Treasury gets worldly.

Globalization of markets and competitive pressures are requiring treasurers to develop creative, cost-effective ways to do their jobs with smaller staffs. Here's how three treasurers cope with the demands of international competition.

TRADING IN THE REAR-VIEW MIRROR by James Haddad Treasurer Rich Products Buffalo, N.Y.

TREASURY STAFF: Five full-time treasury staff positions at headquarters. Other staff members provide part-time functional support domestically and internationally.

STRUCTURE: Centralized for funding, international business analysis, corporate finance, currency/interest rate risk management and insurance. Cash management is decentralized.

FIVE-YEAR GOAL: To become our service providers' first call when they discuss new products, services or ideas.

Rich Products is the largest family-owned frozen foods manufacturer in the United States and has been in business for over 50 years. The company has sales of more than $1 billion, with 6,000-plus associates and over 34 units in operation on a global basis. We sell about 3,000 kinds of products to more than 4,000 customers, accounting for some 45 million cases of product a year. The company also owns and manages a triple-A baseball team, a private golf resort, 11 restaurants and other investments.

We have 16 domestic manufacturing facilities, located mostly in the eastern half of the United States. On the international side, we are in 14 countries, selling to over 50 nations around the globe. Most of our international development occurred within the last seven years. Our double-digit growth drove the treasury department to re-engineer to support that global expansion.

When I joined the company about two years ago, the treasury staff members were capable but had little treasury experience and virtually no international experience. We asked ourselves how we could develop global business when the people who were overseeing the treasury function that supports this global development might not be in the best position to help us get there.

We took a look at the types of responsibilities for which the treasury group had been given authority. They included bank relationship management, cash management, debt placement, covenant compliance and lease financing. It was entirely domestic-focused. Yet, the company saw international expansion as in alignment with shareholder directives. The domestic market' was not going to consistently deliver the returns our investors wanted.

It became clear that treasury wasn't supporting the company's global development in an adequate way. To align ourselves with management's objectives, and to accomplish what our CFO challenged us to do, we had to trade in our rear-view mirror for binoculars.

We now have a broader band of responsibility, but more importantly, we're focused on supporting international development. We've established bank relationships with financial institutions around the world, which isn't easy to do as a private company. Also, we've interjected ourselves into the cash management process in all our international operations. Our goals are to coordinate the systems and the information flow and to become familiar with our new businesses, whether they're partnerships, joint ventures or acquisitions.

As we expanded overseas, we began to feel that we were not masters of our process because we needed to learn more about the host countries' business practices and risks. Treasury has begun to establish itself as a leader in helping the company set up a financial risk-management measurement process. We're now centered around this process to the point where we're looking at it from the standpoints of commodities risk; property and casualty risk; business analysis; and currency and interest rate risk.

The current treasury staffing is quite different today, too. In the past, there was only one year of common treasury experience among the three people in the department. Today, with five professionals in treasury, only one person in the department has less than one year's experience - someone who came to us from an international assignment and has been working with the company for about six years. We've put greater emphasis on treasury experience as well as international experience.

We also interface with the international field offices and plants, working on international business analysis, corporate finance, insurance management and foreign exchange management. We've centralized these functions because right now, we've not organized ourselves on an international basis enough to have full confidence in the decentralization of these functions. As we develop and refine our process and systems, we want to make sure the people in the field will follow in the same vein. We don't want to discover there's something going on in the field that doesn't support where we're headed. We want to set a lead that will eventually guide us toward potential decentralization.

For now, however, in the start-up phase, we're keeping it centralized, and so far it's been fairly successful. We coordinate our activities with the field offices and manufacturing facilities. We no longer rely completely on accounting data, but more on forecasted data. There's a lot more interaction and communication.

Right now, we're being challenged to come up with creative funding strategies to support the global development of the company. On the cash management side, we are being challenged to coordinate systems and information flows. This will help us in establishing both a cash position and better control mechanisms to identify risks. We'll introduce a treasury workstation this year that will help us with this endeavor.

Because the company is privately held, we don't have access to capital markets, which means that we must be creative in how we fund deals. At any given time, we're evaluating between five and seven deals around the world, which gives us the opportunity for travel and interaction with many different cultures. We'd like to standardize this process and, to a much greater degree, involve local staff to help us.

On the banking side, we may have to cut back the number of relationship banks domestically in favor of developing more global relationships with international banks. We looked at our business around the globe and asked ourselves where we have enough coverage and where we need to enhance it. We try to strike a balance between credit and services, working with the representatives in the local operations, because we understand that they have needs as well and that our needs aren't always paramount.

As far as infrastructure development goes, we're looking at establishing regional netting centers and determining the value that can be derived by employing pooling or establishing some form of an in-house bank. Further down the road, we hope to develop regional treasury centers, which would give us continuous coverage in worldwide markets.

One of the first opportunities treasury had to demonstrate its ability came along when the company had the chance to invest in Mexico. In July of 1994, our research showed a very high likelihood of a devaluation in Mexico. As we evaluated this investment opportunity, we asked the management team to consider a different investment mechanism that would stretch out over 10 months. They agreed to it, somewhat reluctantly, because they didn't believe it would be cost-effective. It meant there would be a somewhat larger cost to invest over a period of 10 months, as opposed to doing the deal immediately. But in the end, when the devaluation was announced in December, we'd called it correctly, and the deal wound up costing the company significantly less than it would have otherwise.

So management began to see that going global was not just about whether the business and marketing opportunities made sense. Other departments in the company could truly add value and create or support the investment we're looking to grow on an international basis.

The two biggest hurdles we faced in developing our global treasury were helping people understand what treasury is and what it does, and getting people to believe we're there to help them. I'm not so sure people outside finance really understand the role of treasury. That was exacerbated by the fact that this company had been doing business for 50 years and never had a treasury department; treasury was part of accounting. Therefore, as we began to interact with local joint ventures and manufacturing facilities, people thought we might interfere with the processes with which they were so comfortable. So we've had to work through the cultural issues.

We don't ever want to find ourselves in the situation we were a few years ago: not completely supportive of where the company was going. We've re-engineered the roles and responsibilities of treasury within Rich Products, and most importantly, we continue to seek ways to add value.

COMBINING FORCES by Robert Westoby Director of global treasury operations Monsanto St. Louis, Mo.

TREASURY STAFF: 16 treasury staff at headquarters; 55 treasury staff worldwide.

STRUCTURE: Centralized or decentralized, based on activity, with override global team approach.

FIVE-YEAR GOAL: To provide low-cost, on-time funding to support the company's growth.

Monsanto is a $9-billion, highly diversified global company that employs 28,500 people. We set up our first non-U.S. operation in 1924, which was a joint venture in England. Today, we do business in about 90 countries. By the year 2000, 50 percent of Monsanto's total revenues will be from operations overseas.

In April 1995, Monsanto began restructuring its operations. Before that, we had five operating companies and a very large corporate group. Last year we set up a larger number of strategic business units, as well as Monsanto Business Services, which is a shared services organization, and a corporate stewardship group, which comprises about 10 percent of the previous corporate group. Monsanto Business Services encompasses credit and collections, public relations, law, purchasing, manufacturing services and marketing services, such as ordering and billing, plus a huge part of accounting, including accounts payable, accounts receivable and travel accounting.

A number of staff were also pulled away from operating units and put into the shared services organization, on the theory that you can operate with a centralized mass more efficiently than you can with a bunch of disparate masses. We don't have a true shared services operation yet outside of the United States, but it will come in a couple of years.

The SBUs run their businesses globally. They have hands-on responsibility and performance objectives. The shared services organization provides almost all of the support services. However, shared services will eventually have to compete with external providers for the units' business.

The corporate stewardship group sets policies for areas that are not business-unit-based. Treasury, which is in the stewardship group, manages cash. The SBU, for capital purposes, receives a cash allocation on its balance sheet. So when it comes to cash management, the SBU has no direct responsibility for or involvement in the day-to-day cash management process. That's good, because we don't need to get SBUs involved in our cash business.

Plus, if we want to move cash from one part of the world to another, we don't get into arguments with the units. For example, it we want to pay dividends out of our Belgian operation because it makes economic sense for the total company, we do not have to go to an SBU to seek permission. There's no "ownership" by SBUs of the cash that exists on the balance sheet.

Monsanto's treasury was largely unchanged by the restructuring of the company. The head office for treasury is in St. Louis. Monsanto has operated through finance centers for a number of years. The biggest one is in Europe, which for us is the most heavily capitalized entity outside of the United States. Treasury operates in a centralized or decentralized mode, according to the activity. An example of this is our currency management, which is 100-percent centralized in St. Louis.

The individual operating units deal with currency on a regional and a centralized basis. Cash management is highly centralized within regions, then coordinated at the St. Louis level. Monsanto's treasury department "runs" the cash. Treasury thinks like a business. Our business happens to be cash. That's the raw material we operate with, but we're not a profit center.

Global cash management and banking occupy most of our time. Another of treasury's responsibilities is global financial risk management, which separates into three areas: currency, interest rate and commodities. As a corporate stewardship organization, treasury sets policy, particularly worldwide credit policy. We handle non-U.S. collections and trade financing.

The new structure has caused a fundamental direction change in treasury. In the past, our management said, "Treasury, you're responsible for currency management, including gains or losses." Now operating units are taking on responsibility for currency management, but treasury is the only bank of choice. We're not going to let a bunch of managers go out and run currency management particularly when half of our operating units are run by non-U.S. managers, which means every one of them is a currency expert.

We're going to have a greater cash focus, with greater centralization of netting and pooling. We have a worldwide treasury team approach, and it really works. In fact, the cash management focus we've got going right now has people involved from five countries.

One of our latest moves is unusual for a U.S. company: We're going to channel the majority of our non-U.S. cash management into Europe. In fact, Brussels will be much more of a cash management center, because we can operate most efficiently in Europe. We will also gain some opportunities from a worldwide integrated accounting system we are putting in. By late 1997 or early 1998, we anticipate putting in a global single-point accounts payable system.

We discovered a few years ago that one of the quick hits is to cut bank accounts. We estimate our costs are somewhere between $1,500 and $2,000 annually per bank account. We set out in 1985 to reduce the number of banks and bank accounts we had. In 1985 we had 330 banks, plus or minus a few bank relationships worldwide, and something like 900 bank accounts. As of September 1994, we had 168 banks and around 480 bank accounts, so we've saved hundreds of thousands of dollars. The goal today is 100 to 125 banks worldwide and probably no more than 300 bank accounts.

We anticipate more outsourcing, but one thing I am absolutely dead-set against is outsourcing simply to save headcount, because that usually doesn't save costs. In addition, we'll create an in-house bank, probably by the end of this year. Its primary focus will be to manage our foreign-exchange activities.

THE FLEXIBLE TREASURY by Douglas McKinney Treasurer Mallinckrodt Group St. Louis, Mo.

TREASURY STAFF: 15 treasury people, all at headquarters.

STRUCTURE: Treasurer has three direct reports, including director of risk management and real estate; director, treasury; and director, international treasury. Support staff reports to these three directors.

FIVE-YEAR GOAL: To establish a globally integrated cash management and financing system, run via U.S. operations and a European finance company.

Mallinckrodt Group is a global developer of human and animal health and specialty chemical processes. We're a lot like Monsanto in terms of global reach, but we're quite a bit smaller. About 40 percent of our sales and earnings are generated outside the United States. That will be about 50 percent within the next three years. The company is really a conglomeration of a lot of small worldwide businesses. In the mid to late 1980s, we decentralized, going so far as to set up three independent legal entities that were very independent and had little overlap between the global business units.

This created a challenge in running a treasury operation. We actually had a treasurer for each of these operating companies. We turned transactional responsibilities completely over to the operating company CFO from the standpoint of transaction, cash management and even overseeing the working capital facilities of the foreign location.

It worked fairly well for about four years - very effective for setting up small entrepreneurial operations within countries. As time goes on, however, it gets more difficult to manage. About a year ago, we started to examine how to transition the structure we had into a treasury organization that would fit any business structure going forward.

So we benchmarked the function, using public companies and global companies as similar to Mallinckrodt as possible. We found that in most cases, treasury best practices involve transaction processing on a shared services basis. The best organizations perform foreign exchange, financing and cash management transactions through a centralized processing vehicle. Most of these companies have sophisticated, globally integrated systems.

We felt our treasury area was spending a lot of time doing control activities. The best-practices treasury organizations focus more on economic issues. Therefore, we wanted to refocus treasury and make it consistent with the company's overall objectives: consistent earnings growth, less volatility in earnings, more business development activities. We wanted to get treasury more involved in business decision-making, and less involved in redundant controls and accounting.

Also, we wanted to move functions, such as transactional inputs, out of the department. We had people inputting data into a tax system or accounts payable system and then re-entering the data to do wire transfers in treasury. We're trying to move these activities up the chain so we can control transactions, without duplicating effort.

As far as outsourcing goes, we'll continue to outsource check payments. Also, we're setting up a finance company that will act as a bank in Europe. We'll probably outsource the entire administration of that operation when it's completed. We will consider the major commercial banks that are global in scope for the outsourcing.

The biggest plus is that we can probably leverage that off some global cash management system as we go forward. The downside is that we end up with a commercial bank that we may not want to get locked into. Another downside is that you don't get to leverage some of your other commercial banking fees, so we're still struggling with our decision.

Because we've been through a few different iterations of management philosophy, whatever we do from now on in treasury, we'll do so that it can meet any business organizational structure. From a financial standpoint, at least with the decentralized structure, it got very difficult for us to coordinate corporate credit activities with service activities. As credit pricing has gone down over the last couple of years, we've redone three credit facilities, at much lower prices each time. People were making the transactional decisions at the local level in a vacuum. It was very hard to combine some of the higher-margin service business with the credit business.

We have 80 worldwide locations. Some of these are $3 million to $20 million businesses. They're being run independently by the local controller, managing foreign exchange transactions. The banks had been making a fortune on us until about a year-and-a-half ago, when we standardized worldwide documentation and readjusted our capital base.

All our capital was in the United States, and our revenue stream was growing, so we decided to recapitalize our international operations. We started to solve some of these issues and cut through the politics of the decentralized organization. We set up a global netting center that could be drawn from the standpoint of three independent companies, but netted off at the group level at the top.

It's been successful and has added a lot of discipline to the payment system outside the United States. Also, we're putting all third-party foreign payments through this netting center, and we've reduced about 70 percent of our international foreign exchange purchases to date.

We set up a foreign exchange system - a planning tool that works with our budgeting process. Plus, we're putting together a cash pool and working on a finance company that will be operational July 1. We'll use it as an external bank within our system.

A key consideration - and one of the biggest shortcomings of our old organization - was succession planning. We had a situation where people at the operating company level were getting further and further away from financing and corporate governance skills. At the same time, people at the corporate level weren't actively involved in the transaction aspects. It has created some problems.

Also, we're focusing on systems as a core competence for employees within treasury. We'd like everybody to have some level of systems expertise, so we're making sure people get experience at different levels of the organization and across disciplines. This process showed us that we need to spend more time on building management skills among treasury employees. We want people who know how to use resources, instead of people who know how to manage a function.

As for our current structure, we've turned the organization upside down. We've gone from a very structured legal entity to eight worldwide divisions. We're going to set up a shared services organization. Treasury will be a shared services function, but we're not going as far as setting up an independent company. It's a fairly flat structure with three senior-level treasury positions. One is in charge of risk management, real estate business development activities and due diligence related to treasury. Another position is responsible for all global cash management and corporate financing issues, corporate governance issues and shareholder relations. The third position is responsible for international financing, all foreign exchange, the netting center and finance company activities.

RELATED ARTICLE: THE SHARED SERVICES SHUFFLE

Shared services is a management concept that's making the rounds at many treasury organizations these days. Here's how the treasurers of Monsanto, the Mallinckrodt Group and Rich Products allocate costs or charges for the shared services organizations at their companies.

"When we developed our 1995 budget, we went through an analytical process," Robert Westoby, director of global treasury operations at Monsanto, explains. "Because we had no data with which to work, we took the number of transactions we believed would be performed. We did a detailed budget for each of the functions. We'll review our efforts later this year to see if our assumptions were correct and whether the process made sense."

The jury's still out at Mallinckrodt, according to treasurer Douglas McKinney. "We haven't quite figured out how to allocate costs and charges for services within the company," he says. "My preference would be for a shared services organization to have a blanket corporate charge for a lot of these shared financial services. It's a lot easier, but there's a school of thought in the company that we ought to be running these services like a business and detailing charge-backs."

"We've taken a slightly different angle with shared services at Rich Products," says James Haddad, treasurer of the company. "We've identified an efficient customer-support function that has taken a lot of the traditional finance functions and moved them into a completely different area, so everything from payables, receivables and credit goes through the ECS function. We've identified large customers who are generating a large portion of our revenue. That top group of customers will have a dedicated team."