Chuck Dannewitz:  We have a central treasury team, comprised of 21 individuals, and we also have approximately 20 employees who divide their time between treasury and accounting within our various business units across Europe, Latin America, Canada, and the U.S. They report to the business units' financial directors, and they're the ones who performed all our FX hedging.

Previously, we had a centralized FX policy, and corporate treasury would review the results and provide oversight, but essentially each country handled its own foreign exchange. The business units' treasury staff would pull information from our SAP ERP [enterprise resource planning] system to determine their FX exposures for the day. They would then call two of our FX trading partners and obtain quotes, select the best cost alternative, and enter into a hedge. The methods of obtaining and aggregating information to arrive at our total FX exposures for the day varied, country by country.

T&R:  What was Tech Data's FX volume?

CD:  Our FX volume was estimated to be approximately $30 million a day. A large majority of that volume occurred in Europe.

T&R:  What were some of the challenges this environment created?

CD:  There were several challenges. First, it was difficult to share best practices because our processes were not standardized across countries. Second, a number of those processes were performed manually in Excel spreadsheets, so there was a potential for data entry errors. And finally, trades didn't always happen at exactly the right time, which is an important factor when trading currencies.

T&R:  Why weren't trades timed right? Because some of the processes weren't efficient?

CD:  Different processes, different priorities. Treasury wasn't the only focus for those individuals managing FX hedging for the company; they all had a number of responsibilities. We might ask them to have their trades completed by 11 a.m., but their attention could, at times, be diverted to something else, and it might delay the trade to 2 or 3 p.m. If an FX trade slips to later in the day in a country like Poland or the Czech Republic, where the currency is more volatile and thinly traded, we might not hit the right liquidity window.

Also, we didn't have a large breadth of expertise. If one person was sick or on vacation, there might not be someone knowledgeable enough in treasury processes to fill in. Trades might shift to the next day. Most companies set a hedge rate and then hedge once a month or every two weeks. If we slipped from one day to the next, it was still good practice. It just wasn't best practice.

T&R:  How did central treasury provide oversight of FX trading in this environment?

CD:  We had an information system through which individuals would manually post data about FX exposures and the corresponding hedges in the various currencies. Unfortunately, we would get that information with a lag of at least one day.

T&R:  You started this project in 2008. Was the global financial crisis also a factor?

CD:  Currency volatility around that time really highlighted the importance of timely, accurate data. During that time, the euro-dollar exchange rate moved approximately 10 percent in one week, underscoring the need for better systems.

T&R:  How did you get started with the FX transformation?

CD:  Our treasury team initiated the project. We brought together a diverse group—including individuals from the functional operating groups, accounting, tax, and IT—and we did a thorough review of our practices. We asked: Are we hedging the right things? Are we capturing all the business opportunities? Are there any other things we should be hedging that we're missing? Is our policy correct? We thoroughly analyzed the entire process to identify anything that was not considered best practice.

T&R:  What did you do with the results of that analysis?

CD:  We spoke to consultants and other companies and found that best practice is a centralized function performing FX hedges for the entire group. We recognized that we needed more visibility on a day-to-day basis, as well. We wanted to be able to net trades, and to reconcile our FX trades so we could evaluate how much is the bid-offer spread, and determine how much is just cost and how much is an actual currency gain or loss. We needed visibility into the causes of FX gains and losses, and whether they are expected or unexpected, so when unexpected losses occur, we can determine what went wrong and come up with a different hedging strategy.

T&R:  Did you have this kind of visibility before?

CD:  Not to the extent we do now, and not as timely. It took much more effort to obtain this information.

T&R:  So, how did you build better visibility into your FX hedging process?

CD:  One of the first things we did was roll out FiREapps, which is software that automatically pulls FX information out of our SAP system and aggregates the information, providing us with a net exposure worldwide for each of the currency pairs hedged. At that point, the trades were still decentralized, but every country was using FiREapps. We also implemented FXall, which is an automated trading platform that provides quotes from numerous banks. It took us approximately a year and a half to fully implement the software solutions and related processes.

T&R:  Did you eventually end up centralizing your FX trades to achieve best practices?

CD:  Yes. Once we had everything working well on a decentralized basis, we launched phase two of our project, which brought all the trades into our centralized treasury group and also created an in-house bank.

T&R:  So, how does FX hedging work now at Tech Data?

CD:  Now we have five individuals who handle FX hedging for all of Europe. FiREapps aggregates the data seamlessly, so we have clear visibility on our exposures early in the day. The FX team reviews, country by country, the trades that can be netted on an aggregated basis, then uses FXall to place external trades where necessary.

SW:  We have a lot of internal trades, obviously, due to the netting. Those all settle through our in-house bank, which is part of the FSCM [Financial Supply Chain Management] module of our SAP ERP system. This eliminates the need to transfer funds unnecessarily back and forth through third-party banks. Once external trades are executed, they are also automatically uploaded into our in-house bank.

T&R:  Are the 20 people in the business units doing any FX hedging anymore?

SW:  At this point, very little. They are making sure their books are up-to-date and accurate in SAP, ensuring accounts are correctly designated as FX accounts for FiREapps to pull from so the exposures reported are accurate. But beyond that, it's all handled centrally. We've eliminated approximately two hours of work each day for our in-country personnel, and when multiplied by 20 people, it adds up. The centralization and automation allow them to focus on value-added activities for their business unit, rather than on gathering and consolidating FX data.

Centralizing also provides the corporate treasury team a better view into what is actually going on in-country. We can ask much better questions. We've had some significant wins, just through that process alone. For example, we noticed in some countries a significant portion of trading activity was purely for cash management needs and not real exposure management. This clarified a focus area on some of our cash forecasting process improvements and allowed us to reallocate cash among the different countries, to where the particular currency was needed, without transacting unnecessary FX or changing underlying exposures.

T&R:  What other benefits have you realized by centralizing FX hedging?

CD:  For one, we always have coverage in terms of staffing. There is no longer a skill gap in a certain country when someone goes on vacation. Second, we've developed substantial capabilities in the FX group. Before, we had experts in certain locations, but as people left and we replaced them, the amount of expertise varied. It's much easier to have a strong team of specialists when it's centralized.

Another major benefit is that our volume of FX trading has come down dramatically. In the past, we had 21 different entities in Europe, and each might be placing different trades—some long euros, some short euros. Now we net everything. So on a given day we may have 40 million of long euro and 20 million of short euro against the U.S. dollar, and we'll place one trade for 20 million. Our goal was to cut our trading volume in half, and we are on track to achieve that. We're on a run rate to save €1.5 million this year, or almost $2 million, simply by netting across countries and eliminating the duplicate hedges. And because of the in-house bank, we are saving on wires and other third-party bank fees as well.

T&R:  Are you also getting better exchange rates?

SW:  As we are receiving the information earlier in the morning, we are obtaining the optimal exchange rates because we're hitting the window on the best liquidity in the market.

The other important benefit of our new process is that it is scalable, so it can flex with us as we grow. If we have an acquisition, we don't have to spend a lot of time training the new staff on our FX policies.

CD:  We made an acquisition late last year, and once we converted the acquired business onto our SAP system, it was very easy to connect them to FiREapps. Our centralized team was able to begin handling their FX hedging very quickly.

T&R:  How did you convince the business units around the world to get on board with this project?

SW:  One important factor was that we assigned a dedicated treasury person to the project. That showed our commitment to making this change, and I think it's always important for the department that is leading a project to provide a dedicated resource.

CD:  We also focused up-front on communicating with all the various departments that were impacted by this project, particularly at the country level. We explained, first, that we would be saving them time; second, we would be obtaining more accurate data; and finally, we would be saving them FX costs that were impacting their P&Ls. Centralizing FX trading was a win-win, and as soon as the business units understood that, they fully supported it.

For more information about Tech Data's FX hedging process, join Treasury & Risk for a webcast on Thursday, September 19.