10-02-2013, 10:15 AM
The Essence of Netting - and Drilling Holes
Sacom Nijstad, Global Netting Solutions - Eric Knibbe, Global Netting Solutions - 1 Oct 2013
Netting is nothing new; it has been around for some time. Netting comprises the administrative setting off of reciprocal payment flows, after which only the computed net balance is actually settled. The principle itself is used in many more business areas than just treasury. Examples include the telecom industry using the netting principle for settling cross-provider use of the telephone network and the banking industry settling all cross-bank transfers on a daily basis. So, although the netting principle is no groundbreaking novelty, the number of businesses using it as a treasury instrument is still relatively small. Why is that?
Companies operating in this market date back to the late 1980s and early 1990s. Banks offered netting activities as an additional service to their clients and other market companies evolved over time from client-based to cloud-based solutions. All have tried to attract more attention to this topic. However in recent years more banks have ceased to regard netting as a core activity so now only a few banks and market players are left. What is the root cause of this attitude? Is this the result of proclaiming the wrong message? Or is it just a matter of changing perspective?
Let’s take a few steps back
How has the market evolved over the past 20 years? Today the role of treasurer and chief financial officer (CFO) is every bit as subject to external influences as it was 20 years ago. Globalisation and new interacting possibilities made the world more transparent, and the financial toolkit more extensive. In the five financially-challenging years since the 2008 crisis the core focus of many multinationals has shifted more towards cost control and - pressured by circumstances - less towards revenue growth. As a result, corporate financing roles increasingly embrace internal financing possibilities. Optimising the allocation of financial resources and discovering the best ways to finance your subsidiaries have moved several rungs up the priorities ladder. So from a market perspective Intercompany Finance has gained ground.
All books on the table
But if we open the book of intercompany finance there are many different chapters that attract one’s attention. To name just a few:
•Foreign exchange (FX).
•Liquidity management.
•Interest.
•Administration.
•Forecasting.
•Bank costs.
•Basel III.
•Tax regulations.
Added to these, intercompany finance has its own peculiarities, some of the many examples being:
•Lack of process ownership.
•Lack of dispute management.
•System integration challenges.
So clearly the agenda of today’s corporate finance executives is full, if not overflowing. So how can attention still be drawn to netting? As it’s clearly of mutual interest to both the financial people as well as to the market players, the focus should be on getting the message across in the right way. Perhaps we should take a look at this from another angle and change perspective again.
Understanding the customer
“People don’t want to buy a quarter-inch drill, they want a quarter-inch hole,” runs the celebrated remark by Theodore Levitt, marketing professor at Harvard University.
Selling ideas, or products or services is all about understanding the true needs of the client. All possible means should be utilised to fully fathom them. So when a customer enters the hardware store and asks for a drill, it’s not the drill he desires but the hole it can produce. But what material does the drill need to penetrate, how big does the hole need to be and how deep? To fully comprehend what your customer’s needs are you will not get away with referring to the ‘drill bargain department aisle’. You’ll need to find out what the desired outcome should be.
Making latent needs manifest
So it’s not so much the netting principle itself that needs explaining. It’s all about what the benefit of netting is; namely saving time and money. And the outcome of that is that it provides opportunities for treasurers and CFO’s to re-invest that time and money. What the financial department would really want is to have enough time to do their job. Netting can pave the way to ensuring you can spend enough time on your top priorities. So netting should become the obvious answer any time that financial people ask: ’How can we make sure we have enough time and money to do our jobs?’
Combined effort
The bottom line is that if netting requires more attention, then a combined effort of market players, treasurers and CFOs must provide it. We all need to find out what the real needs of the company are and position netting in the right way to fulfill those needs.
To some netting might seem like a drop in the ocean, but from another perspective it could provide the beginning of a new pool that develops into a new ocean over time.
Conclusions
•Netting is nothing new.
•Many different risk areas determine today’s financial agenda.
•People don’t want a quarter inch drill, they want a quarter inch hole.
•We need to sell what a customer wants, not what he asks for.
•With the right perspective a pool can become an ocean.
•Netting solutions save you time and money.
•These savings enable you to run your business.
Sacom Nijstad, Global Netting Solutions - Eric Knibbe, Global Netting Solutions - 1 Oct 2013
Netting is nothing new; it has been around for some time. Netting comprises the administrative setting off of reciprocal payment flows, after which only the computed net balance is actually settled. The principle itself is used in many more business areas than just treasury. Examples include the telecom industry using the netting principle for settling cross-provider use of the telephone network and the banking industry settling all cross-bank transfers on a daily basis. So, although the netting principle is no groundbreaking novelty, the number of businesses using it as a treasury instrument is still relatively small. Why is that?
Companies operating in this market date back to the late 1980s and early 1990s. Banks offered netting activities as an additional service to their clients and other market companies evolved over time from client-based to cloud-based solutions. All have tried to attract more attention to this topic. However in recent years more banks have ceased to regard netting as a core activity so now only a few banks and market players are left. What is the root cause of this attitude? Is this the result of proclaiming the wrong message? Or is it just a matter of changing perspective?
Let’s take a few steps back
How has the market evolved over the past 20 years? Today the role of treasurer and chief financial officer (CFO) is every bit as subject to external influences as it was 20 years ago. Globalisation and new interacting possibilities made the world more transparent, and the financial toolkit more extensive. In the five financially-challenging years since the 2008 crisis the core focus of many multinationals has shifted more towards cost control and - pressured by circumstances - less towards revenue growth. As a result, corporate financing roles increasingly embrace internal financing possibilities. Optimising the allocation of financial resources and discovering the best ways to finance your subsidiaries have moved several rungs up the priorities ladder. So from a market perspective Intercompany Finance has gained ground.
All books on the table
But if we open the book of intercompany finance there are many different chapters that attract one’s attention. To name just a few:
•Foreign exchange (FX).
•Liquidity management.
•Interest.
•Administration.
•Forecasting.
•Bank costs.
•Basel III.
•Tax regulations.
Added to these, intercompany finance has its own peculiarities, some of the many examples being:
•Lack of process ownership.
•Lack of dispute management.
•System integration challenges.
So clearly the agenda of today’s corporate finance executives is full, if not overflowing. So how can attention still be drawn to netting? As it’s clearly of mutual interest to both the financial people as well as to the market players, the focus should be on getting the message across in the right way. Perhaps we should take a look at this from another angle and change perspective again.
Understanding the customer
“People don’t want to buy a quarter-inch drill, they want a quarter-inch hole,” runs the celebrated remark by Theodore Levitt, marketing professor at Harvard University.
Selling ideas, or products or services is all about understanding the true needs of the client. All possible means should be utilised to fully fathom them. So when a customer enters the hardware store and asks for a drill, it’s not the drill he desires but the hole it can produce. But what material does the drill need to penetrate, how big does the hole need to be and how deep? To fully comprehend what your customer’s needs are you will not get away with referring to the ‘drill bargain department aisle’. You’ll need to find out what the desired outcome should be.
Making latent needs manifest
So it’s not so much the netting principle itself that needs explaining. It’s all about what the benefit of netting is; namely saving time and money. And the outcome of that is that it provides opportunities for treasurers and CFO’s to re-invest that time and money. What the financial department would really want is to have enough time to do their job. Netting can pave the way to ensuring you can spend enough time on your top priorities. So netting should become the obvious answer any time that financial people ask: ’How can we make sure we have enough time and money to do our jobs?’
Combined effort
The bottom line is that if netting requires more attention, then a combined effort of market players, treasurers and CFOs must provide it. We all need to find out what the real needs of the company are and position netting in the right way to fulfill those needs.
To some netting might seem like a drop in the ocean, but from another perspective it could provide the beginning of a new pool that develops into a new ocean over time.
Conclusions
•Netting is nothing new.
•Many different risk areas determine today’s financial agenda.
•People don’t want a quarter inch drill, they want a quarter inch hole.
•We need to sell what a customer wants, not what he asks for.
•With the right perspective a pool can become an ocean.
•Netting solutions save you time and money.
•These savings enable you to run your business.