Slide 1

Professor Michael Mainelli, Executive Chairman, The Z/Yen Group

[An edited version of this article first appeared as "Treasuring Treasury", The Treasurer, The Association of Corporate Treasurers (January/February 2007) pages 44-45.]

Pointless Treasure

Treasury? Who cares?? The difficulty for many important, central, corporate functions is helping people at the ‘coal face’ understand why they matter.  Treasury is no exception.  How do you explain to a sales rep, a shop-floor worker, a counter clerk, a repair-person, a personnel officer, a brochure writer - what does Treasury actually do? If Treasury didn’t exist, who would miss it?

In my experience, Treasury is not alone.  Many central departments have similar problems proving that they have value to their fellow workers, e.g. investor relations, marketing, procurement, information technology or human resources.  In some ways, Treasury has it easy.  Unlike marketing, Treasury doesn’t squash ideas as they get going; unlike procurement, Treasury doesn’t get in the way of buying paperclips; unlike IT, Treasury doesn’t push systems we could buy cheaper and better round the corner; and unlike HR, Treasury doesn’t take away the key managerial responsibilities of choosing and motivating teams.

Z/Yen’s long-standing definition is - “Treasury plays a pivotal role in managing risks and rewards both inside and outside the organisation.  As the function concerned with the provision and use of finance, Treasury typically handles collections, banking, working capital, short term borrowing, foreign currency management, provision of capital and money market investment.  In the past two decades, Treasury has become more involved in identifying unmanageable organisational risk and hedging it in open markets.  Increasingly, Treasury is becoming involved in handling operational risks through insurance mechanisms and, in some leading competitor companies, running internal markets for risk.”

So how do we prove that Treasury’s role is “pivotal”; that it matters.  Well, the first step is to make Treasury relevant.  Most fellow workers don’t understand how Treasury meshes with their day-to-day work.  “What we’ve got here is failure to communicate” …

Beyond Communication Might Lie Understanding

Treasury = Rolls

No, not toilet rolls.  We worked with a large telco on trying to make all of finance relevant, including Treasury.  The objective wasn’t to inflict “death by Powerpoint”, but to teach with a view to improving performance.  In order to do that, we needed to make finance, in general, matter.  As a start, we translated the fundamental, annual, published financial statements into operational terms.  For many staff, this was the first time the organisation tried to communicate annual results in terms they could understand.  Further, we developed different sets of terms for call centres, regions, districts or engineers.  For example, with engineers the profit & loss and balance sheet were translated into rolls of cable.  The cost-of-capital was translated into days of cable rolls.  If a cable roll cost £10,000, then at WACC of 12% and 220 working days, it cost £5.45 per day just to keep it around.

We then went out into the field to run some fun (fun for us) short presentations.  I particularly remember one team of engineers who were aghast at the return on their hard daily work.  I also remember them proudly pointing out that they had secreted nearly 60 rolls “against a rainy day”. When they realised that they lost some £72,000 for their firm each year on their private stash, they were mortified and substantial assets were released.  We had similar success with a delivery company of 800 vans where the drivers were responsible for cash collection.  They were permitted to give a few days credit, but it was making their overall performance deteriorate.  Credit tightened, but very few customers were lost.

Treasury = Big Bets You Don’t Want To Make

Working with one electricity company we once built a small simulation of a month in Treasury.  Everyone understood how the electricity pool purchasing worked, but they didn’t understand how the pool affected finance.  Over 50 managers “had a go” with our simulation.  In our, admittedly fairly simple, simulation we showed the effect of the commitments and purchases on Treasury.  The managers were astonished to see that all of the ‘fun’ they had playing the electricity pool could be lost by not communicating with Treasury.  Then we added their first overseas acquisition and the foreign exchange … few were left with a smug feeling that they could handle it all themselves! We are exploring the idea of using “political cards” (a CORDA concept) as a means of helping managers understand the role Treasury can play in maximising their performance.

Treasury = Real People

In other organisations, just making Treasury people seem human goes a long way.  Have you thought about a “day in the life of” article about someone who works at managing cashflow? Have you thought about putting a small quiz, perhaps a reasonable question copied from the ACT website, in the staff newsletter? We put a short quiz with a small prize for a few months in one client’s staff newsletter and it was surprising how many people realised that notifying Treasury of likely foreign exchange commitments could make a real difference.

Treasury, What A Bunch Of Comedians!

If a picture is worth a thousand words, a good laugh is worth a thousand pictures.  A good laugh is remembered.  Have you thought about having a comic strip centred on Treasury? As Treasury is in many ways at the heart of the organisation and sees the effects of all major decisions, perhaps TreasuryMan could combine a bit of laughter with a lot of relevance.  If you think Treasury has it hard, have a look at AttorneyMan (an online cartoon) where lawyers have succeeded – and nobody likes lawyers.

Our Treasury, I Don’t Understand It But I Like It!

Working with 26 banks and large corporate Treasuries, Z/Yen people conducted one of the largest ever benchmarking studies on the cost of funds for business units and transactions.  We went on to model in detail the cashflows and potential performance improvements of 10 of the large payment-handling organisations, but what surprised us was that the organisations which scored well in the benchmarking were proud of their Treasury functions even when they hardly understood them.  So, if you have the chance to benchmark, and can bury your results if you’re in the bottom 50%, have a go!

Beyond Communication Lies Prediction

To focus too much on cashflow management or foreign exchange is to misrepresent a modern Treasury function.  However, one Treasury skill that most portions of the organisation do not fully appreciate is the skill, and responsibility, of prediction.  We have worked with numerous clients on using multi-variate statistics (e.g. our PropheZy support vector machine tool) to help many elements of finance, treasury or risk management develop predictive models.  But predictive models are more powerful when they are shared.

As an example, one European investment bank used three years data to predict losses/incidents from data such as deal problems, IT downtime, and staff turnover over a six month period.  It achieved reasonable predictive success, an R2 approaching 0.9 at times, though more frequently 0.6 (i.e. 60% of losses can be predicted). A high-level snippet gives a flavour of the data:

Location ID 1 2 3 4
HR-Headcount # 136 121 23 30
HR-Joiners in month 6 6 6 6
HR-Leavers in month 11 11 11 11
IT-System Disruption Incidents 2 2 0 0
IT-System Downtime 35:07:00 03:13 0 0
FO-Trade Volume # 19218 8999 661 4307
FO-Trade Amendments # 317.1 0 8.7 80.5
OPS-Nostro Breaks # 3 17 3 7
OPS-Stock Breaks # 9 4 0 1
OPS-Intersystem Breaks # 6 2 0 1
OPS-Failed Trades # 463 26 0 7
OPS-Unmatched Trades # 52 0 7 0
RIS-Market Risk Limit Breaches # 0 3 0 1
AU-High Risk O/S Overdue Audit Issues # 0 0 0 0
AU-High Risk O/S Audit Issues # 4.5 4.5 4.5 4.5

Of course, each loss or incident affects funds, cash, foreign exposures, working capital, capital allocations and taxation.  Note that some of the items in this snippet, e.g. HR joiners/leavers or IT disruption at the system level, can in practice be very hard to obtain.  It was also noteworthy that, as a data-driven approach, predictions are only as good as the data put into them – “garbage in, garbage out”. In some areas, the data may not be at all predictive.  Data quality can vary over time in hard-to-spot ways and interact with wider systems, particularly the people in the systems.  Many data sources underscore Goodhart’s Law, “when a measure becomes a target, it ceases to be a good measure” (as restated by Professor Marilyn Strathern); for instance at this client the IT department was upset at IT downtime being considered a “key risk indicator” and unilaterally changed from “downtime” to “unplanned IT downtime”, skewing the predicted losses – “computers going down in 10 seconds, “planned””.

Many of our clients are now sharing predictive models around the organisation with the objective of reducing operational risk or pricing operational risk or economic capital.  By showing how predicted outcomes relate to patterns of instrumental variables, Treasury shows how the organisation’s activities affect reserves, funds or cash.  This moves Treasury into a position as an advisor to operations – how do your activities affect organisational risk?

Beyond Prediction Lies Indemnity

Treasury functions often need to lead their organisations in understanding and managing risk and reward.  Personally, I see Treasury contracting in future directly with managers, rather than taking a group view.  Some of our clients are contracting directly with central Treasury – “we, central Treasury, can guarantee this cost of capital or that exchange rate.  Yes, it is slightly above today’s available rate, but it’s guaranteed for X years.”

I also think that Treasury needs to spend a lot more time specifying how it should be evaluated.  I realise that this is a perennial problem, but in age of increased focus on shareholder value, with a competitive financial industry and demanding corporate governance, treasurers should be their own devil’s advocate and work much harder at specifying how they should be measured.  Part of that measure must be a level of indemnification against benchmarks, e.g. no more than X% against the average cost of funds, no more than X% of cashflow. 

With measures in mind, I think that Treasury can be better cast for operational managers as both insurance and banking.  Insurance they can pay against untoward events.  Banking that gives them a return on funds they accumulate.  Treasury needs to be directly charged, and rewarded, against profit centres.  Therein lies true communication and will lead savvy operational managers to truly treasure Treasury.

Professor Michael Mainelli, PhD FCCA FCMC MBCS CITP MSI, originally undertook aerospace and computing research, followed by seven years as a partner in a large international accountancy practice before a spell as Corporate Development Director of Europe’s largest R&D organisation, the UK’s Defence Evaluation and Research Agency, and becoming a director of Z/Yen (This email address is being protected from spambots. You need JavaScript enabled to view it.).  Michael was the British Computer Society’s Director of the Year for 2004/2005.   Michael is Mercers’ School Memorial Professor of Commerce at Gresham College (  Michael’s humorous risk/reward management novel, “Clean Business Cuisine: Now and Z/Yen”, written with Ian Harris, was published in 2000; it was a Sunday Times Book of the Week; Accountancy Age described it as “surprisingly funny considering it is written by a couple of accountants”.

Z/Yen is a risk/reward management firm helping organisations make better choices.  Z/Yen operates as a think-tank that implements strategy, finance, systems, marketing and intelligence projects in a wide variety of fields (, such as developing an award-winning risk/reward prediction engine, helping a global charity win a good governance award or benchmarking transaction costs across global investment banks.  Z/Yen enjoys working with Treasury units on improving not just operations, but the entire risk culture of the organisation.  Z/Yen likes to help Treasury functions make a difference to their organisations’ use of that most key resource, finance

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