"Now the model explicitly lays out the way things are calculated," Baharet says, "and [the sales finance companies'] risk profile is the topic of an ongoing conversation. This has improved decision-making throughout the SFCs. And providing them with this information has increased the profile of the Toyota Financial Services treasury team within the global organization."

In late 2014, Hewlett-Packard was a $100 billion company. Its treasury staff managed more than 2,000 bank accounts, which processed nearly 400,000 transactions annually for business units in 126 countries around the world. They also managed $400 billion worth of derivatives transactions each year. When HP decided in late 2014 to separate into two businesses, the treasury function had just nine months to divide all systems, data, processes, and staff. Calling the undertaking "massive" is an understatement.

One major challenge was establishing the correct liquidity structure for each legal entity. "We had to determine the level of operating cash needed by entities that didn't yet exist, in bank accounts that hadn't yet been opened," says Zac Nesper, vice president and assistant treasurer of HP Inc. "We developed massive models to mimic the global cash flows of the old, combined company and then project how those would translate to all the new business entities." The team had to open 750 bank accounts in 65 countries. They had to split a global cash pool, an in-house bank, and a $30 billion pension fund. And they had to restructure the company's hedging program to support risk management in both new organizations.

Nesper reports that despite the complexity, the HP treasury staff completed the project with no major hiccups. "That demonstrates the value of the HP culture," he says. "The DNA of the company is to work together no matter how tall the task, and we saw that culture shine in our treasury function."

Bharti Airtel was compelled to transform its treasury function when its business moved in the opposite direction. Within one year, the Indian telecommunications giant shifted from serving a single large market to serving twice as many consumers across 17 countries on two continents. "From a pure-play India situation with a reasonably comfortable net cash position in hand, we transformed practically overnight," says Harjeet Kohli, group treasurer and CFO with Bharti Enterprises. "We became a multinational with a net debt position of approximately $12 billion [in June 2010] that had 17 different currency pairs to look at from a risk perspective, and 17 different economies and telecom evolution points to assess for opportunities."

The world's third-largest telecom, in number of subscribers, needed to rethink its entire approach to treasury. Kohli and his colleagues worked closely with the company's board of directors to set a direction and then define seven pillars on which to build the new function, which they named the "group funding, risk, and markets," or GFRM, function. Once the structure was established, they undertook five foundational objectives, including reducing the company's leverage, transforming its risk profile, and rethinking its capital sourcing strategy.

"Overall, our successful transformation into a treasury that serves as both strategic and operational partner to a multinational operation was brought about by a number of factors working in a complementary fashion: a sound platform, charters, clarity, ways of working, seven pillars, five common aligned objectives, integration with business units, and board sponsorship," Kohli says.

Congratulations to all three of these organizations!

Asset and Liability Visibility

For Toyota Motor Credit Corporation, the U.S.-based captive financial services arm of Toyota Motor Company, asset and liability management is business-critical. The company borrows money in the debt capital markets, then lends that money to U.S. buyers of Toyota and Lexus vehicles through auto loans and leases.

Maintaining alignment between assets and liabilities is crucial. However, getting an accurate bird's-eye view into the performance of those assets and liabilities across Toyota's 34 sales finance companies (SFCs) can be challenging. "We're a large global operation," says Sylvia Baharet, treasury strategy and analytics manager at Toyota Motor Credit Corporation (TMCC). "Understanding our global position is very important in helping our management team make decisions. We usually fund at floating rates and lend at fixed rates, so there's a natural mismatch. Management needs to constantly look at trends in interest rates and how those will affect our profit margins."

For years, Toyota Financial Services Corporation (TFSC), the parent company of the global financial services arms, has received a spreadsheet every month from the SFCs around the world, including TMCC. These spreadsheets contain data about cash flows, assets, and liabilities, which the global finance group loads into its asset liability management system. A couple of years ago, the risk management team at Toyota Motor Credit Corporation decided it needed better visibility into financial risks for the Americas region than the current process could generate.

"There wasn't a lot of time for analytics, or even for validating the quality of the data or the consistency of the metrics," Baharet says. "Also, it was very difficult to aggregate all those different SFCs in the Americas region into a historical view of metrics. The asset liability system produces one consolidated answer, but it doesn't show trends, and it doesn't show forecasts of net interest income sensitivity or any other risk metrics."

TMCC wanted to sharpen its visibility into these metrics, but Toyota's smaller sales finance companies did not have the resources to make large-scale changes in their treasury and risk management processes. TMCC launched an initiative to improve its own asset and liability management, with the expectation that if the initiative were successful, it could eventually roll out to additional SFCs. Thus, the other SFCs' limitations stayed top-of-mind.

"The idea was to create transparency in the metrics," Baharet says. "We wanted to aggregate cash flows to create consolidated regional metrics and gain insights into trends. But one key criterion was that we couldn't add any extra burden for the SFCs."

The first step was to set up a treasury data warehouse, which started with an examination of the data that the SFCs were already submitting to TFSC. "We would take their file and compare it with the G/L, trying to find out how close or far away the numbers were," Baharet says. "We needed to make sure that the calculations of metrics that were feeding into the spreadsheets were consistent across the company."

For example, she says, TMCC needed to make sure that all the data in the data warehouse had principal and interest segregated. "We learned that some of the legacy approaches were different," she says. "Another example is that some SFCs were looking at asset cash flows in a discounted way, while others were not. The practices we found weren't necessarily wrong, but we had to have consistent practices across all the SFCs to effectively consolidate results and cash flows."

TMCC established data standards for its data warehouse and worked with the SFCs to make sure that the spreadsheets they were submitting to TFSC met those standards. This ensured that the monthly submissions could also flow directly into the treasury data warehouse, so populating the data warehouse would require no additional resources in the SFCs.

TMCC was the first to have its data loaded into the new system. The U.S. sales finance company then developed asset and liability modules for generating reports from the database, using the TMCC data. "Once we were happy with the quality of the data and knew we didn't need to make any more corrections, we proceeded to create SQL queries to calculate the metrics we were looking for," Baharet says. "First and foremost was NII, or net interest income sensitivity. We also looked at EVE, economic value of equity, and a full suite of other risk metrics. We set up calculations for a variety of durations and groupings, like fixed assets and fixed liabilities. We considered all these metrics in terms of both current and historical calculations."

In the months since data from TMCC started to populate the data warehouse, TFSC has added statistics from Canada, Mexico, Brazil, South America, the Netherlands, and Thailand. When these sales finance companies submit their spreadsheets to TFSC, the data automatically uploads into the treasury data warehouse as well.

The reports TMCC generates out of the data warehouse show trends in metrics for each SFC, as well as consolidated views at regional and global levels. "We graph their historical views, and we show them how things are moving," Baharet says. "They see five years' worth of trend analytics on the different metrics. We also show their current view and a forecast of their next month's risk position within that same analytics framework. They can use this information to plan their hedging and their funding transactions for the month. For example, they can take a look at the hedges that they have for the month ahead and where those hedges would leave them in respect to their duration and their net interest income sensitivity."

Not only do the reports provide better information, but they're delivered much more quickly than in the past. "The SFCs used to receive their risk information around the 20th of the month," Baharet says. "They weren't able to take corrective actions in a time frame that would really affect their risk profile. Now we show them their risk position within the first three days of the month, so they can manage their assets and liabilities appropriately."

Moreover, because Toyota Motor Credit Corporation developed the analytics platform internally, it is quite flexible. "It's very easy to create metrics specific to one particular group," Baharet says. "Let's say that the EVE sensitivity in our standard analysis is 100 bps [basis points] but Brazil wants a 400 bps shock because that's what their regulator would rather see. It's very easy to go into the code and create an extra metric for them. It will reside outside the metrics we roll up into the consolidated views, but it will help them manage their financial risks better."

After sending its monthly report to each SFC, the Toyota Motor Credit Corporation risk management team has a conference call with that business unit's management team. "We go over the results, and we share best practices," Baharet says. "Together, we look at the trends in their metrics, and we let them know what we think of the trends. We also discuss potential corrective actions they could take, if necessary, and talk about whether they should be hedging more or less than they are."

These calls also give the sales finance companies the option to get ad hoc analytics. "We can run what-if scenarios for them," Baharet says. "For example, they might know that upcoming regulations are going to keep them out of the swaps markets for three months, so they might want to look at what would happen if they hedged three months of assets at the same time. We can adjust the input parameters for them and answer that question."

Feedback from the SFCs has been resoundingly positive, Baharet says, because they now have a much better understanding of their risk position. "Before, some SFCs might have been getting some of their risk information from a third-party, black-box solution, and they might not have really known how the calculation was being carried out. Now the model explicitly lays out the way things are calculated, and their risk profile is the topic of an ongoing conversation. This has improved decision-making throughout the SFCs. And providing them with this information has increased the profile of the Toyota Financial Services treasury team within the global organization."

Standing up Two Global Treasuries in Nine Months

In October 2014, Hewlett-Packard announced the largest separation ever to take place in the tech sector. The $100 billion company would split into two entities of similar size in terms of both revenue and profits: HP Inc. would retain the company's PC and printer business, while Hewlett Packard Enterprise would consist of its server, storage, software, networking, and services businesses. The deal was set to close in November 2015.

The separation was a massive undertaking for every corporate function, but it was particularly complex for treasury. Prior to the split, a team of 114 professionals provided treasury services to hundreds of legal entities that supported operations in 126 countries around the world. They managed more than 2,000 bank accounts, and nearly 400,000 transactions worth $4.2 trillion annually. The group also oversaw $400 billion worth of derivatives transactions each year.

"From the date of the announcement, we had roughly a year to separate," says Zac Nesper, vice president and assistant treasurer for HP Inc. "We needed to run all the new systems in parallel with the legacy systems for a few months, to ensure everything worked before shutting down the legacy systems and going live as two new publicly traded companies. That meant we had just nine months to set up completely self-sufficient treasury organizations for two global $50 billion companies."

Nesper and his colleagues immediately started mapping out the transition. Twenty senior treasury managers and staff flew in from around the globe for a weeklong meeting to develop a project plan. "We brainstormed timelines, milestones, and a list of things we still needed to figure out," Nesper says. "We came out of that meeting with a spreadsheet that had more than 300 action items—and these weren't small tasks. They were things like 'Get ISDA master agreements in place with all the new banks'; 'Replicate the revolver'; and 'Issue bonds.' The list was pretty daunting."

A group of eight treasury professionals whom Nesper had recently hired to work on treasury transformation pivoted their focus for nine months to managing certain aspects of the transition, including the opening of 750 bank accounts in 65 countries. The treasury group also engaged consultants to provide project management support. "Getting them involved led to a good project management cadence," Nesper says. "We soon had the milestones down, the timelines and owners of specific tasks in place, and dashboards to track our progress."

To split its treasury technology, HP considered several alternatives. One option was to continue running both companies off the same treasury management system for a while after the separation, which would have reduced the time pressure on building out the new company's technology infrastructure. Nesper didn't like that strategy. "It would have meant our businesses would have stayed entangled for an extended amount of time," he explains. HP also considered cloning its existing treasury management system once to create an instance for Hewlett Packard Enterprise, while HP continued to use the legacy box.

Instead, however, the treasury team decided to create two clones of the treasury management system, one for each of the separated businesses. "At first, it didn't make sense to me to do twice the work," Nesper says. "We discussed it extensively, both internally and with our consultants. Ultimately, they convinced me that it was imprudent to try to tweak the existing system while we were still running a $100 billion company on it."

Once HP had created the two treasury management system clones, the treasury team configured each box for the new organization it would serve, added the appropriate bank accounts, and tested it. Finally, the team cleansed the other company's data out of each system. "One of the biggest challenges was coordination," Nesper says. "A lot of different groups were involved. Treasury and IT were involved, obviously. The accounting organization was involved because they manage reconciliations. Many banks were involved as well."

Despite the initiative's vast scope, HP took advantage of the technology rebuild to clean up some areas of customization that had caused issues in the past. "We came out of the project with two new treasury systems that functioned better than our legacy box," Nesper says. "Powering up the new systems and powering down the old system was a dramatic moment. But that was the right strategy. Trying to operate different companies on the same treasury system would have been tricky. Everybody has their own opinions on how to handle governance and other issues. Having completely separate treasury groups post-split was a big advantage."

Of course, the separation posed myriad challenges for treasury beyond technology concerns. Each new division of both companies required a liquidity structure that would operate effectively from day one. "We didn't want to overcapitalize the businesses, but we needed to make sure they all would be able to pay their bills post-separation," Nesper says. "We had to determine the level of operating cash needed by entities that didn't yet exist, in bank accounts that hadn't yet been opened. We developed massive models to mimic the global cash flows of the old, combined company and then project how those would translate to all the new business entities."

Opening bank accounts in this environment was challenging, as well. "Often the banks would ask for financials, but we obviously didn't have financials for the new company," Nesper says. "We had to work out the cadence of when the legal entity would be formed and when we would have the information we needed to do the KYC [know your customer] for the bank. We had to coordinate all this across a large number of banks, getting legal lined up, getting treasury lined up, getting the controllership lined up to provide the financials. It was a huge project management challenge."

Treasury had to split the company's in-house bank and cash pool, as well. "Ours is a big cash pool with a lot of ins and outs," Nesper says. "Making sure that the regulatory and tax authorities were comfortable with what we were doing took a significant effort."

In the midst of the global corporate banking challenges, HP's Asia division undertook a massive bank account rationalization project. "We had a bold treasurer in Asia who took advantage of the fact that we were already in transition," Nesper says. "He consolidated our accounts with a single bank across three-quarters of Asia."

Foreign exchange (FX) and capital markets posed additional challenges for the transition team. On the FX side, treasury needed to set up a new trading infrastructure, renegotiate contracts, and staff a second FX group. The company's 20 cash flow hedging programs were relatively straightforward to separate, Nesper says. "But we were hedging balance sheet exposures worth billions monthly. Figuring out exactly what the balance sheet was going to be, by currency, for both new companies and then carving up the existing hedges and putting on new hedges at the new businesses—that was a massive challenge."

Despite the gravity of the task, Nesper says, "the accounting group split the entire general ledger for a company with 300,000 employees, and in the end we didn't have a single major hiccup in the balance sheet hedging program. We went live with the two hedging programs, and the noise was pretty minimal."

On the capital markets side, achieving each company's desired credit rating required HP to restructure both organizations' debt profile. The combined company had about $25 billion of debt, all of which would remain with HP in the split. The target debt balance for HP was $7 billion, so the treasury team had to execute tenders and make whole calls on billions of existing debt. Meanwhile, the target capital structure for Hewlett Packard Enterprise involved $15 billion in debt, so the new business had to execute a $15 billion bond deal. And because much of the combined company's debt was covered by interest rate swaps, the treasury group had over $8 billion to unwind and then re-establish at the new Hewlett Packard Enterprise.

Additional treasury responsibilities during the split included filing a Form 10 with the SEC for Hewlett Packard Enterprise, dividing the company's $30 billion pension fund, and moving a captive financial services company that had an Irish banking license along with all of its hedging infrastructure.

The project was enormously complicated, yet HP treasury completed the work on time and essentially without a hitch. "That demonstrates the value of the HP culture," Nesper says. "The DNA of the company is to work together no matter how tall the task, and we saw that culture shine in our treasury function."

He also credits the external project managers with helping keep the myriad parts moving in the right direction. "Having professional project managers who had done major treasury separations made a big difference," he says. "They helped us make sure that we had identified all the right action items, that we had set the right milestones, and that we understood all the interdependencies between the different activities."

Having successfully managed an initiative the size of this separation has made the treasury team at HP Inc. much more agile. "In the end, the whole process was really healthy," Nesper says. "Post-separation, we've found we're able to transform significantly faster than we ever could before."

Top-to-Bottom Treasury Transformation

The scope of operations at Bharti Airtel has expanded rapidly over the past decade. In 2009, the Indian provider of telecom and connectivity solutions and services began doing business in Sri Lanka as well. Then a May 2010 acquisition added more than a dozen African markets to the mix.

Pursuing these opportunities transformed Bharti Airtel from doing business in a single country, where it served about 140 million subscribers, to doing business across 17 nations on two continents, with more than 360 million subscribers and about US$15 billion in annual revenue. Today Bharti Airtel is the third-largest telecom in the world in terms of number of subscribers.

As the company changed, leaders in treasury realized their function needed to evolve too. "From a pure-play India situation with a reasonably comfortable net cash position in hand, we transformed practically overnight," says Harjeet Kohli, group treasurer and CFO with Bharti Enterprises. "We became a multinational with a net debt position of approximately $12 billion [in June 2010] that had 17 different currency pairs to look at from a risk perspective, and 17 different economies and telecom evolution points to assess for opportunities. Context and market environment turned much more dynamic, compounded by the banking and regulatory environment we faced turning even more complex."

When the acquisition happened, many corporate functions took time to integrate. "For a while, we kept our Indian and international businesses largely separated," Kohli says. "We had an Indian CEO and an international CEO. We had an Indian CFO and an international CFO. But from day zero, treasury was centralized because visibility into our cash flows, as a key tenet to ongoing business governance, was important to the organization. We could clearly see that we needed to transform, to move from a one-country, traditional, relatively siloed treasury to become an integrated global treasury that provided differentiated functions, both strategic and operational in nature."

Thus, Kohli and his colleagues launched a top-to-bottom overhaul of the way they managed liquidity, risk, and every other treasury responsibility. The treasury leadership worked closely with the company's board of directors to establish a clear vision for the function.

"Even before the acquisition, we were having discussions with the board about the scope of treasury," Kohli says. "The fact that treasury also led investor relations also helped a lot. Once the acquisition happened and our debt position, cash flows, and risk profile changed significantly, it was clear that a common platform was needed to be providing an integrated view of the liquidity and risk situation to all the company's stakeholders, from internal business units to our investors or to the rating agencies."

The company's treasury and investor relations groups merged, and a markets team was added to focus on debt markets, equity markets, and foreign exchange. The name of the function changed from Group Treasury to Group Funding, Risk, and Markets, or GFRM. "We called it the 'funding, risk, and markets' group because it would integrate those three areas into one strong team," Kohli explains. "Then we developed seven pillars of GFRM, seven areas that the function was responsible for, based on key principles of handling a strategic treasury unit."

Kohli says debt management, risk management, and working capital management were the three most obvious pillars. "The board perspective was that GFRM needs to make sure debt is easily and optimally accessed when necessary, and we need to take care of working capital and liquidity, like any treasury does. But we also need to make sure we are pre-aligning and coming to the board early to raise any red flags for capital structure situations that may arise, on either the debt or equity side, that might eventually require board-level decisions." Thus, capital structure management became the fourth pillar.

Ratings management was the fifth pillar because of the company's sudden shift from a net-cash to a net-debt position. "We had our ratings put on watch, and it was clear it was going to be an intense engagement over a period of time," Kohli says. "The board charged the GFRM group with making sure that the communication with the rating agencies is sound, detailed, and oriented toward our deserved corporate stature and outlook, that of an investment grade."

Policies and procedures comprised the sixth pillar, and controls and compliance comprised the seventh. "Looking through all those other six pillars, we needed a full control and compliance environment," Kohli says. "We needed someone to be sitting in the treasury unit, basically as a GFRM in-house auditor, looking at all the transactions and systems from a controls perspective and providing me with red flags much in advance before any issue arises."

Bharti Airtel restructured the GFRM team to support these seven pillars, adding staff and expertise where necessary. It also defined key performance indicators (KPIs) for each pillar, to identify expected deliverables in support of the board-sponsored strategy. The KPIs remain dynamic as the years progress, Kohli says, but "what is not changing is the broad umbrella of these seven pillars."

Once the seven-pillar structure was in place, GFRM leadership defined five key objectives for the function which led the strategic thought of the company—optimize capital sourcing; reduce leverage, and further strengthen the company's ratings profile; transform the company's risk profile in terms of capital sources, currencies, and interest rates; build an embedded and unified treasury architecture, processes, guidelines, delegation of authority, and manuals; and do all of this and more, but with less.

A series of initiatives were designed to deleverage the organization, both through increased cash flows and new equity. The company paid down debt using cash infusions from two strategic offer for sale (OFS) transactions of stake in Bharti Infratel—a subsidiary that owns and manages passive infrastructure, including towers for use by telecoms—as well as an equity investment by the Qatar Foundation Endowment. Recently, another such divestment has been made to a consortium of KKR and Canada Pension Plan Investment Board (CPPIB). "These actions created significant headroom for our credit rating, which compressed our bond spreads in the market and increased investors' appetite for our bonds," Kohli reports.

Meanwhile, the group also worked on reducing the company's reliance on bank financing, elongating the tenor of its debt, and diversifying the currency and interest rate exposures inherent in its bond issues. Over time, Bharti Airtel significantly reduced the volume of bank debt on its P&L by shifting to the global debt capital markets while concurrently creating a healthy mix of floating and fixed-rate debt, as well as diversifying currency of debt into a mix of rupee-, dollar-, euro-, and Swiss franc-denominated issues.

"We reduced our ratio of net debt-to-EBITDA from 2.95 in 2011 to 2.08 in 2015," Kohli says. "At the same time, we diversified our financial risks and reduced our exposure to short-term swings in interest rates. The way we utilized the bond markets gave us the foundation for achieving all our other objectives as well."

The GFRM group also undertook a massive effort to overtly define the company's treasury structures and processes. "No matter how good a solution is, it will remain sustainably good only if it is embedded in the treasury architecture as an auditable process," Kohli says.

Pinning down the treasury structure required GFRM to define which activities would be handled by the central team in India, and which would be managed in the business units. "There has to be a treasury function inside each of the 17 countries where Bharti Airtel has operations," Kohli says. "We wanted to make strategic and directional decisions centrally, but we needed fully engaged, aligned, and able local treasury managers to execute, as well as to provide information on the context of their individual markets.

"To manage this type of treasury architecture, we needed to define which activities would be centralized and which would be decentralized," he adds. For example, would a treasury manager in Tanzania have authority to meet with a local relationship bank? Could he discuss financing terms for the local business unit? Could he work with the bank on working capital solutions?

The corporate GFRM team developed an "engagement matrix" that provided a granular explanation of how authority would be delegated under each of the seven pillars. "We wanted our local treasury managers to feel empowered, rather than feeling like we had centralized all decision-making, which was neither the case nor the intention," Kohli explains. "We specified: What are the activities that the international business units fully own? What are the activities they own but must inform us about? And what are the activities they must get our consent on before taking action?"

Also part of this initiative was the development of a treasury charter and governance architecture. "Again, we made sure to get very specific," Kohli says. "We didn't just state who governs whom. We looked at the nature of that governance. Is it a report going from one side to the other? Is it a monthly coordination meeting? When governance metrics are moving in a certain direction, who needs to be informed? Who calls whom? Who can ask questions? Who should answer questions for a particular country? What does our monthly analysis look like? What are the mandated sections, and who provides the information for each group? And what are the discretionary analyses where others can raise issues that they may have?"

Finally, the GFRM group put in place a permanent focus on doing more with less. "Our treasury function was always lean," Kohli says. "But now, every 12 months we challenge ourselves to look at ways we can reduce costs even further."

The GFRM group presents for 30 minutes at each board meeting on the company's performance in relation to the KPIs defined by the seven treasury pillars. For example, Kohli says, they might be called on to discuss how the company's capital structure might be affected by changing interest rates over the coming four quarters and what GFRM is doing to deal with those risks, especially in light of business-specific capital expenditures.

As a result of all these initiatives, GFRM is smarter and more nimble than many legacy treasury functions, Kohli says: "We have more accurate and timely information, and we can take decisions faster." They're also much better integrated with the company's business units.

"Treasury is often locked out of business verticals because there is a language barrier," Kohli says. "Business managers think, 'We sell tires or soap or air time, and this guy is coming in and telling us we need to improve working capital. What does that mean to my life?' One of my key requests to the GFRM team was: 'Don't speak treasury's language when you need something solved. Go to the business and speak their language, by being a part of the business itself.'

"For example, instead of telling a sales unit to cut working capital by two days, we might say, 'Let's see more prepaid balance left overnight.' The sales unit will understand what we're asking. And if we can align it with their KPIs—because their KPIs are just as important as our KPIs—then our request makes sense. And as soon as we increase that prepaid balance left overnight, we'll achieve our objective: Our working capital days will improve, and we'll squeeze out more available cash.

"We can't just put treasury staff as a support to the international businesses," he continues. "They're integrated with them—they have to be. They need to understand the metrics that the business executives have to hit, and understand the market environment they're facing, know what they're thinking, what they're going through, what their challenges are. This means that when treasury has a need, such as improving working capital, the local treasury manager understands how to best communicate that need to the local management team.

"Overall, our successful transformation into a treasury that serves as both strategic and operational partner to a multinational operation was brought about by a number of factors working in a complementary fashion: a sound platform, charters, clarity, ways of working, seven pillars, five common aligned objectives, integration with business units, and board sponsorship," Kohli concludes.