An international treasury center/in-house bank improves cash investing, intercompany lending and FX hedging.
A presentation by NeuGroup member company ServiceNow on the benefits of setting up an international treasury center (ITC) in Ireland that functions an in-house bank (IHB) took top honors in a pseudo-Shark Tank competition at a recent NeuGroup for Cash Investments meeting sponsored by ICD and MetLife Investment Management.
- The ITC has improved working capital management, provides better cash visibility and gives treasury enhanced control over cash. It also lowers idle cash, allowing more of it from more countries to be invested effectively.
- “The international treasury center is essentially a one-stop, in-house bank that will allow us to concentrate and invest most of our cash,” said Claire Wang, a member of the treasury team who helped set up the ITC.
- “It will streamline our intercompany funding and aggregate FX exposures and trading at the ITC, which executes trades with external banks, versus having multiple trading entities,” she added. “It’s been a very heavy lift with great results.”
Growing revenues, growing needs. Conceived in 2021 and implemented in 2022, the ITC is part of a treasury transformation effort to scale in preparation for ServiceNow’s projected annual revenues to top $15 billion. Treasury in the first year designed processes and defined the technology architecture to accommodate the company’s growing geographic reach and complexity. The value to the organization included:
- Maximizing returns on global cash by reducing uninvested cash to less than 5%.
- Enhancing FX risk management by centralizing a majority of FX exposures in a single entity and reducing trading costs.
- Simplifying the intercompany loan and funding process.
- Tighter integration between the company’s ERP (SAP), TMS (Kyriba) and banks.
- Maximizing straight-through processing of transactions and reducing bank fees.
- Achieving an improved reporting and compliance process as well as an adaptable and flexible cost structure.
Inside the IHB. The in-house bank has both physical and virtual bank accounts organized in a “hierarchy structure” that provides a “holistic view of bank relationships and is set up as a managed service,” according to Ms. Wang’s presentation.
- At the top of the structure is a USD-functional pool header account into which cash from 26 country “participants” with zero balance accounts (ZBAs) sweeps each night. Participants with account deficits borrow from the ITC pool header account.
- Key benefits include reducing the number of bank accounts and manual processes to monitor cash. The IHB also automates the tracking of intercompany cash flows for regulatory and accounting purposes, eliminates reconciliation tasks and improves operational efficiency.
- The reduction in banking and transaction fees results in part from streamlining the intercompany funding and loan process.
- Lower transaction costs also accrue from the centralization of FX hedging, with the IHB doing back-to-back trades, sitting between subsidiaries and an external bank counterparty.
Investment advantages. Prior to the creation of the ITC, ServiceNow had just two international investment entities to invest cash in money market funds (MMFs) in multiple currencies. With the ITC, cash from more than 25 entities is pooled, which has resulted in investing roughly twice as much cash. In addition to MMFs, ServiceNow is also investing in fixed-income instruments with the help of outside asset managers.
- Ms. Wang told peers that treasury now does currency analysis to assess the trade-offs of converting local currencies to USD and bearing hedging costs versus investing in local currencies.
- Having the ITC and more cash to invest meant ServiceNow was well prepared and positioned to take advantage of the rising rate environment that began in 2022.
Looking ahead. This year, ServiceNow’s focus will be simplifying funding between subsidiaries by implementing intercompany netting. This will require decisions around transfer pricing and will involve Kyriba.
- “With the ZBA sweep automation to concentrate cash to ITC header accounts, as well as streamlined FX trading and intercompany loan processes, ServiceNow treasury is very happy with the profitability and efficiency enabled by the ITC,” Ms. Wang said.
- “We are looking forward to completion of the netting project this year that will enable further benefits of a streamlined and automated monthly transfer pricing funding process.”
