Payment & collection factories: new treasury potential?

30 November 2011

Many organisations are considering the case for centralising payments and collections in a shared service centre - a payment factory. Garry Young, Logica’s director of corporate services and SaaS, discusses the drivers behind corporate payments change. He also examines the cash visibility, control and efficiency benefits that can be realised from a payment factory. Finally, he looks at the challenges faced by treasurers when developing a business case for payments consolidation.

A changing landscape

The corporate marketplace is evolving, and fast. In Europe, for example, we are seeing a significant shakeup as the new SEPA direct debit scheme shifts responsibility from banks to corporates. We are also seeing changes in other regions, as businesses across the world seek to recover from the financial crisis. Many organisations are preparing for a period of diversification and expansion. As part of this, corporates are considering rationalising and streamlining their business at all levels, including treasury. Many are taking a view on consolidating payments systems and processes to find efficiencies and ensure they are ready for economic growth - and are looking at payment factories.

Drivers for consolidation

There are a number of reasons behind the increased uptake of payment and collection factories. Firstly, treasurers want to gain greater visibility, control and insight from their treasury operations. With multiple siloed systems, it can be difficult to build an accurate picture of payments patterns and find opportunities to optimise cash in the business, without resorting to complex offline processes and spreadsheets. With a payment factory, businesses gain a bird’s eye view of all payment flows, processes, timelines, suppliers and costs - and use this to more accurately forecast cash flow and find efficiencies. Indeed, independent research commissioned by Logica saw 79 per cent of treasurers interviewed noting visibility and control over cash as the most important benefits in their payments factory roadmap. (1)

Many firms find that there are rewarding economies of scale from a consolidated approach. For example, some corporates have more than 20 accounts payable units across multiple geographies, with many working in the same currency. These same organisations may have a similar number of banking relationships. By consolidating payment operations into a single factory, rationalising banking relationships and making payments en masse where possible, corporates will save money. They will also move closer to their goal of
increased visibility and control.

Finally, corporates are realising that a payments factory solution is more scalable and flexible than multiple legacy systems. Many firms will look to expand as the global economy starts to recover. Current systems are often legacy and designed for decentralised operations, with processes tacked on as required. This can cause issues as companies expand across new territories and market sectors - while mergers and acquisitions can also be difficult, with the payments systems of a newly acquired company increasing the number of systems to maintain. By implementing a payment factory at the beginning of a growth period, corporates can overcome these issues, and expansion will be far easier with a rationalised, consolidated and scalable system.

The business case challenge

Often treasurers struggle to build the business case for a payments factory implementation. It is time consuming to focus on target operating models, implementation plans and new technologies. Many do not have the luxury of being able to hire an interim treasurer to assist.

Nevertheless, those treasurers wishing to convince senior stakeholders of the need to implement a payment factory will find a multitude of ways in which such an initiative can be shown to improve wider business operations.

Firstly, reputation of both the treasury department internally, and the company as a whole, is a key consideration. Consistently making payments on time and managing cash effectively is business as usual. However, one mistake can result in the loss of customer trust. This is a particular issue when the ‘customer’ is a state body requiring tax payments, as failing to deliver on time can result in huge fines. Treasurers need to be seen to deliver 24/7. By implementing a payment factory with clearly defined service levels supported by rationalised technologies and structures, treasurers can move closer to ensuring that their department lives up to these high expectations.

When continuous high performance is considered ‘business as usual’, though, how can treasurers achieve ‘excellence’ in payments and treasury? A payment factory allows treasurers to move beyond managing cashflow and offer business intelligence to high level decision makers. By bringing together all strands of a firm’s cashflow and payments processes into a single system, it allows for a more comprehensive view of corporate cash positions. This means that treasurers can forecast to management in a more accurate way. At the same time, risk can be reduced - with liquidity managed more effectively, without the need for a ‘golden cushion’ of cash kept unused to allow for cashflow forecasting margins of error. This money can instead be put to more effective use within the business. Other benefits of better visibility of cash include reduced risk of fraud, more consistent controls and improved auditability.

Finally, quantifiable benefits can be found - for example a reduction in the number of banking relationships held, which results in economies of scale and further assisting cash visibility. This will also reduce numbers of audits - while corporates will save money if they can lower the amount of proprietary bank-supplied connections they need to maintain. Working closely with a bank, though, is still integral to a successful payment factory implementation.

Clearly there are benefits for corporates who choose to develop a payment factory. But how can you calculate the real return on investment for such a project?

A payment factory offers easily measurable benefits, such as minimised bank fees and reduced headcount. When considering these benefits alone, though, such a large project can take three years or longer to see a return. This can make or break the case for change. However, just taking these benefits into account is overly simplistic as it does not capture the true value accruing from improved cash visibility, reduced risk and increased control. For instance: what is the opportunity cost to the business from a production shutdown due to an unpaid supplier not delivering raw materials? Those treasurers that include such harder to quantify benefits report that they see an accelerated return, within the range of 18 to 24 months.

A new treasury model

Payment and collection factories have clear benefits for corporate treasurers and the wider business alike, but initiating and implementing such a large project is not always going to be an easy journey. Treasurers would be wise to invest time drawing up an effective rollout strategy before beginning to discuss the impact with the wider business. For those who want more visibility of cash, improved controls over their payments, and to rationalise a plethora of systems and connections, a consolidated solution offers a scalable lifeline. As the world starts to recover post-financial crisis, expect to see more of payment factories.

1. New report finds cost reduction is not the primary driver behind payment factory adoption

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