Understanding corporate clients: Why banks need to rethink their business models and approach to client relationship management

Transcription

1 Journal of Payments Strategy & Systems Volume 2 Number 2 Understanding corporate clients: Why banks need to rethink their business models and approach to client relationship management Per Fremlin*, Joseph King and Peter Mathias Received (in revised form): 22nd October, 2007 * per.fremlin@mathiasco.com Per Fremlin is a 25-year veteran of finance and banking, having held various banking posts, foremost with Citibank, and has for the past eight years been a senior partner with the strategy and client management advisory firm of Mathias and Co. The focus has been on working with global and regional banks in all major geographies to help improve their share of client (corporate and institutional) wallet and profitability. Special emphasis has been on optimising the client management and product sales process across commercial and investment banking segments. Joseph King s career spans 30 years work in corporate finance and capital markets businesses in Europe and North America. He specialises in developing and implementing programmes to improve the depth, profitability and quality of multi-product, multi-geographic institutional relationships with a company s strategic client base. Peter Mathias is CEO of Mathias and Co., a firm focusing on helping senior management design and implement strategic customer programmes. He gained a Doctor of Business Administration from Harvard Business School and has previously worked at Goldman Sachs. He is on the Board of Directors at Strategic Account Management Association, a group of 800 companies and members interested in developing professional skills and knowledge around covering complex customers more effectively. Dr Mathias is a frequent contributor to a broad range of publications which can be accessed at ABSTRACT Corporate treasurers need banks to provide advisory driven cross-product responses to their business issues, while maintaining access to the bank s product specialists. On the one hand, given the need to maintain product specialisation, banks face potential hurdles and challenges to execute a cohesive advisory response across products. On the other hand, banks who have successfully adopted an integrated client management response have demonstrated a 40 per cent average increase in their returns on a representative sample of corporate customer relationships. The treasurers obtain a higher quality of advice and solutions execution from their bankers and, in return, will allocate more profitable wallet to the bank that can provide it. This ultimately improves the treasurer s ability to address critical business issues. Implementing a treasurer s agenda programme in a bank requires an origination process that unites product business lines. It is also heavily dependent on an advisory sales driven approach. Medium sized and regional banks have demonstrated a time to market competitive advantage over global banks in implementing Journal of Payments Strategy & Systems Vol. 2 No. 2, 2008, pp , Henry Stewart Publications, Page 119

2 Understanding corporate clients a treasurer s agenda programme for similar customers. This is mainly due to the ability of non-global banks to overcome thorny trade-off issues across product lines more quickly, and to have less complex product and geographic organisations. Keywords: Banking, client management, treasurer, customer profitability, product sales WHAT TREASURERS WANT FROM THEIR BANKS What does the corporate treasurer want from their main banks? In-depth interviews were conducted with over 200 treasurers from global multinational and large corporate firms in the US, European and Asian markets. The interviews focused on asking the treasurer about the type of critical business issues they faced, how banks currently respond to these issues, and how banks could best serve their needs going forward. On the whole, there were no discernible differences in responses by the treasurers across industries, size of company or geographic location. Nor were there noticeable differences in response to how they wanted to be handled by a bank. The differences in responses were, instead, related to the specific priorities they faced and needed help from banks to resolve. For example, one company may have pressing short-term working capital funding issues, while another may be focused on quickly expanding export markets. But both companies responded in the same way to what they wanted from their banks and how a bank could deliver it overall, although the specific business priorities were different. The responses were themed into four major groupings and are summarised as follows. Implications of solutions and advice from banks Banks are great at selling products, but internal product silos prevent solutions packaging across products. Banks need to assist the treasurer to repackage the banking solutions up the line for internal sensitivities, for example the effect of the solutions to earnings per share, weighted average cost of capital (WACC) or loan covenants. Role of the bank s coverage model Treasurers like the one-person anchor point coverage, but are deeply frustrated over the general inability of banks to provide holistic client team coverage where all the product implications are examined. Treasurers do not expect a super banker to solve all their issues or to have the expertise across all the products, but do expect product specialists to work across product lines, as issues treasurers face the impact of most product families at the same time. Solutions should be originated by the bank through a cross-functional team of specialists who are dependent on each other to deliver. Treasurer key performance indicators (KPI) The treasurer s KPIs vary greatly, and are dependent on the type of business, where the company is in the business cycle, and the degree of integration of the treasury function into other business units, eg Sales or Procurement. Banks need to approach the KPIs uniquely for the treasurer in order to match the advice of the solutions directly to the implications on the KPIs, while retaining efficient product delivery. Page 120

3 Fremlin, King and Mathias Treasurers are not willing to pay for advice directly, but will compensate for it as part of overall solutions pricing, and/or through additional share of wallet. Banks data-gathering and analysis process of treasurer business issues Banks need to take an active role in analysing the company s value chains relevant to the critical business issues with an emphasis on where the risk points are and their importance. General risk categories banks need to examine are: (i) corporate financial management (the support of the company s operations and best return on current assets, liquidity trade-offs) (ii) capital markets funding (short-term and medium-term funding, financing suppliers, buyers and inventory) (iii) working capital (cash forecasting and consolidation, optimising cash throughout the cycle) (iv) risk management (hypothesis testing what if scenarios, supplier/buyer performance risk processes, mitigating currency, interest rate, counterparty performance, credit risks, corporate governance) Collecting, building and analysing data models relevant to the value chains may take a significant amount of time and resources for both the treasurer and the bank, but is a crucial requirement. Data modelling the treasurer s business issues requires dedicated resources by the bank to prioritise what has the most impact for the treasurer, not necessarily the most impact for the bank Larger, more complex companies (eg geography, product lines, market segments) tend to have disaggregated business processes, and understanding the value chain details can take a significant amount of time and effort invested without a certain outcome. The responses by the treasurers point to an evergreen dilemma for both the treasurer and their bankers. On the one hand, the treasurer requires, and for the most part obtains, specialised product expertise, advice and delivery, whether from the foreign exchange structurer, the cash management specialist, the trade finance specialist or other specialists. On the other hand, the degree of product sophistication and complexity which treasurers need has created product silos within the banks, making it very difficult for products to work simultaneously on the same business issues of the corporate treasurer. Product coverage personnel are hired and trained to view their product implications to the customer. The products have different performance metrics and most often do not reward cross-product structuring or execution. While this may be an effective coverage model for the banks, as the research points out, nearly all critical business issues where the treasurer has a need for value added advice touches multiple products. Advice to a treasurer on the supplier risks may create a solution where the company reduces the import letters of credit and shifts to open account handling with a combined foreign exchange hedge (or even eliminating some FX using home currency invoicing) and cash collection accounts and asset management funds. Moreover, the solution that is right for the treasurer may come to the detriment of one or other individual products in the bank, even though collectively the bank s solution is more profitable than each product taken individually. Treasurers just want the best solutions and are concerned, in fact annoyed, at their bank s general inability to integrate their product views. Page 121

4 Understanding corporate clients To complicate the situation even further, treasurers have traditionally responded to banks compartmentalised product teams by assigning product roles to their banks, thereby splitting the share of wallet, in general terms, by products (eg a lead cash management bank, a lead trade bank, a lead USD/EUR bank, etc.). Treasurers are more and more prepared, as both research and practical experience has shown, to be willing to (at least partially) replace their bank product role assignment with multi-product share of wallet to those banks who can successfully integrate their product advice. This sea change in the ways banks can assist the corporate treasurer has significant implications and rewards for both parties. MEETING THE AGENDA OF THE TREASURER The following real-life example illustrates how a cross-product team can meet the needs of a treasurer. The treasurer faces a critical business issue. The company s sales have been negatively impacted owing to longer payment terms in new competitive markets, as cash flow from their receivables have slowed. Even though the treasurer s banks have ample working capital lines available, the treasurer is faced with significantly higher funding costs. The issues affect his cash management, his trade flows, his foreign exchange hedge and his cost of capital. The banks respective experts in their product fields jointly address the critical business issue. They, together with the treasurer, analyse the impacted export value chain and model the As-is situation to determine where the most significant risk points are located (for example with specific buyers/customers, markets, product lines) and the financial impact (eg in terms of WACC implications). The bank s team then together brainstorms potential solutions and alternatives based on the data modelling. Trade-offs are discussed and agreed upon. The new solutions, or the To-be alternatives are modelled (eg the positive impact on WACC) and presented to the treasurer. In the above business issue, the solution could be to securitise the export receivables with currency and credit protection and to centralise the operating accounts. Special purpose vehicle set-ups, hedging schedules, credit default swaps, cash collection accounting and securities distribution could all be product-specific responses. The treasurer now has a multiproduct, holistic advisory view by the bank, which has specifically translated the solution impact to the treasurer and their company s internal performance metric. The treasurer agrees to the solution and execution takes place. Figure 1 illustrates the shift from an independently productdriven to a cross-product response in this example. The treasurer, in making his decision, will consider shifting share of wallet from other banks to the solution provider. It is unreasonable for the treasurer to give all his banking share of wallet to one bank, but if the economics of the solution makes enough sense (it does in well over 90percentofthistypeofcasestudied), the treasurer will be willing to shift the part of the wallet that affects the critical business issue. Furthermore, in most cases, new wallet is created, for example the securitisation wallet, as another reward for the bank s advice. The typical solution packages which a multi-product banking team typically addresses can be categorised into six main topics: (i) securitisation of receivables and other asset-based financing (ii) supplier risk reduction (performancebased, credit insurance) Page 122

5 Fremlin, King and Mathias Current Response (example): Independent product-driven to specific treasurer needs Lending: Utilisation of the Loan Facility Cash Management: Pooling and Netting service Corporate Fin. Mgmt Capital Markets Funding Treasurer Agenda Response: Holistic customer-driven across products Identify a Critical Business Issue: Overall Solution: - Sales revenue impacted due to longer payment terms in new competitive competitive markets, slower cash flow from receivables. Figure 1 Shifting from productspecific to product-holistic advice Trade: Export Finance solution Working Capital - Treasurer can save funding costs, improve cash flow, and mitigate interest and currency risk by securitising export receivables with currency/credit protection and centralised accounts Securitisation: Receivables ABS Structure a cross-product response: FX: FX Sales and Derivatives Risk Management - S pecial Purpose Vehicle set up - collection accounts/pooling - currency hedging/swaps - credit default swaps - credit enhancements/liquidity lines - securities distribution Responding to critical issues on the Treasurer Agenda allows a bank to bundle products more effectively and to develop advisory relationships. (iii) buyer risk reduction (iv) value chain financing both supplier and buyer (performance-based financing and supporting accounts) (v) product risk reduction (currency/ interest/commodity risks, supporting accounts) (vi) demand risk mitigation (shortterm working capital funding and hedges). The impact on a bank s product line and profits changes when these packages are pursued. Owing to the intensive risk mitigation attributes, capital markets and structured products contribute to about 60 per cent of the To-be wallet, while lending and transactional products shift from about 60 per cent (in the As-is product silo view) to about 40 per cent of the To-be solutions. The greater focus on the capital markets and structured products also improves the bank s return on equity and overall client profitability. In representative cases, the total client return (total profits the bank makes on the customer over total assets allocated for the customer) a bank uses to measure customer profitability can increase on average by 40 per cent from 255 basis points to 329 basis points. Figure 2 shows the average increase in banks customer profitability across 56 sample customers where the treasurer s agenda programme has been implemented. The process for a bank to address the issues of the treasurer is straightforward but requires careful planning, focus on the front loading of data analytics and attention to detail and measures. As with any cross-functional exercise, the execution is key, particularly in order to create an industrialised process that can be replicated across customers and markets. Successful banks who have embarked on this type of programme share four generic Page 123

6 Understanding corporate clients Figure 2 Average total client return pre- and posttreasurers agenda response from 56 sample corporate customers Total Client Return (basis points) b.p Structured products Markets Lending 329 b.p Structured products Markets 100 Lending Traditional Trade, Cash Traditional Trade, Cash Product -Specific Sales model Pre-TA response Holistic Product Advice model Post -TA response Data Sample N=56, Pre-TA range b.p., Post -TA range b.p. Mean TCR pre -TA = 255 b.p., Mean TCR post TA = 329 b.p. Mean increase = 41% Median TCR pre -TA = 253 b.p., Median TCR post -TA = 313 b.p. Median increase = 29% process steps in establishing an industrial strength business model: (i) Organise a cross-functional team experienced in structuring multiproduct solutions. In this step, representatives from transaction banking, credit, markets and structured finance who have cross-product experience come together to agree on target customers, markets and types of issues on which to focus. Relationship bankers are also important members of the team, as they can bring client issues to the forefront. (ii) Collect detailed treasurer specifications, critical business issues and value chain data with a selected sample of 10 to 15 customers. This step of the process the front loading is the most time consuming and requires excellent quantitative datamodelling skills. The treasurer normally has a good handle on flows and other data but usually does not have the risk and other modelling capabilities that a bank can offer. (iii) Model development for each prioritised critical business issue. Taking the data model, develop the solution sets and alternatives, including the performance metrics, the economic model for the customer. This is the data-driven advisory content the bank produces, ie the share of mind value added. (iv) Implementation and roll out. Presentations and pitches to the treasurer (and often the extended customer ie the procurement or sales departments who are interested how finan- Page 124

7 Fremlin, King and Mathias cial solutions can favourably affect their business). After some experience, the team is ready to determine the impact of the programme and how to extrapolate the know-how into a robust, production model for more customers and value chains. TRANSFORMATION FOR THE BANK AND THE TREASURER The outcome for the bank in pursuing a treasurer s agenda programme has its rewards but also its implications. Product teams need to be motivated to work cross-functionally. The work often means trade-offs and joint agreement on how to price and count revenues and profits. Complicated matrix designed reward systems often hamper the process more than help. Each bank has different cultural ways of handling these potentially thorny issues. Generally, however, all products should be rewarded if the whole (the solution) is better than the sum of the parts. That is, provided the treasurer believes there is value added. Another implication for the banks is dealing with several product priorities and investments while trying to form a common view for the treasurer. The customer, for example, may be a priority client for trade finance but is not a cash management target or vice versa. A solution which works well is to re-segment customers, based on their treasurer s agenda potential. Not all treasurers are ready for this approach, but many are, and an overall customer segmentation priority is an effective way to meet the needs of the individual products. Again, the relationship banker will play an important role in this area to prioritise the customer strategy alongside the needs of other customers. Given the complexity and size of the large global banks, institutionalising a treasurer s agenda programme across a global bank has one main drawback: time. Global banks need to change the process for teams of thousands spread over geographies and product lines. Overcoming potential internal roadblock issues such as revenue-sharing schemes and final say over trade-offs can significantly delay implementation, but the bottom line impact can be significant by increasing total client return for already large client segment franchises. It is a step by step approach which, in one global bank s case, had a three-year full implementation period. For medium-sized and regional banks, however, time is a competitive advantage over the global banks. Product teams are smaller, and tend to be less silo-behavioural. These banks are also strongly motivated to provide new value added advice to their customers, as the global banks are formidable competitors. Full implementation can be significantly shorter for a regional bank, often less than 12 months. While they may lack the balance sheet strength and full product range compared with the global banks, time to market is a critical advantage as with any advisory, share of mind financial services programme. Whether the bank is global or not, a key success factor to a successful execution of a treasurer s agenda programme is advisory-sales training for the product origination and coverage staff. With some exceptions, product sales and coverage personnel are not trained in advisory sales. The ability to take the customer s view, understand the details behind the business issues, formulate and present insightful advice and alternatives to a treasurer or CFO requires different skills from, say, typical product sales or relationship managing. It is a role that most product specialists/relationship managers were not hired to do, and not everyone can do. Page 125

8 Understanding corporate clients The bank should consider investing in upgrading the skill set and mindset for, initially, selected personnel, and also consider external hires. For the treasurer, the ability to bring the bank s collective view into focus also has major implications. Given that the treasurer s agenda is primarily associated with business, financial and risk flows, the treasurer becomes more and more involved in the business of the company. A simple, but notoriously difficult process is cash forecasting. A bank s treasurer s agenda programme has demonstrated the ability to improve the treasurer s cash forecasting as the procurement/production/sales views become better integrated. This has obvious positive effects for the treasurer. There are many other benefits but also some risks when dealing with banks in this manner. Corporate treasurers can become very dependent on the advisory process of a bank to the detriment of fairly allocating share of wallet (in return for credit assets, for example) which has shown to unbalance bank relationships. At the end of the day, however, if the treasurer and his company are better off, these concerns tend to take a secondary priority (especially when availability of credit is a commodity). BOTTOM LINE Treasurers want banks to take a crossfunctional product advisory role in solving their critical business issues. They want this role while maintaining the extremely valued product expertise from the banks. Banks, while organised to provide advice by product line, will need to establish an origination and execution process that combines the product expertise into a cohesive advisory model. This is a doable but potentially lengthy task for global banks, while regional and medium-sized banks may find a competitive advantage operating in this new environment. Data from both a cross-section of treasurers and sample implementations of the treasurer s agenda programme at global and regional banks have demonstrated the significant market potential for both business results and a new and more effective operating model between banks and their corporate customers. Finally, banks should be encouraged to consider the following questions in addressing the needs of the customer and their response: (i) The fully empowered treasurer may be something of a rarity today but he or she will be part of the future sooner than many bankers are thinking. Is that person recognisable now by the bank? (ii) Product innovation will continue at an accelerated pace, but it alone will not create stunning profits for most banks banks will need to deliver higher and higher quality solutions for their clients. Is the bank organised to deliver those solutions today? (iii) Client loyalty is a precious commodity. Share of Wallet may be the right measure for today but Share of Mind with the CFO or the Treasurer is security for the future. Can the bank take its business to the next level beyond conventional products? Page 126