Giveaway signs: there are two key questions that CFOs should consider when deciding whether or not to outsource the treasury function: what is the cost/ benefit relationship and what are the risks? Peter Nolan weighs up the options.

Author:Nolan, Peter
Position:Finance Treasury
 
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A lack of debt funding or poor funding relationships can stifle business growth. Disastrous and potentially fatal losses can result from unauthorised foreign exchange dealing, poor risk controls or investments in non-investment-grade securities. But, despite the consequences of such failures, many firms have been found wanting in these areas over the years. One of the most recent examples of this was Irish bank AIB, even though, as a financial services company, it was expected to have especially sound internal controls.

Corporate and financial services organisations have the strongest incentive to maintain market confidence in their operational and risk controls. CFOs shiver at the thought that a breakdown of these controls could visit a catastrophe on them. There are two options available in managing this risk. The first is to ensure strong controls internally by allocating a significant amount of resources. Alternatively, through outsourcing, the risks can be transferred to a controlled operational treasury environment elsewhere.

CFOs might express the priorities for core treasury activities as follows:

* provide adequate funding facilities on advantageous terms;

* ensure strong control over cash;

* source low-cost debt;

* make appropriate investments;

* provide effective control of currency risks;

* secure strong bank/funding relationships.

All of these are major priorities, regardless of the size of the organisation. Depending on the scope of the treasury function (see chart, opposite page), priorities might also be stated for other activities. CFOs may first react to the idea of outsourcing their treasury activities by worrying that they will lose control of the function, but this concern does not survive proper scrutiny. With outsourcing, strategic financial decisions remain in-house and there is no need to lose control of cash. This can remain in the organisation's accounts and be invested as specified.

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There are considerable resources--physical, technological and professional--required to provide strong treasury controls. These assets can be either purchased or leased. Purchasing results in all the associated costs of ownership--ie, the management, maintenance and replacement of systems, staff and infrastructure. Outsourcing is the equivalent of the leasing option, which should free the client's own resources for use on more valuable activities. Here the client pays a fee for the service and the provider bears...

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