It is imperative to look beyond reactive crisis management and address the long tail impact of COVID-19 with a view towards business recovery. Sound management of currency exposure and treasury management processes are a vital part of that process.
The disruption caused by the COVID-19 pandemic caught the world by surprise, forcing many law firms to rethink their existing crisis management and business continuity plans. Many firms operate offices globally, representing and counselling domestic and foreign clients in cross-jurisdictional and international matters. As a result, operational and contractual obligations create inbound and outbound cash flows across varying currencies, translating into foreign exchange needs and risks which need to be managed.
The pandemic has also created complexities for treasury teams focused on varying priorities in order to maintain business continuity. Based on our dialogues with law firm leaders in the current extraordinary operating climate, we have observed several consistent themes that can be addressed by practical and well-thought out business considerations.
We believe the following four guideposts touching on short-, medium- and long-term responses will help firms navigate present and future FX and treasury management challenges, with a focus on identifying solutions aimed at increasing efficiencies and capital resource maximization.
Short-term response: Crisis management
Guidepost I: Critically assess FX and treasury management processes for business continuity preparedness
With multiple countries implementing lockdown measures at short notice, firms had to pivot toward alternative working models. Roles and functions that were once deemed impossible for remote work have since adapted, and digital solutions have been key enablers. Organizations that utilize FX or cash management platforms already digitized their processes to a degree to adapt to the new environment. However, are firms unlocking the full value of their selected platforms? Are there enhanced solutions firms can be utilizing? We ask the following questions:
- How have manual processes impacted the firm's workflow with remote work?
- To what extent does your FX or cash management platform digitalize the process end-to-end?
- Has your FX or cash management platform performed optimally while working from home?
The ability for multiple departments and roles to work remotely is critical for operational continuity. As such, firms must evaluate their current processes and electronic/software solutions. Are firms reviewing business processes in silos or are the procedures designed for operational efficiency across the value chain? In this new paradigm, the optimal FX or cash management platform is one that can digitalize processes laterally across multiple functions.
In addition, law firms should critically evaluate their information systems on timeliness of access. This includes Enterprise Resource Planning (ERP), Treasury Management Systems (TMS), & Business Planning Systems which serve as primary data sources, as well as web-based solutions that offer a light version of their primary data source and can capture key summaries of exposures that would enable nimble decision making.
Medium-term response: Business optimization
Guidepost II: Optimize domestic and foreign invoicing funnels and outsource non-critical FX processes
Many accounts payable teams continue to encounter inefficient manual tasks that are a drain on resources, and have become increasingly challenging in the remote working environment. Properly managing the domestic and foreign invoicing process is yet another way to improve liquidity and business resiliency. Some examples of strategies to consider to improve processing are the following:
- Establish a centralized processing office to ensure a standardized approach globally and implement a system/process that allows vendors to submit invoices electronically, while enabling firms to track invoices against their associated POs, validate and approve payments and maintain accurate payment records
- Look for ways to invoice faster, collect easier and free up trapped credit lines that can be utilized to increase sales & profitability
- Match open receivables with payments & remittance data with the goal of automating the recon process for quicker end-to-end cash application
- Outsource non-critical processes such as creating PO receipts of supplier invoices and indexing of documents, allowing the treasury team to focus on value added tasks
- Develop appropriate channels and processes for exception reporting and handling
In the FX domain, team members should also critically examine tasks that their team members perform, with a view towards automating operationally manual and low value tasks. Immediate opportunities include FX payments or the target rebalancing of liquidity in different currency accounts.
With a defined automation plan for low value FX transactional tasks, teams may then turn their focus to the upskilling of their workforce and readying themselves for business recovery post COVID-19. Outsourcing tasks by digitalizing them is a quick medium-term solution that frees up staffing capacity and eases expense pressures, while allowing business managers to focus on unlocking productivity gains from existing teams.
Guidepost III: Synchronize cash optimization and risk management processes
In the wake of recent market turbulence, firms with the best-in-class treasury technologies have benefited in many areas, especially risk management and visibility of liquidity practices both domestically and globally. Absence of such infrastructure has highlighted vulnerabilities in treasuries ability to strike the right balance between liquidity needs and protecting future revenues and earnings.
For example, a core issue law firms face in business disruption is the widening variance between previous cash forecasts and the new operating reality, resulting in profit and loss volatility, potentially driving inefficient credit and cash utilization at a time when liquidity is at a premium.
As a result, it would be appropriate to reassess risk management policies, including those for non-core financial risks such as foreign currency exposures, to avoid unintended financial risks and costs. As an approach, firms should base forecasting across a range of potential business outcomes and adopt a framework to determine the appropriate strategy, reflecting the firm's near term liquidity needs and accepted risk tolerance. The outcome may call for refinements of the risk management policy and C-suite engagement.
Long-term response: Business recovery
Guidepost IV: Future-proof FX risk management processes by accelerating adoption of treasury technology
As firms reassess their crisis responsiveness, they should consider new ways to fortify their workforce and operational models. The first guidepost in this article discusses the importance of digitalizing FX and treasury management processes, however in thinking about future proofing the working model, firms should consider fully or semi-automating their workflows.
The difference between the two is that digitalized workflows still involve an element of manual oversight. For example, a treasury dealer executing a transaction over an electronic platform requires manual input, while full automation of the process involves minimal or no human involvement and relies on pre-defined rules determined by users. Firms should examine manual or semi-manual processes to determine which are time consuming and non-core. Such examples are the following:
- Manually extracting FX exposures from ERP systems or TMS and entering these into spreadsheets
- Analyzing FX exposures across currency pairs and separating exposures according to what needs to be executed at spot, forward, or with a derivative structure
- Calculating the percentage of FX exposures of each currency pair that needs to be hedged
- Calling banks for quotes or entering deals into online trading platforms and executing them individually
- Reconciling deals back into ERP systems through manual data entry
Automating the aforementioned processes mitigates the risk of human errors, omissions and has a positive impact on business recovery. Automation reduces expenses and allows for an increase in workforce capacity.
The role of technology and digital automation is rapidly becoming an increased priority across the entire operational and financial business model. It is important for treasury offices to conduct a review of their existing technology inventory and assess what is needed to effectively move forward in this important journey. For those organizations where digital strategy is in place, the top area of focus is the automation of manual tasks, enhancing customer experience and mitigating cyber security threat in light of recent market disruption.
Post COVID-19, we anticipate a renewed and heightened interest in the subject of process automation and prescriptive analytics. As firms bear the brunt of impaired productivity and reduced capacity, they are understanding the importance of reserving staffing strength for critical tasks. Automating non-core processes is the first but critical step in fortifying operational models.
To further discuss strategies to help optimize FX and treasury management processes, please contact us.