The Balancing Act of Cash Management: Optimizing the Financial Value ChainTEXPO Conference April 3-5, 2011

Gail Angel, FIS Commercial Treasury SolutionsSVP and Business Line Executive

Nanette Crocker, BBVA CompassSenior Vice President, Corporate Treasury Management

Session Description

The Balancing Act of Cash Management: Optimizing the Financial Value Chain

The events of the global financial credit crisis have had a ripple effect on the economy and thrust cash management - and the need to gain greater visibility and control

over cash and liquidity - to the forefront of corporate strategy.

A recent survey from Aberdeen Research found that 82% of companies have increased their focus on cash management over the past 12 months.

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The purpose of this session is to highlight best-in-class company strategies for

• streamlining and accelerating finance business processes• reducing operating costs• managing risk• ensuring compliance• improving visibility, control, and efficiency

Includes Industry trends, study data, reference sources and practical suggestions for taking action

Setting the Stage

Financial Supply Chain

Definition

Integral components of a supply chain, connecting trading partners from order placement to receipt of payment. It carries the flow of financial information and

money in the direction opposite to the flow of goods and services.

BusinessDictionary.com

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Setting the Stage

“balancing act” noun n [usually singular]

Definitiona situation in which a person tries to give care and attention to two or

more activities at the same timedictionary.cambridge.org/dictionary/british/balancing-act

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Economic downturns

Shifting priorities

Multiple responsibilities

Changing business climate

Unpredictable market conditions

Streamline and AccelerateFinance Business Processes

Best Practices: Streamline Business Process Processes

• Migration to electronic payments/processes– Check conversion– Remote deposit capture

• Moving to straight-through processing– Integrated Receivables and Payables– Generate CCD+ or batch wires from ERP System– Eliminate download or “fetch”

• Bank consolidation/rationalization– Technology capabilities – smart safes– Based on credit participation

• Going Green…– Electronic billing, payments and statements…

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http://www.payitgreen.orgFounded by Financial InstitutionsAccessible through NACHA site

Best Practices: Streamline Business ProcessesPitfalls and Constraints

• Executive Buy-In

• Budget

• Resources– Aging North American (and European) work forces

– Smaller financial teams

– 17% fewer COO’s in S&P 500 firms than in 1999 (*)

– CFO’s assuming broader range of responsibilities

33% play active role in developing and defining strategy

• Supplier/Vendor Buy-In

• Other Pressures

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(*) Source: Crist Associates

Trends: Streamline Business ProcessesIncreased Pressure

8

%

Source: Aberdeen Group, Optimizing Financial Supply Chain

Trends: Streamline Business ProcessesCash Management Strategies

9

%

Best in Class Companies – Top 20%21 Days Sales Outstanding

84% accuracy of cash flow forecast34 Days Payable Outstanding

Laggards – Bottom 30%72 Days Sales Outstanding

52% accuracy of cash flow forecast 56 Days Payable Outstanding

Source: Aberdeen Group, Optimizing Financial Supply Chain

Reduce Operating Costs

Best Practices: Reduce Operating CostsEfficiency

• Increase staff productivity through better tools, processes & training– Explore business process optimization (Six Sigma)

– Eliminate non-value added functions and expenses

– Web and SAAS/Cloud-based systems

• Move from paper to electronic– Work flow

– Record keeping

– Transactions

– Payments

• Consider outsourcing non-core competencies

• Reassess treasury costs – Bank fees

– Working capital carrying costs

– Take advantage of existing options

– Perform internal TM Review

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Best Practice: Reduce Operating CostsConstraints and Pitfalls

• Staff Resistance to Change– Purchase Card Processing

– Posting from Images vs. paper records

– Automating GL updates using STP

– “Letting Go”

• Negative impact to customers and/or service– Determining when enough is enough

– Professionally compromised

– Learning Curves

• Impaired agility/innovation– Penny wise and pound foolish

– Tunnel vision

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Trends - Reduce Operating CostsOngoing Focus

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• Reducing costs constant focus for last 2 years– Only 19% of companies not trying to

reduce cost … status quo?

• Best in Class – Investing in processes, tools and

training to achieve greater productivity– Focusing marketing efforts on better

serving most profitable customer segments

– Seeking better commercial terms from partners

%

Source: http://www.EY.com Competing for Growth: Winning in the new economy – Cost competitiveness

Manage Risk

Best Practices: Manage RiskInternal Process

• Establish clearly defined role and responsibilities

• Document and adopt methodology – Identify, characterize, and assess threats

• Financial

• Technical

– Assess exposure and vulnerability of assets

– Determine the level of risk associated with threats

– Identify how to handle/manage risk• Avoidance

• Reduction

• Sharing

• Acceptance/Retention

– Prioritize risk reduction measures based on a strategy

• Monitor and confirm adding value

• Perform Compliance Reviews (Audit Enforcement)

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Trends: Manage RiskTop 10 Global Risks (*)

1. Regulation & compliance2. Access to credit3. Managing talent4. Slow recover or double-dip recession5. Emerging markets6. Cost cutting7. Non-traditional entrants8. Radical greening9. Social acceptance and responsibilities10.Alliances and transactions

(*) http://www.ey.com – Risk management:The essential guide for fast-growth companies (*)

What about

FRAUD?

Best Practices: Manage RiskFinancial Risk

• Take advantage of bank offered fraud controls– Positive Pay/Reverse Positive Pay (83%) (*)– ACH Debit Block (77%)– ACH Debit Filters (58%)– Payee Positive Pay (52%)– Post No Checks Restriction (37%)– Security administration and audit reporting

• Leverage Marketplace Solutions– Out of Band Authentication– Mobile verification– Alternative notification– Locked-down Browser– Secure desktop– Transaction Monitoring – Low cost/no cost business changes

(*) AFP 2010 Fraud Study – usage statistics

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Best Practices: Manage RiskTechnical Risk

FS-ISAC, NACHA & FBI Risk Mitigation Recommendations (2010)Business Users• Initiate ACH and wire transfer payments under dual control• Execute all online banking activities from a dedicated, stand-alone, and completely locked down

computer system – no e-mail or web-browsing.• Limit administrative rights on users’ workstations to prevent downloading malware.• Reconcile all banking transactions on a daily basis.

Financial Institutions• Implement awareness communication programs to advise customers of current threats and

fraud activities.• Implement appropriate fraud detection and mitigation best practices.• Consider using manual or automated Out-Of-Band authentication systems

… Plus 14 additional in-depth defenses, ranging from : 1. Perimeter router blocking of all unnecessary ports

to14. Develop relationship with your local FBI and USSS Field Offices

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Trends: Manage RiskTechnical & Financial Risk

• Cybercrime– March, 2009 – MacAfee reported analyzing 20 millionth piece of malicious software– 2010 Discussions with FS-ISAC, FBI and high end incident response vendors indicated anti-

virus software less than 60% effective– March, 2011 – EMC disclosed a recent cyber attack that exposed non-public information

related to RSA SecureID system

• 2010 AFP Fraud Study– 73% of organizations experienced attempted or actual payment fraud in 2009

• 81% for organizations with annual revenues over $1 billion• 63% for organizations with annual revenue under $1 billion

– 90% of the organizations that experienced attempted or actual payment fraud in 2009 were victims of check fraud

– Electronic Transaction Fraud Chart– Typical loss was $17,100

Best Practices: Manage RiskConstraints and Pitfalls

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• Organizational– Lack of ownership

– Insufficient processes

• Attitudinal– Not enough time

– Too expensive

– It won’t happen to us

• Insufficient resources– Training

– Tools

– Personnel

Ensure Compliance

Best Practices: Ensure ComplianceBest in Class Practice

• Focus on Trends– Regulatory compliance one of top 10 Global Risks

– Rapidly changing and increasingly complex

– Internal compliance key to success of enterprise programs like Supply Chain Management

• Suggestions– Work with your Financial Institutions

– Take advantage of training and educational opportunities

– Establish a Vendor Management Program with Key Management Oversight

– Document and communicate Vendor Risk Management Program

– Monitor and make adjustments as necessary

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Let’s look at an example…

Best Practices: Ensure ComplianceVendor Management Program

FIS Approach

• Provide enterprise-wide governance of vendors to protect client-provided consumer information and prevent a negative performance impact due to vendor provided products or services

• Establish consistent vendor acquisition, assessment of controls, on-going monitoring and reporting requirements

• Validate vendors have deployed adequate controls and processes for the protection of client data and NPI from unauthorized access, misuse or inappropriate disclosure

• Monitor financial health for financial stability and continued viability

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Vendor Selection

Due Diligence

Contract Manage

ment

Continuous

Monitoring

Vendor Management Life Cycle

Program structure and activities based on key objectives within regulatory and industry standards:– Gramm-Leach-Bliley Act (GLBA) 501.b– FFIEC examination handbooks– Federal Trade Commission (FTC)– Health Insurance Portability and Accountability Act

Best Practices: Ensure ComplianceVendor Management Policy

FIS Example• Ensure FIS consistently employs effective processes for procurement, risk

management, vendor assessment and ongoing monitoring enterprise wide

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• Ensure vendors meet required minimum standards related to:– Technical competence– Product quality– Reliability– Delivery performance– Cost– Financial soundness

• Ensure vendors selected align with FIS business objectives and maintain compliance with industry and regulatory requirements.

• Policy re-evaluated on an annual basis to validate relevance and effectiveness.

Best Practices: Ensure ComplianceSample Vendor Risk Management Governance

Best Practices: Ensure ComplianceSample Program Roles and Responsibilities

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Vendor Risk Management

• Day to day operational responsibility of Vendor Risk Management Program• Ensuring consistent processes are in place to manage vendors throughout the relationship life cycle• Ensuring the appropriate level of vendor due diligence is performed• Performing an annual control environment review on managed vendors

Corporate Legal

• Understanding the legal and regulatory requirements for contractual requirements• Monitoring for regulatory change and communicating any updated requirements• Ensuring contracts contain all necessary components to define the terms and conditions of third party service(s) provided

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Business Unit

• Ensure that the provisions as set forth in the Vendor Management Program are understood, implemented and monitored

Information Security

• Ensuring that technical, physical and administrative safeguards are instituted for protecting FIS and NPI

Physical Security

• Deploying controls and processes to help ensure that third party physical access to facilities and resources that store, process or transmit NPI are restricted to only appropriate authorized individuals

Procurement

• Ensuring all activities requiring the use of a third party providers follow the established FIS policies and procedures• Ensuring the procurement process contains adequate controls to manage vendor relationships and support regulatory requirements

Best Practices: Ensure ComplianceSample Program Roles and Responsibilities

Best Practices: Ensure ComplianceConstraints and PitfallsPITFALL CAUSE CURE

Ownership/infrastructure•Unclear authority and accountability•Gate keeping/ineffective management of relationship

• Number and complexity of relationships

• Fragmented or siloed departments

• Document structure/process

Miscommunication•Lack of communication•Reactive communication

• Lack of process or discipline

• TPIIOTTCO (*) (*) The proof is inherently obvious to the casual observer.

Uneven commitment levels•Lack of trust•Conflicting priorities/values

• Sales cycle failure • Change in

direction/strategy

• Come together• Step back, reassess • Secure executive commitment

People issues•Resource constraints•Inexperience / change-averse •Unresponsive contacts•Turnover and handoffs

• Unable, unwilling or untrained

• Reinforce executive support• Deploy stick or carrot … or both• Monitor, measure, follow through

Familiarity and Assumptions • Age/stage of relationship

• Start anew

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Improve Visibility, Control, and Efficiency

Best Practices: Improve VisibilityTransparency

Automate wherever possible• Bank information

– Multi-Bank reporting– Treasury workstations– SWIFT

• Internal interfaces– Customized or standard utilities– Electronic vs. paper

Routinely explore additional technology/new services– Implement new Web-based solutions to link AP/AR and Payment systems– Apply Internet technology to overlay remittance detail onto EFT transactions– Leverage connectivity and data to improve trade terms

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Best Practices: Improve VisibilityTransparency

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New Technologies• SAAS/Cloud-based applications

– Trade networks

– Treasury workstations

• Bank portals

• Commercial card services

• XML EDI Formats

Align Treasury as a strategic partner • Present cash management as a holistic process

Trends: Improve VisibilityKnowledge = Power

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Source: AITE Trends in Bank-supported, Business-Initiated Payments , February 2011

“The organizations that most effectively weathered the economic crisis were those with access to timely, accurate and usable information.”

Trends: Improve VisibilitySignificant Business Drivers

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Source: Treasury Strategies, 2010

How do you compare?

Number of banks• Business needs• Risk mitigation – counterparty and FI-based• Wallet sharing• Operational cost reduction• Limiting exposure to any 1 bank

Trends: Improve VisibilityLeveraging Technology

Technology Solution 2011 2008

Treasury management system 57% 47%

Bank account management 58% 50%

Netting 26% 21%

Investment portal 39% 13%

FX portal 36% 8%

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IDC Financial Insights Preliminary Findings from Technology Trends Surveys, March, 1022

Best Practices: Improve VisibilityConstraints and Pitfalls

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• Lack of inter-departmental communication/executive support

• Complexity– The bigger you get, the more complex the challenge

• Insufficient resources

• ROI– The longer you wait, the harder it is to get done

• Cause and Effect Delays…

Trends: Improve VisibilityConstraints and Pitfalls

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AITE Supply Chain Finance: A Taxonomy, November 2010

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“ the difference between chess masters and ordinary players is not intelligence, analytical

ability or creativity …it is ‘structured knowledge.’ ”

Gtnews.com - “Becoming a Grand Master in Cash Management” by Chris Nicols, 11/8/07

“An ounce of action is worth a ton of theory.” Fredrich Engels (1820-1895)

“You may delay; but time will not.” Benjamin Franklin

• Knowledgeable• Focused• Disciplined• Practiced• Confident

SUCCESSFUL

Q&A

Thank You!

Gail AngelGail.Angel@fisglobal.com

773 907-2400

Nanette CrockerNanette.Crocker@bbvacompass.com

205 297-7218

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