OUTSOURCING: Treasury outsourcing in action

Dublin-based financial consultancy and treasury outsourcing operation FTI began as a spin-off from what might seem to UK eyes an unusual source: the state-owned Electricity Supply Board in Ireland. ‘They had a lot of treasury expertise at the time,’ says executive director Pat Leavy. ‘There were high levels of foreign and domestic debt; high levels of cash flow going through the organisation; currency exposures and commodity exposures, with much of the electricity generated from dollar-denominated oil imports. So a decision was made to try and sell that expertise externally.’

The company was granted a licence to operate under the aegis of the International Financial Services Centre in Dublin, an EU-approved tax-efficient zone aimed at encouraging the growth of the city as a centre of excellence for finance. But the real breakthrough came with the privatisation of the electricity market in the UK in the early 1990s.

‘Because of our energy and treasury background, we became heavily involved in the electricity sector, setting up treasury operations in the RECs and also working with the National Grid – they are still one of our major clients,’ Leavy explains. That has changed a little as RECs have consolidated and some have been snapped up by foreign energy groups. Also, the IFSC’s tax breaks are being phased out. But the expertise FTI has been able to build up in the intervening years has kept business brisk.

FTI usually begins the relationship with a client on gradual basis. ‘There are two concerns that companies have,’ says FTI chairman Aengus Murphy. ‘One is that they’re relying on a third party for service; but we don’t get a client in a matter of weeks in this area – it takes about a year to cultivate a relationship with a prospect company such that they’re prepared to outsource a sensible treasury operation to us. Often, there will be some initial project work that we will do together, so that they can get to know us.’ This might include a financial risk analysis project, outsourcing of simple operational treasury functions or wider-ranging consultancy work.

‘The second concern is that they would want to be sure that things are secure – that funds don’t disappear, that it’s well-managed and controlled. So we’re regulated by the Central Bank of Ireland as a provider of these kinds of services, and they focus in their regulation on our control arrangements,’ Murphy continues.

Once a company has gone through this ‘comfort’ process, and the decision to outsource treasury has been taken (often clients will simply choose to take the back-office functions from FTI, for example), the next step is establishing the operational structures that will support the outsourced unit.

‘In most of our operations, a separate company [running the treasury operation] has been set up, and there’s a board in that company which meets frequently (normally monthly) in Dublin,’ Murphy explains. ‘The board would be comprised of a majority of parent company directors and typically two directors from FTI. Sometimes there will also be a Dublin-based external director. They look at planning and performance, and then we nominate one of our front office people as the point of contact for the parent group, so they’re in continuous contact.’

‘The client always has control, that’s the main thing, but we are running their operations for them,’ agrees Leavy. ‘They have control over the decisions that are made, the strategies that are being adopted, and that can be at any level. If they want to go one step further, we can advise them on what strategies to pursue, we would develop the policy guidelines for them which set out how those treasury activities run. You can evaluate how they’re managing their treasury and often you see that they’re spending 80% of their time on operations and 20% of the time on strategy – and it should be the other way around. Strategy has a greater impact on the business. So if they outsource their operational side, they can concentrate on that strategy, on the commercial issues from a treasury perspective.’

So FDs keen to focus on strategic issues are major beneficiaries, Leavy claims: ‘You often see organisations where the resource constraints force [the FD] to get involved in the day-to-day things, to the extent that they spend too much time at it and something else has to give.’

From a functional perspective, FTI offers a complete service. ‘We would provide a management function, including providing the managing director of some of these subsidiaries, but also the ongoing business planning, strategy and reviews that go on at management level,’ Murphy points out. ‘Then the technical service will be the front, middle and back office, the front office being the people who relate to the internal clients of the group whose subsidiary we’ll be managing and who will conduct the transactions with the markets. The back office will be the unit that handles the confirmations, the fund transfers and reconciliation and control. The middle office handles the accounting and reporting and some of the controls as well.

‘We also provide the admin and secretarial, so it’s a one stop shop – everything from board director, management, all the technical operations, premises, systems, everything is provided by FTI.’

Murphy also breaks the operation down by services. ‘That would be a full range of corporate treasury activities, such as cash management, surplus cash investment, financing, intra-group financing, foreign currency cash flow hedging, interest rate and exchange rate risk management, management of banking relationships and all the controls and procedures that go with that,’ he says. ‘In some instances, we will be viewed as an internal bank for the group. In some cases we operate in a kind of fund manager role – one of our clients has a lot of surplus cash, and they have allocated a proportion of that to a longer term fund for FTI to manage and we have to perform against benchmarks.’

Client sizes vary: sometimes FTI will be executing only a handful of transactions per week, although one company uses FTI to handle over 6,000 foreign exchange deals a year. And Murphy concedes that outsourcing treasury is not ideal for every company. Too big, and developing the level of expertise in-house will be more than justified; too small, and the number of treasury transactions will be too few.

But for many mid-market operations, or those with growing levels of exposure to foreign markets, outsourcing may be ideal. ‘There have to be cost savings for the client as well as making it easier,’ says Leavy. ‘There’s no point being esoteric about it: all our clients have practical issues they need solved.’

Return to the Financial Director website