Jun 01

Achieving efficiency in a new dimension

My introduction to pan-European finance technology came on the day Europhile Tony Blair became prime minister. After casting my vote, I drove to my companies newly opened Paris office to struggle with installing a French version of Windows 95 from 24 floppy disks. Since then I have become well versed in the benefits and practice of multi-national finance systems.

So I feel a neat parallel as we enter a new era of domestic coalition politics in the UK, that there is an increasing realisation that in the current climate more untapped and immediate efficiencies might be gained from a coalition of commercial finance businesses.

Let’s first have a look at some trends:

  • Through the slump at the start of 2009 just about the only new UK finance business activity was Private Equity investor Anacap’s creation of Aldermore. This combined the banking licence and source of funding from Ruffler Bank, Base Commercial Mortgages, newly formed leasing operations, and then the acquisition of Cattles – now Absolute – Invoice Finance and portfolios from Heritable Asset Finance
  • Santander, which already has Abbey and Alliance & Leicester’s leasing operations within its Corporate and Industrial Banking unit also added Liquidity, a specialist factoring and invoice discounting provider, and a joint venture with Zenith Provecta to provide a fleet funding and management solution.
  • Lloyds TSB Commercial Finance has continued its merger of commercial finance operations including Bowmaker and Alex Lawrie, while it acquired further operations with its acquisition of HBOS.
  • And in continental Europe during the last month Credit Agricole Leasing and Eurofactor have merged.

So how does technology support the synergies that are obviously being sought here? Well, on the whole, from the software vendor side the answer to that question has to be “not immediately”. In the UK the majority of packages remain aligned with one or two of traditional silos of commercial finance. Perhaps this is changing – as recently demonstrated by White Clarkes acquisition of Nexus and Cassiopaes purchase of InfoParc.

Laurent Tabouelle, Product Manager for the iMX Commercial Finance solution at Codix (who supply software to both sides of Credit Agricole Leasing and Factoring) explains: “We have two flavours of iMX: one for commercial finance and one for debt collection. Regarding commercial finance, you hear a lot about products – Invoice discounting in the UK, Inhouse Factoring in Germany, supply chain finance, commercial finance – but to me these are mainly  marketing terms. When you really look at the details of those products, they are broadly the same but with different names in different details, and legal constraints. From a systems standpoint you don’t want different systems to handle different products. If you have thought of those products in a flexible way up front then you can very easily handle them in the same system, even in the same contract for the same customer. Today, I am speaking to prospective clients who have two or three systems. Why? ‘One for my invoice discounting, one for my financing of receivables, one for my leasing and other types of commercial finance.’ And why? ‘Oooh…because they are so different’. But the bottom line is that you have a creditor and collaterals, then all products are variations around those key concepts. By having several systems you spread your risks over systems, which is not what is wanted. It increases the operational risk because you don’t see it. Handling all these products on a single system, in the same way, is our focus.”

Even without software packages that will cover all of the finance products there are still efficiencies that can be gained from business operations. Could you achieve benefits just by simplifying the business without a single system? “One alternative that we are seeing more interest in recently is Business Process Management solutions.” says Steve Byrne of Cap Gemini. “This
alternative enables companies to leave the existing infrastructure in place and still deliver enhanced, standardized, processing capabilities.”

If we extend the basic concepts outlined by Laurent Tabouelle, we have the two fundamental components of any commercial finance:

  • Providing finance to a customer in return for collateral or lien of an asset.
  • Collecting receivables from a creditor – who is getting economic benefits from the asset.

The efficiencies that can be gained from use of technology and business process management – and where money can be made – in this process come in three areas:

  • At the start with risk based pricing for the finance.
  • In the middle with management of the assets and collateral that are your security.
  • And finally with efficient collection from the creditor.

This should be a cyclical process – particularly under Basle ii – with feedback from the collections history – and the asset management process – being used to improve the accuracy of the pricing.

The most immediate benefits of synergy are to be had at the back end of this process. But don’t fall into the trap of thinking of it as a standard accounts receivable shared service centre. The collections process for each commercial finance product have unique features with long separation in time (for leases and commercial mortgages), separation of your customer and
your creditor (for invoice finance and factoring) and even geographical separation (if we include trade finance).

However the general concepts of a shared service centre can be applied to the collections process, accounting, statutory and regulatory reporting – and by sharing IT services, if not applications – to start to get real efficiency gains, particularly in a market that is still effectively in recession.

And there will be challenges, not least cultural differences between the traditional silos of commercial finance, not unlike those faced by multi-national finance systems delivery.

An edited version of this article appeared in June 2010 Edition of Leasing World

(c) Nic Evans 2010. This Article may not be reproduced, in full or in part, without the prior permission of the author.

Nic Evans is Director of Evans Global Associates, delivering consultancy and interim management for commercial
finance technology and business agility. If you want to discuss any points raised by this article or broader issues he can be contacted by email nic@nicevans.eu or through LinkedIn http://uk.linkedin.com/in/nicevans

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