Transforming cash to support continued global growth
Growth is a central goal of most modern businesses, and Baltimore-based Ciena Corporation is no exception. Yet, as the company continued to grow, senior management found they needed to constantly rethink and optimize certain aspects of Ciena’s business model. One group that saw the unique opportunity inherent in this challenge was the treasury function.
Ciena operates in the telecommunications technology sector. “We provide the networking systems, software and services that underpin a communications network,” said Thomas Liu, vice president and treasurer. “Our customers are major providers of telecommunications services and Internet content. We enable them to offer communication services to their end users, who are primarily consumers and businesses.
Ciena’s technologies are in high demand as the global need for bandwidth grows exponentially. The company is a market leader in North America and is rapidly expanding its operations throughout Asia-Pacific (APAC), Europe, the Middle East and South America. Ciena is also seeing strong demand for its deep-sea cable offerings, which form the communication backbones between continents.
“We now have operations in over 80 countries, with offices in around 35,” Liu says. Over the past two years, the company has invested significantly in improving systems and processes to support its new, truly global operations. “In the past, we operated almost everything from our US operating companies. But growth has prompted us to reorient our business model towards supply chain and distribution processes that are more global in nature.
In addition, “we had planned that under the new economic model, customer payments would be made in local entities, so cash would spread everywhere”, he continues. “Visibility would be difficult in this environment. Additionally, intercompany transactions would multiply, and settling these intercompany transactions in a timely manner would create a headache for treasury groups across the organization.
Another challenge the corporate treasury team anticipated was the increased complexity of foreign exchange (FX) risk management. Some local entities would sell products in a major currency such as the US dollar or Euro, in addition to the local currency. Local finance staff worked closely with the corporate treasury team, but currency exposures were widely dispersed across the organization’s entities. Obtaining an enterprise-wide view of FX risk and optimizing FX hedging activities at the enterprise level would be difficult without a centralized platform.
The treasury team considered addressing each of these issues in a phased manner. However, they instead decided to launch a broader initiative that would proactively prepare them to support Ciena’s planned future expansion. Restructuring the treasury function and operational structure to better reflect the company’s new business model would not only increase short-term efficiency, but also allow treasury to manage a global operation of increasingly complex without significantly increasing staff resources.
“We anticipated that more changes would occur in the future, and a piecemeal approach to cash flow improvements would not prepare us for what was to come,” Liu said. “We saw this as a good opportunity to build a world-class global treasury infrastructure, so that we can continue to effectively support Ciena for years to come.”
Ciena engaged a consulting firm to help plan and execute the redesign of the treasury function. “This type of transformation project would be difficult to achieve without outside help,” Liu says. “We wanted to take advantage of the expertise of a professional advisor who understood, through experience, what makes this type of project successful. We also wanted help to ensure this would be a cross-functional effort. Tax, accounting, IT, legal and supply chain all needed to be involved, and we needed to update our ERP [enterprise resource planning] system and our cash management system. And then finally, we saw an external consultant as offering time management benefits. We all have our own day-to-day work, so having someone who specializes in this type of initiative to focus on and bring us all together was really helpful.
Armed with this expertise, Ciena’s treasury managers selected major new banking partners, focusing on institutions’ cash pooling capabilities. They weighed the benefits of fully consolidating the company’s banking footprint in a given geographic area versus fostering strategic banking relationships. And, of course, they factored in the cost.
Once Ciena selected its partner banks, Treasury deployed a global notional cash pooling structure. For many of the Company’s entities outside of the United States, this structure sweeps all operating account balances into cross-border pool accounts. In-country operating accounts can withdraw money from pool accounts to fund their disbursements. Then, excess cash is transferred daily – in multiple currencies – to a notional pool in a European country. In a few cases, a multi-bank scanning structure is also activated.
“Each entity maintains its own bank accounts,” Liu explains. “But because of the pooling structure, they have cross-collateralization against each other, so the liquidity works, essentially, as if all the businesses were running from one cash account.”
For US operations, Ciena has established zero-balance accounts (ZBAs) that concentrate excess cash in a pool of physical cash. Funds from across the country flow into the pool and the company invests any excess. The ZBA structure functions essentially as an internal bank for Ciena’s US operations.
The pooling approach dramatically improves the efficiency of all global treasury and finance teams. It finances operations in countries where local entities need additional liquidity, reduces interest payments that certain Ciena entities may have to pay on bank lines of credit, and increases the possibility that excess liquidity will generate interest or investment income. It also represents a huge improvement in efficiency over the company’s legacy intercompany settlement process.
“If you don’t have a pool of cash, treasury has to settle intercompany transactions by moving cash from one entity to another across the globe,” Liu says. “It’s a lot of manual work.” On the other hand, he continues, “with cash pooling, our ERP system provides information on all inter-company exposures to our cash management system. The cash management system generates a clearing report and a payment file which we transmit to the bank. We basically press a button in the cash management system, and all intercompany exposures are settled immediately into the notional cash pool. It’s hard to overstate the efficiency of being able to pay thousands of business-to-business invoices with a single click.
Ciena’s treasury team also leveraged its cash management system to centralize spot currency translation and hedging activities through a designated hedging entity. By centralizing the management of foreign exchange risk, the company avoids the risk of different local entities executing redundant or even contrarian foreign exchange transactions. This approach has also simplified the management of currency exposure and helped reduce trading costs.
Overall, the revamped treasury function has reduced costs, optimized investment income, and increased team member productivity. It will also accelerate the integration of new entities into the company’s cash management activities: each time Ciena creates or acquires a new entity, it can easily add the entity and its bank accounts to the company’s cash pool. company and the overall compensation structure.
Perhaps most importantly, new treasury systems and processes provide much better visibility into every treasury activity. “If you have a pool and all cash flows in that pool, you can run a report from the banking portal or cash management system and see a summary of all your cash holdings, as well as inflows and outflows cash,” says Liu. . “We have that, and we can break down the report by local entity or by currency.
“That is perhaps the most important benefit of transforming our cash flow,” he adds. “As treasury professionals, we always need to know how much cash we have, where it is and where in the business it is needed to fund operations. This is the goal of every cash group. Some use spreadsheets to create this perspective, but it’s much more effective when you can minimize your manual entries. This means we have more time to work on the strategic aspects of supporting Ciena Corporation’s continued growth.