Industry: Professional Services
Efficient Treasury Management in the Professional Services Industry
featuring Bo Jansson, Senior Vice President, Sweco
Leading engineering company Sweco has pursued a successful growth strategy in recent years. This has required a highly efficient approach to treasury management, and a focus on mitigating core business risks and optimising working capital management. In addressing these challenges, it was important that any solutions were specifically tailored to Sweco’s individual needs, as defined by its industry, strategy and organisational structure.
Releasing working capital
As a technical consulting company engaged in complex engineering and infrastructure projects, Sweco has few fixed assets and low levels of traditional inventory on the balance sheet. Bo Jansson, Sweco explains,
“Consequently, Sweco is not a capital-intensive company as such, but working capital, particularly accounts receivable, is a key consideration. Instead of physical inventory, our inventory takes the form of consultancy hours that have been invested in projects, but not yet invoiced. Around 80% of revenues are derived from work invoiced by the hour, and the remaining 20% from fixed price contracts that typically have milestone payments.”
This is a very different situation from that of, say, a truck manufacturer, which would have significant amounts of fixed assets and tangible product inventory on its balance sheet.
A key factor in optimising working capital was therefore to accelerate the speed with which consultants could invoice for hours worked. Around two years ago, a project was undertaken to assess performance in this area. The study showed that some of Sweco’s units managed to invoice customers within five days of completing the work, whereas in other units, it took as long as 15 days. Bo Jansson, Sweco continues,
“By aligning processes to internal best practice, we were able to release SEK 140m of working capital. The project clearly showed the benefits of a clear focus on working capital. As a result, we have updated our performance metrics to track working capital, and increased management accountability for monitoring and enhancing performance across the value chain.”
Efficient invoicing processes are important to all industries, but the process challenges are a little different when dealing with billable hours as opposed to physical product delivery.
As Bo Jansson, Sweco continues,
“By reviewing and enhancing performance criteria, we have also been able to review the utilisation levels of our consultants. Currently, around 75% of consultants’ time is chargeable, but for every percentage this ratio can be increased another SEK 100m will be added to the bottom line. This is clearly a compelling proposition, but increasing chargeable hours forces us to be more flexible in the way that resources are utilised. For example, resources need to be leveraged across borders and units in line with project demand, as opposed to being governed by the location of consultants. This requires an efficient approach to intercompany billing and means we need to be aware of tax and regulatory issues relating to transfer pricing, legal entity profitability and withholding tax issues. Therefore, the treasury and finance functions needs to be closely involved when finding ways to deploy the workforce in a flexible way.”
This is a good example of how treasury can add tangible value to the organisation by supporting the company’s pursuit of efficiency goals in its core business activities. To make another analogy with the manufacturing industry, Sweco is faced with managing its intellectual rather than physical resources in an efficient way.
Counterparty risk mitigation
Alongside initiatives to optimise working capital and profitability, it is important for Sweco to manage counterparty risk effectively. Bo Jansson illustrates,
“Many of Sweco’s export contracts have some support from international organisations or agencies, such as the World Bank, which helps to mitigate counterparty risk. However, we also have contracts with private sector buyers in emerging markets where there is inherently more risk, not least because it may be difficult to assess the credit quality of the customer. We are therefore endeavouring to introduce advance payments and invoicing at key project milestones instead of hourly billing to the extent possible. This gives greater assurance that we will not incur a loss on a project even if the customer terminates the contract over a dispute or is for some reason unable to pay.”
Since Sweco’s products are intellectual rather than physical, it is difficult to use traditional trade finance instruments as risk mitigants. There is therefore greater reliance on a combination of customer credit monitoring, a proactive collections process and advance or timely invoicing to manage our risk.