Treasury at the Heart of Business Transformation
Digitization is revolutionizing product distribution and companies are rapidly changing their business models in response. For this to work, treasury needs to be intimately involved in the change process.
Many companies are changing their business model in the face of digital competition, globalization, and the disintermediation of value chains. Many companies have revamped their distribution arrangements moving from a wholesale B2B model to a direct-to-consumer model. The digitization of numerous products also means that these products do not need to be physically produced, shipped, and sold, but can be consumed electronically.
But for this transition to work, there need to be fundamental changes to the ways in which these products are sold and revenues accounted. These transactions also throw up huge amounts of management data that need to be incorporated into the strategy. This is where treasury comes in. Put simply, business model transition is almost impossible without an integrated and strategic treasury function.
“Treasury really needs to be there to enable the business, provide solutions and ideas, and be part of that business strategy conversation,” said Tristan Attenborough, MD, Head of Corporate Sales EMEA Wholesale Payments & Global Industry Solutions Head for Energy & Renewables at J.P. Morgan. “In my experience it is not always the case that treasury is involved in those decisions and designs. Often treasury inherits these decisions and have to manage the consequences.”
One company that has undergone a business model transformation and put treasury at the heart of this transition is Pearson, the global learning and education provider, which has recently changed its business model in two fundamental ways. “The two significant business model changes that have accelerated over the last couple of years are that firstly we have put the consumer at the heart of everything we do. The second is focused on the journey from ownership to usership,” said Stephen Porter, VP Treasury at Pearson, during the recent EuroFinance International Treasury Management conference.
Pearson’s shift to consumer was driven by a change in CEO, which Treasury supported to ensure that end to end processes provided the right consumer experience and usable data for all Pearson employees (not just finance). “[This included] everything from payments through to refunds through to recurring payments through to ensuring customers have the right data on their account,” said Porter.
That change to the business model has not come about without challenges, one of which was ensuring all the different datasets became dependent on each other – accessing the product relies on the payments data, which in turn relies on authorization data. “The interdependence between different processes, is a major management issue,” said Porter. “Corporates have traditionally been set up in a cash world or a procure-to-pay world but as business moves towards the consumer, those worlds tend to merge.” This is interdependence gets magnified by the trend of accessibility over ownership, as it brings a further time dimension to the transaction.
A further challenge was that digitizing the business necessitate much more cross border activity. This throws up other challenges. “Historically, most B2B businesses have used an in-country contracting structure whereas the world of e-commerce is a more cross border,” says Porter “And with that you use more of the payment card networks, which are more expensive cross border than in-country. And you also have increasingly localised tax structures with different digital taxes and VAT in different countries. And then after that, you have FX, which also needs to be managed.”
Treasury Owning E-commerce
Treasury’s role in these business transformations is critical if they are to be successful. “It is not always the case within corporates that treasury owns the responsibility for e-commerce payments,” said J.P. Morgan’s Attenborough. “But it is such an integral part of the receivables dynamic.”
Two aspects of the treasury function make it best place to lead these transitions. Firstly, it is one of the few parts of the business which has an end-to-end view of the business, from receiving payments to paying suppliers and accounting for the difference. But it has also had to evolve a solutions mindset over recent years, and that makes it particularly adept at undertaking these large-scale transformations.
“We have been heavily involved leading all the finance processes around our move to a subscription business,” said Porter. “That means everything from designing the way the databases work in finance, how products are set up, how we do recurring billing, how we collect payments, how we recognise revenue, all the way through to ensuring senior management have leading indicators of data. It is all an end-to-end process that was designed by us.”
Undertaking business transformation is a high risk for any company. Ensuring that treasury is at the heart of the process is a key way to minimize the market and execution risks that arise from changing the business model. The key ingredients of success are keeping an end-to-end view of the business, adopting a solutions approach, and focusing on the interdependence of data is understood, all maintaining strict segregation of controls to align with audit committee requirements. It’s a big lift.