There are plenty of sayings about management and measurement. Peter Drucker, the management consultant, is credited with: “That which can be measured can be managed,” while his contemporary, statistician and consultant William Edwards Deming is also attributed with the adage: “The most important figures needed for management of any organisation are unknown and unknowable.”
There is one matter on which they both agreed: to get good results you must keep inspecting and measuring the process. That applies to the relationship between banks and corporates. EuroFinance’s Corporate Treasury Network (ECTN) polled treasury professionals to ask them whether they got good value for money from their banks. The results showed that 71% of them thought that they did. Corporates with formal measurement processes of their banks’ performance were significantly more satisfied (88%) than those with no measurement processes at all (54% satisfied). Measurement appears to be a key component in perceptions of satisfactory relationships. However, actually implementing a measurement strategy can be a struggle. Measurement has two components, first is the hard quantitative calculation of total spending on banks and the proportion of that total (share of wallet) that each bank gets. The second is service and quality received in exchange for this expenditure. This is the more qualitative and difficult area.
The relationship between a multinational company and its major banks is never solely one to one. The MNC is likely to have multiple subsidiaries which deal with different branches and operational units of the bank. Somehow all the information must be collected and aggregated to present the overall relationship picture and provide a performance and value for money metric.
The definition of core or lead commercial banks is principally based on credit. Since the 2008 credit crunch banks have been less able to achieve a satisfactory return on capital from a pure credit relationship. Even though spreads have widened, the banks’ need to reduce leverage an almost universal regulatory requirement under Basel III) has meant that credit banks want ancillary fee revenues to increase their returns. From the corporate standpoint the share of wallet calculations have also grown in importance, not just to help with value for money discussions but also to support the ‘fair’ allocation of extra spending between credit banks.
When it comes to measuring total spending on banks, credit is one of the easiest areas as the spread and fees are transparent. This is also the case with other pure fee-related services such as letters of credit and guarantees, though the bank typically also has some capital allocated to these credit products.
FX spending measurement
A more difficult area for the corporate to assess expenditure on is foreign exchange (FX) and derivatives activities. “Banks frequently claim that they make no money on FX up until the point when you say ‘if that is the case, I’ll go elsewhere’,” quips one corporate treasurer. Most efforts to measure FX value to a bank are based on a volume multiplied by an assumed spread (margin) of maybe a pip or two. In some cases this is further refined to allocate different spreads to different currency pairs.
“For the more exotic currencies we’ll assume a higher spread, for non-deliverables or something fancier,” says the senior corporate treasury analyst at one MNC. Treasury management systems often enable corporates to record not just the FX deal, but the losing banks and their prices, and provide analysis of the individual banks bidding records. This can be a useful tool to get banks to be more competitive.
For banks, the biggest source of additional revenue is the payments and cash management business. The revenue to the banks typically comes from fees, FX and float (including free balances). The fees are relatively easy to determine – often they are calculated from bank Twist or Swift data or by drawing on bank fee spending information held in corporates’ accounting systems.
FX is more difficult as it arises from credits and debits to accounts in different currencies to the account currency, typically for amounts too small to trade. This can be very good bank income and is rarely tracked. Float is often invisible and while some corporates try to stop banks taking float, it happens and is also rarely visible. Although free balances are visible, corporates do not usually estimate the income they generate for the bank. So of the cash management expenditure, only the fees are routinely tracked by corporates.
Cash management business is usually given to major credit banks because of its high value. However, it is a banking activity that takes a long time to set up and is hard to move. It is also one where service quality is most important and most variable and where multiple relationships with each individual bank have to be aggregated.
A sample of the participants polled by ECTN give different measures, but most say their metrics rely on the subjective evaluations of the treasury staff that deal with the banks around the world. They often provide the criteria for evaluation within each banking service area used. “We have a survey that we send out to controllers to gauge relationship management at a local level,” says one treasurer. “We define the value with regards to price, service and response time,” says the bank relationship manager at one global manufacturer. But the reality is that the measurement of quality is largely based on subjective opinion. “We do not have grades, it’s more like ‘OK they perform well, they perform badly’,” he adds. Some treasuries have developed their own systems for facilitating measurement and aggregation of banking expenditure, share and performance [see box on best in class]. Most still use spreadsheets but they are cumbersome to use to aggregate data.
Banks generally appreciate the feedback of share of wallet information. Corporates surveyed typically communicate to the banks the tier into which they fall rather than hard numbers. Some provide full rankings and communicate the percentage of total spend that each bank gets. One company polled uses the red, amber, green (RAG status/ traffic light) project management tracking indicators for performance. Typically the numbers are broken out by product area. Anecdotally, the banks rarely argue about the corporate evaluations. This may be because their own numbers cannot show these breakdowns, but this is not always the case. One treasurer relates a bank saying: “This is what we think you spend with us. This is our profitability per area.”
Attempts to share information also prompt honest discussions with banking partners. One corporate polled asked its banks to rate its treasury, another said that a bank shared its risk-rated capital allocations with it and yet another said that it found out the services where the bank said it was making inadequate returns.
Relationship reviews typically occur annually, with some quarterly reviews for the largest relationship banks. Formalising this feedback process is at the heart of improving the service that a corporate gets from its bank, it is that feedback loop that is critical for improvement.
Toyota’s best in class bank scorecard
Toyota Financial Services has developed an automated bank scorecard in order to view and optimise treasury spending across 60 different global bank relationships. This includes an internal SQL [structured query language, which is the standard language used to access information in database management systems] that gives real-time data and analytics which can help support negotiations with bank counter parties. The scorecard has redefined the process of evaluating which banks to use to give underwriting mandates and is now a fundamental part of the company’s bank review process. The scorecard uses existing resources to best advantage at minimum cost to the company. “While there are many considerations to our funding and business decisions, the scorecard affords us the ability to speak directly to, and quantify, how our banking partners are compensated for credit and services provided,” says Theodore Zarrabi, director of balance sheet strategy at Toyota Financial Services.