- The benefits and challenges of consolidating payments for a multinational company are clearly outlined in P&O Nedlloyd Group and HSBC's collaboration.
- Asia's diverse characteristics, combined with PONL's wide-spread locations, prompted its decision to separate financial and accounting activities.
- PONL set up a shared service centre in Shenzhen, China, a centre of excellence in Hong Kong, and a processing centre in Pune, India to streamline and improve efficiency in its treasury functions.
It is entirely appropriate to caveat this article with a health warning. One treasury management solution does not fit all - and certainly not in Asia. There are numerous dependencies, and the solution developed by HSBC for P&O Nedlloyd Group (PONL) resulted from many years of relationship development and tailoring of services.
Typically, companies thinking about optimising the potential to centralise certain functions in their treasuries need to examine a number of key factors:
- corporate objectives, mission, or values;
- what to centralise;
- where to centralise;
- reality check - can they centralise? and
- barriers and constraints.
This list is by no means exhaustive and is merely included to alert readers not to view this as a "quick fix" or a "must do". Nevertheless, there is much interest in exploring the migration and consolidation of repetitive functions in a single cost-effective location such as India or China.
Change for Change's Sake?
There are a number of drivers that will prompt a treasury team to consider the implementation of a payments "factory". The three key factors that are generally in play are: cost leadership; information technology (IT) infrastructure; and operational efficiency.
Companies that have been successful in effecting change move from a situation where costs were difficult to control, particularly if these were spread across a wide range of geographic locations. In addition, procedures and operational models are often embedded and, as such, prove inflexible to change. Following the implementation of change management, a number of benefits become evident - the primary point being significant cost reductions delivered through economies of scale where the cost base becomes dedicated and clearly attributable. Intangible benefits also become evident - more accurate and timely management information, for example.
Before introducing a significant change to the business model, multinational companies (MNCs) must acknowledge the inefficiency of multiple local systems that do not "speak to each other" nor present information in a consistent format, and which result in a considerable amount of re-work and re-interpretation being required.
Following a change programme, legacy systems are decommissioned, liberating much sought-after IT resources to focus on a strategic core platform used by the group as a whole. In turn, this results in local IT becoming obsolete as IT itself can now be centralised.
There are a number of critical issues relating to an "as is" scenario that can be addressed to advantage by progressing with the establishment of a payments factory. Prior to making modifications to their business practice and transaction execution, MNCs find that their strenuous efforts to implement consistent treasury policy may be thwarted by the local interpretation of that same policy to "suit local market conditions". An army of auditors is recruited to focus on attempting to highlight weaknesses and influence the results by recommending the acceptance of group standards.
Once a change is implemented, expertise becomes centralised, with close alignment to treasury and other group policy control functions. There is an opportunity to not only effect changes to a predefined secure group and a global standard, but also to refine the model and then refine it further.
The PONL Experience
P&O Nedlloyd was formed in 1996 with the merger of P&O Containers and Nedlloyd Lines. It is one of the world's top carriers and is involved in containers, shipping and logistics. In 2002, the company had a turnover of USD4.7bn and carried over 3.5 million loaded TEU (20-foot equivalent) container units worldwide.
PONL offers port-to-port and door-to-door liner services, linking all parts of the globe. In addition, it offers high-quality logistics and supply chain management services. It continues to develop its e-commerce capabilities via electronic data interchange (EDI), the Internet, and INTTRA, the industry portal. PONL operates from almost 400 offices worldwide and operates a fleet of more than 150 container ships. In Asia Pacific, PONL employs more than 2,500 staff and maintains 89 offices in 19 countries.
The Shipping Market
Customers are seeking better-quality supply chains, while rationalising their supplier bases. There is an increasing requirement for tailor-made solutions and innovative change, but of a high standard and consistent quality. Delivering this in the context of the global shipping business is no mean feat. PONL is finding, in common with many supply chain businesses, that large customers are getting even larger through mergers and acquisitions, and are looking for synergy savings and cost reductions.
It is believed that customers and suppliers must work together to identify new ways to meet the above requirements, and such "new ways" must have stability and therefore be born out of a true partnership. Clearly partnerships do not just "happen", they have to evolve.
PONL's Experience in Relation to Key Change Drivers
At PONL, we put much emphasis on cost-effectiveness, customer service with global standards of quality, and being a smart company by using innovative internal processes and by developing state-of-the-art e-commerce solutions. In this context, our project Focus was born - the Finance Operations Customer Service change programme. It entails the rollout of a global system, providing greater efficiency, crossing functional and country borders, and improving customer service. Where do we find the benefits?
There are numerous local practices in shipping, as it is one of the oldest industries. However, in today's international environment, customers increasingly expect standardised quality. The development of the Focus system enables our customer service staff to concentrate on customer needs (e.g. tracking the shipment from start to finish).
We also aim for process standardisation, giving us scale and productivity, and enabling us to manage by exceptions. Furthermore, with a global system, one is able to work with a single test site and can create a uniform support structure for the integrated systems. A challenge, however, is the need to have the system operating 24/7, as our offices operate across every time zone.
It is important that a large project such as Focus has the full backing of senior management and the buy-in of regional and corporate staff. To support the changes, we embarked on a review of our shipment management process, which includes activities such as receiving bookings and shipping instructions, arranging container and truck availability, providing shipping documentation (bills of lading), and settling bills. We also looked at the various jobs in the shipment management chain to determine whether jobs could be moved to cheaper locations in China and India.
Centralising Asian Finance Operations
The finance division in Asia Pacific took up the challenge in 2001, following the roll-out of our enterprise resource planning (ERP) system: how could we improve the efficiency of our operation further? We separated the finance and accounting jobs into three streams:
- invoice to cash (e.g. raising invoices, applying cash, credit control);
- purchase to pay (e.g. voucher input, paying the bills); and
- financial reporting, including statutory and management reporting, cash management, and forecasting.
We acknowledged that the types of jobs were very different. On the one hand were the more mundane data-input and data-processing jobs, while on the other, there were jobs higher up the value chain scattered across our Asian country offices. We decided to rank and classify the various tasks and allocate them to either shared service centres (SSCs) or centres of excellence (CoEs).
In consultation with our banking partner, we planned to separate these two major functions across three locations in Asia: a CoE in Hong Kong to handle cash management operations and cash flow monitoring and control, an SSC in Shenzhen, China, and another processing centre in Pune, India. The SSC in Shenzhen would have a pool of skilled but cost-effective staff for the processing jobs. The CoE in Hong Kong would have comparatively fewer but highly educated and experienced staff.
China Payments Factory
The first key process we identified for the finance SSC was voucher processing and payment. Other processes followed. We had commitment from the country controllers and ensured they were involved in the setting up of the SSC from the beginning. The results were astounding; we achieved a net cost saving of a minimum of 25% and reduced staff in the affected countries by more than 33%. All this was achieved in less than a year from the project's start.
An important ingredient for the payments factory in China was the development of a single payment pipeline. We had gradually, with our regional banking partner, built up an efficient regional overlay bank structure, covering many multi-currency accounts, both offshore and onshore. Working with a single bank
was easier for payments than for receipts, which were complicated by the various local regulations and the difficulty we had in establishing full coverage of our Asian locations.
We have about 25,000 individual collections and 5,000 payments per week across our Asia-Pacific branch and agency offices. But with regular reviews and discussion with our regional bank, we have been able to find good solutions with which to overcome the local problems.
The product we first used for our payments was a country-based Hexagon system. We started immediately with the development of the "single pipe" to support our SSC in Shenzhen. This proc ess is now in place and functioning well. The system is based on standardised EDI ERP interface protocol. We can now set up a single payment run to pay all Asia-Pacific vendors from our Shenzhen SSC.
Centre of Excellence
In the CoE in Hong Kong, we centralised the financial reporting and cash management operations, as well as cash flow forecasting, monitoring and control. The availability of state-of-the-art tools for complete and up-to-date working capital and cash balance reporting has been key.
We have had excellent cooperation with our regional bank over the past years, and in this project in particular. It is important that the bank has a good understanding of the client and its project goals, and is able to deliver against the set expectations.
The Role of the Regional Bank
Presented with the demands of a global client seeking to enhance its financial processes in a traditionally "difficult" region, how did HSBC respond? To answer this question, we will examine the following factors:
- the context of Asia;
- progressive evolution;
- getting the foundation right (overlay bank);
- addressing liquidity (CoE); and
- connecting technology.
The Context of Asia
HSBC makes no apology for the overuse of the phrase "Asia is more than one country" - particularly for the benefit of corporate groups whose home base is outside of the region. Unlike Europe and North America, market synergies do not exist. There is a wonderful diversity in Asia, which makes the region dynamic - and attracts businesses from many industrial sectors.
From a banking perspective, you will find the full spectrum of development - from the highly automated Japanese environment, akin to the Benelux experience, to the paper-intensive situation in Indonesia with its multiple clearing centres. Then there is China - the subject of increasing interest as WTO accession progresses - which remains a challenging environment where corporate cheques become stale within 10 days of issuance.
It is in this context that PONL wanted to enhance its approach to cash and treasury management. The project was started in 1997 and took two years to implement (we can often miss the timescales involved in such a study). PONL's methodical and pragmatic approach is to be noted, particularly when tackling the regional diversities.
The "partnership" approach between bank and corporate is entirely appropriate since, on occasion, securing local buy-in on the client side was achieved finally through direct local dialogue between the operating company and HSBC. This complemented the direction from regional head office by emphasising the benefits, as well as allaying concerns about migrating to a new bank with full visibility now evident at regional and global levels.
Getting the Foundation Right
The first phase of the development of the regional solution was a "back-to-basics" cash management model whereby HSBC and PONL undertook a country-by-country project to open accounts. Inevitably there was resistance, particularly where there was a perceived deterioration in service; this required a proactive and positive response to tailor the cash management model without diluting the benefit. The provision of timely and accurate information was key. HSBC put in place a technological infrastructure to allow local, regional, and global visibility for operating companies, regional headquarters, and global treasury alike.
The secondary benefit of such a structure is the uniformity of access and presentation. Each country has its own conventions (and language) for presenting information, and often it is difficult to view, interpret and interface the data provided. With the predominance of cheques in Asia, HSBC supplied appropriate delivery channels to facilitate the execution of payments in various countries through paper. The support of a strong local branch presence is an invaluable asset in this regard.
As this implementation phase concluded, attention turned to identifying a means by which the various cash positions could be optimised. Again, we must return to the challenges raised in the context of Asia. The economic conditions of the past five years have prompted, in some cases, draconian measures being taken by local regulators. We have witnessed a change from previously relaxed conditions to the imposition of
legislation that renders full liquidity management impossible.
Furthermore, where there is no clear regulation, we often find that market practices have the same effect and carry the same weight as local legislation. The situation can be complicated by taxation considerations - particularly withholding taxes - that apply even in the more benign environments.
PONL and HSBC achieved the right solution through dialogue with both sides presenting various models. In each case, local liquidity management techniques were adopted to move surpluses into the control of the treasury in line with local conditions.
The Shenzhen SSC was enabled in part by the implementation of an ERP, and came as a result of a strategic imperative for increased shareholder value through greater efficiency. The implementation process was evolutionary and involved the development of an interface between the ERP and the proprietary electronic delivery platform. This then progressed further to full host-to-host connection.
Our dialogue on systems development progressed on two levels - commercial and technical. Delivery of paper-based payments as a result of files being submitted through a "single pipe" was recognised to be important. Once this matter had been resolved, it gave way to an intense technical discussion lasting some months covering file formatting, security considerations, and the decision about where to locate the communications interface for the host-to-host link. After considering Shenzhen and Hong Kong, it was decided it would be London - although any of these options were feasible.
The China Payments Factory Model
The final solution to servicing the needs of the China-based SSC was a host-to-host connection between PONL's ERP and HSBC's delivery channel. Specifically, PONL and HSBC selected and have developed the capability to use EDIFACT as the preferred format for delivery of payments instructions. Within the range of message formats available PAYMUL was chosen; this is aligned to the guidelines as laid down by the
Corporate Reference Group (CRG).
The CRG is an association of leading multinational corporates whose aim is to promote and standardise EDIFACT D96A as the premier means of communication in international trade. Both PONL and HSBC have aspirations to gain accreditation based on this development.
In terms of "how it works", each PONL entity inputs its accounts payable on the ERP for processing and authorisation at the SSC level. The SSC then prepares the batches, against scheduled settlement days, and releases it to the bank through the client gateway in London. HSBC then distributes the payments instructions back to the individual countries for debit to locally domiciled bank accounts in local currencies.
- Step A: PONL entities feed invoices to the Shenzhen SSC for input, verification, and authorisation. The file of payments is then transmitted internally to the ERP mainframe in the UK. The file is transferred to HSBC's "client gateway" maintained on the PONL premises in London.
- Step B: The file is encrypted immediately upon receipt at the client gateway and transferred to HSBC via a dedicated leased line.
- Step C: On receipt at the bank gateway, the payments file is decrypted and then passed through a "translator" to bring individual payments into the appropriate format of each country's underlying clearing system. Payments are then transmitted through internal secure systems to the country of execution. On receipt in each country, individual payments are sorted by payments type for final execution (i.e. cheque issuance, RTGS, ACH and SWIFT).
This process is the culmination of a close cooperation between PONL and HSBC. It did not just happen overnight but formed part of an evolutionary model, which took advantage of technological developments as business imperatives prompted the need to modify business practices and processes. Is this the end point? Certainly not. PONL will continue to match functional efficiency in response to and in advance of the demands of its customers in the context of the global economic conditions that challenge all industries.
Originally published in HSBC's guide to Cash and Treasury Management in Asia Pacific 2004.