CHAPTER 6 Streamlining Foreign Exchange Management Operations with Corporate Financial Portals

Transcription

1 CHAPTER 6 Streamlining Foreign Exchange Management Operations with Corporate Financial Portals Hong Tuan Kiet Vo, Martin Glaum, Remigiusz Wojciechowski 6.1 Introduction Global competition and decreasing profit margins force companies to reduce their operational costs. This puts pressure on all business units and operations, including financial management. One approach to increase operational efficiency is the automation of existing processes by eliminating unnecessary manual interventions. Alternatively, one can design and implement new, improved processes. This is a challenging task that gets even more complex if the financial management has to deal with the heterogeneous environments of a multinational corporation. In this sense, the deployment of information systems that help to reduce the complexity of integration, communication, coordination, and collaboration challenges is required. Thus, financial management is in search for the equivalent of the global information system postulated by Chou (1999). In this work, we present and discuss the concept of the corporate financial portal as a global financial information system and management reporting tool. We discuss the extent to which corporate financial portals can help to meet the information management challenges of today s multinational financial management. To complement the theoretical argumentation, we present the foreign exchange management practices as they are currently conducted by the Bayer AG, a German company with core competencies in the business areas: health care, nutrition, and high tech material. By the means of a corporate financial portal and respective service implementations, Bayer s foreign exchange (FX) management practices have been fundamentally restructured and simplified. We evaluate the impact of the corporate financial portal implementation on Bayer s foreign exchange management practices by analyzing the transaction data from 2002 to The chapter is structured as follows: Section 6.2 briefly outlines the challenges the financial management of multinational corporations has to face. In today s international environment, financial management on a corporate level is faced with

2 124 Hong Tuan Kiet Vo et al. integration, coordination and collaboration challenges when striving for operational efficiency. In Section 6.3, we present the concept of the corporate financial portal and discuss how such systems can be of use in the context of financial management. In Section 6.4, we describe the Corporate Financial Portal CoFiPot project at Bayer. We explain how the information and transaction services offered by the portal led to major improvements in the efficacy, efficiency and quality of foreign exchange management at Bayer. The paper concludes with a summary of the lessons learned and an outline of further research questions regarding this topic. 6.2 Challenges of Multinational Financial Management Corporate financial management has to fulfill three primary functions. First, it has to guarantee the financing of long term business-activities throughout the organization. Second, it has to manage short-term liquidity needs and optimize corporate cash flows and cash balances. And third, it has to design and implement financial risk management strategies. 1 While already demanding in a domestic setting, in a multinational context these tasks become highly complex. MNCs operate in several countries and are therefore confronted with a multitude of economic, financial, legal and tax environments. Moreover, MNCs are faced with additional risks, in particular exchange rate risks, and political risks. The complexity of multinational financial management is increased by the fact that MNCs are usually organized as groups of legally independent firms, with local subsidiaries in various foreign countries being under the common control of the parent company: On the one hand, the group structure can be used by the MNC to exploit differences in national legal, tax and other systems. On the other hand, it sets further restrictions for management as each unit is subject to the legal requirements of its respective host country (Glaum and Brunner 2003). Geographical distance, different time zones as well as language and cultural differences further contribute to the challenges. As mentioned before, in this setting financial management has to meet integration, coordination and collaboration demands. Today, MNCs are subject to fierce global competitions. Decreasing profit margins force them to reduce their operational costs. This also puts pressure on the financial management to cut costs and increase the efficiency of its financial operations. The automation of existing processes by eliminating unnecessary manual interventions is one way to increase operational efficiency. An alternative approach 1 Refer to (Cooper 2000; Eun and Resnick 2004; Eiteman, Moffett et al. 2006; Shapiro 2006) for a detailed discussion of (multinational) financial management functions; a brief summary is presented by Glaum and Brunner 2003.

3 6 Streamlining Foreign Exchange Management Operations 125 is to design and implement new, improved processes. The prerequisite in each case is the integration of the involved information systems. The financial industry is well known for its highly heterogeneous systems landscape (Weitzel et al. 2003). Considering that the growth of MNCs is often based on mergers and acquisitions, MNCs are often confronted with the need to integrate a highly diverse systems landscape with regard to global business processes. One further challenge to financial management represents the coordination of the financial activities in the multinational business environment. As noted above, geographical distances, different time zones and local holidays make coordination and communication within the financial organization difficult. In particular, if the corporate centre has to provide in-house banking services (Richtsfeld 1994) to the dispersed affiliates, it will want to establish mechanisms and processes that enable services on a global scale regardless of time zones and geographical restrictions. In addition to the coordination requirements, collaboration also poses challenges in this context. The major goals and strategies of the MNC s financial management are developed at the corporate centre. However, local managers may pursuit their own, personal goals. The MNC thus may have to deal with principal-agent problems (Hommel and Dufey 1996) that affect the willingness and quality of collaboration within the organization. Yet, the quality of the decisions made by the corporate financial centre strongly dependents on the timely delivery of accurate financial reports provided by the operational and legal sub-units. The efficient execution of decisions also depends on the willingness of local management to follow the MNC s overall financial strategies. Thus, the financial management of the MNC has to design and implemement incentive mechanisms and control structures that enforce and ensure collaboration and compliance within the organization. In order to meet these challenges, financial management has to make use of the benefits that information systems based on Internet technology offer. Therefore the following section will present the concept of the corporate financial portal and discuss to what extend this tool can support the main financial management functions. 6.3 Corporate Financial Portals Corporate portals are applications built upon and accessed through the use of Internet technology. The primary function is to offer one single point of access to personalized, business-relevant information, applications and services (e. g. Collins 2001; Dias 2001; Vo et al. 2006). Depending on the actual field of application, literature distinguishes between a multitude of different types of corporate portals including knowledge portals, process portals, or the enterprise information portal (Dias 2001). This work focuses on the concept of corporate financial portals that address the information management requirements of the corporate financial management

4 126 Hong Tuan Kiet Vo et al. functions on a global scale. It serves as a central hub to financial information, application and services on the corporate level as well as on the level of the individual affiliates. In the following, we discuss key characteristics of corporate portals in general, as well as the role of the portal concept in the context of financial management of MNCs Key Characteristics of Corporate Portals Today, most companies have an efficient, always-on communications channel the Intranet. This network can be accessed from virtually everywhere in the world, provided that access to the Internet is available. Applications build upon the use of Internet technology are called Web applications. Every corporate portal implementation is a special form of Web application that consequently can be accessed from everywhere through the means of a standard Web browser. In contrast to traditional applications, Web applications offer various advantages to users and to operators, alike. From the latter s perspective, Web applications have to be installed and maintained on one central application server only, reducing the complexity of software administration and maintenance tasks (Balzert 2000, p. 946) which is particularly helpful with regard to a global operating environment. Further, it is guaranteed that the users will always access the latest version of the application without the need to pay respect to installation and software updates. From the end-users perspective, the primary function of corporate portals is to act as a hub to information, applications and services. For this purpose, the integration of data and systems is a prerequisite (cf. Davydov 2001; Linthicum 2003). Corporate portal initiatives have to be accompanied by associated integration initiatives. Preferably, the integration efforts result in a reusable business integration architecture (Vo et al. 2005), which forms the basis for any portal service or application as it allows portal services to easily access needed data and system functionality for further processing and transformation. A corporate portal will not per se solve the technical issues of system and data integration: these problems have to be addressed within separate integration initiatives. However, the corporate portal can foster integration on the business process level: corporate portal services can access the data and system functionality of one system and make them available to the user within a specific business context. More importantly, the corporate portal architecture supports the implementation of application components and services that can easily combine, transform, and process data and functionality from various information sources. This facilitates the streamlining of existing, as well as the development new business processes. With the corporate portal, these services will be available instantly throughout the organization. The corporate portal therefore not only opens the door to existing integration, but also facilitates process integration on a global level.

5 6 Streamlining Foreign Exchange Management Operations Corporate Financial Portals With the corporate financial portal, financial management is offered a tool that facilitates the coordination needs within the organization. The corporate financial portal can provide often requested information and service regardless of time-zone and geographical restrictions. In this context, the corporate financial portal can be regarded as a one-stop-shop (Österle 2001) that fulfills the user s financial information and transaction needs. Thus, the objective is to establish among the financial community the mentality to search within the corporate financial portal for the needed information or service, first. To support this target, it is important to inform portal users on a regular basis about new services that are available and to monitor their wishes. As a result the portal will help reducing communication and coordination needs of standard processes. Moreover, in a multinational environment, financial management processes will depend on a variety of information that is dispersed throughout the organization. The corporate financial portal and the accompanying integration activities provide the means to access, process, and analyze the financial data throughout the organization, with regard to specific business scenarios. As an example, a corporate financial portal can implement services that periodically (e. g. on a daily basis) evaluate the corporate foreign exchange exposure level and automatically notify the persons in charge in case critical limits are reached. Aside from the information requirements, the effective and efficient coordination of the information flows is a critical determinant of multinational financial management operations. From a corporate perspective, information processes have to be coordinated between subsidiaries and the corporate centre. As the quality of financial management decisions significantly depends on the quality of the underlying data, it is important to provide the financial managers of the local subsidiaries with the necessary incentives to supply the data of the required quality. With a corporate portal, the corporate finance centre can offer value-adding reporting services for these local subsidiaries. By linking the quality of the reports provided to the quality of the original data provided by the local managers, the local managers are required to provide data of high quality for their own benefit. The financial planning activities on the corporate-level that requires the collection of planning figures from the dispersed local affiliates is one potential scenario for the application of a corporate portal as a reporting hub. In summary, the corporate financial portal provides the instruments to improve the effectiveness and efficiency of the financial processes on a global scale. It fosters the management of data, information and knowledge regardless of time zones and geographical boundaries. Still, one has to keep in mind that a corporate financial portal is not a product that is bought off-the-shelf. Rather, it is an information system that follows an evolutionary development process, thus grows in functionality with the number of services provided. In the following section, we will describe a corporate financial portal implementation and evaluate its impact on the financial management processes of the regarded company.

6 128 Hong Tuan Kiet Vo et al. 6.4 Bayer s Corporate Foreign Exchange Management with the Corporate Financial Portal Bayer is a global enterprise with employees and core competencies in four business areas: health care, nutrition, and high tech material. The Bayer Group comprises of three business areas 2 that operate independently under the leadership of the management holding Bayer AG. The German headquarter supervises and coordinate the activities of 350 companies, worldwide. In 2005, the Bayer Group generated a net income of 27.3 billion Euros resulting in an operating result (EBIT) of 2.8 billion Euros. 3 In 2000, Bayer decided to re-organize the organization of the group s financial management structure. The decision was to centralize the financial management activities at the Corporate Center in Germany, Leverkusen, thus reduce the numbers of the dispersed regional financial services centers worldwide. Currently, the Bayer Group s Corporate Finance Center comprises of the Corporate Finance, Corporate Treasury, Credit Risk Management, and Corporate Financial Controlling departments. It takes the role of a global financial services centre and bears global responsibility for the financial management of the Bayer Group. The strategic re-organization poses new requirements and challenges on the information management for Bayer s financial management. On the one hand, the Corporate Finance Center has to provide the worldwide subsidiaries with the required financial information and services. On the other hand, group-level financial management decisions require the Corporate Finance Center to collect, aggregate and process the relevant financial data from the individual subsidiaries worldwide. To address these information management challenges, in 2001 the Corporate Financial Portal project was initiated. The objective was to provide a central point of entry for all manners of financial services for the global financial community of the Bayer Group by the means of an Intranet corporate portal, the CoFiPot. Currently, the CoFiPot provides services that support the key tasks of the corporate treasury management, the corporate financing, the corporate controlling, and the corporate financial planning. Furthermore, a knowledge-base and a number of general services address the requirement of Bayer s financial community. Figure 6.1 shows a screenshot of the homepage of the Corporate Financial Portal. In this section, we describe and discuss the impact of the implementation of the corporate financial portal on Bayer s foreign exchange risk management practices. We first describe the corporate foreign exchange management processes and then elaborate the portal services that were introduced to reengineer key aspects of the corporate foreign exchange management. 2 3 Subgroups: Bayer HealthCare, Bayer CropScience, Bayer MaterialScience. Figures from Bayer Investor Relations:

7 6 Streamlining Foreign Exchange Management Operations 129 Figure 6.1. The homepage of the Corporate Financial Portal (as of February 2007) Corporate Foreign Exchange Management Companies with international business operations are exposed to foreign exchange risk in as much as the cash flows from their projects depend on exchange rates and future exchange rate changes cannot be fully anticipated. Broadly speaking, one can distinguish three concepts to measure the effect of exchange rate changes on the firm. The accounting exposure concept (translation or book exposure) measures the impact of parity changes on accounting profits and owners equity. The transaction exposure concept concentrates on contractual commitments which involve the actual conversion of currencies. Finally, the economic exposure concept also takes into account the long-term effects of exchange rate changes on a firm s competitiveness in its input and output markets. 4 Surveys among MNCs show that the majority of companies base their foreign exchange risk management on the hedging of transaction exposure (e. g. Glaum 2000; Marshall 2000; Pramborg 2005). Companies first try to determine their exposures on the basis of their open foreign-currency denominated contracts (receivables, payables, loans, etc.) Sometimes, foreign-currency cash flows which are expected in the short-run, typically over the budgeting horizon, are included in the determination of the foreign exchange risk exposure. Depending on the firm s hedging strategy, financial management can then neutralize the exposure by enter- 4 Refer to (Glaum 2001) for a detailed analysis of the three exposure concepts.

8 130 Hong Tuan Kiet Vo et al. ing into counter-balancing forward contracts. For example, an exporting firm that expects US-dollar inflows from US exports receivables can sell the expected future US-dollar inflow in the forward market The effects of exchange rate changes on the receivables and on the forward market position will now cancel each other out, the home currency value of the future cash flow is fixed (US-dollar amount times the forward rate). Bayer s foreign exchange risk management process is depicted in Figure 6.2: 5 Corporate FX management practices and guidelines (e.g. hedging limits and restrictions, benchmark definition, ) Measuring FX Exposure Hedging FX Exposure Controlling FX Hedging feedback Figure 6.2. Bayer s foreign exchange risk management process In order to gain from economies of scale and to consequently reduce the cost of risk management, MNCs to manage foreign currency risk on a global level rather than on a domestic level. More precisely, firms try to identify their overall net positions in any given currency by subtracting expected cash outflows ( short positions) from expected cash inflows ( long positions) over all of its sub-units. Since the effects of exchange rate changes on long and short positions cancel each other out, only the net position is effectively exposed to exchange risk. Hence, the netting of foreign currency exposure over the parent company and all subsidiaries results in substantially reduced hedging transactions. In order to enable netting on a global, group-wide level, corporate financial management has to deploy a central treasury management system which retrieves the local exposure data from the subsidiaries and implements mechanisms and functionality to support the multilateral netting process (Cooper 2000) Bayer s Foreign Exchange Management Practice The primary goal of foreign exchange management at Bayer is to reduce the risks that arise from exchange rates fluctuations. This is achieved through the elimination 5 Refer to (Glaum and Brunner 2003) for a detailed discussion of the individual process steps.

9 6 Streamlining Foreign Exchange Management Operations 131 of the effects of exchange rates on booked and anticipated foreign exchange cash flows, such that the impact of currency rate changes on receivables and payables is fully offset (except for hedging costs). Financial risk management is focused solely on exposures which have an impact on cash flows. This means that only accountingbased risks, for example, gains and losses stemming from foreign exchange translation, will not be hedged. Foreign currency exposures of booked cash flows are completely hedged while currency exposures from anticipated cash flows are only partially hedged. The hedge ratios for the anticipated foreign-currency exposures are determined once a year by the corporate financial management. Bayer distinguishes between two perspectives on FX management: group level perspective and legal entity perspective. From the group perspective, the corporate financial head quarter hedges the group net exposure with external banks counterparties usually by executing FX forward contracts. This practice ensures that the FX risk of the Bayer group is hedged according to the corporate financial guidelines. Yet, the legal entities do not automatically participate from the group level hedging activities in the sense that the hedging results are not automatically attributed to the respective corporate entities and their exposure. The legal entities are free to decide on their individual FX management strategy with the option to hedge their FX risk or speculate on improving their earnings by betting on positive exchange rate developments. If they decide to safe-guard their own P&L from effects of FX rate fluctuations they may hedge their exposure with the corporate financial service centre CFSC by means of internal FX hedges. Hence, the CFSC acts as an in-house bank and quotes market oriented prices for the requested hedging transaction Redesigning Foreign Exchange Risk Management with CoFiPot In this section we present the redesigned foreign exchange risk management process at Bayer as it has been implemented with regard to the means offered by the CoFiPot. Still, due to the possibilities offered by the portal, financial processes at Bayer are in a state of constant evolution. The discussion will follow the steps of the foreign exchange risk management process presented in Section We exclude the task of determining the corporate FX guidelines from the subsequent discussion as the definition of corporate financial management policies is not within the scope the presented project Identification and Measuring FX Exposure To determine the Bayer group net exposure, the data on the booked foreign exchange exposure has to be reported by the legal entities on a regular basis e. g. For the majority of entities this process is done automatically on the basis of a daily

10 132 Hong Tuan Kiet Vo et al. 1 Report Exposure Corporate Center Entity A Automated exposure report Manual exposure report Entity B Local exposure Corporate Exposure Database , CoFiPot Local exposure Request exposure reports On-demand Request exposure reports On-demand 2 Monitor Exposure FX Exposure Monitor Figure 6.3. Measuring FX exposure at Bayer with CoFiPot FX Exposure reports offer different levels of aggregation (from group level to the individual transaction) Figure 6.4. CoFiPot FX Exposure Monitor service data import process. The remaining entities that lack the technical requirements to participate in the automated process have to report their exposure data manually either via or by directly entering the data using an exposure upload service provided by the Corporate Financial Portal ((1) in Figure 6.3). In either case, the reported data is stored in a central exposure data base that is managed and used primarily by the financial headquarter for the purpose of group level exposure management.

11 6 Streamlining Foreign Exchange Management Operations 133 The role of the FX Exposure Monitor is to access the exposure database, extract the relevant data, and prepare the required exposure reports ((2) in Figure 6.3). Personalization services provided by the CoFiPot application framework enables the FX Exposure Monitor to provide exposure reports on different levels of details and aggregation with regard on the user s preferences and security level. Grouplevel FX managers have access to all exposure data, while local FX managers only get the exposure reports for the entities within their responsibility. By the means of the FX Exposure Monitor the local FX managers have access to and rely on the same exposure reporting capabilities as the group level FX managers. The FX Exposure Monitor offers on-demand reports of the current FX exposure that automatically highlight critical exposure levels. The exposure report provides three levels of aggregation from the group net exposure, over the entity level, to the transaction level. Moreover, the application offers basic data warehouse slice and dice capability with regard to the dimensions region, sub group, entity and date (cf. Figure 6.4) Hedging FX Exposure On the basis of the FX exposure level reported by the CoFiPot, the corporate centre decides on the subsequent hedging actions on the group level. In the past, this process was done on a monthly basis. However, due to systems integration and process automation, a weekly evaluation of the current corporate foreign currency exposure could be implemented. The process of evaluating the foreign currency exposure, deciding on the hedging needs, and subsequently engaging in hedging transaction on the global FX market has been automated to a large extend. The CoFiPot does not only support affiliates in their data reporting tasks, but also assists them in their individual risk management needs. If the local FX manager identifies the need to save-guard the legal entity s profit and loss from FX rate fluctuations, he may do so by entering into internal FX forward contracts with the CFSC. He can either rely on the traditional voice trade channel (i. e. telephone trading) or chose the CoFiPot FX Trade Entry application (Figure 6.5) to enter into valid FX transactions on a 24/7 h basis. With the FX Trade Entry the FX manager has to specify the trade type, the settlement type, and the currency pair with the buy or sell amount respectively. The application relies on personalization mechanisms to reduce the interaction complexity by pre-selecting suitable, and omitting irrelevant options. Using the get quote functionality, the FX manager obtains a quote for the requested transaction that is based on the current market rate as provided by an external market data provider. The quote is valid for five minutes. Figure 6.6 describes the FX exposure hedging process. After the FX manager executes the FX trade, the CoFiPot FX Trade Entry application directly saves the trade details as specified into the corporate treasury management system TMS and notifies the staff at the CFSC for final agreement and confirmation. It is important to note that regardless of the actual time the trade is processed at the CFSC, the trade conditions on execution are guaranteed. Upon agreement and

12 134 Hong Tuan Kiet Vo et al. Quote from market data provider. Mid rate between bid and ask. Valid for 5 minutes. Figure 6.5. CoFiPot FX Trade Entry service CoFiPot FX Trade Entry 1 Request deal 24/7h 2 Get valid market quotes Hedging demand 4 3 Save trade Confirmation & settlement Corporate Treasury Management System External market data provider Local exposure Legal Entity Corporate Center Figure 6.6. Hedging FX risk process (intercompany) confirmation, the FX manager automatically receives a confirmation letter as a contract for this hedge. The FX manager then either confirms the trade by replying to the with the confirmation letter attached or via the CoFiPot. Furthermore, documentation that complies with the IFRS hedge accounting requirements and guidelines 6 is automatically created and stored for the transaction. This documentation is necessary for the subsequent controlling requirements. 6 The reader is referred to (Deloitte 2006) for a comprehensive discussion on the IFRS hedge accounting guidelines and requirements.

13 6 Streamlining Foreign Exchange Management Operations Controlling FX Hedging Activities Every FX transaction that is closed with the CFSC, is stored and managed by the corporate treasury management system TMS. Consequently, these trades automatically participate in the TMS workflows that include the valuation of the individual trades. The TMS provides FX reporting capabilities that originally were only available to the employees at the CFSC. In this regard, the primary objective of the CoFiPot FX Trades application is to provide a convenient access to these FX trade reports as provided by the TMS not only for the CFSC but for every FX manager with Bayer s financial community. With FX Trades application the FX manager can now request an overview of all FX trades that he is responsible for, and with the respective market values either in Euro or in local currency. Following the general CoFiPot reporting standards, the FX Trades application allows for a slice and dice of the data according to the dimensions entity, portfolio, date, type, and the current trade status (Figure 6.7). It is important to note that the level of detail provided by the CoFiPot FX Trades reports satisfies the requirements of the Bayer s accounting principles (HGB, IFRS, US-GAAP). Close new internal/external FX transactions Documentation according to IAS39 is automatically created for new FX transactions Figure 6.7. CoFiPot FX Trades service Lessons Learned In the following, we evaluate the effects of the corporate financial portal on the foreign exchange risk management process of Bayer. The discussion follows the steps of the risk management process.

14 136 Hong Tuan Kiet Vo et al. The integration of the transactional data from the local/regional ERP systems and the automated import of this data into the corporate exposure database on a daily basis has significantly reduced the need for coordination and communications with the respective subsidiaries. More importantly, the exposure database is updated on a daily basis offering the CSFC a timelier and more accurate overview of the group-level exposure. Currently, virtually all of the relevant affiliates are integrated into the exposure upload process. The process of managing foreign currency risk is also significantly improved as the integration efforts laid the basis for the automation of this process. The information stored in the exposure database is assessed and used to automatically determine and execute hedging activities on the corporate level. As stated in Section 6.4.2, this is done on a weekly basis which would not be manageable with manual processing. Actually, automation would allow for an even higher frequency of the risk management process. Yet, it still has to be evaluated if this activity would result in any further significant improvement of the risk management process. Traders of subsidiaries have the option to close foreign exchange transactions using the traditional means of communication (e. g. telephone, fax) or the corporate financial portal. Figure 6.8 illustrates the development of the hedging transactions per month for the regarded periods and shows whether the telephone or the CoFiPot was used as a transaction channel. Furthermore, the line illustrates the development of the ratio of CoFiPot transactions versus telephone transactions. In 2005, on average 82% of all internal transactions were closed using CoFiPot. From February 2002 till June 2006, a total of 8,966 internal trades were closed using the financial portal (1,694 using the telephone trading channel). We deter- # CoFiPot # Telephone Percentage CoFiPot Jan 02 Mrz 02 Mai 02 Jul 02 Sep 02 Nov 02 Jan 03 Mrz 03 Mai 03 Jul 03 Sep 03 Nov 03 Jan 04 Mrz 04 Mai 04 Jul 04 Sep 04 Nov 04 Jan 05 Mrz 05 Mai 05 Jul 05 Sep 05 Nov 05 Jan 06 Mrz 06 Mai 06 Figure 6.8. CoFiPot vs. telephone transactions (intercompany)

15 6 Streamlining Foreign Exchange Management Operations 137 mined through observation, that the average time to execute an internal transaction is about 4 minutes using the telephone. Even under the assumption that closing transactions using the portal take approximately the same amount of time, one has to consider that with the telephone two persons are involved in the trading process. The analysis of the transaction data further shows that since the introduction of the CoFiPot FX management services in January 2002 the number of transactions per month has increased from an average of 60 trades per month in the year 2001 to an average of 235 trades in the year Figure 6.8 further outlines the different trading channels used for the transactions. The data reveals that following the introduction phase CoFiPot has replaced the traditional telephone trading for most transactions. As of July 2002 the number of CoFiPot FX Trades Entry trades surpasses that of telephone trades. There are at least two reasons for the strong increase in total hedging transaction (cf. Figure 6.9). First, the average number of hedges per entity has increased from an average of 4 trades to 8 trades per month. Second, and more important, the increase in hedges stems from an increased number of entities that hedge their exposure. Figure 8 shows that this number has increased from 14 entities that do hedge their exposure in 2001 to 35 entities in Both effects explain the strong increase in hedges. Fluctuations in this number are due to external business events. As an example, the Lanxess spin-off in January 2005 was followed by a departure of the respective entities that consequently leads to a significant drop in the hedging activities for the subsequent periods. To further support the subsidiaries with their FX management operations, the CFSC offers them the option to participate in a so called Autohedging process. This initiative is another example that illustrates the role of the corporate financial portal as an enabler of new financial practices. The idea is to automatically create internal hedges whenever the foreign exchange exposure of a participating subsidiary changes substantially. The only prerequisite is that the subsidiary feeds the corporate exposure database with its exposure data. The corporate centre will continuously observe the currency exposure of these subsidiaries and execute Ø Number of telephone trades per entity per month Ø Number of CoFiPot trades per entity per month Number of active hedging entities Number of [Entities, Transactions] CoFiPot Trade Entry Autohedging LanXESS Spin-off 0 Figure 6.9. CoFiPot vs. telephone transactions per entity; number of active entities

16 138 Hong Tuan Kiet Vo et al. hedging activities when needed. The financial portal can be used to monitor these hedging activities. Following the active promotion of this service in 2004, currently the Autohedging service accounts for one half of all FX exposure hedges. Taking aside effects from external business events, the CoFiPot currently accounts for an average of 80 percent of all hedging transactions. 6.5 Conclusion This paper identifies and discusses the challenges that the financial management of multinational corporations has to meet. Under the pressure to continuously improve financial business processes, financial management not only has to find ways to streamline existing processes but also has to look for new ways of doing business by designing and implementing new processes. This demand can only be met with the help of modern information systems that reduce the complexity of integration, communication, coordination and collaboration challenges that might be especially demanding in a multinational business environment. We describe the concept of the corporate financial portal as a central hub to financial information, systems and services. We argue that with this information system some of the above-mentioned demands can be met. Moreover, we believe that a corporate financial portal project does not only help to solve existing operational needs but, more importantly, also enables new financial practices that improve the quality of financial management functions. Finally, we describe and evaluate the corporate financial portal implementation of the Bayer AG. On the basis of Bayer s foreign exchange risk management practices we evaluated the role of the corporate financial portal within the context of redesigning the underlying processes of this key function. System integration and process automation enabled us to design and implement new financial practices like a hedging of currency exposure on a weekly rather than a monthly basis. Furthermore, we were able to better meet the foreign exchange risk management demand of the local affiliates by providing them with the possibility to use the corporate financial portal in order to execute and monitor inter-company foreign exchange transactions. Following the process reengineering, we could observe a strong increase in the hedging activities of the affiliates since the introduction of these Web-based trading service. References Balzert H (2000) Lehrbuch der Software-Technik Bd. 1. Software-Entwicklung. Heidelberg; Berlin, Spektrum Akademischer Verlag Chou DC (1999) Is the Internet the Global Information System. Decision Line 30(2): 4 6 Collins H (2001) Corporate Portals. New York

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