The Hidden Costs of Complexity in Treasury Operations

Narrator: Foreign. Welcome to the Treasury Update Podcast presented by Strategic Treasurer, your source for interesting treasury news, analysis and insights in your car, at the gym, or wherever you decide to tune in.

Paul Galloway: Welcome to the Treasury Update Podcast. I'm Paul Galloway and I'm joined today by Chris Craig Jeffrey, founder Managing partner of, uh, Strategic Treasurer. And today we're going to talk about the hidden costs of complexity in treasury operations. And when I think about treasury operations today, compared to, you know, five, ten plus years ago, we've seen a lot change. New payment Rails, the use of technology, now AI, machine learning. We've had new payment Rails come online, new payment forms. It continues to evolve. And so I think complexity and treasury operations is, um, it's not stagnant, it's evolving as far as I can tell. And from what I see. So with complexity, what are the issues that should be framed up? Craig, when people are thinking about how do I manage these challenges, uh, how do I make sure that I'm overseeing and making sure that my team is up to speed on the things that are happening within the operations of Treasury.

Chris Craig Jeffrey: We probably remember back from high school the second law of thermodynamics, that things tend to lead towards disorder. Right. You can see it with your bedroom, your yard, all those activities. There's probably a corollary or another term for that with complexity is that over time things will become increasingly complex. And why is that the case in treasury operations? You know, organizations grow, they expand to new markets, they acquire their companies, they have, um, they inherit additional technology debt, tech debt, they inherit other people and processes change, there's regulations and other factors that change. Like you said, there's new payment rails, and those have to be supported. So things go from simple to a little bit more complex to very complex to hyper complexity. And this happens at scale. So complexity for most companies accumulates over time. Simplicity only happens by being intentional about it. And this is really a key area for that. And our goal, if we're trying to be efficient, we're trying to make sure the organization can scale, the organization is well controlled and compliant, it can get the type of visibility and be flexible. It requires reducing that complexity through several different means.

Paul Galloway: So Craig, what are some of the sources of complexity? I can think of some things in my mind, but you know, when it comes to treasury, what are those sources?

Chris Craig Jeffrey: Yeah, I'll just, I'll start listing some of them off. Right. So I mean, you and I talk about these all the time with companies like how many banks do you have, how many are domestic, how many are International, uh, what systems do you have? Accounting systems, treasury based systems, banking portals. How many entities, how many bank accounts, how many payment rails do you have? How is that changing? What are the formats that you need to support payments or information or transference activity? Um, other sources of complexity? How fast are you growing? What new markets are you entering? Do you have MA activity? So you're buying companies or you're selling companies. Um, you're expanding geographically, you're supporting legacy decisions and legacy setups. Right. That have to be accommodated as you move forward. Those are some of them. I know you could come up with 10 more and everyone listening could add their dozen as well.

Paul Galloway: Yeah, no doubt. I've certainly seen it in the years that I've been involved in treasury activity that you hit on many of the things that people are dealing with today, our clients are dealing with. And so when, um, we think of what the impacts of complexity are on treasury operations, how do you view the true cost? What is that how you define it? What drives the true cost of operational complexity in Treasury?

Chris Craig Jeffrey: I uh, like how you said true cost. You didn't say cost, you said true cost. So there's, there's always some trade offs. So what's the, if you think about our organization needs to accomplish certain things and treasury needs to make sure we're flexible. We gain the right type of insight, you know, flexible, that we can adapt to changes and growth. We get the kind of insight so we can make decisions and manage risks and expand. We have visibility essential for seeing what we do, what's coming down the road, what our forecast is, what risks we need to look out for. We have to have efficiency, which is an ability to scale so that doubling in size doesn't mean I have to double the number of people or you know, 110% of the number of people to help manage the uh, additional complexity. We need to have an efficient aspect, uh, to that we need to grow gracefully. And then the other area that we tend to think about as well is on a control standpoint is we need to make sure the controls work. You have to have a controlled environment, but that controlled environment should just be massive amounts of extra time to make sure you don't have a problem or fraud or loss or error, but that you can control things as part of the process, that you've designed things in such a way that it's the process itself helps support efficiency. So those are some of the true costs. Right? Rework defects, those are significant costs. Those are brought about by poor processes, manual processes, not Creating a more streamlined process, a more integrated process. So those are some of the biggest ones that exist. So I think about losses are you can't scale when the organization needs to scale. Scaling is too expensive. We have increased uh, amounts of fraud. We should be getting more efficient at handling fraud as criminals become more expert at it. And we have better and clearer access to information. So we're making decisions with the most current, best information that's available. Uh, so those are some of the elements of cost that uh, that I look at.

Paul Galloway: Yeah. So, um, kind of playing off true uh, costs. What are some of the problem areas that folks should identify that may have an impact, you know, on true cost or disoperating efficiency or the ability to manage your treasury operations?

Chris Craig Jeffrey: Well, I may be being a little simplistic here, but when I think about how to identify problem areas, I always go to defects. Defects first. Defects are inefficient, they're terrible. And what causes defects? Well, it's a poorly designed process, a manual process, or someone doing something that doesn't consider the end to end aspect of what goes on. So looking at defects or things that don't run smoothly is a very good way to find that out. I know there's going to be others that say, uh, you have to design every process from the start so you know the happy path and then you have a good way of managing the broken path. But I will say that looking at where defects come in and how to eliminate those get you there very quickly. Anytime you have a manual handoff, right. Defects come from bad processes. Manual handoffs are some of the key issues there. So where are their handoffs? Are they digital or are they, you know, they manual? Is there a whole control process built in to support a quality effort? Because you have a very manual process. So that's another key area, you know, so non standard processes, non automated processes are a huge part of that. The other side that can add complexity is we have data, uh, and information in lots and lots of different systems. We don't standardize on data, what we share with third parties, or what we pass internally in different systems. So we need to make sure that we look at a fully end to end process. What are they doing, what do they need? If we don't send them the information they need now they've created, they have a problem, they have a defect and they come to us asking for information, how to post a, uh, payment, how to correct an order or an invoice. All of those are key elements. So problem areas are fragment the Data reporting defects, manual, um, handoffs. Those are, those are some of the best ways to identify problems.

Paul Galloway: Well that makes sense Craig, and uh, kind of closing the loop on uh, the various areas that you just talked about. What are some of the practical steps that organizations can take when it comes to managing complexity and treasury operations?

Chris Craig Jeffrey: I guess the steps are to understand the end to end flows and that would be looking at through several different lenses if you will. One would be how does it flow from a Treasury perspective? We always want to know how activity occurs through the banking structure. Funds are received, funds are dispersed, they move here, they're concentrated, etc. So there's a, there's a flow through the banking structure that, that can be horribly inefficient or uh, very tight that supports efficiency. Recording, uh, controls. That would be one. A second area to look at would be what are the systems and what's going on with the data as you're passing information? Is it being passed manually, um, like being output to paper? Is it being, you know, someone keying stuff in? How are we handling data? Is there potential for errors coming in or is that being controlled and managed? That's another key area. So this whole flow of information, so we look at systems, the flow of data, uh, the end to end aspect of the process, if you look at all those, you're going to do quite well. There's certainly more aspects that need to make sense. But if we look at, you know, the typical discussion is people, processes and technology. But we have to think of, for these flows we have to think of structure, uh, services, you know, people, processes and technology. Where's the gap and how do we, how do we make sure that that complexity is decreased? And there's one other thing that I'll say on that too. On the complexity side, if you have a lot of complexity and it's being fixed by manual processes, two significant things can happen. Uh, there's more but two that I'll point out. One is if we have a very manual process, it adds complexity and we can spot excess complexity. If we have four CPAs in a bank rec area to fix bank rec, why is that a problem? It means the process isn't designed well. There's not the one to one or one to many match and it's usually many to many. It's very complex, things have been broken on the design front when that happens. And so we're trying to fix a bad process with high powered users. That would be one example for uh, where there's a problem. Second would be not understanding that defects have a disproportional impact on overall productivity. But in Treasury's domain, errors or defects really impede working capital liquidity. You know, it's not like, oh, we had an error, we fixed it in a day, AR is going to be off a day. It's the disproportionate weighting of a problem is, uh, is very surprising for anybody who ever has had their own theories about it and then went in and found problems, fixed them, and saw how negative the impact is and how positive the impact is. When it's fixed, it's so disproportional it really matters. So those are some of the practical steps. So eliminate some, Design it in a straight process. Eliminate something. Arbitrage labor rates or other things. All those things matter. But make sure you get at the defects you manual processes lead to defects. Poorly designed processes lead to defects. You get rid of those by multiple different methods. You make everyone's life quite a bit easier.

Paul Galloway: Well, thanks, Craig. I appreciate you being on, uh, the podcast today and, um, look forward to doing it again.

Chris Craig Jeffrey: Thanks, Paul.

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