Who will man the treasury?

Are you accomplishing all you can with your treasury function? Just how much help should you ask from your bank -- with technology and with manpower?

At the end of 1993, companies were spending about $6.7 billion on cash management services in the United States, up $441 million, or 7 percent, from 1992. And in 1992 the growth was about 7.5 percent from 1991. Overall, the cash management business has stabilized, and it should continue to stabilize. But the many items that make up cash management are shifting in importance. Account-reconcilement and information-reporting services are making way for demand-deposit account, check-clearing, and electronic data interchange services.

So what should you, as a treasury executive, be focusing on for the future? Technology -- and deciding if you should continue to do the detail work of the treasury department or if, instead, you should let your bank take on the assignment while you help steer your company into the next decade.

AHEAD OF THE CURVE

Smart banks already are investing in technology to give customers more of what they want. As part of this drive, their information services continue to grow. Banks know they need to transmit to companies up-to-the-minute information, so many banks are buying software to make that transmission possible.

But the issue is more complex. To make a business productive, banks and corporations must become truly electronically integrated. They must be directly linked -- personal computer to personal computer, mainframe to mainframe -- without routing business through an individual. As a customer, you should be able to log on to the system any time of the day and wherever you are geographically.

As a financial executive, you must make sure your bank is keeping ahead of this technology curve. It should be asking you questions like, when do you want your customer-service people to have access to the bank to request information? Should they be able to request information if they come in on a Saturday morning? The answers should be yes.

These are some of the capabilities you'll have when you become electronically integrated with your banking partner.

* Electronic delivery -- Using an EDI file, your company's customer can send its invoice data directly to your bank. The bank will then translate the data into a payment and update your system. Many companies already use this technique.

* Electronic account analysis -- With electronic account analysis, you'll receive the breakdown on your accounts' activity faster, in electronic form, so you can adjust your positions accordingly. You also can format the information to perform your own analysis. While companies are still experimenting with this technology, it's growing in popularity.

* Automated tax payments -- When you use a personal computer-based tax-payment system to automatically pay your corporate taxes on the due date, you have greater control over your payments and you eliminate any lost float from an early remittance. In California, for instance, corporations that pay real estate taxes over $100,000 are now required by law to pay them electronically. Unfortunately, not all companies can take advantage of automated tax payments yet, because not all states have the system in place. But more companies will be doing this in the future as acceptance spreads across the country.

* Electronic reconcilement -- Here, you receive a reconcilement report through a data transmission from the bank. Because the check-reconcilement process is automated, you eliminate work and cut down on paper.

* Electronic claims investigation -- This allows you to log onto a personal computer and communicate with your bank regarding investigations or questions about your account. You may, for example, ask if a credit posted or request a copy of a statement. With this capability, you'll have direct electronic access 24 hours a day.

* Merchant card services -- This area already is reasonably automated, with credit and debit cards; proprietary cards bundled with Visas, Mastercards, and so forth; automated teller machine cards; and smart cards (the latter is a stored-value card). Today, there's more sophistication at the point-of-sale terminal, and you also get immediate inventory control.

With all this advanced technology, companies will begin to solve some of the more serious problems in treasury management. One glaring example is check fraud.

Check fraud totaled more than $5 billion in 1993, and companies recovered only 13 percent of their losses. Both payroll checks and credit cards are prime targets of the fraud, so companies realize they have to develop better methods of dealing with the problem, starting with electronic products that fit your firm's technology scheme and its growth objectives.

One such technique is the new "positive-pay" approach. This includes using technology to make on-line "pay" or "no-pay" decisions before you release items, so you can determine whether there's been fraud in your company's check processing. With positive pay, you then transmit to the bank the check issue information. The bank compares the check issues with the check presentments and reports any exceptions. You then review the exceptions and instruct the bank to return particular items.

Note that positive pay isn't just for checks; it's also for automated clearing house, or ACH, transactions. ACH positive pay lets you designate which ACH transactions you'll accept and which you'll reject. This is an area that's becoming more important for many corporations.

SHOULD YOU JUMP?

All of these changes in technology signal trouble for a business if the CFO or treasurer doesn't sit down with its bank representatives and really talk. It's not news that more banks are forming strategic partnerships with their corporate clients. What's in it for you? You can -- and should -- have direct input into deciding what areas your bank should focus its resources on, so the bank will develop the products you want, not what it wants.

Part of this relationship should be the service-level agreement, which holds the bank to a predefined level of performance. The hard part in structuring this type of agreement, though, is to identify the levels of quality with which both the bank and your company will be comfortable enough to sign their names to. Also, many banks will tell you they have certain standards in place, but if a bank ultimately doesn't meet those standards, there's not much you can do. The moral: Sign only those contracts that clearly spell out the bank's performance requirements and make the bank accountable -- that is, if the bank doesn't perform, you don't pay.

A big consideration is whether you want to hand over, or outsource, to the bank some of your cash management or other treasury functions. Outsourcing used to be a bad word, because when a company outsourced it meant the firm couldn't do the job very efficiently by itself. Today, that's changed.

Many economic pressures are forcing companies to move toward horizontal integration, or focusing on their principal business, which usually isn't banking. Part of the reason may be that treasury departments are shrinking in size. So they're outsourcing the banking services they traditionally would do inhouse and, in this way, they eliminate this vertical price. Companies commonly look at such areas as accounts payable, vendor payments and payroll.

For example, as executives become more aware of their total operating expense as a percent of gross sales, they're looking for cost-saving alternatives. Say you calculate your operating services at 1.5 percent of your total operating expense. If you want to reduce that number to 1 percent, outsourcing may be the answer.

Besides lower costs and improved operating margins, some other benefits of outsourcing are an improved trade flow cycle, an increased level of detailed information earlier in the day and high-quality service to your customer.

In the lockbox area, for instance, more banks are using imaging to get information to you more quickly. Many use a matching process in which information can be stripped off a magnetic ink character recognition, or MICR, line and matched to a receivable file early in the day before the information would have been transmitted from normal lockbox processing, so you can adjust your positions.

If you're outsourcing, you'll send the bank a file that will include ACH, wire and check issuance, and, if you have a good outsourcing partner, the bank will process that information more quickly and more efficiently than you could.

When shouldn't you outsource? Here are three items you need to consider before making the plunge:

* Do you need to save money? Some companies aren't as driven by cost as others. It sounds strange, but this area may be one a company wants to retain control over if the costs aren't critical. And, in some cases, outsourcing simply doesn't fit the company's profile, in the payroll area, for example.

* Are you prepared to have your treasury work performed by someone you have no direct relationship with? Do you worry about losing control? Your outsourcing contract is with the bank, but many banks turn around and outsource to other parties the work you outsourced to them. For example, a bank might agree to perform your lockbox tasks and then outsource the bank's entire lockbox function to another vendor. If that makes you uneasy, you may not be a good candidate for outsourcing. And, even if it doesn't bother you, you still need to carefully monitor the bank's activity on the project.

* Are your bank's standards up to snuff? Some banks don't have the same level of commitment to quality that you have. Their internal standards aren't as rigid as you'd like. For instance, your bank may post debit items at 10:00 a.m., but your business needs dictate a 9:00 a.m. posting. This is yet another area you need to look at closely with the bank you'll be dealing with.

GETTING YOUR BANK TO EARN AN A+

A few years ago, American Stores Co. decided to consolidate its depository business in the East under one bank that it was already using. But the company wasn't happy with the bank's service quality. Still, the bank had some important pluses, so it got the business -- with some conditions.

"We made an agreement with the bank's chairman that we'd put a report card together and they'd live up to those commitments," says A. Lynn Enyeart, vice president of cash management and assistant treasurer at American Stores. To show the bank it meant business, the company tied the bank's fee to the performance report. If the bank didn't measure up, its fee would be reduced.

The bank did improve its overall performance, but the performance report had some other unexpected bonuses. It encouraged the company's corporate and subsidiary offices to communicate better. "The subsidiary office monitors many day-to-day items, so we often weren't aware of issues until they became major problems," she explains. "Now we know on a monthly basis when quality is slipping."

The report also spurred the bank to refine its handling procedures, giving it "incentive to respond to inquiries within a certain period of time and to communicate within its own departments," she reports.

But perhaps the most important benefit is greater motivation for both the company and the bank "to achieve higher performance standards each month," Enyeart says. And, since a successful performance plan is "key to the visibility and success of the treasury department," that's nothing to sneeze at.

Mr. Randall is senior vice president of global payment services at Bank of America in San Francisco.