EDS Reorganizes for a Value-Added Treasury.

When Scott Krenz became treasurer at Electronic Data Services, he saw a burning need to reorganize the function to improve coordination and streamline relationships. A close-up look at the challenges he and his managers faced and the decisions they made.

"Don't automate, obliterate!" was the game plan for Scott Krenz in mid-1998 when he assumed the treasurer's role at Electronic Data Services, the $19 billion provider of consulting and information technology services based in Plano, Texas. An EDS veteran, Krenz had previously served as CFO for Europe, the Middle East, and Africa, where he developed a global perspective and a different, broader philosophy about the role of finance at EDS.

In fact, Krenz's prior experience had involved him in more than finance; he had daily contact with EDS's customers and other functional areas, such as marketing and customer service. This background, plus the planning experience he had logged on the job, was the inspiration on which he developed the framework for a reorganized treasury group at EDS.

Krenz's plans for treasury fit well with the goals of Dick Brown, chairman and CEO, to transform EDS into a more efficient, active and service-oriented company. EDS has more than 9,000 business and governmental clients in 55 countries around the world and, at the time, had more than 130,000 employees. In 1999, the company implemented a $1 billion cost-reduction and productivity improvement plan that included retooling operations, paring business lines from 48 to 4, reorganizing into three geographic regions and focusing on global industry expertise.

At the time of Krenz's appointment, the treasury group at EDS resembled treasury departments at other corporations, with a structure that mirrored EDS's decentralized and geographic lines. It functioned as a traditional treasury -- that is, as a cost center with little day-to-day interaction with other corporate areas.

Domestic treasury operations were handled separately from international treasury activities, which had been delegated to treasury offices overseas. As a result, there was little interaction between domestic and international treasury, even though they were parts of the same organizational entity. A perfect example of this was the fact that EDS had two different treasury workstations from different providers -- one for domestic operations and one for international operations -- that were not linked.

Furthermore, local operations controlled bank accounts and relationships. This created a vast and complex banking network that was costly and difficult to manage. The network had no real structure; banking relationships were driven more by convenience than anything. Treasury was bogged down by the enormous effort required to monitor accounts and collect information across the vast number of banks.

There were several attempts to coordinate policies across business units, but follow-through was difficult and reduced treasury to a small, advisory role. As a result, there were few coordinated efforts, ineffective execution of treasury activities, and unconnected systems.

This changed when Krenz arrived.

First, get the organization right

As he took over the treasury group, Krenz knew he had to jolt the staff out of their old mindset. He wanted it to transform itself from a traditional cost center to a resource that could support business lines and add value to these lines. "I went trolling for ideas and people who could help," says Krenz. He was looking for internal personnel who could handle change and would rise to the challenge. He also searched outside EDS for staff to share his vision.

His first major decision was to scrap the existing organization and restructure it around functional, not geographic, lines. The new treasury functional areas included:

* Treasury operations

* Corporate finance

* Risk management

* Pension and corporate investments

Krenz also wanted more direct day-to-day contact among his managers, so he closed all the international treasury offices and centralized all treasury activities in Piano. He also brought in new managers for two of the treasury activities. "The key to our vision," says Krenz, "was getting the right people in place in an organizational structure that freed them to get the job done."

Krenz challenged his managers not only to come up with ideas to add value but also to come up with plans to implement them. He recognized that each area was at a different stage in developing more effective (i.e., best practice) treasury procedures that would fit into his overall goal. In some cases, that meant simplifying activities and reducing the number of service providers, while other cases entailed identifying areas to outsource.

* Treasury operations

Treasury operations had not really kept up with the needs of EDS business units. To turn this area around, Krenz brought in David O'Brien as assistant treasurer for treasury operations. O'Brien had a solid background in managing the treasury "back office" and had spearheaded major revamping of daily treasury activities in his previous jobs.

O'Brien quickly recognized that treasury operations lacked any integration and had no accurate reports of key treasury data. He developed a plan to reorganize worldwide treasury operations from many fragmented banking relations into coordinated relations, principally using two U.S. multinational banks that could service offices overseas. This simplified EDS's treasury information reporting so reliable daily reports could be generated. O'Brien also noted that EDS was incurring a substantial amount of bank service charges for information reporting, much of which could be eliminated by reducing the number of operating banks and by integrating all information reporting (worldwide) into one common system. Finally, the independent but duplicate treasury workstations had to go.

A major concern was the ability to cover worldwide treasury operations from Plano. To handle this, treasury personnel are scheduled in overlapping work times:

* 5:00 AM: The cash coordinator for Europe and the Middle East starts the EDS day. This sets up the rest of the day as data is fed into the system.

* 6:30 AM: The foreign exchange (FX) trader arrives, gets updates on FX positions and needs and begins to make FX trades as required.

* 7:00 AM: The managers of treasury operations and FX arrive. This begins the regular operations activities throughout the business day.

* 8:30 AM: All treasury operations personnel are in and working.

This schedule covers Europe, the Middle East and North America on a same-day basis. EDS's Asia-Pacific activities are handled on a next-day basis as part of regular business of the treasury back office.

* Corporate finance

On the other hand, the corporate finance area did not need the overhaul treasury operations required. This area includes structuring financial deals related to EDS's information technology (IT) services and strategic planning for EDS's overall capital position. Assistant treasurer Tony Glasby was able to build on existing strengths.

Glasby had been an integral part of EDS's international treasury group in London. He also had experience in the controller's side of EDS finance, so he brought a wider view of finance that dovetailed with the new vision of EDS treasury. Corporate finance at EDS before Krenz and Glasby had many management layers and was not as globally coordinated. With the consolidation of all corporate finance activities in Plano, the area receives more direction from the treasurer and gains greater visibility throughout EDS. Corporate finance can provide financial expertise by becoming part of the business deal, offering its expertise to potential EDS clients by structuring beneficial cash flows or other attractive financial arrangements.

Glasby's group also deals extensively with the banking community to arrange financing for EDS business deals. Expanding EDS's corporate finance role has also meant reconsidering the level of service EDS requires from banks participating in its structured financial deals. Glasby now has a deal structure in place before obtaining bank commitments, so there is less need for front-end advisory services from participating banks.

* Risk management and pensions

The risk management area, like corporate finance, underwent smaller, fine-tuned alterations. Richard Dauterive, manager for risk management, was a seasoned EDS employee and had spent the past seven years in risk management. Because of the nature of its business, EDS is required to carry a large amount of insurance. Most EDS clients expect or require such coverage. This translates into a large portfolio of insurance policies, numbering between 6,000 and 9,000.

Dauterive's group identified the key insurance activities that made sense to keep in-house and outsourced many administrative activities to reliable outsourcers. Using the Internet for better communications with insurance brokers also is adding value to EDS business deals. Another is the captive insurance company EDS has set up to take on and manage risks that could not be outsourced successfully or cost-effectively. EDS risk management also uses the company Intranet heavily to disseminate instructions and forms for routine activities such as filing claims and establishing links to insurance brokers, activities requiring little hands-on action by risk management staff.

"The pension and investment area has probably undergone the least change," says chief investment officer David Nixon. It already was centralized and practiced outsourcing. In its role of overseeing EDS pension assets managed by outside money managers, it had established procedures and performance measurement techniques. As it was in line with best practice standards and procedures, minor fine-tuning was all that was required.

Best practices and treasury 'metrics'

Krenz challenged his new organization to implement best practice standards as a way to assure that it was working at peak efficiency. Each manager had to define performance measurement statistics that could be used to establish what Krenz called "exception and action reporting." This meant establishing a few indicators that can tell a manager or a senior executive that something has not worked properly and requires action by the responsible person. It enables Krenz -- or other managers -- to have what he calls a "meaningful conversation." Furthermore, the statistics have to measure the performance of EDS functions and that of outside sources.

Identifying and establishing procedures for regular capture and reporting of these best practice statistics -- treasury metrics, as EDS calls them -- was not easy. Exhaustive literature searches and refinement of existing data yielded many useful statistics, and for others, EDS turned to knowledgeable users: other corporate treasurers. Krenz hosted a meeting of a dozen other treasurers to discuss how to measure treasury activities. Many of these discussions led to additional metrics. This approach proved so successful that the group is planning regular meetings semiannually to discuss many other treasury issues.

In all, some 24 metrics were formulated. They are housed on EDS's treasury Web site and are available to the appropriate executives. Included in the final group were existing measures, such as the average short-term debt rate, weighted average cost of capital (for capital planning), bank fees and return on pension investments. Each of these is compared to industry standards or other appropriate benchmarks.

Some metrics are simple averages that can be measured against a target, such as the average daily cash balance or outstanding short-term debt. Major variances from the desired target trigger investigation and explanation. Others metrics might include a ratio of financial assets related to a time period, such as the number of days of operating expenses held as cash. Here again, significant variances create actions. Some metrics incorporate standard financial ratios measured against industry standards, such as times interest earned (TIE) or net debt to capital.

Some areas have proven difficult to measure effectively, such as those that are more deal-oriented. Here the process of developing meaningful measures is still underway.

EDS wanted the metrics to cover its service partners as well, especially its banks. To gain commitment from its banks, EDS issued a request for proposal (RFP) to begin consolidating its worldwide banking network. Each potential service partner was required to commit to EDS metrics. Krenz and his managers were pleasantly surprised by the fact that all responders to the RFP agreed to the metrics without difficulty.

Savings and further challenges

The impact on EDS treasury has been substantial. Efficiency is up, costs are down, and treasury is involved in deals early on, when they can make a difference. Consolidating the activities in Plano and reorganizing has allowed Krenz to contribute to EDS's corporate goal to reduce overhead and unnecessary expenses. Krenz and his managers have reduced personnel from 123 to 45. Included in this reduction were transfers to outsourcers -- risk management administration, for instance -- or to other EDS operating areas or functions deemed to fall outside treasury's core areas, such as leasing. Other savings came from productivity improvements: reduced working capital needs through better information and tighter control, and lower bank charges resulting from a 40 percent reduction in the number of banks used and a 45 percent reduction in the number of bank accounts.

The EDS treasury group is now in a position to work closely with EDS's dealmakers as they negotiate new business, which greatly increases the negotiating team's ability to offer a better package. In addition, the treasury group is ready to manage EDS's financial and insurance risks on a more active, targeted basis, which will allow EDS to take on more risk. With the ability to identify risks at the earliest stage, the treasury group can accommodate these new risks, together with other outstanding risks. This can aid EDS's marketing efforts.

Looking forward, Krenz sees further room for improvement. There are still too many banks for a totally efficient system, resulting in an undesirable level of service charges. Also, like so many firms its size, EDS is moving to worldwide implementation of an enterprise resource planning (ERP) system. The new consolidated treasury workstation has been designed with this in mind, and treasury will have to prepare for other interfaces with the new ERP system in the near future.

Krenz is proud of the fact that "EDS treasury is becoming a resource that adds value to EDS's business deals." The economic impact is measurable and is part of the standard deal evaluation process. "We now have more requests from deal teams to help improve the financial metrics than we can handle," he says.

By reorganizing treasury into a value-added financial center for EDS and obtaining more visibility for the department, Krenz has realized a twofold payoff whose benefits should only continue to increase.

Joyce R. Ochs and Kenneth L. Parkinson are principals with Treasury Information Services, a treasury management consulting firm in Hopewell, N.J.