Please explain how SGS operates its treasury.
SGS operates an in-house bank model though one which is also fairly unique in that we have outsourced the front-, back- and middle-office functions to a third-party provider, Treasury Management Systems (TMS) in Neuchatel, Switzerland. In order for our treasury team to focus on higher value adding activities, we decided that the leg work involved in executing, reporting and confirming treasury deals would be best done by a specialist provider who had the economies of scale and expertise to grow with us some years ago. Many treasurers may feel that letting go of these core treasury functions would in some way diminish the value of treasury in their organisations. In reality, we have found this to be a powerful enabling tool to improve our productivity. We retain control through the approval and communication process with our affiliates and through the service agreement and dealing authority granted to TMS -- but the high-volume repetitive activities of daily trading and all that goes with it are taken off our hands.
What activities does the in-house bank handle?
The in-house bank is based in Switzerland where our parent company is based. Wherever possible FX and money market operations of our affiliates are dealt through the bank and from there the external deals with outside banks are executed. We are also operating a pan-European cash pool in euro and US dollars as well as a global netting or intercompany invoice settlement system. Again the actual operation of these pools and the netting are handled by TMS. There are in-country cash pools in various countries around the world and these are handled locally.
How does Asia fit into SGS's in-house bank structure?
About a year and a half ago our treasury department decided that we needed to make an effort to be closer to our subsidiaries and to take the locally performed treasury functions into our care. While treasury is centralised in Switzerland, a global company such as ours cannot avoid having local relations when it comes to handling FX or money market operations in certain countries.
To provide the best service to our affiliates we decided to open our first treasury execution function here in Singapore. The goal was to automate the affiliate exposures and the execution of hedging deals into a regional area, while also providing an advisory role with local and regional knowledge. We have since added eight Asia-Pacific countries into this automated reporting function and have plans to add more this year. The idea is that while the responsibility for the treasury operations of an affiliate remains with the local finance team, they are able to use our resources and expertise so that the job is easier and more hands off for them so they can focus on their core financial roles. The success of this project in standardising and streamlining the exposure reporting as well as ensuring the consistency of data quality across the region has been well received and the group will replicate this model in other regions in due course.
What are the strengths and weaknesses of SGS's treasury in Asia?
The strengths are a small dedicated team with a good local knowledge of the practices in the region. Implementing a country into the treasury execution function is not like flicking a switch. Instead, it involves a complete review of all the working capital and cash management processes in the business. This gives a good understanding of where improvements, differences and problems may be found. A good all round understanding of the cycles involved is needed as well as the ability to convert these into treasury thinking. On the weakness side, being a small team of two here in Singapore it can be a challenge to meet the competing pressures of the daily duties versus the need to push the multiple projects forward towards their end goal. We are the sum of our parts and treasury here in Singapore is working towards upgrading the skills of the local finance managers in the region on treasury issues to strengthen the global treasury function.
At Eurofinance last month you said SGS had difficulties with trapped cash in Asia, particularly in Bangladesh, China and Vietnam. Could you please describe the difficulties and what you're doing to address them?
Each country has a slightly different problem within the trapped cash spectrum. In general, capital controls are at the root of the problem, however each varies. In Vietnam, it is an availability of liquid foreign currency in the market which can hamper payments. Here we are looking at sourcing funds from outside the country to alleviate the problem.
Bangladesh frustratingly applies "get out" clauses in their legislation preventing payments for services and subcontracted work even though technically all payments on the current account are permitted. We have been in contact with the central bank on this matter and are now pushing through service agreements between our affiliates in order to strengthen our case for commercial funds transfers.
In China, our strong cash flow and a lengthy dividend approval process lead to a build-up of cash which we cannot transfer out. We always have to work within the legislative framework but also the commercial realities of our operations in China. Sometimes where a solution may exist the reality is that we need to take into consideration our minority partner's concerns for example. One positive though is the rapidly changing Chinese legislation in the financial area which is moving in a more liberal direction.
Looking ahead, what do you plan to change or improve in SGS treasury?
Our short-term goals, to the end of the year, are to add four more affiliates into the current treasury execution function as well as to begin extending the concept to different regions. Longer term, over the next year, we are implementing a global cash concentration scheme. We have recently completed a critical review of our treasury activities with our internal and external stakeholders and this has confirmed the direction that we are taking is supported and that we are providing the services our business wants.
