What Treasurers Overlook When Managing Risk

Risk mitigation is often thought of in the context of FX volatility and global trade. OpenLink wants corporate treasurers to have something else in mind, though: commodities.

The procurement of raw materials can expose an organization to some serious market volatility, the risk management software firm said, and much of the solutions these firms are using to mitigate risk, like ERP solutions, don’t quite make the grade when covering a business’ exposure to commodity trade risk.

That’s according to OpenLink VP of Commodities and Treasury Solutions Mark O’Toole. The executive recently told PYMNTS that it’s common for a multinational firm that depends heavily on commodity procurement — someone like a food and beverage conglomerate — to have several systems on which their processes operate.

According to the executive, it becomes a problem when the FX and hedging platforms, cash and treasury management tools and commodities procurement processes don’t all interconnect with each other.

FX risk management has historically been managed separately from commodity risk management in the organization, according to OpenLink in its newest whitepaper, “The New Horizon in Treasury Management for Commodity Intensive Corporates.”

FX risk is often managed by the CFO and treasury management systems; commodity risk lands on the desks of the procurement team, which is tasked with locking in FX rates for the purchase of raw materials over an extended period of time in order to avoid the impact of currency fluctuations.

“Sometimes, you’ll come across treasurers that think they’re covered,” O’Toole said, explaining that these money managers can assume that an ERP system and a hedging strategy have got them covered from market volatility risks.

But when these treasurers are asked about the exposure embedded within their commodities procurement processes, “that’s where you draw a blank,” the executive said.

Bringing Them Together

Today’s market is preventing corporate treasurers from being able to avoid dealing with commodity volatility, according to OpenLink.

A series of recent events rattled the global market, like the Swiss National Bank’s decision to unpeg the value of the Swiss franc or the possibility of the so-called Brexit. Both shook up the foreign exchange risk management space for corporate treasurers.

But other happenings, like tumbling oil prices, reveal the challenge for corporations to get a firmer grasp on FX risk exposure through commodity procurement, too, the firm said in its paper.

“What we’ve seen over the last 12 months is a shift in the mindset, particularly for companies that have large amounts of raw material coming in,” said O’Toole. “What’s driving this shift is the disconnect and the siloed ways of handling commodities and procurement on one side of the business, and it not flowing automatically over into treasury, where you can see your currency and commodity risks all together.”

It’s a fairly recent phenomenon that corporate treasurers are waking up to this issue, he added. Even just 16 months ago, these professionals probably weren’t as attuned to the gaps between FX and commodities risk management as they are today.

Technology Changes The Game

That gap emerges from the multitude of platforms and systems corporations use to manage their operations. But, according to O’Toole, when it really comes down to it, filling that gap is all about data.

“It’s a Big Data gap,” he said, “and it’s all about: How do we get all of the data, put it on a platform and make it actionable?”

OpenLink described the ability to manage currency and commodity risk on a streamlined, single portal as “unrealistic” even just 10 years ago. Today, however, technology has made it a possibility.

“For a number of years, we have witnessed a trend towards sophisticated, centralized technology platforms,” the firm stated in its whitepaper. “There is a new option in treasury management systems that integrates commodity procurement with treasury management, giving CFOs a single, detailed, transparent and timely view of risk [commodity, cash and currency] across the entire enterprise.”

Not only are risks increasing, but regulations are getting tighter, the company added. And it’s not up to the financial institutions to make sure corporations are covered.

“Ultimately, I think the responsibility lies in the corporation itself,” O’Toole stated.

But what was once a long shot is no longer out of range for C-suite executives, he added.

O’Toole said he wants corporate treasurers to “understand that there is now technology in place in this marketplace that will help them improve margins and decrease the total cost of ownership by reducing the multiple systems they may have.”

Taking the initiative to get commodities and currency risk management on a single platform won’t just provide treasurers with a clearer view of corporate exposure, either. O’Toole said doing so means fewer resources spent on training employees on and maintaining these systems and improving the granularity of data on reports and analysis.

It’s all about improving the bottom line, a win for any treasurer and CFO, of course, he said.

“CFOs like it because it means more money for them, and treasury likes it because they get more visibility into cash and operations across procurement and treasury functions,” O’Toole stated.