The irrelevance of KPIs
Treasuries are all too rarely measured on their ability to help the company succeed. However, any CFOs wishing to measure their treasury department’s performance in 2009 will find that the credit crisis has made it even more difficult to achieve an accurate indication of success.
Organisations commonly use key performance indicators (KPIs) to measure and access how the treasury department performs. Some of these KPIs, such as measuring FX hedging activities against a budget or benchmark rate, are relatively easy to establish and measure such as measuring the FX hedging activities against a budget or benchmark rate. This is still a useful KPI to use even in today’s volatile markets.
Treasuries are also often measured on how much of the cash is centralised and therefore controlled by the treasury. Today, this has become extremely relevant, because with the availability of credit in decline, good cash management has never been more appreciated.
However, having been established in more carefree, prosperous times, other KPIs are now inadequate to treasury evaluation during a period of recession.
For instance, the yield that the cash generates is often compared to a benchmark such as the Libor.
Today, this could be controversial, as it is likely to encourage investments in less secure instruments. Now, investors are suspicious of even triple A rated instruments, especially if they give unusual high yield for their investment grade. This has severely limited the choice of investments available for treasurers driving down the yield. In fact, the credit crisis has shifted the focus from yield and placed in firmly on the liquidity of the investment instruments.
On the debt raising side, it is even more difficult than ever to create a meaningful KPI. Even at the best of times, benchmarking the cost of debt is a controversial business as the interest companies have to pay for their borrowings will vary depending on the company size, industry and credit rating. Now, it is virtually impossible.
Suddenly, a new range of variables has come into play. Now, the price of and, more importantly, the access to debt fluctuates depending on external events such as a political bailouts and folding banks and these are almost impossible to predict. This credit climate makes it very difficult for the CFO to establish any meaningful KPIs for the debt.
Right now, the treasury and cash management department has the best possible opportunity to demonstrate the full extent of its value. However, as I commented last week, it’s a pity that it has never been more difficult to actually measure that contribution.
