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Reaching for the sky…

10The ‘cloud’ is the next big step in IT for treasury operations. PAUL MELLY looks at the advantages and risks

Can you afford to invest in the right technology
– or can you afford not to ? That’s the conundrum that so often faces finance  directors today. Is it possible to remain competitive without regularly refreshing your IT to keep up with the latest systems that other businesses may already be buying?

It is a question that’s particularly applicable for treasury tasks such as cash management and foreign exchange, where the sheer volume of work to be handled imposes pressure and the risk of mistakes.

It is these dilemmas that are pushing many companies towards considering entrusting treasury operations to “the cloud” – servers hosted on the internet.

11Cloud computing – the use of such remote servers to store, manage, and process data – is increasingly widespread in many areas of business life. And as individual private consumers, finance executives are usually comfortable with it in their daily lives.

However, it is a big step to move from such generalised familiarity to adopting cloud services as a main operating tool for the treasury operations of an entire company.

When it comes to a function as critical as treasury, can a business risk placing its trust in an outside internet server provider?

Drivers for change

Yet powerful factors are driving many firms to contemplate this option.

It is possible to rely on traditional spreadsheets for treasury work. But these can be slow and they carry the human risk of errors in manual data input.

For today automated treasury management systems (TMSs) offer a quicker and a more reliable alternative. And once competitors and business partners have moved on to more modern systems, it is hard to resist the pressure to match them.

However, a modern TMS system does not come cheap. A potential buyer has to invest in the necessary infrastructure, sort through the choice of potential systems on offer, pay a hefty licensing fee and then endure a prolonged installation and testing process.

Industry experts say that it usually takes several months to set up a TMS and the process can drag on for much longer than that.

Yet even once that hurdle is overcome, the costs and the technical challenges don’t end.

Even after the system has been put in place, it will still require regular maintenance and support.

Research by business and information technology consultant Infosys suggests that businesses spend the vast majority of their IT budgets on running the systems they already have and then keeping them fully operational. It is hugely expensive to maintain a TMS at a time of such rapid technological change and this can cost far more than purchasing and installing the technology in the first place.

Moreover, before long a customer may feel it has to expand or further modernise its TMS, just to remain competitive in terms of both efficiency and operating cost. But such an upgrade, of course, is a further burden on the investment budget.

Turning to the specialist

Faced with these challenges, it is hardly a surprise that many companies now turn to providers of TMS services on the cloud.

Thus they contract out the job of operating automated TMS to a third party, a specialist for whom this is a main business.

For such an expert service provider, investment in the latest technology, its maintenance and regular upgrades is the core activity; and because services are being offered to a range of customers, the cost of staying at the forefront, in technical terms, is being spread across all their client businesses. And that should help keep costs affordable.

Of course, each customer firm still faces the initial time-consuming challenge of selecting an appropriate provider to begin with. But, once signed up, they can leave the operation and regular upgrade of the TMS system to the specialist.

Reliance on a cloud system can also bring extra flexibility, at a manageable cost.

The customer can request the addition of further features as required, subscribing only to those upgrades or extra functions that are relevant to their particular needs.

The capacity of the system can also be increased to match their growing requirements as their business expands – or, if need be, it can be scaled down, if the business goes through a quiet period. Capacity that is reduced is not wasted, because the cloud provider of the TMS is also servicing the needs of other customers, and some of them may be expanding.

Facing the risks

But it is not only the workload and technology costs that are outsourced. In entrusting treasury management to a cloud provider, the customer is also outsourcing risks and some of its control over those risks. The client business no longer controls where its internal treasury data and the IT applications managing this are located.

There are risks of systems failure. The TMS could suffer a major software hitch, for example. Still, that risk may be no greater than if the TMS was installed in-house; indeed, the risk could be lower because the cloud provider has such a powerful incentive to ensure that its technology – its core product, after all – is reliable and up- to-date.

The system needs to offer speed and reliability so that transactions take place in real time, to ensure that the customer is not left exposed with, for example, a foreign exchange position that is not hedged, or pricing that is not matched because a technical flaw has delayed the conclusion of a matching counterparty deal.

But tougher questions relate to privacy.

Can the provider guarantee the security of the data – which is after all some of the most important internal financial information about the customer’s business? What measures are in place to ensure that no unauthorised person – or competitor – could get access to this information?

Treasury data relates to key business functions such as payments into and out of a company, its cash reserves, its funding arrangements and use of swaps, or its foreign exchange dealings and how these may be protected through forward cover or options.

After all, if data leaks out that could damage the credibility and reputation of the client firm. Its own business partners and customers might start to wonder whether the company can be trusted or whether it is financially solid.

For this reason, industry specialists generally advise companies not to opt for TMS services provided on a public cloud used by a range of other clients, where resources are shared and confidential information may be available to a relatively large number of people.

It is important to opt for a provider that can offer a dedicated cloud space that benefits from economies of scale and shared technology, but is, nevertheless, private and thus offers the best security.

Today, such private hosting is on offer at affordable cost, offering the flexibility of service and scale that one would expect of cloud services, but with good security, too.

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