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Justin Jones In Technology, Treasury Management

Up the Learning Curve: How Coca-Cola Is Implementing ChatGPT

Coca-Cola’s internal model of ChatGPT has numerous use cases for treasury team members who learn to use the AI tool.

Coca-Cola is one of several NeuGroup member companies that have partnered with OpenAI to create an internal version (also known as an instance or model) of ChatGPT that runs entirely on servers owned by the corporate. Within Coca-Cola treasury, senior director of emerging capabilities Rui (Ree) Yang is spearheading the effort to put the artificial intelligence tool to work by guiding employees to find uses that cut down on hours spent on repetitive tasks.

Ms. Yang is leading by example through a variety of use cases for the chatbot, including a recent project in which she created a world map that features every country’s credit default swap spread. Using Excel’s internal mapping function, she worked with ChatGPT to write a code that pulls and cleans data from FactSet, a data software provider, and outputs a heat map of the globe which can be updated in seconds.

Coca-Cola’s internal model of ChatGPT has numerous use cases for treasury team members who learn to use the AI tool.

Ms. Yang is leading by example through a variety of use cases for the chatbot, including a recent project in which she created a world map that features every country’s credit default swap spread. Using Excel’s internal mapping function, she worked with ChatGPT to write a code that pulls and cleans data from FactSet, a data software provider, and outputs a heat map of the globe which can be updated in seconds.
At the first-half meeting of NeuGroup for Digital Assets, she briefly discussed her company’s partnership with OpenAI. She later walked NeuGroup Insights through her journey so far to embrace ChatGPT and help coworkers see the potential in the tool, rather than fear it.
“Technology can’t run a business, you need human beings to run a business,” she said. “But tools can help us become more efficient and productive—that’s the type of mentality we’re trying to embed into employees.”

Rui Yang, Director of Emerging Capabilities, Coca-Cola

Putting ChatGPT to work. ChatGPT has proven particularly valuable for streamlining tasks like Excel document creation and writing code for specific automations; in the case of the global CDS map, the hours required to make the chart manually would likely have exceeded the benefit.

Because the data is on a private server, employees can use ChatGPT for tasks that deal with sensitive information with no risk of the publicly available model being trained on what employees share—surely a balm for risk managers concerned about leaks. Employees can ask specific questions about topics including org charts, company history and acronyms used by coworkers, which Ms. Yang said is incredibly useful for onboarding.
“Another way ChatGPT helps is it’s a really good proofreader,” she said. “If I’m writing a white paper or something that’s very formal, I may write my initial draft and ask it to proofread for me. It does a great job.”

Improving coding knowledge. Ms. Yang has basic coding knowledge but isn’t an expert at writing scripts, even for small automations. In just a few months working with ChatGPT, though, she’s been able to implement successful code generated in part by the tool and become better at understanding software coding more broadly.

When asked to build a web page for an internal announcement, Ms. Yang said she didn’t quite know where to start. But by asking ChatGPT questions about web design and the functions required to build what she needed, she completed the project in half a day.

Asking the right questions. Generative AI tools like ChatGPT often introduce errors known as hallucinations, but Ms. Yang said issues like this are often prevented by knowing how to ask the right questions.

“Having a good answer is highly correlated to asking the right question,” she said. “There’s definitely a learning curve for how to be a competent ChatGPT user.”
But once a user starts to understand the potential applications and limitations of the tool, she said it can improve their critical thinking skills while teaching resourcefulness.

Upskilling employees. Coca-Cola’s forward-looking approach to technology is not just about efficiency; it’s also about empowering the workforce and improving an employee’s skill set. “People have a fear of technology taking over a job, but I think the best way to be in command of technology is to learn to master it,” she said.

“Different types of repetitive jobs may shrink because of technology, that’s almost inevitable—so why not put yourself in a position where you’re upskilling yourself and learning these new capabilities?”

Building the habit. In many cases, NeuGroup members have shared that younger employees pick up tech tools faster than long-tenured ones, but Ms. Yang said that hasn’t been the case for ChatGPT. For all employees, implementing the tool has required intentional time spent learning how to use it and building the habit.

Ms. Yang consistently checks in and makes sure her coworkers use ChatGPT, especially if they’re bogged down by a repetitive task.
“There is a high chance ChatGPT can write a code to automate that process, and that can save lots of time—and provide an opportunity to master a skill,” she said.

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Justin Jones In FX, Technology

Why FX Algos May Belong in a Risk Manager’s Trading Toolbox

Some NeuGroup members are using algos to reduce trading costs and take advantage of aggregated liquidity in the FX spot market.

FX algos offer corporate risk managers a well-established technology tool that can, ideally, lower trading costs while increasing speed and efficiency without moving the market when the need to trade falls outside the window of optimal liquidity in the forex market. Algos allow managers to define specific trading rules based on timing, price or quantity to determine trade execution parameters, such as waiting for the market to reach a level where they want to buy or sell instead of taking the current price—including the spread—that a bank is offering at spot.

But corporates need to weigh the benefits of algos against the execution risk of using an automated instrument that trades currency over time, meaning the market may move against it. That’s one of the considerations about the tool that arose at the fall meeting of NeuGroup for Foreign Exchange where peer group leader Julie Zawacki-Lucci moderated a discussion between the FX risk manager of a mega-cap corporate and Justin Mitrani, head of electronic fixed income and currency sales in the Americas at Societe Generale, which sponsored the meeting.

Some NeuGroup members are using algos to reduce trading costs and take advantage of aggregated liquidity in the FX spot market.

But corporates need to weigh the benefits of algos against the execution risk of using an automated instrument that trades currency over time, meaning the market may move against it. That’s one of the considerations about the tool that arose at the fall meeting of NeuGroup for Foreign Exchange where peer group leader Julie Zawacki-Lucci moderated a discussion between the FX risk manager of a mega-cap corporate and Justin Mitrani, head of electronic fixed income and currency sales in the Americas at Societe Generale, which sponsored the meeting.
Execution risk, opportunity cost and the work it takes to both understand algos and execute trades with them may help explain why fewer than one-third of NeuGroup members in attendance said they use algos. Also, some risk managers may need to convince finance leaders to approve the use of algos or change their treasury policy.

Types of algos. So-called passive algos are the most common type used by corporates looking for an alternative to locking in a price in what practitioners call a risk transfer trade with a bank that offers a bid-ask spread. The bank takes the risk and the corporate must “cross the spread” to secure a fixed price. By contrast, a company using a passive algo can set a limit price and may “capture the spread” if another FX market participant takes the other side of the trade. The potential cost savings over a large number of trades during the course of a year can total millions of dollars compared to using risk transfer trades, members said.

The execution risk that the market moves against the corporate while it waits, though, creates the possibility of opportunity cost, Mr. Mitrani said about using an algo instead of locking in a price. “Clients have to weigh, ‘what is my opportunity cost for not transacting immediately?’”
He described other algos, including those that are time- or volume-based that try to replicate the currency’s time weighted average price (TWAP) or volume weighted average price (VWAP) during the life of the trade.
Opportunistic algos, another kind, attempt to take available liquidity; the client ends up crossing the spread, but because the algo has aggregated liquidity from multiple sources, they may obtain a better overall price because of the spread compression achieved, Mr. Mitrani explained. Few corporates use these, he said.

Using the tool. The member who uses algos has employed them more often as technology improves, and noted that he is able to enter algo trades electronically in his trading platform, FXall. He does not use them daily and considers algos “part of the toolbox” that account for about 10% of his total trading volume.

The member’s company only hedges balance sheet exposures and uses algos, for example, when it needs to do a spot trade to make a large FX payment to fulfill a contract. The member also turns to algos to hedge changes in forecasts that are greater than $50 million.
He noted that most banks only offer algos for spot trades, which must be rolled forward to work as a balance sheet hedge. Mr. Mitrani said if a client is using an algo offered by Societe Generale, the bank will price the forward.

When to use the tool. Mr. Mitrani said he sees more use of algos on larger trades or for emerging market currencies. “If market conditions are challenging, an algo can help you tap into additional liquidity sources,” he said. In addition, “when markets are volatile, and generally spreads widen, you get the benefit of spread compression through aggregation and access to an increasingly fragmented FX market. And because markets are moving, there is potential to capture spread.”

Both the member and Mr. Mitrani said algos provide flexibility for risk managers who have a view on the market. “If you think the market is coming toward you in your trade, you have the ability to slow your trade down and let the market come to you so you can capture more spread,” Mr. Mitrani said.
The member said algos are also useful for executing trades in overseas markets overnight. Timing also comes into play when a large spot trade comes in during illiquid hours and the banks’ bid-ask spreads are extremely wide. In this case, he can avoid the cost of risk transfer to the bank and use a passive algo that allows him to “capture the mid”—the middle of the spread between a currency’s bid and ask rates.
These algos may take a couple of minutes or longer to execute the trade and are among the most successful when the market is hardly moving, he said. One reason is the aggregation of liquidity over time.
Another NeuGroup member, at an earlier session, said it’s especially important that an algo is stealthy in an illiquid market. “You cannot have a stealthy algo that does not know market liquidity,” he said. He gave the example of putting on a Chinese currency trade on a Friday afternoon that moved the market “like an elephant walking in.” To guard against elephants, he measures the average market mid five minutes before algo execution and five minutes after it.

Goals and benchmarks. Both the risk manager member and Mr. Mitrani agree that corporates considering or using algos need to know why. “The client should have a clearly defined benchmark going into the trade. What are they trying to accomplish?” Mr. Mitrani said.

Being clear on the goal and the benchmark will help determine what to do if the market moves against you. “How do you handle it if you’re starting to lose on the trade? When do you say I want to finish this trade and move on more quickly,” he added.
Mr. Mitrani echoed the member in underscoring the value of algos as an execution tool offering another option to trade foreign currency. Through this lens, he said, “it becomes more a matter of clients creating what their execution workflow is, when they want to do a certain trade a certain way, what are those parameters and finding the choice that works best for them.”

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Justin Jones In Banking, Risk Management

Creating a Plan B for Bank Failure

SVB’s failure has pushed the conversation about backup cash management banks to the forefront for more companies.

Shifting business to a new cash management bank is a huge ordeal for corporate treasury teams, but concern about bank creditworthiness, triggered by the collapse of Silicon Valley Bank (SVB), is leading more treasuries to explore what’s required and how to set up a backup solution.

Thirty-nine percent of respondents to NeuGroup’s Best Practices in Assessing Bank Counterparty Credit Risk Survey reported they are considering establishing a backup cash management bank to mitigate operational risk in case of a bank failure or a meaningful decline in credit quality.

SVB’s failure has pushed the conversation about backup cash management banks to the forefront for more companies.

That’s a significant percentage because a corporate’s relationship with its cash management bank is very sticky. Switching banks is complicated and extremely time-consuming, involving the creation of a new account structure as well as transitioning pooling and sweeping arrangements.

Taking action. Despite the challenges, several NeuGroup members have already taken steps to establish this alternative solution. One member had the benefit of getting a head start: Towards the end of 2022, discussions began about how to mitigate the risk of a major relationship bank failing. “Even before SVB, we were exploring cyber and geopolitical concerns, and what we would do if our main cash management bank went down,” the member said.

While this large multinational did not have a meaningful exposure to SVB, its collapse triggered a more urgent conversation about its preparation for a major event. “Once SVB happened, it really did gain a lot more traction in the company, and moved to the forefront for us to really evaluate the banks we transact with,” the member said. “It also generated stronger sponsorship because the CFO got personally involved.”
The company deals with multiple major banks, so the focus was broader than just cash management. “We had conversations with each of them about how they would recover if they experienced a cyberattack.” Those initial conversations helped accelerate the process of setting up a backup provider.

A risk-based approach. The timing and extent of another SVB-like event is, of course, uncertain. So preparation requires flexibility. “We don’t know what the next crisis might be—an outage for a day or a more extended period. We focused on a setup that allowed for optionality,” the assistant treasurer at this organization said.

The process included an evaluation of the type and volume of transactions the company has with each bank. “Then we asked: “What would it take to pivot if one went down?’” The initial focus was domestic. “All funds come into a single concentration account so we can invest more of those funds. We wanted to be able to pivot if we need this backup account,” he said.
“We took a risk-based approach,” he added. That meant opening one account for now that does not offer full capabilities but can be quickly expanded. ”We didn’t set up everything that we do today, but to ensure we have liquidity in our structure.”
The corporate ran tests with the single account to ensure it can make the switch quickly and that the backup can handle critical treasury transactions smoothly. “We tested our capabilities with that account by running small transactions; we tested the machine,” he said.

Communication is key. Internal and external dialogue is critical when establishing backups. “We had several calls with the bank we chose to make sure we were aligned in what our expectations were and what they wanted from us,” the member said. In addition, treasury kept in close contact with big functional areas with extensive accounts like AP and payroll that would require services right away in the event of a major problem.

“We worked with our business partners to make sure we’re protected against disruption at every account where we do big transactions,” the member said. “We had to ensure all lines of communication are open, so we can pivot from bank to bank in times of crisis.”

Cost concerns. Some treasuries may be concerned about the additional fees associated with opening a redundant account. “We looked at the pricing and what could happen—we had to make sure it all made sense on that end,” the member said. The good news: the cost is not necessarily prohibitive.

“Fee wise, the cost of having this additional account is very small. You only really get charged when you start moving funds into it and transacting out of it. If we decided to switch it, depending on the volume, we can further negotiate fees.”

An essential part of the playbook. While many treasuries may remain reluctant to go through the process of selecting another bank, opening new accounts and doing extensive testing, the exercise should be part of every company’s business continuity plan.

“I think it’s a really smart move. I’d like to advocate that more corporates do it. Having that backup is a super important hedge,” the member said.
“It is a lot of work up front, but if you think about it, we do a lot of disaster planning. This is going to go into a business continuity plan like everything else.”
And bear in mind that this exercise should not be a one and done. “We will plan to test the arrangement annually and incorporate it into our business continuity playbook.”

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Justin Jones In Banking, Risk Management, Talking Shop

Talking Shop: Account Verification Solutions for Payments Fraud

Editor’s note: NeuGroup’s online communities provide members a forum to pose questions and give answers. Talking Shop shares valuable insights from these exchanges, anonymously. Send us your responses: [email protected].

Context: Payments fraud remains a significant threat to corporates—although some research shows it declined in 2022. The 2023 AFP Payments Fraud and Control Survey reported that 65% of organizations surveyed were victims of reported or actual payments fraud last year. That’s down from 71% in 2021 and the lowest percentage of fraud activity since 2014, when it was 62%. And it suggests some fraud detection, mitigation and prevention efforts by treasury and other finance teams are working.

But in an age when both criminals and those working to stop payments fraud are exploring how artificial intelligence can help them, a large number of treasury teams still rely on phone calls to verify changes in vendor bank account information.
More than half the respondents to the AFP survey (53%) said their companies validate beneficiary payment information verbally. Only 16% rely on an external service or third party to validate payment info. Another 17% rely on their banks or other financial vendors to do it.

Member question: “What process do you use to verify vendor bank accounts, especially when you have a request to change banking details? Do you use any third-party vendors to provide this service, any fintech products or companies that you can share?”

But in an age when both criminals and those working to stop payments fraud are exploring how artificial intelligence can help them, a large number of treasury teams still rely on phone calls to verify changes in vendor bank account information.
More than half the respondents to the AFP survey (53%) said their companies validate beneficiary payment information verbally. Only 16% rely on an external service or third party to validate payment info. Another 17% rely on their banks or other financial vendors to do it.

Peer answer: “A callback is made to the vendor. The callback cannot be done by using the phone number provided on the request e-mail or a new invoice. It is usually verified using contact details from a previous invoice. We do not use a third-party provider.”

Member response: “Callbacks are also the current process we have in place; but we are looking for ways to implement an automated check in our ERP system via a third-party provider.”

NeuGroup Insights follow-up. In an email exchange, the member posing the question explained why her team wants an automated solution and how it might work: “Having an automated solution is always better than a manual bank verification call. We see that fraudsters are getting more and more sophisticated, and we see more fraud attempts.

“We also see that not all employees are following policy and processes for bank verification; some call the number in the fraudulent email.
“We do not have a specific product in mind but are inquiring. Banks use algorithms which are based on payments history; but there is no option I’m aware of to match international bank account numbers (IBANs) with beneficiary information.
“Ideally, before a payment is authorized the system would verify the IBAN and confirm that the beneficiary name matches the IBAN. Only when they match can a payment be released. In my view, this should work and be available.”

An update. This topic surfaced in a Talking Shop about a year ago that mentioned a bank account verification solution from GIACT. One of the members who had looked into GIACT is now exploring solutions offered by a company called apexanalytix that offers software for supply chain management and fraud prevention. The member is intrigued by “validation built into their vendor onboarding services.”

The same member also said his treasury team has implemented and likes a validation service offered by U.S. Bank which leverages Early Warning Services, a fintech owned by the bank and six others. “It is an automated process where you input the information for the counterparty manually and it provides back guidance on the risk of making the payment to the counterparty,” he explained.
“However it is limited, as not all counterparties are in the system,” he added. “This means we continue to do manual validation calls. One other limitation is the early warning system is only for domestic banks, it does not include international banks.”

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Justin Jones In Cash & Working Capital, FX, Technology

Machine Learning Wizardry: Analytics-Based Cash-Type Forecasting

Data science “wizards” and clean, treasury-tagged cash transaction data are transforming cash forecasting at one corporate.

Transaction tagging, data science “wizards,” statistical models and machine learning (ML) are the current cornerstones of an ambitious, yearslong project by treasury at one NeuGroup member company to transform cash forecasting—which now includes grouping cash transactions by type. The FX leader and a member of his team shared details of the project, some of its successes and what they have learned along the way at a recent peer group meeting of NeuGroup for Foreign Exchange sponsored by Societe Generale.

The move to what the company calls analytics-based cash forecasting is aimed at overhauling the current, manual and resource-intensive process involving more than 150 global entities and forecasters contributing monthly currency cash forecasts used by treasury to produce rolling, 13-month cash flow forecasts for more than two dozen currencies.

Data science “wizards” and clean, treasury-tagged cash transaction data are transforming cash forecasting at one corporate.

The move to what the company calls analytics-based cash forecasting is aimed at overhauling the current, manual and resource-intensive process involving more than 150 global entities and forecasters contributing monthly currency cash forecasts used by treasury to produce rolling, 13-month cash flow forecasts for more than two dozen currencies.
“These forecasts drive all our US dollar positioning, investments as well as our hedging,” the member said. “When they come in wrong, we’re educating people why it’s such a big deal: We run the risk of needing to change our hedges, offset trades, or miss hedging opportunities.”

Beginning of a journey. The project began with the risk management and cash teams working with a consultant to benchmark with other corporates, evaluate third-party solutions and do a feasibility study on model-driven forecasts. “Let’s not have those 150 forecasters do this each month if we can build a model to do it as well or better,” the member said, describing the goal.

That led to a proof of concept initiative using bank account balances, data scientists and ML models. But while initial results were promising, the team ultimately decided that account balance forecasting wasn’t sufficient and went back to the drawing board.
“When the account balance forecast wasn’t right, we had no way to answer the treasurer or other stakeholders as to why our 12-month cash forecast was off,” the member said. “We had no real insights.”

Clean data and tagging. To address that problem and identify why and where variances occur, a transition to so-called cash-type forecasting began: all cash transactions—inflows and outflows—would be grouped by type. At the highest level, the types are the corporate’s key drivers of cash flow actuals: payables, receivables, taxes and payroll. (By now, an internal analytics team had replaced the consulting firm and started readjusting the models.)

For the project to work, treasury needed to provide the analytics team with clean data and embarked on a massive, global tagging project involving all regional treasury centers. They had to tag all historic transactions and supply business logic for rules-based tagging for future transactions.
So far, more than five million transactions have been tagged with some 150 tags representing all transactions. Those 150 transaction types are filtered into about 70 mid-level cash types and about 40 high-level cash types.
This split into tiers will help treasury create different levels of forecasts and get more granular to explain variances beyond the main categories of inflows and outflows. Each currency is tagged and treasury can view data by currency alone, cash type by currency as well as by cash type and entity by currency.
The FX leader noted that the company had 98% visibility to its transactions by type within its FIS Trax system, giving it a significant leg up. “You have to be able to see that data to be able to tag it properly and know that you have that visibility to feel confident you’re capturing everything,” he said.

The wizards. Equally important to the treasury team’s efforts are those of the data scientists who are on the transformation team of the corporate’s global finance organization. The FX leader’s colleague calls them wizards. “They are a group of wizards who love statistics and are helping us along this journey,” she said. “They are the ones that are building our statistical models and machine learning forecasts. “

She explained that these data scientists have built a number of algorithmic models based on statistical time theories, machine learning, neural networks and regressions, among other tools.
The models are based on thousands of data points generating thousands of forecasts that are aggregated into one forecast. The models are constantly being refined based on feedback from the risk management team.
Treasury also provides the analytics team with information on cyclicality, M&A or anything else that could change the trajectory of the model. “It’s a constant feedback cycle,” the team member said. “The biggest thing we’ve learned with this project is not only does it take a lot of time, but it’s a constant innovation cycle.”
Forecasters access the model via an interactive user interface built with Power BI. The model can be refreshed in about 45 minutes.
The team is now working to embed internal forward-looking drivers including sales forecasts and business plan information as well as external inputs including economic indicators.

Success and the road ahead. The member’s presentation included accuracy and error data for three of the seven currencies the team has created currency models for thus far. The 12-month error metric ranged from 1% to 13% for the three currencies. The team is also tracking how often the model is meeting the corporate’s internal metric for accuracy. In each of these currencies, the member noted that the analytics-based cash forecast is more accurate than their legacy process.

“We’re seeing some nice pockets of opportunity,” the FX leader added. “It’s clearly better in some spaces for us to use this model-based forecast than our existing process.
“And it’s really a question of how long it will take us to get all of our currency forecasts built and ready for a transition from our legacy process to the new, machine learning model. We’re thrilled with where we’re seeing it go.”

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Justin Jones In Compliance, Risk Management

Getting Ahead of the Curve: ERM’s Reputational Risk Rethink

The case for ERM practitioners to view reputational risk less as an impact of other risks and more as a risk itself.

The power of social media to damage corporate reputations in the blink of an eye is just one factor leading a growing number of enterprise risk managers to take a more proactive stance toward heading off reputational risks rather than reacting to them after the fact. This marks a shift in perspective by some ERM practitioners who have traditionally viewed reputational risk more as an impact of other threats instead of a bona fide risk itself.

That emerged as a key takeaway at a recent monthly session of NeuGroup for Enterprise Risk Management where several members shared how they collaborate across departments including communications in order to be prepared should their companies’ reputations come into question.

The case for ERM practitioners to view reputational risk less as an impact of other risks and more as a risk itself.

That emerged as a key takeaway at a recent monthly session of NeuGroup for Enterprise Risk Management where several members shared how they collaborate across departments including communications in order to be prepared should their companies’ reputations come into question.
One member at the forefront of this trend noted that “from a social media perspective, companies are being held to account for things that they say now. Activist investors and activist groups are more sophisticated at picking apart statements and promises and holding us to account.”
The climate of heightened scrutiny and instant critique underscores the relevance of the oft-repeated phrase quoted by one member at the session: “Reputation takes a lifetime to build and minute to destroy.”

From impact to risk. The traditional view of reputational risk framed it as a byproduct of other, operational risks such as human rights violations by vendors in the global supply chain (a major area of risk for multinationals with thousands of suppliers). John Sidwell, a member of the ERM group and co-author of “Enhanced Enterprise Risk Management,” explains: “Reputational risks historically relate to being associated in ERM as an impact of other risk topics and generally part of the assessment in rating the risk topics in the risk profile.”

The pivot to viewing reputational risks as “individual risk profile topics,” he says, also reflects the effects of geopolitical events, media reporting and new regulations governing public company disclosures related to cybersecurity and ESG. Those realities are prompting some senior executives to view reputational risk through a sharper financial lens.
“We were one of the two-thirds of organizations two years ago who viewed it as an impact call rather than a risk,” one member said. “Then we had an executive comms session where we had certain leaders in the organization who felt there was a direct carrying cost to capital and propensity to win business based on poor decision-making around ethics and compliance.
“So, it wasn’t just an impact, but a preceding risk. We changed tack and flipped to the other side of the fence, and we manage it as a risk in itself. It typically polls as a top-15 risk.”
That said, it’s important to set boundaries and not position ERM to track every reputational risk, such as customer complaints. “We set some limits around materiality,” the member said. “They are expressed as long-term revenue impact, free cash flow impact and share price impact.”

Ahead of the curve. The proactive perspective taken by members who are ahead of the curve requires tactics and cross-functional collaboration to prepare and plan. “Every company needs to have robust programs in place to proactively identify, treat and respond to reputational threats,” Mr. Sidwell observed. “These would be embedded in the company’s ERM program.”

He added, “This overall risk governance would include mitigation strategies including crisis management plans, communication protocols, and contingency measures, risk awareness of employees and their role in safeguarding the reputation of the organization.”
Of critical importance is aligning with the corporate communications team on reputational issues. Several members said they game out possible risks and have “drawer statements” ready should a negative story break.
“Our ERM team talks to our head of communications quarterly and then many times on an interim basis” one member said. “They have a playbook that they keep in close proximity that if something were to come up, then they have a plan as to how they are going to respond.”

Enlisting audit. Corporate risk managers must work in tandem not only with communications departments but also with internal auditors responsible for monitoring overall risk governance, according to Mr. Sidwell, who is chief audit executive at Infinera. “The internal audit function has the responsibility to ensure the company has effective risk management programs in place,” he said. “It can proactively help protect an organization’s reputation and build trust with stakeholders.”

He added, “To audit a company’s reputation protection effectiveness, auditors would really need to focus on those sources of events that could damage a company’s reputation and assess the robustness of the efforts in place to identify and manage reputational risks collectively as a singular program—not a fragmented approach or in a reactive manner.”

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Justin Jones In Capital Markets, Risk Management

Corporates May Need to Add Sugar to Recipe for Bonds Funding M&A

Investors may demand better terms in special mandatory redemption clauses amid longer deal review times and rate cut risk.

Treasury teams structuring bond deals to fund M&A transactions who want to lock in rates before an acquisition closes may need to sweeten the terms of a clause in bond offerings called a special mandatory redemption. The key reason: increased risks for investors stemming from longer regulatory reviews of mergers and the possibility that deals fall apart.

SMRs typically require an issuer to repurchase the bonds at a premium—typically 101% of par—if the deal is not completed within a specified period, traditionally one year.
SMRs help corporates entice investors who are exposed to interest rate risk if the deal falls through. The clauses also give companies increased financing flexibility.

Investors may demand better terms in special mandatory redemption clauses amid longer deal review times and rate cut risk.

SMRs typically require an issuer to repurchase the bonds at a premium—typically 101% of par—if the deal is not completed within a specified period, traditionally one year.
SMRs help corporates entice investors who are exposed to interest rate risk if the deal falls through. The clauses also give companies increased financing flexibility.

Regulators and rates. More scrutiny of M&A deals and longer periods to review them by US regulators, as well as a possible recession and the specter of falling interest rates, may drive more investors to push for changes in SMR terms in the months ahead, according to NeuGroup members and bankers who work with issuers.

At a session of NeuGroup for Capital Markets sponsored by Deutsche Bank, Ryan Montgomery, a managing director in liability management at the bank, spoke about the shifting state of M&A financing and what steps corporates should be prepared to take to draw in investors if market and economic conditions shift.
“Investor willingness can change,” Mr. Montgomery said. “If you’re contemplating M&A and you might not be funding it until sometime in 2024, you have to be prepared that the environment might not be as easy to obtain these types of provisions. So the question is, how can companies adapt to continue to get the flexibility they need?”

Higher premiums. In addition to M&A deals taking longer to complete under the Biden administration, SMRs are coming into focus now because of the possible effects of falling interest rates that would likely come with a recession. In that scenario, investors holding SMR bonds issued when rates were still high will likely see them trade at a premium as rates fall and bond prices rise. No problem there.

But if the acquisition is delayed by regulators past the SMR date (triggering the SMR clause), investors would lose their mark-to-market gains and receive only the 1% premium for a bond trading above that in the secondary market. And they would be reinvesting at lower rates.
To ensure the bonds remain attractive to investors, some corporates are considering raising the premium paid if the SMR clause is triggered. One member in another session has weighed raising the premium two or three points above par. However, he expressed concern this would signal a heightened risk of the deal not closing.

The synthetic route. Another way to improve SMR terms for investors is pricing bonds at a discount to par, which one member called raising the premium synthetically.

One complication with the synthetic approach is that by pricing the bonds at a discount, the corporate receives less cash from the bond issuance, potentially creating the need to raise the size of the deal.
“As the discount gets larger, it could start to add up. For example, an average of five points on a $10 billion deal would be another $500 million of funding,” Mr. Montgomery said.

Step right up? In response to longer regulatory reviews of deals, some corporates, including one NeuGroup member, have extended the terms of an SMR clause to 16-24 months to give themselves more negotiating time and maneuverability. But this creates more time when market conditions could move against investors who buy the bonds.

If investors begin to push back on these longer time horizons for a standard 101% redemption, Mr. Montgomery suggested issuers “consider including SMR pricing that steps up to something like 102% after 12 months and maybe more after 18 or 24 months.”

Investor activism. This year, The Canadian Bond Investors Association and The Credit Roundtable have advocated for changes in SMR provisions. Their proposals include requiring that at least two-thirds of bondholders support changes to SMR terms—including the time-period in which the deal must be completed.

Perhaps the most significant proposal is setting the redemption price at the greater of a) a price based on a predetermined percentage of the original offer spread and b) a pre-set percentage of par, such as 101%. That change would expose the corporate to interest rate risk.
Mr. Montgomery does not expect issuers to be willing to bear this risk. “The whole reason SMRs exist is that issuers want to get large-scale financing done and be able to lock in interest rates,” he said.
“If the acquisition goes away, they are willing to pay the extra point for insurance. If corporates had to bear the full exposure to interest rate moves in the event of a busted deal, they would probably simply not do the M&A financing ahead of closing.”

Prepare for a bear. A deeper than expected recession could send corporate bond spreads wider as investors demand more yield in response to weaker earnings and lower cash flows. That would also likely prompt investors to demand changes in SMR terms. “Investors aren’t yet pulling out of fixed income markets, but a bearish credit market could come, and investors could collectively push back enough to get a big change,” Mr. Montgomery said.

“We think issuers should prepare for this possibility so that if markets turn for the worse, they are ready with SMR terms that respond to investor concerns in a way that balances issuer and investor interests.
“While changes may not be necessary in a strong market environment, we don’t want to see issuers caught flat-footed if the market for jumbo M&A offerings becomes more challenging from when they announce their M&A deal until they launch the financing.”

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Justin Jones In Crypto, Technology

Corporates’ Tentative Steps Into the NFT Universe

Over half of NeuGroup members that have implemented NFTs manage some portion of the project in-house.

Corporate uses of nonfungible tokens (NFTs) have had a roller-coaster journey over the last two years, with a boom of adoptions in 2021 that plateaued rapidly. But the tokens are far from dead—nearly a third of respondents to NeuGroup’s newest survey, Digital Assets: Current and Future Use Cases, said they’ve already issued NFTs.

NFTs are unique digital assets similar to cryptocurrencies that can be bought and sold, built on a digital ledger known as a blockchain. But these tokens do not store any value, instead serving as a proof of ownership of digital or physical items.

Over half of NeuGroup members that have implemented NFTs manage some portion of the project in-house.

NFTs are unique digital assets similar to cryptocurrencies that can be bought and sold, built on a digital ledger known as a blockchain. But these tokens do not store any value, instead serving as a proof of ownership of digital or physical items.
Largely, NFT implementation has been limited to digital images or videos: for example, a collectible based on a recognizable representation of a company’s brand. More innovative NFT uses include tying the token to a proof of membership, tying it to a physical good as an authenticated receipt, and creating digital media that can be used in a video game or the metaverse.

NFT implementation. In the last two years, as markets and technologies for the tokens have matured, the number of options that corporates have to issue, or “mint” NFTs, has grown significantly.

When NFTs were first popularized, a number of NeuGroup members didn’t trust the technology enough to mint them directly or to accept the cryptocurrencies required to sell them, instead hiring third parties that assumed all responsibilities, but for a high fee.
Now, multiple members have begun minting NFTs on the Ethereum blockchain directly. Of those who are active in the NFT space, only 40% outsource their entire project to a third party (see below).

Understanding the options. When outsourcing, members pay a percentage of NFT sales or royalty payments to the third party, or they completely relinquish ownership and the sales process. The cost to outsource may be worth it if a company does a one-time mint; but for repeated mints, the costs can add up.

Building up. One member, who previously employed an advertising agency to accept cryptocurrency made from NFTs on her company’s behalf, has now set up a digital wallet through Coinbase that accepts ether directly, and converts to USD daily.

The drawbacks to building a project internally, even partially, are the required expertise and operational know-how, which are expensive to develop or acquire. Even companies that choose to go the in-house route often rely on outside experts to outline their strategy and operational requirements.
For some companies, another option to ramp up expertise is acquiring an NFT provider to expand product offerings and accelerate return on investment—a strategy one member has already implemented successfully.

NFT holdouts. Respondents who have so far shied away from the NFT universe listed several reasons; chief among them is the absence of relevant use cases. Other hurdles include the complexity of the required technology infrastructure, an immature marketplace, complex legal, tax and accounting issues as well as a lack of senior management backing.

“There may be a use case for an NFT to be a store of membership to something that can be redeemed, but building that would be hard,” one member said. “You’d need the technology to support, track and monitor the NFTs, and users that will know what to do with it when they get it. There’s a bunch of barriers.”

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Justin Jones In Insurance, Risk Management, Talking Shop

Talking Shop: Charging Stores for Workers’ Comp Insurance Claims

Context: Members of NeuGroup for Retail Treasury represent a variety of businesses that operate thousands of stores, restaurants and other retail outlets where the safety of customers and workers is a preeminent priority. But accidents inevitably occur. So it’s essential that companies managing the risk of people being injured at their facilities have workers’ compensation (WC) and general liability (GL) insurance coverage.

To incentivize managers to prioritize reducing accidents and the associated insurance costs, many retail member companies issue what members have dubbed “chargebacks” to store locations that file WC or GL claims. These charges hit the store’s P&L and may impact manager incentive pay. Companies can also award credits to locations for positive post-accident actions or superior safety records.
One member told NeuGroup Insights that he believes corporates are “borrowing” the term chargeback from banks and finance companies because “it works in much the same way.” He offers two alternatives: “Instead of chargeback, you could say ‘cross-charge’ (more of an internal construct, which is what this is) or simply, ‘charge.’”

Member questions: “A few months ago, all risk management functions, including insurance, enterprise risk management, and crisis management moved from legal to treasury. As part of this process, we have been reviewing and updating safety documentation with the goal to reduce claims that ultimately impact the bottom line.

To incentivize managers to prioritize reducing accidents and the associated insurance costs, many retail member companies issue what members have dubbed “chargebacks” to store locations that file WC or GL claims. These charges hit the store’s P&L and may impact manager incentive pay. Companies can also award credits to locations for positive post-accident actions or superior safety records.
One member told NeuGroup Insights that he believes corporates are “borrowing” the term chargeback from banks and finance companies because “it works in much the same way.” He offers two alternatives: “Instead of chargeback, you could say ‘cross-charge’ (more of an internal construct, which is what this is) or simply, ‘charge.’”

“Do you issue chargebacks to locations for filed claims? If so, is it a flat rate or variable rate depending on some criteria (medical-only vs. lost time, repeat offender, etc.)? Do you issue a chargeback for general liability incidents?
“In which department does your operational safety function reside?”

Peer answer 1: “We have a carrot and stick approach: We use a variable schedule of chargebacks and credits to penalize failures and reward good actions. The chargebacks are internal only and are zeroed out for external reporting, but they will impact the location’s P&L and therefore the manager’s bonus.

“For example, a $5,000 charge to the P&L for a WC claim that results in lost time. Conversely, a $750 credit if the incident is reported the same day and/or a credit of $3,000 if the impacted employee returns to work within seven days. There are also longer-term incentives to encourage the desired behavior/focus (e.g., a $1,700 credit if the location has no injuries during the year).
“We use chargebacks similarly for workers’ comp and general liability claims. The issues are the same (ensure appropriate safety procedures are followed in an effort to minimize accidents), the difference is simply who was injured (an employee or a non-employee).
“This practice is also consistent with the general accounting concept of matching. While it might not be realistic or productive for a location’s P&L to bear the entire cost of a claim, it is only fair that some portion of the financial consequence resides on the P&L responsible.

“Our safety strategy and program design reside with the corporate risk management team, reporting into treasury. Safety program execution resides in the individual brands, led by ops and asset protection/loss prevention.”

Peer answer 2: “We issue chargebacks for WC and GL at a flat fee based on the type of claim (minor or major). We take the total estimate for the year, and charge all locations about half the fee, and use the chargebacks to cover the rest. We usually ‘overcharge’ them in total, which enables us to give back a bonus to safest locations at the end of the year.

“Safety is with asset protection (in ops).”

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Justin Jones In Capital Allocation, Cash & Working Capital

Marriage or Dating: Dividends vs. Buybacks for Capital Return

What companies facing pressure from investors to return capital need to consider as they mature and growth slows.

The decision to start paying a dividend to return capital to shareholders is one that growing companies don’t take lightly—and for good reason: the consequences of later lowering or eliminating the quarterly payouts is an undeniably bearish signal in the eyes of most investors. That fact informed discussions about dividends and share repurchases among members of NeuGroup for Large-Cap Assistant Treasurers at their first-half peer group meeting, and in a monthly virtual session.

One member referenced the nature of romantic relationships to capture the difference between repurchases and dividends: “You date share repurchases, and you marry dividends.”

What companies facing pressure from investors to return capital need to consider as they mature and growth slows.

One member referenced the nature of romantic relationships to capture the difference between repurchases and dividends: “You date share repurchases, and you marry dividends.”

Capital return considerations. The first question is always whether a company has reached a point in its growth where it should consider returning capital; the second question is picking the form of that return. Balancing financial flexibility and capital allocation is the ultimate consideration as corporates mature, say bankers who work with them.

Dividends, perceived to be in perpetuity, offer investors a certain payout now. One concern, though, is how they may affect stock valuation. A share repurchase program, meanwhile, tends to solve two issues: it offsets dilution from stock-based compensation and reduces the number of shares outstanding.
Most companies that pay a dividend do it in conjunction with a share buyback program; and while dividend yield is an important target, capital allocation metrics are expressed in reference to free cash flow.
Bankers tell NeuGroup Insights that whether to institute a dividend is also resurfacing as a major boardroom conversation topic for more mature companies whose top line growth is decelerating.

Investors clamoring. Interestingly, idle on-balance sheet cash, even in the current interest rate environment, can draw the attention of activist investors looking for enhanced returns and operational efficiency. One member at the H1 meeting mentioned that his company had a large amount of cash on its balance sheet and is predictably hearing from shareholders about issuing a dividend.

“It’s a conversation we’re having with our board. Investors are saying, ‘if you start paying a dividend, this will open the company up to a whole new group of investors—income investors.’” He asked whether peers had initiated a dividend.
Among the dividend lessons learned by one member whose company pays one: Once you start, “there is an expectation to increase the dividend, and the debate is around the pace of that.” Dividend yield relative to the peer group becomes an important performance benchmark, potentially resulting in pressure to increase the payout.
Another member is in a similar situation: “The noise from our investors is getting louder. Are we at that point in our company where we should start paying dividends?” He added that the decision isn’t simple given that cash is getting tighter, and the macro horizon looks tough. Flexibility in uncertain times is important. How do you manage EPS growth going into an earnings recession?

Not so special? The member discussing the issue with the board asked about options, including a special dividend, a non-recurring distribution of company assets, usually in the form of cash. They’re often tied to a specific liquidity event like an asset sale.

One member whose previous employer had taken that route said he was not in favor of the move. “We issued a special dividend, then we saw a decrease in the stock price by exactly the same amount,” he said.
And while uncommon, special dividends are on the rise this year, noted NeuGroup senior director Scott Flieger. “It is rare to see investment-grade companies issue them unless it is tied to the sale of an asset,” he said.
“During the late 1980s, due to the LBO era, they were used as an anti-takeover strategy,” he added. “In the last 15 years or so, they have been used by private equity firms to pay themselves; so they effectively get back the equity, typically in the range of 30% to 35%, that they put up to take a company private, essentially reducing their downside risk.”

Divorcing (or diminishing) a dividend. In the monthly session on dividends and share repurchases—where the marriage vs dating comparison was made—one member quipped, “We just divorced our dividend.” Actually, they clarified, the company hadn’t eliminated the dividend but had reduced it substantially.

“We had this really big dividend,” they explained. “There was this feeling that we were an aristocrat. But is that really the priority of our business? For the health of the business and to create long-term shareholder value, we needed to lower the dividend. We were leasing away our future.”
While the decision was difficult, the company’s decision-makers concluded it made sense. “It was the right thing to do,” the member said. The stock is trading lower than before the reduction, “but not any worse than expected.”

Share repurchase complexities. The member who asked peers about initiating a dividend said his company had a history of buying back shares. “There is a lot of equity-based compensation,” he said. “We’re fortunate that our share price has gone up a lot. But at what point are you just buying your shares to pay your employees?”

When the topic of doing more share repurchases instead of initiating a dividend came up, one member said, “I ran a pretty aggressive share repurchase program at a previous company. It was a systematic program that kind of worked like a dividend.”
Another member with a similar story said repurchase programs can be difficult to walk away from as well. “For us we also do a lot of share-based compensation, so there’s an expectation that we’ll at least buy back our dilution. When compensation is share-based, buybacks can be a bit of a drug.”
He went on to say that when the repurchase discussion arises it seems that “the answer is never fewer buybacks. I’ll tell you that.”

Final word. The overwhelming market perspective, bankers say, is that as long as companies continue to deliver growth, capital allocation policy is secondary. However, as businesses mature and growth tapers, investors’ focus shifts to operational efficiency, free cash flow generation and capital allocation. More mature corporates find themselves under pressure to improve shareholder returns and to conform to the capital allocation policy in their peer group.

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Justin Jones In FX, Technology, The NeuGroup Insights Interview

One Man’s Goal: Leveling the Playing Field for FX Trades

Just Technologies CEO Anders Bakke wants to give corporates pricing data that lets them negotiate better with banks.

In the newest episode of NeuGroup’s Strategic Finance Lab podcast, NeuGroup founder and CEO Joseph Neu talks with a man on a mission to bring more pricing transparency to corporate treasury teams that trade in the foreign exchange market. His name is Anders Nikolai Bakke, a serial entrepreneur who is the CEO and founder of Just Technologies, or Just for short. The fintech company started in Oslo, Norway in 2017, serves businesses in Europe and is now expanding into North America.

As you’ll hear in the podcast, available on Apple and Spotify, Just offers corporate treasurers a data-driven trade cost analysis (TCA) solution with the goal of giving them more negotiating power with the banks that charge fees and earn profit margins from FX trades that global businesses use to translate revenues from one currency to another, as well as to hedge FX exposures.

Just Technologies CEO Anders Bakke wants to give corporates pricing data that lets them negotiate better with banks.

In the newest episode of NeuGroup’s Strategic Finance Lab podcast, NeuGroup founder and CEO Joseph Neu talks with a man on a mission to bring more pricing transparency to corporate treasury teams that trade in the foreign exchange market. His name is Anders Nicolai Bakke, a serial entrepreneur who is the CEO and founder of Just Technologies, or Just for short. The fintech company started in Oslo, Norway in 2017, serves businesses in Europe and is now expanding into North America.

As you’ll hear in the podcast, available on Apple and Spotify, Just offers corporate treasurers a data-driven trade cost analysis (TCA) solution with the goal of giving them more negotiating power with the banks that charge fees and earn profit margins from FX trades that global businesses use to translate revenues from one currency to another, as well as to hedge FX exposures.
Mr. Bakke says banks have access to far more market knowledge and data than many customers—a disparity that for many large but especially medium-sized companies leads to what he describes as price discrimination. Of course, that conclusion is not how many bankers view what is a multi-layered and complex subject, a point Joseph raises and explores with Anders.

Anders Bakke
CEO, Just Technologies

In addition to TCA, you’ll hear another acronym in the podcast: MTF. It stands for multilateral trading facility, a European term for a trading system for transactions between multiple parties. In this context, it includes multi-dealer FX platforms like FX All, 360T and Bloomberg’s FX Go.

One thing you won’t hear but might enjoy knowing is that for three years, Anders played professional bandy, a Nordic sport that’s a cross between ice hockey, field hockey and soccer. Some say bandy is the world’s fastest team sport. So maybe it’s no surprise that Anders is committed to creating what he thinks is a more fair and level FX playing field between corporates and banks.

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Justin Jones In Cash & Working Capital, Investment Management

Collaboration with Treasury as Key to Improving Working Capital

Breaking down silos between treasury, AP and procurement to optimize invoice processing and strategic liquidity management.

With interest rates likely to remain higher for longer, opportunistic treasury teams want to invest excess cash where it can earn attractive yields. One obstacle standing in the way at some companies stems from differing priorities between accounts payable (AP), which often aims to pay invoices as soon as possible, and treasury, which has a more strategic view of liquidity.

At a recent session of NeuGroup for Payments Strategy sponsored by Citi, treasury team members shared how they are thinking more strategically about the procure-to-pay (P2P) cycle by collaborating with AP and procurement, which negotiates payment terms.

Breaking down silos between treasury, AP and procurement to optimize invoice processing and strategic liquidity management.

At a recent session of NeuGroup for Payments Strategy sponsored by Citi, treasury team members shared how they are thinking more strategically about the procure-to-pay (P2P) cycle by collaborating with AP and procurement, which negotiates payment terms.
The session included discussion of tools offered by Coupa, a business spend management platform whose offerings include a TMS and a solution called Coupa Pay that fosters open lines of communication between the three pillars of the P2P process.
Coupa vice president Tamir Shafer discussed the added importance in times of economic uncertainty of invoice processing that balances a company’s liquidity situation, plus the yield or discounts that can be generated based on the method of payment, as well as the timing of that payment. “The higher that interest rates are, the more important a program that takes all these pieces into account becomes as more potential yield is in play,” Mr. Shafer said.

Efficiency vs. strategy. In the session, one member said her company used to pay its invoices within about a week of receiving them, regardless of the payment terms. But interest rate hikes have put a premium on cash, forcing her to rethink strategy and make changes. “I said, ‘Let’s get working capital [operating] as organically as we can,’ so we created a playbook,” she said.

Under treasury’s guidance, the procurement team reached out to suppliers and renegotiated payment terms that are now followed. “We started negotiations at 120 days, then landed at 90. You’d be surprised how many companies are okay with 90-day payment terms,” she said. There’s also an option now to pay early at a discount—if the price is right.
Another member is attempting a similar rethink of how payments are processed, but is encountering difficulties due to AP’s different priorities. “Our AP team wants to be very efficient, so as soon as an invoice comes in, they process,” he said. “And that’s the exact opposite of what treasury wants to do: hold funds until the agreed time and put the cash to work.”
“If treasury is short cash, and AP is paying on day 12, instead of day 30 for example, then the process is broken, especially if treasury needs to go borrow money at a rate higher than what cash sitting in a bank account is earning,” Mr. Shafer said. “We have a vision of treasury and AP working together to make smarter decisions to ultimately improve working capital.”

A portal to collaboration. The problem, Mr. Shafer said, is that AP often isn’t aware of the lost opportunity to invest short-term cash when paying even a few days or weeks early. “That decision can only be made with treasury input,” he said. “If AP can help treasury make smarter decisions, that ultimately improves working capital.”

Coupa Pay works by consolidating all three pillars of the P2P process into a single online portal. Procurement can use the portal to interact with and purchase goods and services from suppliers, similar to using an e-commerce platform like Amazon; then AP can verify and approve the invoice. All payments are reconciled with bank statements automatically, so treasury immediately can see payments made. The portal also reflects any early payment discounts negotiated by procurement.
Coupa’s TMS includes a treasury cash management worksheet that gives AP more visibility into the company’s liquidity picture. By consolidating all payment information in a single place, Mr. Shafer said treasury can help AP make smarter decisions on when—and when not—to hold on to cash.
“Is AP looking at payment terms, where they are either paying in the early payment window, or are they holding the invoice until it’s due? That decision can only be made effectively if treasury is advising AP of where they are from a liquidity perspective,” Mr. Shafer said.
One member said Coupa Pay could fit well into her treasury team’s toolbox, aiding the company’s ability to be agile and adapt to market conditions. “The key is having different levers you can pull,” she said.

To review, here’s an overview of how Coupa says users of its products can improve working capital management:

“As AP related invoices are approved for payment, treasury sees those as a liquidity reduction, based on payment date, before the payments are actually made. This minimizes the need for treasury to manually input AP related payments in the treasury cash management worksheet (which otherwise could lead to manual input errors).
“If the sum of payment amounts are material, treasury could push back on AP and ask, ‘What’s going on here? We don’t have liquidity, so could we delay these payments?’ Or conversely, ‘Hey AP, did you know we have a lot of liquidity? Tell me about these invoices you just approved; were there early pay discount options, and if there were, why didn’t we leverage it here?’
“AP has visibility into the treasury cash management worksheet and forecast, and makes decisions about when to pay invoices given their access to the information, provided they worked with treasury to understand how to read the treasury cash management worksheet.”

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Justin Jones In Crypto, Technology

Crypto Leads the Way in Corporates’ Blockchain Use Cases

A NeuGroup survey reveals trends among corporates embracing blockchain tech—and reasons others are holding back.

Members of NeuGroup for Digital Assets are among the groundbreakers for corporate use of digital currencies, blazing trails at companies including mega-cap corporates, by developing use cases for enterprise-wide projects involving a blockchain.

NeuGroup’s newest survey, Digital Assets: Current and Future Use Cases, clearly shows rising interest in this area—as well as a growing urgency among treasuries to learn more. The survey revealed that nearly half of respondents have already executed a blockchain project. A quarter of those who are not yet in the crypto market have plans to do so in the next 12-18 months, indicating broader adoption over the coming year.

A NeuGroup survey reveals trends among corporates embracing blockchain tech—and reasons others are holding back.

NeuGroup’s newest survey, Digital Assets: Current and Future Use Cases, clearly shows rising interest in this area—as well as a growing urgency among treasuries to learn more. The survey revealed that nearly half of respondents have already executed a blockchain project. A quarter of those who are not yet in the crypto market have plans to do so in the next 12-18 months, indicating broader adoption over the coming year.
“The best approach to coming up the learning curve is to find out how early adopters are deploying technology and using digital currencies to realize their objectives,” said NeuGroup’s Matt Thomas, who leads the group. “It ranges from supporting the business in expanding the customer base, to reducing friction in—and increasing the speed of—global liquidity management.”

Taking the first steps. Among respondents that have launched a blockchain project, almost two thirds (63%) are accepting, paying or holding digital currencies.

The survey shows that 37% of early adopters are holding cryptocurrencies such as ether, bitcoin and polygon for daily operational needs, with about half of those also taking direct balance sheet exposure.
Other digital currencies in use include central banks’ digital currencies, also known as CBDCs, and fiat-based stablecoins, which can support liquidity management through cross-border payments.

Self-custody. The next most common use case, at 25%, is direct custody of digital assets, primarily because members are concerned about the steady deterioration in the creditworthiness of current counterparties. Because regulatory oversight of this new asset class is in the early stages of development, third parties have often been the providers of custodial depository accounts.

One member at a so-called “crypto-native” company with a business model based exclusively on use of blockchain technologies said his company mostly uses self-custody, not external custodians. “Self-custody makes it a lot easier to do payments to vendors, and even invest to diversify our portfolio,” he said.

Smarter contracts. The third most common blockchain application among members is using distributed ledger technology to program an automated agreement called a smart contract. These are typically coded into the blockchain, requiring a decent amount of technological proficiency, and can be used to track NFTs or even physical goods.

The member at the crypto-native company said he is exploring smart contracts that automatically convert a certain amount of the company’s profits to the USD-backed stablecoin USDC. Then, once a month, treasury could convert to dollars to save as cash reserves.
One member said more established corporates may find smart contracts are nice to have, but aren’t quite ready for widespread adoption. “This is going to take a long time for old companies to embrace,” he said. “Until someone has a solution to make creating smart contracts easier, it won’t happen quickly, since you have to create your own.”

New opportunities. The “other” category in this survey question, chosen by 38% of respondents, featured a variety of other blockchain uses, including some of the applications below. Keep an eye on NeuGroup’s Peer Research page to read the full report, which dives deep into each blockchain use case, and will be released later this month.

NFTs
Data aggregation
Permissioned blockchains
Intercompany liquidity management
On-demand funding
Carbon credits

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Justin Jones In FX, Talking Shop, Technology

Talking Shop: FX Dashboards Made With Tableau or Power BI

Context: FX dashboards are an extremely useful tool for treasury teams managing currency risk and shaping the narrative delivered to C-Suite executives about treasury’s ability to hedge the impact of FX rate swings. Well-designed dashboards—some using real-time data—allow risk managers to monitor exposures and dynamically illustrate cash flow, balance sheet and other important areas affected by FX volatility.

Julie-Zawacki-Lucci, leader of two NeuGroup for Foreign Exchange groups, said, “Across the NeuGroup Network, we have seen more and more treasury teams embracing internally built dashboards instead of relying on ‘out of the box’ solutions from treasury and risk management system and software providers.

“This is partly because the growing use of data lakes and warehouses allows for tools such as Power BI and Tableau to pull critical information from large amounts of data instead of treasury teams pulling data from multiple sources to manually update spreadsheets.
“The customization of dashboards allowed by data visualization tools provides treasury teams access to reports that make the most sense for their workflow, analyses and mandates from executives. Within the FX function in particular, the ability to quickly and efficiently examine hedge coverage ratios alongside market dynamics and various KPIs has elevated the role of the corporate FX professional.”

Member question. “We are looking into creating an FX dashboard either using an FX system or one of the tools like Tableau or Power BI to enhance data visualization and save the time taken to consolidate reports from multiple sources.

“This is partly because the growing use of data lakes and warehouses allows for tools such as Power BI and Tableau to pull critical information from large amounts of data instead of treasury teams pulling data from multiple sources to manually update spreadsheets.
“The customization of dashboards allowed by data visualization tools provides treasury teams access to reports that make the most sense for their workflow, analyses and mandates from executives. Within the FX function in particular, the ability to quickly and efficiently examine hedge coverage ratios alongside market dynamics and various KPIs has elevated the role of the corporate FX professional.”

“Does anyone in this group have an FX dashboard currently? Have you created one? Any insights will be highly appreciated.”

Peer answer 1: “I created and maintained an FX dashboard (with Tableau) with a previous employer. I found it was extremely useful in that:

“You could make the dashboard interactive using filters, drop-downs, and ‘actions’ (where you click on a specific bar or line and the rest of that information filters automatically). This allowed two different end users, one who needs a high-level overview and another who wants to get in the weeds, to both find utility in the dashboard.
“You could share a link that, once bookmarked by the user, allowed all interested parties to quickly reference back to the dashboard (as opposed to emailing an Excel-driven model with each new version).

“My advice with this route is to keep automation in mind throughout production, and how long it will take to update the dashboard as a finished product.

“Will you need to use data from multiple sources or only one?
“How can you map these data sources together if there are multiple? Using a published data source or, ideally, connecting straight to your accounting system if possible may save someone hours a week down the line vs. running an Excel report and manually updating the dashboard each time a new iteration is required.
“I have seen dashboards set up for efficiency’s sake become more onerous than the original method of reporting when all is said and done for this reason.”

Member response: “Thanks a lot for the detailed information. We are also looking into Tableau; however, it may take a while for getting IT resources, as our intention is to pull data from multiple systems. Did you rely on IT resources when creating the dashboard?”

Peer 1 response: “Yes, I did. The IT department had one or two individuals in ‘Tableau admin’-type roles. I worked closely with them on connecting to live (published) data sources they had made available, as well as navigating the Tableau server they had created when publishing the finished dashboard. They were also the contacts for granting new end users with licenses that allowed them to view the dashboard once published.”

Peer answer 2: “We are currently in the process of building out some dashboards. We will be using Tableau for the data visualization and an internal data lake to source the data from various sources. Still in the development stage.”

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Justin Jones In Capital Markets, Risk Management, Technology

Focal Points: Tech and Risk Among Treasurers’ Top 10 Priorities

NeuGroup meetings in 2023 H1 offered unique insights into critical concerns for treasury teams in the months ahead.

Hundreds of members of NeuGroup’s treasury peer groups met during the first half of the year to discuss a multitude of critical topics they face and share their main priorities for 2023. While the groups vary in company size, member titles and geography, 10 themes dominated the conversations in NeuGroup’s singular projects and priorities sessions. Here’s what’s top of mind.

NeuGroup meetings in 2023 H1 offered unique insights into critical concerns for treasury teams in the months ahead.

1. Modernizing treasury’s technology. Treasury teams are on an automation spree: Many are replacing or implementing a TMS, investigating specialized solutions and integrating existing ones, often through an enterprise-wide migration to SAP S/4HANA. Members are also exploring new fintech offerings and technologies such as RPA, AI and ML, in particular for collecting data from diverse source systems, reducing swivel-chair activities and fine-tuning cash forecasting.

2. Data management and governance. Consistent data is the cornerstone of effective process automation and a prerequisite for running advanced analytics methodologies. Members are focused on standardizing data across the enterprise, including integrating multiple finance systems. The first step is establishing a robust data governance strategy and collaborating with IT on ownership and accountability.

3. Capital (re)structure. Borrowing costs and pressure on earnings sparked focus on optimizing companies’ capital structures. Members are exploring deleveraging by buying back debt at discounted prices and considering share repurchase programs and tweaking dividend policies.

Debt planning also includes choosing between increasing borrowing flexibility through a downgrade or maintaining an investment-grade rating to cap borrowing costs and considering the use of cash to buy back stock and pay dividends.

4. Capital markets. Treasuries are working on refinancing maturing debt, as well as how to fund acquisitions and spin-offs, including hedging expected issuance and deciding on floating- vs. fixed-rate debt ratios. Members are also recalibrating their relationships with creditors and intensifying communications with credit rating agencies.

5. Bank counterparty credit risk. Silicon Valley Bank’s collapse triggered a review of treasury’s approach to managing bank counterparty credit risk. This focus outlasted the immediate crisis. Treasuries are including new risk metrics, shifting operational funds to MMFs, adding new risk metrics and considering aggregating different types of exposure (e.g., deposits, funding, investments and in-the-money derivatives) by leveraging cloud ERP migration and emerging tools like AI and ML.

6. Financial risk management. Financial market volatility has prompted treasuries to evaluate their FX and interest rate (IR) hedging strategies, with a specific focus on net investment and balance sheet currency hedges. They are also considering introducing greater flexibility into risk management policies to adjust to quickly changing market conditions. More companies are also launching IR hedging programs.

7. Liquidity management. Basel III and new Fed capital requirements put banks under pressure to raise prices on low-margin services, e.g., revolvers, supply-chain finance and LOCs, to maximize internal liquidity and cap the cost of capital holdings. Many treasuries are looking to defray higher future costs by establishing or expanding liquidity centralization projects, e.g., setting up in-house banks as well as notional and physical pools.

8. Cash forecasting. A perennial topic, forecasting gained importance in 2023 against the backdrop of earning pressures and higher borrowing costs. New projects include a review of strategies as well as the use of enabling technologies, such as experimentation with AI and ML.

Many are trying to consolidate direct and indirect methods, often in collaboration with FP&A. Another trend is greater use of scenario analysis and predictive models.

9. Talent development. Rising reliance on technology is altering treasury’s talent profile, further complicated by the need to replace team members who left during the pandemic and adjusting to hybrid work. Treasuries are deploying capability assessment models to identify skills gaps and using rotation, shadowing and training programs to upskill existing staff.

10. Operating model. Treasuries are adjusting their organizational structures to prepare for a future of greater automation and rising management demand for decision-support. They are establishing treasury COEs in low-cost locales, leveraging existing enterprise SSCs and outsourcing some activities.

Lifting and shifting legacy processes will not yield expected ROI, so leaders are preparing by standardizing and automating the process before migrating to a new operating model.

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Justin Jones In Risk Management, Talking Shop

Talking Shop: Revisiting Enterprise Risk Categories

Context: Ted Howard, peer group leader of NeuGroup for Enterprise Risk Management, offered this context on the subject of enterprise risk categories: “When it comes to ERM, companies frequently use a variety of risk categories and standards to build programs tailored to their needs. The specific standards and categories used by ERM teams are based on the organization’s objectives, industry, regulatory environment and overall operational needs.

“The main and perhaps most utilized standard framework is from COSO, or the Committee of Sponsoring Organizations of the Treadway Commission. For many companies, COSO is a holistic risk template they would use to construct the foundation of their risk program.
“They would then incorporate other standards into that program to address more specific issues like cybersecurity (NIST), IT governance (COBIT), or quality management (ISO 9000).”

Member question: “I am revisiting our current risk categories—strategic, operational, financial and IT (we mostly follow the COSO framework). What categories do you use? I’m also interested if you adopted from COSO, ISO, Gartner, etc.”

“The main and perhaps most utilized standard framework is from COSO, or the Committee of Sponsoring Organizations of the Treadway Commission. For many companies, COSO is a holistic risk template they would use to construct the foundation of their risk program.
“They would then incorporate other standards into that program to address more specific issues like cybersecurity (NIST), IT governance (COBIT), or quality management (ISO 9000).”

In a follow-up with NeuGroup Insights, the member explained the timing of her question. “We are finalizing our risk register (basically the list of all of our risks and the definitions) to upload it into ERM technology and therefore are revisiting our risk categories,” she said. She added that “individual risks roll up to risk categories to help broadly bucket them.”

Peer answer 1: “For enterprise risk (which looks at broad strategic risks) we use four broad categories: strategic (which includes risk areas like business model, employees and policy), technology (a very broad category), finance and compliance, and operational risk (which tends to be less strategic).

“We benchmark against COSO and ISO; we also looked at 10-Ks from similarly sized companies in the tech industry to identify gaps. We review annually and do a comprehensive review every three years; however, the broad categories have been stable for the last 5+ years.
“Like other companies, there are a substantial number of other risk assessments that are tactical or operational in nature conducted by other parts of the organization.”

Peer answer 2. “We follow the COSO framework in general and use the four COSO categories: operational, strategic, financial and regulatory. The COSO methodology maps to a proven control model that is accepted nearly globally. We have other risk assessments that we use for IT, especially following COBIT and NIST.

“Some companies are adding a more descriptive topic related to technology to assist in further clarifying types. It’s hard to argue [with that] in this day and age, but the COSO model has not yet been updated to provide this category addition.
“It really does not make much difference unless the company wants to add credibility to their ERM program to be based on an approved ERM model. Nearly all companies have the four vs. other, different ones, regardless of the industry.”

Peer answer 3: “We settled on COSO, but my issue is that the COSO taxonomy doesn’t provide any additional insight or perspective. I would like to hear about risk taxonomies that help provide further insight or patterns on the risk categories or guide the treatment of those risks.”

Peer answer 4: “At a high level, we use COSO as a baseline, but modified for our company. Then also use ISO and NIST frameworks in specific circumstances. If there is an ISO standard available for an area and we are trying to get certified, we’ll use that framework for that area. If it is IT/cyber related, we’ll use NIST.”

Peer answer 5: “We generally use strategic, operational and financial, and used Gartner as a baseline which we have modified to fit our own purposes.”

Member wrap-up. After reviewing the peer responses, the member who posed the question said, “the majority of respondents follow the COSO framework, which was helpful to benchmark against.”

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Justin Jones In Cash & Working Capital, FX, Regional

Argentina: Trapped Cash, Election Tea Leaves, Chinese Currency

Dollar-linked investments are one way multinationals are preparing for a possible devaluation of the Argentine peso.

Multinational corporations closely watching Argentina’s primary elections on Aug. 13 for a preview of the general presidential election in October face significant uncertainty about the magnitude and timing of a possible devaluation of the Argentine peso. Many are seeking ways to hedge their exposure to the currency as they struggle to get trapped cash out of a country with capital controls, spiraling inflation, taxes on imports and a scarcity of US dollars.

“The big question mark in the market these days is what is going to happen with the official FX rate after the election,” said Alejandro Haro, CEO of Comafi Bursatil, the brokerage arm of Banco Comafi, which sponsored a recent meeting of NeuGroup for Latin American Treasury held in Buenos Aires. “We think there is a 100% probability of having a sharp movement in the official FX rate in the next year.”

Dollar-linked investments are one way multinationals are preparing for a possible devaluation of the Argentine peso.

“The big question mark in the market these days is what is going to happen with the official FX rate after the election,” said Alejandro Haro, CEO of Comafi Bursatil, the brokerage arm of Banco Comafi, which sponsored a recent meeting of NeuGroup for Latin American Treasury held in Buenos Aires. “We think there is a 100% probability of having a sharp movement in the official FX rate in the next year.”
At the official exchange rate, the peso recently traded at about 280 per US dollar; the unofficial “blue-chip swap” rate that is less favorable for corporates sitting on pesos was about 590. The more than 100% gap between the rates is just one sign of the fear of devaluation and further depreciation.

Dollar-linked investments. That outlook is driving more corporates to seek hedges through buying notes and bonds in Argentina’s relatively small debt capital markets. The yields earned on dollar-linked debt help offset the loss in value of a corporate’s cash amid local currency depreciation.

“We are seeing huge demand these days from our corporate clients on dollar-linked instruments that are linked to the official FX rate, not the blue-chip swap rate,” Mr. Haro said. “It’s a small market but you can use it to invest some of your pesos.”
Comafi Bursatil believes dollar-linked, intermediate investments are attractive, he added, noting that shorter-duration instruments have negative yields. Mr. Haro mentioned a 90-day promissory note recently issued by an Argentine company yielding about minus 12%. “We think that is a very good alterative if you want to be hedged through the elections.” He also cited a local issuer rated AA+ that sold two-year, dollar-linked notes with a yield of minus 9%.
During the surge in demand for hedging in Argentina over the last two years, Mr. Haro said, issuers have continued to issue bonds at a 0% rate, but with some now “pushing tenors” to five years, a rarity in the country.
As Bloomberg recently noted (see chart below), Argentine companies in industries including energy and telecom have taken advantage of demand by investors for dollar-linked assets, using the opportunity to issue low-rate debt to refinance or raise new capital.

Putting cash to work. One company that presented at the meeting that is committed to putting local cash to work listed several actions for doing that, including investing in dollar-linked securities issued by the government that are held to maturity.

But the deteriorating economic situation in Argentina means “it’s been hard now to find alternatives to use all the cash,” the member said.
The corporate is also analyzing making dollar-linked loans to third parties as another way to deploy cash that offers a hedge against depreciation.

The China factor. Adding complexity and perhaps opportunity to the calculus facing companies managing risk is the economic role China is playing in Argentina. In addition to investments in Argentina, China is strengthening economic ties through a currency swap line the South American country has tapped to avoid defaulting on IMF loans.

Some corporates are discussing with advisors the possibility of converting pesos to Chinese RMB and then into dollars. “Now that there’s a deal with China, do we have to maybe go through China to get money out?” one member asked.
The inquiring member had previously been converting pesos to dollars using the official rate. But those transactions have not been approved in many months, leading to the decision to try to access the blue-chip swap rate. To do that, a corporate must show it hasn’t accessed the official market in 180 days, and then won’t be able to access it for 180 days following use of the blue-chip swap rate.
Doing what the member proposed would also require regulatory approval to invoice in Chinese currency. But all other things being equal, Mr. Haro said, “I think to get a payment abroad in Chinese currency will be of much higher probability than to get it in USD. So if that is something you can do, I think that is a good idea.”

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Justin Jones In Banking, Risk Management

Scrutinizing Risk: Taking Frequent Looks at Bank Credit Exposure

Downgrades by Moody’s point up the ongoing, post-SVB review of bank risk by investors and corporate treasury.

Moody’s this week downgraded 10 regional banks and took other actions that underscore that a banking crisis ignited by the collapse of Silicon Valley Bank five months has changed how the world—including corporate risk managers—views the creditworthiness of banks. The failure of SVB and other institutions has triggered a widespread review of credit risk policies and led to changes within many finance organizations.

Downgrades by Moody’s point up the ongoing, post-SVB review of bank risk by investors and corporate treasury.

Moody’s this week downgraded 10 regional banks and took other actions that underscore that a banking crisis ignited by the collapse of Silicon Valley Bank five months ago has changed how the world—including corporate risk managers—views the creditworthiness of banks. The failure of SVB and other institutions has triggered a widespread review of credit risk policies and led to changes within many finance organizations.

One indicator of their commitment to this critical cause is how often treasury teams review the counterparty credit risk of their banks. The latest survey by NeuGroup Peer Research, Best Practices in Assessing Bank Counterparty Credit Risk, shows 43% of them review their exposure monthly or more frequently.

Many take a two-pronged approach: They scan high-level metrics like credit default swap spreads and bond spreads frequently and perform a more thorough analysis on a quarterly or semiannual basis.

The chart below captures respondents’ current review frequency. The cadence often reflects the size and volatility of the exposure. One treasury team with a significant cash balance pulls data into an Excel template on a daily basis. “I look at the report first thing every morning,” said the member. Any meaningful change triggers further review and potentially pulling money out and shifting it to another bank money market fund.

While treasuries are already monitoring their exposures closely, the survey data shows that 13% of them are planning to increase the frequency of reviews, and 15% that currently look at exposures on an as-needed basis are formalizing their process by establishing a set cadence.

In a debriefing session this week covering the full set of survey results, one member said his company leverages third party research from banks, ratings agencies and the Fed. But he said that data isn’t updated frequently enough—regardless of how often his team reviews its metrics.

“There is a lot of stuff, but it’s snapshots available quarterly or infrequently,” he said. “They really don’t scratch the itch because it’s so dynamic; you really need the in-between reporting.”
“That’s a really good point: a lot of indicators are periodic, regardless of your own review,” said NeuGroup’s Nilly Essaides, who led the survey and the debrief session. “Trying to get regulators and credit rating agencies to be more transparent would be helpful, because they’re very opaque until you see the downgrades after the fact.”

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Justin Jones In Capital Markets, Investment Management

Gear Shift: Cash Investment Managers Eying Eventual Rate Cuts

With the end of Fed rate hikes in view, some managers are now talking about extending investment duration.

When 2023 began, corporate cash investment teams were battening down the hatches, keeping maturities very short in anticipation of more interest rate hikes. Almost eight months later, the discussion has shifted to when the Fed might start cutting rates, leading to a flatter and eventually steeper yield curve, opening the door to extending duration.

“Short-term rates may exceed or be more optimal than investing in one-year securities, but at some point, that’s going to turn,” said one cash investment manager at a recent session of NeuGroup for Cash Investments requested by members. “When it turns, the short-term’s going to get hit a lot harder than longer-term.”

With the end of Fed rate hikes in view, some managers are now talking about extending investment duration.

“Short-term rates may exceed or be more optimal than investing in one-year securities, but at some point, that’s going to turn,” said one cash investment manager at a recent session of NeuGroup for Cash Investments requested by members. “When it turns, the short-term’s going to get hit a lot harder than longer-term.”
For that reason and others, several members said they are starting a gradual process to lengthen the average maturity of their cash investment portfolios as inflationary pressures cool.
Other managers, though, are either waiting until the yield curve steepens or say they’ll stay short in keeping with their mandate to preserve capital, not aim for high yields.

Timing a move. On one end of the spectrum are cash investment managers convinced this is the right moment to start making changes. “This is historically the time to extend duration, where you time the Fed hiking cycle,” said one member. “This is where my mind will be for the next couple of years.”

Treasury at this company, which has kept investments “very short,” plans to increase duration over a two-year horizon. The goal is to return to pre-pandemic levels of 60% cash allocated to one- to three-year investments and keep 40% in short-term instruments, the member said.
This strategy in part reflects the views of an experienced investor on the company’s board who is pushing treasury to take more risk in the portfolio “if the timing is right.” The rest of the board, the member noted, is more risk averse. “If the three-year is even just a bit lower yield, they will ask us why we invested in that tender.”

Keeping your balance. This member commented that when a corporate puts all its money in cash, it is betting that rates will be higher for longer. Even if you agree with that bet, they said, “you should take a more balanced approach.”

Multiple members agreed, with one saying that a barbell-shaped portfolio—with investments in very short-term assets and very long-term assets—is the best way to balance that risk. “We take advantage of very high cash rates, and at the same time can extend the duration of the portfolio,” he said.
Another member, who believes the end of the Fed’s tightening cycle is in sight, is being cautious about the pace of policy change. “We have begun extending portfolio duration relative to our underweight positioning that was in place over the last 18-24 months,” he said. “But we are skeptical about the 100 basis points of cuts priced into the market in 2024, and we’re picking our spots on the curve accordingly.”

No time for timing. On the other end of the spectrum at the NeuGroup session were cash investment managers who will not be extending duration because it’s at odds with treasury’s mandate to protect principal and ensure liquidity—not to chase higher yields.

“We’ve been using that same policy for close to two decades,” one said. “The curve won’t change our strategy; we’re not a hedge fund.”
Another member equated trying to figure out how many more rate hikes there may be before the Fed starts cutting to a game he’s not willing to play. “It’s a magic eight ball issue,” he said. “I’m not good at those.”

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Justin Jones In Risk Management, Technology

Generative AI’s Promise and Peril Weighed by ERM, Internal Audit

Analyzing interviews, drafting reports and auditing expense reports are among AI use cases for auditors and risk managers.

Extra work now for less later. One member of the ERM group is using an in-house LLM to streamline his review of the nearly 100 risk interviews he is responsible for annually. He’s working with his company’s data analytics team to train the AI on past data and a glossary of jargon. All identifying information about individuals in the company was stripped out before uploading interview transcripts.

Analyzing interviews, drafting reports and auditing expense reports are among AI use cases for auditors and risk managers.

At recent peer group meetings of NeuGroup for Enterprise Risk Management and NeuGroup for Internal Audit Executives, members interested in harnessing the power of generative artificial intelligence tools discussed use cases as well as potential data security risks posed by AI. Several member companies have contracted with OpenAI—creator of ChatGPT—or Microsoft to set up in-house, large language models (LLMs) while others are considering the move.

Extra work now for less later. One member of the ERM group is using an in-house LLM to streamline his review of the nearly 100 risk interviews he is responsible for annually. He’s working with his company’s data analytics team to train the AI on past data and a glossary of jargon. All identifying information about individuals in the company was stripped out before uploading interview transcripts.

Wringing new efficiencies from the tool required increased legwork on the front end, the member said. “The problem is I just created more work for myself this year because I’ve got to manually go through and look at what the tool says versus what we say and see if it’s reasonable.
- “Otherwise, do you just trust it? How do you audit it unless you do all the manual work? So now we’re doing twice as much work in hopes that next year we’ll be doing half as much work.”
In an ideal world, the member said, “I’m hoping it will be near real-time so that we can do an interview, and either right after the interview or within a few hours, the interviewee gets a note that says, ‘Here are the meeting notes. This is what we believe the key points were. Please comment.’ That would save me a whole lot of time.”

Drafting reports. Across the two groups, the most common use case being discussed involves the drfafting of audit or risk reports. While reports produced by generative AI will require revision and correction, they will help get the ball rolling, members say.

One member explained why he’s optimistic about the tool. “It seems like the most obvious use case for internal audit is the audit reports or the drafting process.
- “If ChatGPT was able to pass the graduate management exams at an 80 percent rate, then surely it can come up with [an outline of] a draft audit report that would be meaningful in a way that would save enough time and mindshare to be useful.”
He views this as low-hanging fruit but sees more applications including audit planning if it delivers what’s been promised. “Pretty mind-blowing,” he said.

Expense reports. Other use cases include using the technology to assist or fully take over some of the painstakingly detailed work of combing through data that needs to be audited—like expense reports. One member sees a future use case in his company’s continuous audit program, which includes going through mountains of credit card expense reports.

He said, “Ideally it would identify things with precision, rather than producing a list of 500 things that could be fraud” that someone would then need to review manually. Another member wistfully added, “You kind of think AI should do your T&E audit for you.”

A hallucinating black box. Several members across the two groups acknowledged that GPT tools function as a black box, raising questions about how to audit outputs from them. As has been widely reported, generative AI also occasionally introduces errors, a phenomenon that has been dubbed hallucinating.

The member using the tool to streamline the risk interview process reported back in a recent monthly ERM session on the results of his first foray. “No one knows how this works, so it’s really hard to audit,” was one comment.
He also described issues in the initial outputs. “The AI was hallucinating. We tried to limit the creativity factor to make it be more literal. But if you say, ‘here’s a transcript, tell me what the top 10 risks are in this discussion,’ in a 45-minute discussion, some people didn’t mention at least 10. Some mention two over and over again. Well, the tool will try to figure out something from that text to make up 10.”

Managing the risks. In the past few months, some corporates, such as Samsung, have banned the use of generative AI chatbots for employees. The Samsung ban came after an engineer uploaded sensitive internal source code to ChatGPT.

And several member companies in the ERM and internal audit groups are prohibiting employees from using ChatGPT or other LLMs until they have a closed system—with most companies eying enterprise licenses from LLM providers including OpenAI. The goal is mitigating the potential risk of IP or other proprietary information finding its way onto the internet.
Several companies have some sort of AI committee. One member has an AI council through which business leaders within the organization can make requests to use AI in their function. She discussed with her team possible use cases and said report writing seemed like the most natural choice. “We’re going to log a request to get some kind of approval to just get the discussion going,” she said.

The biggest risk: missing out? Almost every member involved in these conversations sees that perhaps the biggest risk is getting left behind by competitors who adopt and leverage the tool quicker than they do.

One ERM member put it bluntly: “Can a cut-rate, mediocre competitor become a power competitor if they figure out how to use these tools quicker than we do?” Another said, “AI has replaced ESG and work-from-home as a topic that you can’t escape.”

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