Designing a Global Liquidity Mobilization Structure A Colgate-Palmolive Case Study

Elaine PaikAssistant Treasurer, Colgate Palmolive Company

Melissa CameronPrincipal, Deloitte & Touche LLP

Daniel MungerPartner, Deloitte Tax LLP

Session Outline

• Introductions & Objectives 5 min• In-House Bank Components & Drivers 15 min

– External Market Factors & Operational Drivers– Cash Maturity Model – Definitions of In-House Banking– Business Case Considerations– Tax Factors

• Colgate Case Study Introduction 5 min• Colgate IHB 15 min

– Drivers– Approach

• Key Lessons (Panel Discussion & Open Q&A) 35 min– Establishing a Business Case– Design Phase– Implementation Phase– Final Q&A and Wrap-Up 15 min

Session Objectives

• Dive into the external and internal drivers and key lessons learned by the Colgate-Palmolive In-House Bank team through an interactive panel format

• Discuss key issues around business case development, monitoring and change management

• Discuss tax considerations when designing an In-House Bank

Greater Need for Treasury Centralization

• Uncertainty about the future availability of credit has forced many companies to hone in on how to tap into internal sources of funding first before going externally.

• Many are exploring ways on how to consolidate cash and centralize cash and liquidity management globally in order to gain greater visibility into their global cash position in order to make the most cost-efficient short and long-term investment and borrowing decisions.

• A value add service that can achieve this level of centralization and consolidation on a global scale is an In-House Banking Structure

Cash Management Maturity Profile

Bank Rationalization

Domestic Pooling

Cross-Border Pooling

The basic building blocks to an efficient cash mana gement system are streamlined bank accounts and consolidated banking relationships. Ba nk communications strategic options are opening up.

Pooling of domestic funds facilitates disbursements and the investment of excess funds across subsidiaries before cross bo rder activity is undertaken.

Pooling across jurisdictions gives better visibility to internal cash to support broader liquidity strategies.

The ability to easily mobilize cash across

entities and borders has become increasingly important for global

companies given increased borrowing costs and

reduced bank liquidity

Full service In-House Bank pays and receives on behalf of group companies. Structure concentrates liquidity needs and may provide improved FX exposure visibility. Intercompany transactions are settled through internal accounts.

In-House Banking

(Full Service)

Definition of an In-House Bank

� An In-House Bank (“IHB”) is a centralized function in which Treasury becomes the primary provider of banking services for an organization’s operating entities as well as the coordination center for inter-company lending

� The IHB seeks to optimize the use of internal cash to fund operations as well as reduce external transactions with the banks

WHAT IS AN IN-HOUSE BANK?

Components of an In-House Bank

� It is a centralized function which consolidates payments made to external vendors and between intercompany entities

� Payments are aggregated globally across entities by vendors and currencies and are paid using the most efficient method of payment, thus reducing the use of expensive cross-border payment methods

� Maximum benefits can be realized by processing payments via an ERP system, such as the In-House Cash module of SAP Financial Supply Chain Management

� Similar to the role of a payments factory, a collections factory is a consolidation and efficiency tool addressing customer payments

� The collections factory, which is a component of the IHB, receives customer payments on-behalf of the company’s subsidiaries on a global basis

� Receipts are aggregated by currency and customer across entities and the factory becomes an engine for providing global visibility and access to cash to the IHB

PAYMENTS FACTORY COLLECTIONS FACTORY

External Drivers

• Along with the credit crisis, which has recently led to an increased cost of borrowing, some additional external drivers for an IHB are:– Increasing globalization of business strategies and growth– Maximize use of inter-company funding and reduce reliance on

external sources– SOX regulations require transparency and control of cash flows in a

centralized manner– Increasing costs of maintaining proprietary connections with multiple

banking partners

Internal and Operational Drivers

• Some internal drivers for creating an IHB are:– Visibility and control of cash – Improve working capital – Increased focus on centralizing Treasury functions into ‘centers of

excellence’– Reduced banking fees and increase in credit lines– Reduced FX execution spreads and settlement volumes by net-

settling centralized FX activity– Alignment with the development of shared service centers to reduce

operational costs– Improved Treasury technology offerings– Straight-through-processing– Centralized and improved controls

The Business Case

• Some quantifiable benefits of an IHB are:– Improved working capital– Improved visibility of global cash– Efficient borrowing and investing of cash– Reduced bank fees – transactional and operational– Reduced overhead– Standardized bank communications

Tax Drivers

• An IHB can:– Facilitate review of group loans to ensure after tax costs are

optimized– Identify cash balances available for structural offshore use or

repatriation– Provide global financial risk review and updated pricing and

documentation implementation– Coordinate operational Supply Chain and Financial Supply Chain

goals– Lower foreign tax costs– Lower cost cash redeployment– Enhance foreign tax credit utilization– Minimize tax audit exposure– Minimize excess cash build up

COLGATE-PALMOLIVE CASE STUDY

Colgate-Palmolive Background

• Colgate-Palmolive Company (“Colgate”) is the worldwide leader in Oral Care, Personal Care, Household Surface Care, Fabric Care and Pet Nutrition

• Colgate’s 2007 revenues reached an all-time high to $13.8 billion with presence in over 200 countries and territories worldwide

Colgate’s Global Business

Region / Major Division % of Total Sales

North America 19%

Europe/South Pacific 24%

Latin America 26%

Greater Asia/Africa 17%

Hill’s Pet Nutrition 14%

Note: Data as of 2007

Treasury ProfileColgate’s worldwide treasury processes billions of dollars in payments, millions of transactions, and manages one billion dollars in liquidity. This operation incurs significant transaction costs, personnel cost, and risk exposure

Total Colgate

Receipts >$25 B

Payments >$22 B

Total Transactions >2 M

Average Liquidity >$1 B

FX Bought and Sold >$ 9 B

Treasury Objectives

“BECOMING A WORLD CLASS TREASURY ORGANIZATION”

• Streamline bank interfaces and strengthen global bank relationships

• Increase visibility and management over cash

• Reduce external transactions and fees

• Lower interest expense

• Enhance control and risk management

• Leverage ERP and banking technology

Global Treasury Design

• In 2007, Colgate-Palmolive set out to establish an IHB with the following components:

– Global FX center

– Inter-company settlements

– Payments factory

– Centralized cash and liquidity management

– Standardized treasury processes

A Phased Approach

• Assisted by its external consultants, Colgate-Palmolive used a phased approach for the design and implementation of its IHB:

• Developing the Business Case– This step focused on understanding the current treasury processes– Establishing the business case and – Management approval for the project

The Business Case Development

• Prepared field questionnaire• Validated and issued questionnaire• 96 countries (99% revenue) responded

• Benchmarked interviews

• Interviewed corporate treasury team

• Interviewed European treasury team• Interviewed internal groups such as Procure to

Pay and Global Business Services leaders• Interviewed finance executives• Interviewed divisional controllers

Step 1

Project Initiation

Corporate Data Gathering

Step 2Field Data Gathering

Benchmarking

Steps 3 & 4

Treasury Review

Implementation Plan

Business Case

• Compiled questionnaires and documented findings

• Analyzed findings to develop conclusions and recommendations

• Reviewed hypotheses with Core Team• Drafted treasury review deliverable

• Prepared cost-benefit analysis and high-level implementation plans for recommendations

~4 weeks

~6 weeks

~4 weeks

A Phased Approach

• The Design Phase– An estimated 12-14 weeks– The objective of this phase was to create the “end-state” design for

the new treasury organization– The design was signed-off by key constituents such as Accounting

and Tax– Banking RFP issued and bank partners selected

A Phased Approach

• The Implementation Phase – An estimated 45-55 weeks– Currently in process, the implementation phase is focused on

executing against approved plans– Ensure timely implementation within a pre-defined budget– Coordination with selected banks and vendors– Staffing and recruitment– End user training– System, unit and User Acceptance Testing (“UAT”) testing

PANEL DISCUSSION

Understanding Common Pitfalls

• Designing and implementing an IHB is a big project to embark upon with far-reaching implications throughout the global organization

• Barriers to achieving a centralized IHB are manifold and understanding common pitfalls to avoid and key considerations learned from those who have successfully implemented an IHB is critical to the analysis, design and implementation phases of such a project

Key Lessons Learned:Developing the Business Case

• A sound business case will identify main drivers of the IHB and quantify the costs and benefits of employing all functional components within an IHB framework

• Some key considerations are:– Integration with tax to properly assess costs and tax compliance in

various jurisdictions– Identify geographical scope of the IHB roll-out early on and vet out

the scope during the design phase– Develop calculation models that compute both costs and savings for

each identified driver

Key Lessons Learned:Design Phase

• Some key considerations are:– Empower functional leads to make decisions– Lockdown scope, geographic and services, after secondary review

of legal and regulatory constraints– IHB lending is not always most tax efficient. Thoroughly engage tax

specialists to develop a tax efficient IHB entity structure– Thoroughly engage IT in the project planning process and ensure

that future system upgrades, enhancements coincide with the IHB project plan activities

– Coordinate with subsidiaries and strategic global initiatives that may impact implementation and roll out timelines

Key Lessons Learned:Implementation Phase

• Some key considerations are:– Prior to beginning implementation phase, it is key to have locked

down scope - geographical, as well as services scope, during the business case development and design phases

– Ensure proper governance for scope changes, driven by business or technical constraints. Be aware of “scope creep”

– A phased implementation approach is best suited to companies with extensive global footprints, especially when resources are sparse

– Clearly articulating, documenting and prioritizing your businessrequirements to your IT resources is a crucial early step in the Implementation Phase

– Establish project management protocols with your external vendors, banks and other 3rd party providers and monitor progress on a timely basis

– Set firm timelines for internal as well as external resources

Q&A

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