Treasury's role in planning for the worst-case scenario.

Almost every organization considers what would happen if its CEO suddenly were out of the picture. But many don't consider the impact in the wake of a disaster if the people who run treasury were unable to make payments, manage cash and schedule transactions. Finance, and the treasury department in particular, has a unique role to play in business continuity planning (BCP). At a basic transaction level, treasury is essential to the survival of a business.

Business Continuity Planning Basics

Business continuity planning (BCP) involves assessing threats and analyzing their impact; creating plans to manage incidents and mitigate impact; and implementing longer-term disaster recovery planning. Virtually all companies have backup processes for IT infrastructure failure, however, effective BCP involves four key components: people, processes, partners and technology.

IT-focused plans often make treasury systems a lower priority because treasury often lacks visibility within the business to be considered a "core" operation. Treating BCP as an IT issue will not necessarily ensure treasury continuity. Since treasury generally consists of managing very high levels of operational risk, non-payment following a disaster could have serious consequences, incurring interest, charges, reputation damage and risk of default. Because treasury manages large amounts of information that are critical to daily operations, it should be at the core of BCP.

Michael Rasmussen, vice president of Enterprise Risk/Compliance Management at Forrester Research, describes treasury as a "critical part of overall operations risk planning." In the event of a disaster, the continued functioning of treasury operations is essential, he says, because the department manages processes that impact financial reporting, and, consequently, regulatory compliance.

Maggie Scarborough, research director at Financial Insights, agrees, and notes that despite this serious risk, only 30 to 40 percent of corporate treasuries have business continuity plans in place. Large companies are more likely than medium or small companies to have a proper business continuity plan for cash management and treasury operations

Putting BCP to Work for the Treasury

Rasmussen indicates that only about 50 percent of executives understand BCP as a strategic issue. But for successful plan implementation, executives must define processes and procedures, including a communications plan, to ensure that the right people get the business up and running after a disaster.

There are many ways to approach this. A simple "just-in-case" policy is to have the cash manager take home a laptop and security access device every day to execute urgent payments, should the treasury facilities not be accessible. More sophisticated solutions could include:

* A back-up "mirror" treasury site at a group subsidiary;

* Plans for another region to take over the treasury department's work in case of central treasury down-time; or

* Outsource the back-up site to a third-party specialist.

In some cases, a phased approach is best. For example, a company with an in-house bank may want to first create a simple plan wherein global operating units revert to their local banks until an alternative location was available. The next phase would be to establish a separate back-up site for the in-house bank. In this phase, the "mirror" site becomes a hub for post-disaster operations.

Susan Feinberg, senior analyst of wholesale banking at TowerGroup, emphasizes that the continuity plan "should focus on the impact, rather than the cause of the disaster." Each business has to quantify the potential impact of a catastrophe, and qualify which critical operations must be supported in the short term.

Partners to the treasury--the external banks--also should be deeply involved in the development and deployment of BCP, and all plans should be tested with the banks, comments Financial Insights' Scarborough. And Forrester's Rasmussen adds that centralized operations streamline and help to more clearly define business processes, and thus enable better risk management. This also means the treasurer plays a strategic role because centralized treasury management systems enable better BCP processes in the first place.

Rasmussen notes that responsibility for BCP lies with the Chief Risk Officer (CRO) and the operational risk/ERM department the CRO oversees. This department should have a separate committee on BCP, and treasury should have a seat on this committee. Alternatively, the treasurer should work directly with the CFO.

Business continuity is ultimately the CEO's responsibility. But treasurers must communicate the unique risks their department faces in the case of catastrophe--and the opportunity to reduce operations risks through plans that keep payments on time and transactions running smoothly.

Jorgen Jensen is Head of Product Marketing and Carol Power is Product Manager, both at Trema, a global provider of treasury and asset management solutions. For more information, contact [e-mail], [e-mail] or visit www.trema.com.