Cash Pooling

TREASURY FOR NON-TREASURERS: The good, the bad and the ugly of outsourcing

| 12-02-2018 | treasuryXL |

Planning & OperationsIn January 2018, Carillion – a British construction, engineering and facilities company – entered into liquidation. They had been in existence since 1999 after a demerger from Tarmac, which had been founded in 1903. They were the second largest construction company in the British isles, employing more than 40,000 people and were listed on the London Stock Exchange. They were known for their role in Private Finance Initiative (PFI) schemes – a form of Government outsourcing. Their insolvency has led to the loss of jobs, shutdowns of ongoing projects, and financial losses to more than 25,000 pensioners and 30,000 suppliers.

Outsourcing is a method used by most Governments in Europe to buy a particular service as opposed to providing the service directly. This allows a Government (or a company) to identify their core competencies and to buy in the ancillary services they need to perform all their tasks. A big motivator is of course related to cost. For a company this means only employing those staff that are needed for the core operations and hiring in those needed for non-core functions, such as pay roll. For Governments it allows large direct capital expenditure to be removed from the balance sheet whilst still providing necessary services for maintenance and construction in the general infrastructure within the country.

In simple terms, however frustrated we might be with builders or manufacturers, we generally recognise that it is more efficient – both financially and economically – to have external suppliers perform these functions. We do not possess the knowledge or proficiency to undertake building our own homes or designing and fitting our own kitchens. It is more acceptable to hand complex tasks over to others, and so make the procedure more accountable and manageable.

Likewise for companies it is imperative to determine whether to employ permanent staff to undertake their treasury and cash management operations, or to look at buying in the relevant knowledge and expertise. Many companies do not have a dedicated treasury team. Regularly, the work of a treasurer is incorporated into the work of another existing role within the organisation. This can be performed by the CFO, a controller, or the head of planning and control. Invariably, none of these people actually have the complete skill set to perform the treasury task.

When financing is needed for long term investment, contacting 3 banks and just taking the cheapest quote is not actually the same as getting the best deal. The individual banks could have different standard terms and conditions. The ratios expressed in the bank covenants could also differ from bank to bank. Implementing a hedging strategy for foreign currency requires a deep knowledge of the company’s cash flows, sales and purchases, and comprehensive understanding of the different financial products that can be used to hedge the risks.

Employing someone fulltime to perform these tasks is counterintuitive if there is not enough work for that person to be employed full time. Other staff could be resentful; the person could become disenchanted if there is not enough of a challenge in the work; a lack of continuity within the company could exist.

However, employing someone on a flexible basis to do the work that needs to be done and nothing else, allows direct payroll to be cut, a dedicated and proficient person is employed to perform the tasks, and the company can yet again focus on their core competencies.

Are you facing these issues? Are you looking for a professional solution?
Flex treasurer offer you a bespoke solution to address your individual needs.
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Lionel PaveyLionel Pavey – Cash Management and Treasury Specialist

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