A year ago, debate revolved around whether a centralised or a decentralised structure was ideal for multinational companies (MNCs) operating in Asia. In terms of cash management, this debate related to the regional cash management and financial treasury centres that were being established in the Asia-Pacific region and where these centres were to be located.
At the time, the two key Asian cities caught up in the debate were Hong Kong and Singapore. Although these two cities are still important, the debate has progressed beyond which is a better location in which to establish a regional office as other low-cost centres are becoming available. Unsurprisingly, the debate continues today with MNCs and Asian companies alike still torn between whether to establish a centralised or a decentralised approach.
In deciding whether to take a centralised or decentralised approach, a company needs to first evaluate its whole business strategy and model. The strategy determines the business needs and issues and questions to be addressed, such as target market, competition, suppliers, and other factors affecting the business such as geography, government regulations, taxes and technology. The cash management structure must fit the business strategy and the business model. For instance, a business model requiring considerable local knowledge may not be as suited to a centralised cash management approach as a business that operates on economies of scale. Companies exploring a centralised versus decentralised approach need to ascertain what constitutes the optimal level of efficiency for them – economies of scale for cost efficiency, or local knowledge for quick on-the-spot decision making.
Here we discuss the choice and also consider how enterprise resource planning systems (ERPs) fit into the picture. We will also revisit the Hong Kong versus Singapore debate.
The Decentralised Approach
Decentralised organisations have been the most common cash management organisational structure for MNCs in Asia to date, with local management control of operations being typical and corporate and treasury control residing in the US or Europe. Decentralised structures favour companies with diverse businesses or stronger geographic needs that require local knowledge and quick on-the-spot decisions.
The conglomerates of Asia, many drug companies and the Asian property companies also typically operate in such a decentralised manner. For the Asian conglomerate, the decentralised structure allows the establishment of executive layering and hierarchy, and helps these companies make quick decisions commonly required for asset trading (buying and selling) activities. The only overall control is ‘centralised’ reporting by the local executive to the designated group-wide executive, and more commonly to the majority owner or leader of the conglomerate.
Most MNCs have in the past few years either moved towards, or are at least actively considering, a centralised regional headquarters structure for better monitoring and control over cash in the region, especially in light of the recent slowdown in global economies. Most MNCs envisage, at a minimum, some sort of regional centre based in Hong Kong or Singapore, although many would agree that a truly centralised organisation is hard to find.
The immediate goal of many MNCs is to first rationalise in-country cash management and use that as a stepping stone to a regional headquarters structure. The key goals are: improving visibility of funds and information, improving corporate control, achieving economies of scale (cost savings) and developing centralised centres of excellence (finance being one, and technology being another). The economies of scale to be achieved by concentrating funds with fewer banks means a reduction in banking charges and fees due to a company’s improved ability to leverage regional volumes when negotiating with its banking partners.
Establishing a centralised cash management function also requires more centralised resources for information technology (IT) hardware and software and the management of IT and management information systems (MIS). In addition, as most companies have expanded from a traditionally decentralised approach, converting to a centralised structure requires a high degree of management process and procedure redesign.
Airlines provide a good example of a centralised company in Asia. An airline’s cash management, payment and finance systems are all centrally managed. Horizontally and vertically integrated companies, too, are able to find ways to centralise to gain economies of scale and reduce costs from non-core business functions; however, communication costs are likely to increase as a result of the need to link various systems and locations.
One method used to link various departments and locations is to implement a company-wide ERP system. This will merge operational and financial information systems on a company-wide basis. ERP systems can be an important tool to reflect management style and philosophy. For example, a centralised and common ERP system in a company will help align subsidiaries and their performance. An ERP system can also serve as a tool for establishing best practice across the company; for example, companies that acquire others will generally insist on the merged or acquired companies adopting the systems of the parent company.
The strategy taken (whether centralised or decentralised) will have a significant impact on upgrades and design changes for the ERP system. A centralised and common group-wide ERP system would generally allow for cost savings through a reduction in maintaining skill sets and resources required to manage various systems. Note that an important consideration for a centralised ERP system is the need to maintain more powerful group-wide systems, more powerful servers and back-ups for the whole company, and definitely the use of a private data network.
Choices in Centralised Structures
When considering the centralisation of the cash management process, a regional company can choose between implementing a reinvoicing centre, a regional treasury and financial centre or a shared service centre.
Reinvoicing Centres – A reinvoicing centre is established for the purpose of centrally invoicing local entities, and purchasing from a parent company generally located in the US or Europe. Purchases are made in the currency of the parent (e.g. USD, the euro, or GBP), while sales to local entities are made either in the same currency as the purchase, or in local currencies. A degree of automation and centralisation is required in this structure, which represents the first step towards a more centralised treasury.
Regional Treasury and Financial Centres – These are commonly established to allow a single centre to manage foreign exchange (FX) exposure for all entities in the region, and to oversee regional liquidity management and investments of surplus funds.
FX trading can be done centrally, or in the name of the local entity in each country. Either way, settlement is effected through centrally held treasury accounts for each currency. Pooling, cash concentration or some other aspect of liquidity management carried out on a regional basis is usually a vital part of such a structure, and is becoming ever more important to MNCs operating in Asia. Although cross-border activities are restricted due to FX constraints under banking regulations, many countries now at least allow in-country pools and sweeps. A further advantage is the power that comes from concentrating funds and investments, as well as the improved capabilities and knowledge achieved by staff who pool their improved skills in the centre of excellence.
Shared Service Centres – SSCs are operational centres established to centralise not only treasury but also the accounting functions (payables and receivables) for all entities in the region, or even on a global scale. Domestic collections and payments are either outsourced to a cash management bank or monitored and executed centrally. In its most developed form, the SSC would require extensive standardisation of processes, liquidity management and rationalisation, and almost always a degree of outsourcing, plus the establishment of a common ERP or MIS.
To achieve more automation and outsourcing, a strong electronic banking platform common to all subsidiaries is needed; it should be flexible, robust and capable of interfacing with a company’s back office systems. Recent improvements in automation and electronic banking in Asia have combined to speed up local collections and enhance the payment process, thus assisting cash flow forecasting and liquidity management, and contributing to overall management control and efficiency. The outsourcing trend enables companies to refocus on their core businesses, leaving banks and specialised service companies to engage in the logistics and operations of the back office and administration functions.
The centralisation trend has gained in popularity over recent years. However, companies in Asia are still predominantly decentralised, having grown from separate geographical and domestic bases of operations. Nevertheless, the move in recent years towards centralising has largely been influenced by the movement of back office and non-core administration and operational functions to low-cost labour areas. For this reason, the debate on whether Hong Kong or Singapore is the best regional financial centre has now moved on, replaced by the search for a location that can provide the best combination of the cheapest labour and the right skill sets to perform the necessary back office functions. India and China are emerging as strong contenders in providing low-value centralised services.
The emerging danger for Singapore and Hong Kong is that their past roles as regional financial centres might now be replaced by the removal of the higher-value decision-making and treasury functions to the head office located in Europe or North America. However, we believe Hong Kong and Singapore, with their educated labour force, strong infrastructure, rule of law and proximity to market, still have important roles to play as established locations for the centralisation of treasury and finance operations in Asia.
In examining how companies can realise new or additional benefits from a coordinated cash management approach in Asia, we determine that what first needs to be established is whether a centralised or decentralised cash management approach will suit the company concerned. ERP systems and cash management tools can help in the process transition and are important factors in a successful implementation. However, it is vital to understand that the structural approach must match the company’s business model and strategy.
Centralisation and Decentralisation
1) Keep decision making power at the top of the hierarchy
2) Don't delegate to local or lower levels
1) Power and authority to make decisons delegate from head office to lower and local levels
2) Less uniformity
3) Decisions made in relation to local circumstances
1) Consistent policies, greater control and standardised proceedures
2) Quicker decision making
3) Branches are identical, so customer knows what to expect
4) Tight financial control
1) Empower local managers
2) Local knowledge may benefit sales and promotions targetted more effectively
3) Reduces day to day communication with head office
4) Business is more flexible as it is able to respond to customer demands faster
5) Improved motivation and performance
1) Local managers may have better knowledge of customer needs
2) Motivation of local managers may be affected
3) Inappropriate decision at local level
1) Customers may prefer the uniformity of branches
2) Local managers may not see the bigger picture