to gain high-level treasury capabilities.
Why Companies Opt for Treasury Outsourcing
- Cost Efficiency: Managing treasury operations in-house can be costly. By outsourcing, companies avoid expenses related to hiring, training, and technology maintenance. Providers often deliver services at a lower cost due to economies of scale and shared resources, helping companies maintain high service standards without stretching budgets.
- Access to Specialised Expertise: Outsourcing offers access to professionals with deep treasury expertise who bring best practices, market insights, and regulatory knowledge. This is especially valuable for small to mid-sized companies that may lack the resources to build an in-house treasury team with comprehensive skills.
- Enhanced Governance and Risk Control: Outsourcing introduces additional layers of control. Providers offer impartial oversight and ensure compliance with internal policies and regulatory standards, reducing the risk of errors, fraud, or mismanagement.
- Flexibility in Operations: Treasury outsourcing can be tailored to meet specific needs, with companies choosing which functions to outsource and how extensively. For instance, companies might keep core activities in-house while outsourcing routine transaction processing to free up resources for strategic priorities.
- Resilience and Continuity: Outsourced providers typically maintain robust disaster recovery plans to safeguard treasury operations. In the event of a disruption, they offer backup systems and trained personnel, ensuring continuity and protecting the company from operational risks.
Commonly Outsourced Treasury Functions
Treasury outsourcing can encompass a wide range of functions, including:
Liquidity Management: This essential function covers cash flow forecasting, cash pooling, and working capital management. Outsourcing liquidity management allows companies to optimise cash deployment and access a broader range of funding options.
Risk Management: With market volatility on the rise, risk management – including currency, interest rate, and credit risk – requires specialised knowledge. Outsourced providers can navigate these complexities and implement strategies that align with the company’s risk tolerance and goals.
Transaction Processing: Outsourcing the day-to-day handling of treasury transactions can enhance accuracy and streamline operations, freeing internal resources to focus on high-value tasks.
Reporting and Analysis: Financial reporting, dashboard creation, and scenario analysis demand significant expertise and advanced tools. Outsourcing this function can empower companies with real-time data insights and agile decision-making.
Choosing the Right Target Operating Model (TOM)
A company’s success with treasury outsourcing hinges on selecting the right operating model. Here are four commonly used TOMs:
Agency Treasury TOM: A full-service model where the provider manages all treasury functions, including cash management, risk, and reporting. This model is ideal for companies seeking extensive outsourcing with minimal in-house oversight.
Agency Treasury TOM Light: The provider manages most treasury functions but leaves strategic decision-making or sensitive tasks with the company. This approach maintains some internal control while outsourcing the bulk of operations.
Middle and Back Office TOM: Here, only middle and back office functions like transaction processing and reporting are outsourced, leaving front office activities like cash forecasting and risk management in-house.
Back Office TOM: In this model, only back office tasks such as settlement and data management are outsourced, while front and middle office functions remain internal.
The choice of TOM depends on the company’s complexity, size, resources, and strategic goals. Companies should conduct a cost-benefit analysis to determine which model aligns with their risk appetite and operational requirements.
Real-World Examples of Treasury Outsourcing
Case Study 1: Cost Savings in Liquidity Management
A prominent gold producer in South Africa opted to outsource its treasury operations to TreasuryONE because of our ability to handle intricate financial transactions, adeptness in risk management, and state-of-the-art treasury technology offerings. As a result of this decision, the company gained access to a team of treasury experts who manage everyday treasury tasks, world-class treasury technology, and connectivity to all banks. This has enabled the automation of cash and investment visibility.
Case Study 2: Streamlined Treasury in a Merger
Thungela was formed when the South African thermal coal operations demerged from the parent company and listed on the JSE and LSE in June 2021. As a result of the demerger, Thungela had to set up its own treasury department. TreasuryONE assisted with the set-up of a treasury department that runs on world-class treasury technology. Within just four weeks, Thungela’s treasury function was up and running – utilising TreasuryONE’s team of experts.
Case Study 3: Streamlined Connectivity between ERP and Banks
A prominent JSE-listed fashion retailer partnered with TreasuryONE to enhance its ERP to bank connectivity. Recognising the need for a comprehensive payment and bank statement collection solution, the retailer selected TreasuryONE for its exceptional connectivity capabilities and API integration tool that provides a seamless single access point to all banks. All local payments, cross-border payments and bank statement retrieval are now automatically processed via API. The partnership ensures that Mr Price is utilising the latest solutions for bank connectivity and, in return, it reduces the strain on internal IT resources, allowing them to focus on their core business activities.
A Flexible Approach to Treasury Outsourcing
Companies don’t need to adopt an all-or-nothing approach. By taking a modular strategy, they can selectively outsource specific treasury functions, tailoring the arrangement to their unique needs and budget constraints. This flexible approach helps maximise cost savings, improve efficiency, and align the outsourced tasks with overall business objectives.
Conclusion
Treasury outsourcing is a strategic solution that empowers companies to scale and adapt their treasury functions in an increasingly complex financial landscape. Whether through comprehensive or selective outsourcing, companies can gain access to advanced systems, expertise, and cost efficiencies that drive better financial performance.