The Special Status of IT

Until the recent credit crisis, a significant issue in managing a business was the special status of the information technology function, in that when new hardware or software is requested, it is usually approved. Few companies subjected these acquisitions to rigorous evaluation, and information products were approved based on little more than faith. This situation is changing due to the need to carefully manage capital and the trend toward the outsourcing of technological applications.

Working capital issues to consider in any information technology decision include:

• Does the project meet the company's requirements? Large sums have been spent on systems that were never properly scoped and designed, and inevitably more money and time became necessary for even partial implementation. SCM (Chapter 7) systems have been particular problems, as are applications that purport to analyze risk management (to be discussed in Chapter 11).
• Does the project have internal support, or is a vendor the major proponent? Internal support is often referred to as having a champion. Technology vendors are talented at developing interest in a project that no one ever considered before, particularly as their compensation is often based on sales commissions. The internal supporter should be willing to stake his or her budget, credibility, time, and even career on a technology success.
• Have all costs been considered? External solutions can appear to be reasonably inexpensive; after all, the vendor may have priced the technology at only $3,000 or $5,000 a month. However, there are many other costs to consider, including parallel testing, implementation, training, staffing, special facilities requirements, documentation, security, additional computing and communications equipment, establishing second sites in the event of a disaster, and other expenditures. The investment only begins with the acquisition of the system. Some costs will directly affect working capital, while others will be depreciated over the expected life of the technology.
• Has our company considered outsourcing the project to an application service provider (ASP)? An ASP is a business that sells access to software applications through central servers over a communications network. ASP providers include IBM, Oracle, and hundreds of other companies, some of which focus on the computing requirements of specific industries. Major advantages include the following:
  • The ASP's core competency is to support the technology requirements of its clients for a reasonable monthly fee.
  • Costs are significantly lower than developing, owning, supporting, creating a backup site, and upgrading a complete system.

  Significant disadvantages of ASPs are:

  • Specific client requirements cannot be supported except at substantial cost.
  • Clients may rely on the ASP to provide a critical business function that limits their control of that function.
  • The ASP could decide to limit or terminate the service.
  • There could be a change in management support, ownership, or even failure of the ASP.

Development of Bank Systems

Data on daily bank activity were first electronically transmitted on dumb terminals. Little customization was required for clients to receive this transmission, and the banks could provide a useful product, recover their costs, and capture their customers in a semi-permanent relationship. Once a demand for online reporting had been confirmed by customer acceptance, newer versions of the product were developed. A few of the deficiencies included the requirement for repetitive keying to other systems, the need to create company-specific spreadsheets, and the lack of analytical tools.

The result was ill-advised investments in treasury information system (TIS) products with various modules and interfaces. These products were supposed to do everything, be user-friendly, and be easy to install, but not cost a lot more than the early versions of the product, because, after all, banks did not charge much for noncredit services. The problem was that enhancements required enormous development and implementation costs, along with systems professionals to maintain the product.

As banks abandoned these products given the inevitable losses, nonbank vendors jumped into the market with sophisticated, multifunctional products. Traditional pricing has totally changed with such companies as SAP, PeopleSoft, and SunGard charging well into the hundreds of thousands of dollars, far beyond the equivalent fees received by the banks.

These vendors provide consulting services to assist companies in the analysis of requirements, integration with legacy systems, general ledger interface, implementation, and training. Another approach to TIS today is delivery through the Internet. Vendors create and maintain these systems, usually under the name of the client bank.

Basic Transactional Functionality

At the most basic level, bank systems are used to optimize and expedite the transactions required to conduct business. In other words, these systems promote information flow, providing the side benefit of convenience, without losing accuracy or compromising security, privacy, or regulatory compliance. Since most commercial software provides the basic transactional functionality, any automated differentiation must be realized by setting system parameters. This is an important requirement in a search if the plan is to offer a unique product or service supported by technology.

Many bank systems are accessible internally and externally using Internet technology. This immediate and seamless delivery of information has improved efficiency and offered banks, and their customers, great gains in service. This exponential growth in functionality makes the basic management of working capital fairly routine. However, the technology used by the bank is important to the customer because access will be through firewalls, security restrictions, and other safeguards.

Modules for Standard Services

The following modules provide the standard reporting services required by many companies. The term reporting refers to information summaries and details of bank account activity.

• Balance and activity. The ledger and available balances of yesterday and today are listed in balance and activity reports, including details of debits and credits, float by day (zero, one and two business days), and other transactions. Companies use these data to begin the periodic (often daily) process of developing a cash budget. Banks run their DDA systems (from which much of this information is derived) at night, with previous-day activity available the next morning. As same-day reporting requires feeds from separate systems and is more costly to provide, there is usually a premium charge for this service. DDAs and cash budgets were discussed in Chapter 4.
• Multibank polling and parsing. Account data can be retrieved by polling banks electronically and then downloading or parsing information into reports based on a script developed at the time of installation. Important features include the following:
  • Automatic dialing of banks
  • Electronic responses through scripts
  • Selection of appropriate data
  • Formatting into reports
  • Exception reports of banks for whom information was unavailable
• Wire transfer. As discussed in Chapter 3, Fedwire transfers are same-day, final transfers used primarily for large-dollar transactions. Appropriate practice for control and security strongly encourages that these transactions be initiated, approved, and released through a bank's software (rather than by telephone or fax), using keys and passwords unique to the sender and receiver. In fact, the few recent cases of fraudulent wire transactions involved manual wires, and some banks charge as much as $100 per manual wire to discourage such activity.
• ACH. Many banks now offer terminal-based ACH, allowing debit and credit transfers to be initiated by finance rather than through the mainframe computer system. This permits flexibility in sending and receiving payments for a low fee, and allows the initiation of ACHs or intrabank transfers to cover the daily clearing amount in controlled disbursement accounts.
• Controlled disbursement. TIS modules offer various electronic reporting options, including stop payments (for checks issued in error), the transmission of checks issued files (for positive pay review and monthly reconciliation), the review of positive pay mismatches, and account reconciliation data.
• Bank relationship management. This module includes information on bank relationships and contacts including:
  • Name, address, telephone, and fax numbers
  • Names of senior managers, calling officers, and customer service staff
  • History of the relationship and calling efforts
  • Listing of services used, persistent problems, and unique capabilities
  • Credit facilities available and used, as well as fees, restrictions, and other covenants

Modules for Advanced Services

Larger banks offer additional modules designed to meet the needs of companies doing business globally:

• Foreign exchange (FX). Modules to expedite the process of purchasing or selling FX, primarily in the major currencies used in international transactions. Other FX may be available based on the market presence of each bank and the requirements of its corporate customers. In addition to automating FX transactions, these modules offer lower transaction charges and better rates than by manually contacting financial institutions.
• Letters of credit. Export and import financing often requires bank letters of credit (LCs) to ensure payment once all documentation and other requirements have been completed; see Chapter 9. LC modules enable automated processing of the LC and supporting documentation.
• International money transfer. Funds movement between global banks involves linking various different international money transfer systems, usually using SWIFT formats.¹ In addition, extensive cross-border payment capabilities help companies manage payments globally through a single message to the bank.
• Investment management. Portfolios of investments can be managed by listing short- and long-term holdings, including trades, market-to-market pricing, and the tracking of dividends, interest, and other income. Larger financial institutions offer a full array of products, including:
  • Automated sweep services
  • Fixed income securities
  • Money market funds
  • Tax-advantaged investments
  • Managed account solutions
• Debt management. Debt modules report credit line activity, commercial paper outstanding, fixed and floating rate instruments, and intercompany loans. Global capabilities may include pooling, a technique used by in-house banks (often located in treasury centers) to offset the deficits in the accounts of certain subsidiaries with excess cash in the accounts of other subsidiaries; and netting, involving the reduction in the number of intracompany payments through the consolidation and aggregation of individual transactions. These techniques were noted in Chapter 9.

Responsibilities in Banking Decisions

The appropriate organizational responsibility must be involved in banking decisions. While finance manages banking, relevant information often resides in another area of the company. As an example, check mismatches (where the issued and clearing check numbers and/or amounts due not match) occur due to errors by company or bank personnel, or because the recipient or a thief has altered the check.

Banks provide positive pay to find these situations and report them to the issuing company, with a time limit on whether or not to honor the check; see Chapter 3. The issuing function (e.g., accounts payable) can review positive pay files directly to determine if check mismatches should be honored or rejected.

Before Web-based platforms became standard practice, this process was handled by finance staff that was often uninformed as to the purpose or validity of a particular disbursement. The result was a series of telephone calls, e-mails, or faxes, and any delay meant that the period for review (usually only about four hours) might expire. In that situation, the bank decision reverts to the preset “accept” or “reject” rule made by the company at the time the account was established, and that default is almost always “accept.”

Other functions in a company similarly require data from banks that can be viewed using the Internet. For example, sales managers want to ship but experience slow-paying customers that present a risk to the collection of receivables. With access to lockbox receipts, they can quickly determine whether payments have been received and if it is appropriate to ship against pending orders.

Benefits of Internet Bank Technology

There are various advantages to the use of Web-based technology services:

• Cost. A full range of modules is available to users at nominal cost. Automating bank transactions greatly reduces costs for personnel, technology, and customer service, and presents a suite of technology services previously unavailable to many medium-sized and smaller companies.
• Secure single-platform access. Access through a single platform allows the corporate user to move easily from one product to another. Security is provided through transport layer security (TLS) protocols,³ multiple levels of user IDs, monitoring by the bank, and various other controls.
• Ease of implementation and upgrading. New modules can be installed with minimal setup, delivery effort, and cost. User-friendly menus enable users to quickly learn and adopt new technology, and banks provide online tutorials to allow on-demand training and unlimited repetitions. There is no requirement for physical installation of software, as the information modules reside on the bank's server.
• Disaster recovery. Banks have multiple backup sites for their computer services, and these locations are widely dispersed to avoid the risk of a catastrophe affecting more than one data center. These facilities are stress tested frequently for reactions to emergency situations.
• File exporting. Working capital management is simplified through file exporting in various formats to support accounting, receivables, payables, and inventory management. However, the working capital file interfaces are generally not integrated in a common platform, as are ERP systems.
• Reports. Companies can receive summary and detailed reports on every service, each user, by product and by bank account. Control is enhanced through this reporting and the archiving of activity; see Chapter 8 for a comment on the control requirements of the Sarbanes-Oxley Act.

Disadvantages of Internet Bank Technology

Disadvantages include the following:

• Noncore competency. Many banks would prefer not to allocate the required capital or expertise to the design and maintenance of an Internet-based product. For this reason, ASPs have become the primarily providers of bank technology. As a result, the bank does not “own” the product; the ASP does.
• Service coverage. The scope of functions offered by even the largest banks is limited to standard financial products.⁴ As a result, information is not provided on the other working capital functions as listed in Exhibit 10.2.

Why ERP?

ERP responded to manager demands for information that would provide in-depth information on many working capital issues and help answer “what if”#x2212;type questions. Why are sales declining in a particular market? Why is this customer less profitable than that customer? What has been the sales outcome when prices rose or advertising expenditures fell?

In order to accomplish this goal without creating individual systems for each company, ERP was organized around standard modules, requiring that existing business processes be mapped using a thorough business process analysis before selecting an ERP vendor and beginning implementation.

This analysis should document current operations, enabling selection of an ERP vendor whose standard modules are most closely aligned with the established organization. Furthermore, ERP systems can extend beyond a single organization to support comprehensive business activities that cross a company's organizational, departmental, and geographic boundaries, including customers, suppliers, and partners.

Advantages from ERP

There are various advantages to the use of ERP:

• Common interface. A typical problem that companies face is the lack of a common interface between the various systems they use. For example, most accounting software does not interact with bank technology, while supply chain management involves yet another entirely different platform and data entry protocols. As we noted, files can only be interfaced through exporting protocols. ERP can end these “silos” and allow functional components of a business to communicate rather than be separate and focused on their own objectives.
• Best practices. Vendors use generally accepted “best practices” to design the modules that support ERP. These procedures assist inefficient companies in adapting effective approaches to specific business activities through the necessary redesign and reengineering that allows ERP to function.
• Control of sensitive data. ERP systems reduce the risk of the loss of sensitive data by combining multiple access permissions and security models into a single structure. Security features protect against outsider crime, such as industrial espionage, and insider crime, such as embezzlement.

Disadvantages of ERP

ERP systems are typically complex and usually impose significant changes on staff work practices. Implementing the process is typically too complicated for internal personnel, forcing companies to hire outside assistance to implement these systems. As the result of these complexities, there are three issues to consider, particularly when compared to competitive bank technology as supported by internal systems:

1. Modules require standardization. ERP systems inherently require modular components based on standard business processes. Companies desiring to implement ERP must reconfigure existing activities to meet the system's requirements, and it is precisely the unique approach of a business that may have led to marketplace success. While there is nothing wrong with reengineering an established set of procedures,⁵ the effort should provide clear added value.
2. Time, cost, and other implementation issues. The length of time to implement ERP is often greater than one year, and involves both internal staff and consultants. The cost of an ERP can be $1 million or more considering software and consultant fees.⁶ Any estimate of time and cost depends on the size of the business, the number of modules, the extent of customization, the scope of the business change, and the willingness of the company to take ownership for the project.
3. Training. Other than implementation, a considerable problem with ERP results from an inadequate effort in ongoing training. With bank systems, the training is focused on the user (and not on the information technology function) through Internet downloads and tutorials. This avoids reengineering entire business processes, purchasing new generations of hardware and software, and other potential delays.

Information System Problems? It's Easier to Unplug Than Sue

In considering a working capital information system, remember that bank products are “plug and play”—that is, there is little implementation other than to comply with relatively simple bank protocols. Furthermore, these modules reside on bank computers (or on those of the third-party provider that actually sells and supports the system). If a company is unhappy or dissatisfied with the product, it can “unplug” and inform the bank to stop invoicing.

ERP systems are major capital investments that cannot easily be abandoned. According to CIO Magazine, the recent history of this software “is packed with tales of vendor mud-slinging, outrageous hype and epic failures.”⁸ A partial listing of dissatisfied companies includes Hershey Foods, Nike, Hewlett-Packard, and Select Comfort. These situations resulted in losses in the hundreds of millions of dollars, unhappy customers, lawsuits, and other unfortunate outcomes.

Phase 1: Determine Requirements

The decision on working capital technology begins with an analysis of a company's requirements, particularly considering how data are currently used and whether there are any perceived deficiencies. Management should focus on situations where information is clearly inadequate to support decision making. For example, which products are profitable, by customer and by market? Would this information assist us in making better decisions, or is it interesting but not particularly critical? And, can it be developed from existing data sources?

A useful approach is to establish an ad hoc project team to compile a list of unanswered questions that are important to the business. This committee should represent functions likely to be affected by any decision on a new system. The list should drive the decision on whether to proceed to step two. Here are a few concerns noted by companies in recent technology reviews:

• What time of day does the company typically know its cash position? Is this timing adequate to allow finance to make optimal investing or borrowing decisions?
• Are interfaces to other systems primarily manual? That is, do interfaces with accounting, financial, and other systems involve internal company communications and the rekeying of data? Does this situation cause difficulties in managing our business or an unacceptable error rate, or is it merely an inconvenience?
• Does the company use JIT (see Chapter 8)? Is there sufficient knowledge about the financial health of vendors? What would happen if there were a bankruptcy or a serious shipping delay?
• What is the customer retention history? Does the company attempt to sell “up” to more profitable customers, or is marketing primarily reactive to incoming opportunities?
• Do employees understand the strategy for expanding business? Would better training, selection practices, and/or compensation improve the ability to deliver quality products or services to the marketplace?
• Would a function-specific application be adequate for the company's requirements? For example, would an FX and investment quotation system (e.g., Bloomberg) be adequate, or a system that supports specific assets or liabilities (such as have been discussed throughout this book), or a risk management system (see Chapter 11)?

Phase 2: Conduct Vendor Search

Venues that provide competitive information on bank and ERP products include the following:

• Bank technology conferences. The most important exhibition for banks and affiliated vendors is the Association of Financial Professionals (AFP) annual conference, which meets every autumn in a major U.S. city. The number of exhibitors at this event is about 200, perhaps one-third of which offer some form of working capital technology. In addition, local treasury associations hold regular meetings. For further information, see www.afponline.org.
• ERP conferences and seminars. As with most systems products, conferences and seminars tend to be either sponsored by the vendor (i.e., Microsoft) or by a vendor's user group, or for a specific industry (i.e., retailing). For a partial listing of webinars, see panorama-consulting.com. Some universities offer courses on ERP; for example, the Missouri University of Science and Technology offers programs in conjunction with SAP covering various ERP topics.⁹
• Websites and bank contacts. See Appendix II for a listing of websites. Bankers and ERP salespeople can arrange for product demonstrations.

Phase 3: Provide Justification to Senior Management

Companies' requirements should be matched against the technology specifications provided by bidders. However, traditional economic analysis will not be of much assistance in making the decision on working capital information software. There are three important benefits from such a system that are difficult to subject to traditional capital budgeting analysis:

1. The quality of the information. Rather than receiving (or searching for) raw data, working capital managers had the opportunity to view a variety of data organized through logical analysis and reporting.
2. The opportunity for rationalization of documents and processes. Bank technology and ERP systems organize existing files from various sources, making it possible to quickly locate actionable information leading to the choice of appropriate business tactics.
3. The general business process efficiencies gained through the improvement of existing practices. The reengineering of established but somewhat out-of-date procedures is a major benefit from the decision to implement new working capital technology.

If the decision is based solely on economics, the likelihood is that bank technology will be chosen. In most situations, ERP can only be justified if the time and cost to implement supports the long-term strategy of the company. Whatever decision is made, the following issues should be addressed in the justification statement:

• Which provider will service and maintain the product: the bank, the vendor, the ASP, or internally (probably through the information technology function)? Will the service be available 24/7 or only during normal business hours? Is the product supported by technology experts or by customer service staff who respond to questions?
• What happens in the event of a system failure or disaster? Does the service provider have adequate, secure backup facilities?
• Is there concern for compatibility with other financial and accounting systems?
• Is the product user-friendly, or will extensive training be required?
• What is the commitment of the bank or vendor to the business? How long is the provider likely to continue to offer, support, and improve the product?

Information Principles

When considering information changes in support of working capital management, consider seven basic principles to guide decision making:

1. Remember that technology is not magic, nor is it an end; it is a means (a tool) to the end.
2. Define the purpose of the working capital function.
3. Determine the functions and proper use of people, process, and technology.
4. Use a disciplined methodology to create and reengineer the workplace.
5. Learn how to exploit the functionalities of bank or ERP systems.
6. Analyze the costs and benefits of information systems as rigorously as any capital budgeting decision.
7. Ensure that there is security, privacy, and regulatory compliance.