CHAPTER 5

Process-Oriented Systems in Corporate

Treasuries: A Case Study from BMW Group

Christian Ullrich, Jan Henkel

5.1 Introduction

Today, most organizations in all sectors of industry, commerce and government

are fundamentally dependent on their information systems. In the words of
(Rockart 1988): “Information technology has become inextricably intertwined
with business.” In industries such as telecommunications, media, entertainment
and financial services, where the product is digitized, the existence of an organiza-
tion depends on the effective application of information technology (IT). The
treasury management function of multinational companies provides another inter-
esting example. Treasury management has developed during the last two decades
from a simple function of protecting and enhancing cash flows, to a complex one,
where all aspects pertaining to modern cash management, foreign exchange man-
agement, investment management, exposure management, risk-return analysis,
and accounting are handled.
The reason for the changing role of corporate treasuries can be found in the
changing financial landscape itself. Changes in financial markets over the past
decade have been rapid and profound. New computing and telecommunication
technologies, along with the removal of legal and regulatory barriers to entry, have
led to greater competition among a wider variety of institutions, in broader geo-
graphic areas, and across an expanding array of instruments. The result has been
an increase in the efficiency with which financial markets channel funds from
borrowers to lenders. Moreover, there has been considerable improvement in the
ability of market players to adjust their risk-return profiles.
Among the key technological innovations are those that have enabled the de-
velopment of databases critical to pricing and managing the risks of financial
instruments. The ability to value risky financial assets laid the foundation for un-
derstanding the risks embedded in those assets and managing them on an aggre-
gated, portfolio basis. While the value of risk unbundling has been known for
decades (Markowitz 1971) the ability to create sophisticated instruments that
96 Christian Ullrich, Jan Henkel

could be effective in a dynamic market had to await the last decade’s development
of computer and telecommunications technologies. In fact, technological changes
have tremendously contributed to the evolution of financial markets, since more
people and institutions have a greater number of alternatives for supplying or
acquiring funds. In addition, both lenders and borrowers have a much wider range
of instruments from which to choose the risk profile of their financial positions
and to adjust that profile in response to changes in their own situations or in the
overall financial and economic environment (BIS 2005; Bodnar et al. 1999). Ac-
cording to (Greenspan 1999), “… the extraordinary development and expansion of
financial derivatives …” has been “by far the most significant event in finance
during the past decade”. For example, it has helped to reduce the cost of transfer-
ring savings from anywhere around the globe into investments anywhere around
the globe. It has also reduced the reliance of particular classes of borrowers and
lenders on particular types of financial intermediaries. However, it has also chal-
lenged financial and technology service providers to identify the value they add to
the intermediation process.
Although these changes have created potential for more robust financial mar-
kets, in reality the shifts have not been without difficulties. Some significant dis-
turbances in the past decade have challenged market participants’ and regulators’
understanding of risk and revealed considerable weaknesses in risk management
tools and practices. For example, in 1997 and 1998, capital flows to a number of
Asian countries were disrupted, with severe effects on their economies. In 1998,
the global financial system was rocked by the Russian debt default and the trou-
bles of Long-Term Capital Management. Those events were followed by the worst
excesses of the stock market bubble, including not only the overvaluation of many
stocks, but also the lapses in corporate governance as revealed by a range of cor-
porate disasters which have marked that era (see e. g. Benston et al. 2003; Culp
and Miller 1994; Mello and Parsons 1994).
New technologies and changing market structures imply regulatory bodies to
constantly review their legal frameworks. During the last years, a range of regula-
tory requirements (FAS, IFRS, KonTraG, SOX) have been put into practice in order
to promote greater flow of accurate information and therefore enable private par-
ticipants to make better informed decisions. Today, we observe that companies are
not trying to fulfil regulatory requirements only, but strive to integrate regulatory
demands in a corporate value-orientated context. This tendency has become particu-
larly obvious in firms’ financial risk management practices. As creators of value,
treasuries seek to progress from pure measurement of financial risk and return to
effective decision-support analyses.1 In addition, they play a pioneering role in
passing risk management expertise on to other, core business related areas, in order
to establish enterprise-wide risk management frameworks. In order to fulfil this
role, treasuries face the challenge to move from monitoring and managing accounts

1
Note that this behaviour is contrary to the theoretical findings of (Modigliani and Miller
1958) which basically states that under the assumption of perfect capital markets, firms
need not manage their financial risks since investors can do it for themselves.
 5 Process-Oriented Systems in Corporate Treasuries 97

locally, regionally or globally, to providing detailed analytical reports on the finan-

cial position of the company. These new tasks can hardly be accomplished without
technology support.
In this chapter, we present the current status on how IT systems support BMW’s
treasury activities. We take different views according to the notions of (Zachman
1987).2 The contribution is organized in seven sections as follows. In Section 5.2
we give an overview of the technological options available. Section 5.3 presents
the major challenges that multinational corporations are confronted with today
when optimizing their treasury procedures. In Section 5.4 we portray BMW, its
business strategy and its current position on the international market for automo-
biles and motorcycles (“ballpark view”). In Section 5.5 an “owner’s perspective”
of BMW’s treasury process is taken. We describe the role and function of BMW’s
treasury department by examining its organizational structure and responsibilities,
as well as its processes and the flow of information (“architect’s view”). In Sec-
tion 5.6, special emphasis is put on the functionality and architecture of BMW’s
treasury IT (“designer’s view”). How IT supports the company’s treasury opera-
tions is shown within a case study. Section 5.7 gives the conclusion.

5.2 The Technological Environment

The market for Treasury IT systems is characterized by a huge number of differ-

ently aligned system manufacturers, which offer the whole range from simple plug-
and-play solutions up to complicated integrated systems including comprehensive
range of functionalities. In the following, we survey the technological possibilities
that exist. We focus on four key technological options that have emerged to shape
the topography of information architectures over the past three decades:

• legacy systems
• best-of-breed solutions
• enterprise resource planning systems (ERP)
• decision-support systems (DSS)

2
In 1987, John Zachman published an influential approach to the elements of system
development. Instead of representing the process as a series of steps, he organized it
around the points of view taken by the various players within a company. These players
included (1) the CEO or whoever is setting the agenda and strategy for an organiza-
tion (“ballpark view”), (2) the business people who run the organization (“owner’s
view”), (3) the systems analyst who wants to represent the business in a disciplined form
(“architect’s view”), (4) the designer, who applies specific technologies to solve the
problems of the business (“designer’s view”), the IT experts who choose a particular
language, program listings, database specifications, networks, etc. (“builder’s view”),
and finally, (5) the system itself.
98 Christian Ullrich, Jan Henkel

A brief look back in history demonstrates that companies were deploying large
numbers of internally developed, agglomerated smaller systems isolated by func-
tion – so called legacy systems – to support critical business processes. Little
thought was given to integrating these applications with each other and existing
systems. As a consequence, these resulting information architectures made it diffi-
cult for decision-makers to combine and gain insight from information housed in
unrelated systems.
The delivery of sophisticated treasury management system (TMS) solutions
has progressed hand in hand with the availability of the necessary network,
server and processor power. Until the mid 1990s, sophisticated risk management
was the preserve of banks whose massive IT budgets enabled them to deploy the
mainframe computers, which offered the necessary storage capacity and process-
ing power. IT budgets for corporate treasuries were comparatively modest –
despite the volume of money which they process and the various risks that this
implies. The advent of networked minicomputers in the early 1990s was the first
big advance, as it enabled low-cost PCs to share information to complete such
processes as the aggregation of different kinds of treasury deals. This provided
much of the raw data needed for risk analysis in a timely and convenient way.
However, early networked PCs were significantly constrained by disk capacity,
network speed, processor power and memory capacity. As the demand for treas-
ury systems grew, it was cheerfully met by programmers who produced more
and more automated solutions in order to limit operational risks. Still, success
was inhibited by the slowness of the technology on which they had to operate.
During the last years, these constraints have been eliminated by the exponential
improvement in capacity and performance, coupled with the downward pressure
on prices which finally led to the adoption of business process segment specific,
best-of-breed TMS in many corporations, especially large multinational ones.
This is also reflected in a range of industry surveys which confirm that the ma-
jority of industrial corporations today use TMS for supporting treasury processes
(Ernst & Young 2005; PricewaterhouseCoopers 2003). Very generally, a TMS
can be characterized as a “… complex piece of software which can be used to
automate, record, and control many core treasury functions. TMSs, sometimes
referred to as ‘Treasury Workstations’ also act as a central database for informa-
tion flowing in and out of the treasury, …” (Unknown 2006). The TMS vendor
business itself has evolved into a fragmented industry in which numerous pro-
viders exhibit strength in different regions and among different customer seg-
ments, but no competitor is capable of dominating the field globally. Well-
recognized TMS providers on a global basis include FXpress, Reuters, SAP,
SimCorp, SunGuard, Trema and XRT-CERG. While the TMS competitive land-
scape changes slowly, shifts that are taking place are arising largely from con-
solidation as the recent acquisitions of Integrity Treasury by SunGuard, Selkirk
by Thomson and Richmond by Trema demonstrate. Still, TMS providers have
focused on providing internet-based tools that facilitate the extension of transac-
tion processing beyond the central treasury operation, including foreign business
subsidiaries (customers) and banks (suppliers). Web browsers on desktops and
 5 Process-Oriented Systems in Corporate Treasuries 99

cheaper bandwidths create an environment whereby deployment of internet-based

tools is a viable option for corporate treasuries.
Over the last decade, ERP systems have been widely developed to replace ag-
ing legacy systems, as well as to better integrate and automate core business pro-
cesses, such as manufacturing, logistics, distribution, inventory, quality, human
resources shipping, invoicing, and accounting. Thus, all functional departments
that are involved in operations or production are integrated in one system. ERP
systems are often called back office systems indicating that customers and the
general public are not directly involved. This is contrasted with front office sys-
tems like customer relationship management (CRM) systems, eFinance systems,
or supplier relationship management (SRM) systems that deal with companies’
external business partners. ERP systems are cross-functional, enterprise-wide and
are marked by a seamless design that reduces time spent maintaining and upgrad-
ing separate systems and interfaces. Treasury and risk management functionalities
are not represented as single systems but as integrated modules. This may remove
organizational, geographic and political barriers. For instance, a single-vendor
package of enterprise solutions for a range of global transaction processing needs
brings the advantages of simplicity, integration and single-contact points for sales
and support. Vendors whose packages provide greatest functional coverage in-
clude SAP, Oracle and PeopleSoft. However, although ERP systems are designed
to handle heavy transaction-processing loads, they have not been universally es-
teemed for their performance management features. Reporting and analysis capa-
bilities are pre-built and usually not customizable. The complexity involved to
create new reports or to code changes has accelerated the adoption of third-party
products that hide back-end complexity while simplifying reporting and analysis
activities. Furthermore, the difficulty of extracting, combining and analyzing in-
formation from multiple disparate sources has led to an explosion of business
intelligence tools, such as DSS in the very recent years.3
DSS can take many different forms and the term can be used in many different
ways (Alter 1980). For example, (Finlay 1994) considers a DSS broadly as “a com-
puter-based system that aids the process of decision making.” In a more precise
way, (Turban 1995) defines it as “an interactive, flexible, and adaptable computer-
based information system, especially developed for supporting the solution of
a non-structured management problem for improved decision making. It utilizes
data, provides an easy-to-use interface, and allows for the decision maker’s own
insights.” At the conceptual level, (Power 2002) differentiates model-driven, com-
munication-driven, data-driven, document-driven, and knowledge-driven DSS:

3
According to (Keen and Morton 1978), the concept of decision support has evolved
from two main areas of research: the theoretical studies of organizational decision mak-
ing done at the Carnegie Institute of Technology during the late 1950s and early 1960s,
and the technical work on interactive computer systems, mainly carried out at the Mas-
sachusetts Institute of Technology in the 1960s. It is considered that the concept of deci-
sion-support systems became an area of research of its own in the middle of the 1970s,
before gaining in intensity during the 1980s.
100 Christian Ullrich, Jan Henkel

• A model-driven DSS emphasizes access to and manipulation of a statisti-

cal, financial, optimization, or simulation model. Model-driven DSS use
data and parameters provided by DSS users to aid decision makers in ana-
lyzing a situation, but they are not necessarily data intensive.
• A communication-driven DSS supports more than one person working on
a shared task.
• A data-driven DSS or data-oriented DSS emphasizes access to and ma-
nipulation of a time series of internal company data and, sometimes, ex-
ternal data.
• A document-driven DSS manages, retrieves and manipulates unstructured
information in a variety of electronic formats.
• A knowledge-driven DSS provides specialized problem solving expertise
stored as facts, rules, procedures, or in similar structures.
Moreover, at the system level, (Power 1997) differentiates enterprise-wide DSS
and desktop DSS. Enterprise-wide DSS are linked to large data warehouses and
serve many users in a company, whereas desktop single-user DSS are small sys-
tems that reside on individual users’ PCs. In the field of treasury, DSS tools are
mostly model- and data-driven desktop solutions, which involve the special sub-
jects of financial market prediction, scenario analysis and risk-return optimization.
Figure 5.1 characterizes all four system types in terms of their functional
breadth (which refers to the system’s functional reach within the company) and
their functional depth (which refers to the degree of specialization). Typically,
systems with high functional breadth, such as ERP, are marked by low functional
depth. Vice versa, systems with high functional depth such as legacy systems or
DSS have low functional breadth.

Legacy & Decision Support Systems

High

Best-of-breed Systems
Functional depth

Enterprise Resource Planning (ERP) Systems

Low
Cost Materials Supply Chain
Treasury Management HR Management Management
Functional breadth

Figure 5.1. Categorization of system solutions

 5 Process-Oriented Systems in Corporate Treasuries 101

5.3 Challenges for Corporate Treasuries

For treasury operations today, the application and integration of IT systems has
become a key success factor in order to meet a range of internal and external chal-
lenges (see Figure 5.2):
• enhancing transaction processing
• providing timely-accurate, periodic management information
• complying to business controls and corporate governance
• integrating decision-support mechanisms into the existing IT systems in-
frastructure
Transaction Processing: Treasury management has developed during the last two
decades from a simple function of protecting and enhancing cash flows, to a broader
one, where all aspects pertaining to modern cash management, foreign exchange
management, investment management, risk-return and exposure management and
analysis, and accounting are handled. Naturally, these activities are being accompa-
nied by increasing transaction volumes. Since the flow of data is faster than ever,
the data itself is more detailed, and it has no regional boundaries, data management
is becoming more sophisticated. Consider a global corporate treasury operation that
comes with a whole taxonomy of data around it. For instance, if the company has
1 million Euros in an account, that figure is associated with a currency, a legal en-
tity, a bank, a business unit, geographic data, a date, etc. Consider now that the same
firm has thousands of accounts with many banks all over the globe. This may result
in voluminous financial transactions and hence huge amounts of information across
thousands of accounts that have to be sliced, diced, aggregated and segmented in

Today Tomorrow
100
Decision-Support Value Contributions
Search for value enhancement,
Deployment of expert knowledge.
Business Controls/
Corporate Govenance
Decision-Support
Management Information Business Process
Reengineering to reflect
environmental changes in the
organization. Business Controls/
Corporate Governance

Transaction Processing Management Information

Cost savings through economies of Transaction Processing

scale and IT systems support.
0

Figure 5.2. The changing role of corporate treasury (Source: PricewaterhouseCoopers)

102 Christian Ullrich, Jan Henkel

many different ways. The collection of the necessary data from a range of sources
within a company in order to compile management and treasury position reports as
well as financial forecasts may thus be a very time-consuming process. Conse-
quently, there is a technological need to quickly process financial transactions from
initiation to settlement in an automated and secure fashion. According to Figure 5.2,
the main challenges that multinational firms are confronted with are still efficiency-
related. The main purpose herein is to exploit economies of scale that result from
efficient transaction processing. Among system vendors, the term “transaction
processing”, understood as the embracement of an efficient, instantaneous flow of
information within a system in order to realize economies of scale, is often referred
to as straight-through-processing.
Management Information: Often, financial processes lack transparency because
the relevant data does not come from one single source, but is distributed over
a variety of systems. Missing interfaces make straight-through-processing and
exchange of real-time data difficult. As a result, firms encounter contradictory
data, which may lead to the problem that questions about the liquidity reserves in
a particular country, legal entity, or business unit or about the financial obligations
towards a certain business partner can often not be answered. In order to avoid
such problems, automated systems are necessary that provide precisely timed
access to accurate information, and thus allow for real-time financial performance
measurement, risk-return controlling and financial reporting. The degree of
straight-through-processing becomes a particular issue during those times when
management reporting cycles coincide with important market shifts or roll-over
dates and rate fixings. In addition, since managers rarely rely on a single source of
information, the focus of information systems planning has moved towards the
integration of individual systems into coherent sources of management informa-
tion. This involves information analysis techniques such as data modelling and
entity analysis to devise new ways of organizing and delivering information.
Moreover, advances in communication capability facilitate new and complex
forms of organization embodying distributed network structures and processes.
Business Controls/Corporate Governance: It is nothing new that the treasury
function in global corporations also faces a highly competitive and demanding
regulatory environment that mandates a seamlessly integrated corporate treasury
solution. The recent spate of corporate scandals and failures, including Enron,
WorldCom, and Global Crossing in the United States, Daewoo Group in Korea,
and HIH in Australia, has raised serious questions about the way public corpora-
tions are governed around the world. When managerial self-dealings are excessive
and left unchecked, they can have serious negative effects on corporate values
and the proper functions of capital markets. In fact, there is growing consensus
around the world that it is important to strengthen corporate governance in order to
protect the rights of shareholders, curb managerial excesses, and restore confidence
in capital markets.4 The recent years have shown a huge push on corporate govern-

4
The term “corporate governance” is understood here as “the economic, legal and institu-
tional framework, in which corporate control and cash flow rights are distributed among
 5 Process-Oriented Systems in Corporate Treasuries 103

ance recommendations and regulations, such as Sarbanes-Oxley in the US or IFRS

and hedge accounting rules (IAS 39) in Europe. This regulatory demand, coupled
with stakeholder pressure for more financial transparency and control over treasury
transactions is making increased tracking and justification of treasury transactions
not only desirable but necessary. Since spreadsheet calculations are prone to error
due to their low degree of automation, there is now a demand to create financial
figures using a controlled, visible and audited process. As a consequence, more and
more organizations turn to treasury automation with a system solution to the prob-
lems of clarity and accountability in the production of financial figures. A related
trend is the demand from corporations for their TMS to not only control and auto-
mate treasury processes, but also document them in order to prove that a clear and
controlled process exists. As a consequence, treasury technology providers must
now include compliance analytics and metrics, such as verification of profit/loss
entries being double-checked or payment authorities and approvals.
Decision-Support: It is anticipated that in the next years there will be a shift
in focus from efficiently “running the business” to effectively “managing and
optimizing the business” (Ernst & Young 2005; PricewaterhouseCoopers 2003).
Accordingly, resources are expected to be redirected from back-office transaction
processing to front-office decision-support and performance management related
activities. Two important resources that aid users in managerial decision making
within an organization are models and data.5 Prerequisites for making better deci-
sions faster consist not only in having access to clean and complete data. Greater
connectivity and access to increased variety and volume of information generates
larger data volumes and also greater informational complexity. Since data offer
an intrinsic value proposition, it has to be determined what data are relevant for
the underlying decision context. Data Mining, also known as Knowledge-Dis-
covery in Databases (KDD), is important for “the nontrivial extraction of implicit,
previously unknown, and potentially useful information from data” (Frawley et al.
1992). Furthermore computational methods from the field of Artificial Intelligence
(AI), such as Fuzzy Logic (Nguyen and Walker 2005), Machine Learning (Mitchell
1997) and Evolutionary Computation (Ashlock 2006) can transform data into
information, and, at peak performance, into intelligence. As literature on applied
informatics has shown, these areas can be helpful for solving decision problems
involving corporate financial planning (Pacheco et al. 2000), risk management
(Chan et al. 2002), and financial market forecasting (Peramunetilleke and Wong

shareholders, managers, and other stakeholders of the company” (Eun and Resnick
2004, p. 472). From the view of regulatory authorities the resulting problem to be solved
can be stated as “how to best protect outside investors from expropriation by the control-
ling insiders so that the former can receive fair returns on their investments” (Eun and
Resnick 2004, p. 474). How authorities deal with this problem has enormous implica-
tions for shareholder welfare, corporate allocation of resources, financing and valuation,
development of capital markets, and economic growth.
5
Note that we view a “model” as a computer-executable procedure that may require data
inputs, a view that is widely held in the DSS literature (Gachet 2004; Power 2000).
104 Christian Ullrich, Jan Henkel

2002; Ullrich et al. 2005). It is important to note that the opportunities in this opera-
tional area of treasury management clearly drive the demand for broader and tech-
nically better educated people whose value-orientated assignments should not be
blocked by repetitive actions. While manual preparation of relevant information
may take lots of time and lead to decisions that are based on outdated or incomplete
data, automated applications with a high degree of interconnection to market and
intra-company data sources are required that enable operational units to make
quicker and more informed decisions.
We observe today that multinational corporations are not only trying to fulfil
regulatory requirements, but strive to integrate them in a corporate value-orientated
context. The need for consolidating and integrating treasury systems stems from
the desire to improve business controls through visible processes and the in-
stallation of transparent management information systems. The purpose here is not
only to avoid functional lacks that naturally exist due to aging legacy systems and
heterogeneously organized decision-support solutions. It is also about minimizing
departmental deficits in terms of redundant and complicated flows of information.
Hence, the ability to gather transactional data from remote locations through auto-
mated data feeds to the corporate finance engine without additional interface re-
quirements would certainly represent a significant win. For these reasons, it is quite
obvious that a consolidated treasury system landscape can only be realized by
companies if they are heading towards single-vendor ERP systems. However, the
barriers to streamlining information flows in treasury can be significant. It is im-
portant to note at this place that treasury is not a priority in ERP systems whose
vendors are slow to respond to changing circumstances that impact treasury. The
slow uptake of new financial accounting standards (FAS) accounting rules over
derivatives and hedges is one such example. The lack of flexibility around interfac-
ing to external information sources, due to the need for strict interfacing rules,
inflexible reporting capabilities, and the inability to perform complex treasury
analysis are all arguments accusing ERP of failing to offer a comprehensive treas-
ury solution. In addition, the increasing demand towards value creation requires
highly specified and context-dependent decision-support solutions that supply
decision-makers with superior information. For these reasons, the choice of IT
systems that suit a company’s business needs is an interesting practical problem
that is far from being trivial. In the following we will provide insights into the
treasury organization, process and system support of BMW Group (“BMW”),
a multinational manufacturer of premium automobiles and motorcycles.

5.4 Portrait BMW Group

The BMW Group is one of the ten largest car manufacturers in the world and
possesses, with its BMW, MINI and Rolls-Royce brands, three of the strongest
premium brands in the car industry. The BMW Group also has a strong market
position in the motorcycle sector and operates successfully in the area of financial
 5 Process-Oriented Systems in Corporate Treasuries 105

services. The BMW Group aims to generate profitable growth and above-average
returns by focusing on the premium segments of the international automobile
markets. With this in mind, a wide-ranging product and market initiative was
launched back in 2001, which has resulted, over the past years, in the BMW
Group expanding its product range considerably and strengthening its worldwide
market position. The BMW Group will continue in this vein in the coming years.
The BMW Group is the only automobile company worldwide to operate with all
its brands exclusively in the premium segments of the automobile market, from
the small car to the absolute top segment. The BMW Group’s vehicles provide
outstanding product substance in terms of aesthetic design, dynamic performance,
cutting-edge technology and quality, underlining the company’s leadership in
technology and innovation. As an international corporation, the BMW Group
currently has 22 production and assembly plants in 12 countries. Within the
framework of its sales strategy, the BMW Group has, since the 1970s, been con-
sistently pursuing its objective of having its own sales subsidiaries in all the major
markets around the world. Thus in 1981, BMW was the first European manufac-
turer to establish a sales subsidiary in Japan. Today, the sales network consists of
35 group-owned sales companies and 3,000 dealerships. Approximately 100 more
countries are handled by local importers. This means that the BMW Group is
represented in over 150 countries on all five continents.
In 2005 the BMW brand outperformed its historical record for the fifth time in
a row since 2001 to 1,327,992 units. For the first time, more than 200,000 MINI
brand cars were sold in a single year, with the number of cars delivered increasing
by 8.7% to 200,428 units, as compared to 2004. The Rolls-Royce brand confirmed
its position at the top of the absolute luxury class. 796 Phantoms were delivered to
customers in 2005, marginally higher than the 792 sold in the previous year. In the
business year 2005, the BMW Group employed 105.800 employees approxi-
mately. Three quarters of all BMW employees are located in Germany. According
to IAS, the BMW Group reported revenues of 46.7 billion Euros and a net profit
of 2.2 billion Euros. The BMW ordinary share has been listed since 1926. In 1999
BMW Group introduced the 1 Euro par value share. Concurrently BMW moved to
the collective custody account procedure. Physical share certificates are no longer
available. As of 31 December 2005, the subscribed capital of BMW AG amounted
to 674 million Euros and comprised 622,227,918 ordinary shares and 52,196,162
preferred shares.

5.5 Portrait BMW Group Treasury

There are many dimensions for determining the structure, role and function of
a treasury organization. Generally, corporate treasury practices can vary according
to size, geographical reach, and process complexity. At one end there are treasur-
ies that focus on managing daily cash flows and optimizing working capital
through process excellence. At the other end of the spectrum, there are treasuries
106 Christian Ullrich, Jan Henkel

that are strategic to the business and whose objective is to support the financial
performance of the company. Clearly any organization can exercise its choice on
the scope of the treasury functions that it undertakes and where it positions itself
between these two extremes. In doing this, it may be governed by a variety of
considerations. It may choose to handle only those needs driven by utilitarian
motives such as liquidity support or, on the other hand, it may consider treasury as
a “core” organizational process and hence handle the full range of services. It may
also choose to outsource portions of the activities required or it may choose to
foster these capabilities in-house. Independently, an organization can also decide
on the extent of centralization of treasury management. For instance, it may be
efficient to centralize transaction processing, while the front office may need to be
decentralized to aid speedy local decision-making. It may also be important to
have a common risk management strategy, while execution may be decentralized.
Many large corporations manage their business entities in a decentralized fashion
to promote local ownership of business decisions and accountability for results
which is in turn favoured by many investors.

5.5.1 Organization and Responsibilities

At BMW, the treasury division is responsible for all of the company’s relations
with the capital markets. This includes pension funds management, financial mar-
keting, and corporate finance. The main goals are to minimize the cost of capital
to the company, protect its solvency and each of its individual subsidiaries and to
safeguard BMW’s financial independence in light of strategic decisions along with
the requirements for profitability and value contribution by managing risk-return.
The question of appropriately aligning the Treasury within the enterprise organiza-
tion, whether as a cost, service or profit centre, has a very special meaning in re-
gards to the definition of the single Treasury-functional areas and of course the
overall definition of treasury goals and strategy. (PricewaterhouseCoopers 2003)
report, that the great majority of corporate treasuries are organized as service cen-
tre models. Only some companies characterize their treasury as cost centres and
even fewer ones as profit centres. The main features of a service centre include the
management of financial risks and liquidity within narrow guidelines, a restricted
scope of action for entering open positions, as well as the idea of serving and sup-
porting operational subsidiaries in order to optimize performance with regards to
foreign exchange and liquidity questions. Since conformity with BMW goals re-
quires both efficient processes and positive financial performance as compared to
financial market developments, the company may consider its treasury function as
a hybrid one. It is organized according to the service centre principle, however,
does not possess all of its characteristics, such as narrow operational guidelines.
Instead, the BMW Group Treasury also contains notions of the profit centre con-
cept, especially with regards to its risk management practices, and of the cost
centre concept.
 5 Process-Oriented Systems in Corporate Treasuries 107

Figure 5.3. Vertical perspective: BMW Group Treasury

Figure 5.3 depicts the organizational structure of BMW Group Treasury. In this
article, we will not embrace the BMW Group Treasury as a whole, but rather fo-
cus on those divisions which are responsible for the execution of treasury func-
tions as commonly known. These functions are attributed to the Corporate Finance
department along with local Treasury Centres (TC). The purpose of the latter ones
is to align local treasuries with the BMW Group’s treasury strategy and represent
the BMW Group Treasury in the local markets. This allows the local subsidiaries
(Sales, Financial Services, and Production companies) to benefit from uniform
standards, methods, and expertise. TCs are located in Europe (Belgium, Nether-
lands, Great Britain and Austria) and the United States. Recently, the company has
decided to build an Asia-Pacific TC in Singapore. It is due to this step that BMW
Group Treasury is now able to cover the entire eastern hemisphere and realize
economies of scale from optimized processes in treasury management.
In spite of the functional basic structure of the organization, a decentralized
leadership philosophy prevails at BMW. This leadership philosophy is marked by
a central guidance that is coupled with decentralized responsibility and stretches
through all parts of the BMW organization. Thus, decisions on the overall treasury
policy, procedures and guidelines (including strategy, concepts, standards, princi-
ples and structuring) are made centrally in Munich. Local TCs are wholly respon-
sible for the way in which the treasury policy and strategy are executed. This helps
BMW to ensure a uniform approach to the financial markets. It also enables BMW
to offset contrary positions and evaluate executed transactions via the application
of a centralized treasury system which we will refer to below. Furthermore, the
core benefits of decentralization hold: local proximity, operating in the same time
zone, knowledge of local culture, regulations and accounting practices, as well as
existing opportunities for local support. The fact that BMW neither has a totally
centralized nor a totally decentralized treasury is not an unusual phenomenon in
German multinational companies. (PricewaterhouseCoopers 2003) demonstrate
that 62% of the responding companies pursue a similar approach to treasury man-
agement. This can be attributed to the fact that, traditionally, expansion into new
markets has been accompanied by deployment of local treasury staff to handle
funding, investment, liquidity and exposure management in unfamiliar business
environments, especially in those where change is rapid and the organization has
108 Christian Ullrich, Jan Henkel

significant business and/or financial exposure. At present, financial transactions

are conducted exclusively via BMW TCs as long as the BMW Group is not af-
fected by adverse legal, tax or economic effects.

5.5.2 Business Process Design

In this subsection the current status of the operational work and information
flows at BMW are examined throughout the treasury process chain. This is im-
portant because the functional representation of the Treasury as shown in Fig-
ure 5.3 is not valid from a business process and information flow perspective. As
depicted in Figure 5.4, the treasury process chain as a whole further affects other
parts of Group Finance (namely the Financial Controlling and Financial Report-
ing divisions) and other divisions of the company (Corporate Sales). This hori-
zontal, cross-functional flow model of a business is better suited for identifying
simplifications of processes, standardization of procedures across diverse busi-
ness units and their integration, both within the organization and with those of
external organizations, including customers and suppliers. Intuitively, these as-
pects provide an important starting-point for IT systems design. An effective
separation of duties is ensured by grouping single process activities into process
units or process classes. A typical treasury is divided into the following process
units: front office, middle office and back office. Due to decentralization of
treasury activities at BMW, desks are separated market-specifically, i. e. there is
a front and back office in each of BMW’s financial entities. Middle office tasks
are managed centrally.
The treasury process starts off at the local operating units, which estimate and
adjust their future sales volumes periodically according to the rolling window
principle. Based on product- and market-related sales forecasts, important middle
office responsibilities include periodic determination of exposures and quantifica-
tion of risks which, above all, provide the foundation for front office activities as
will be described below. Middle office is further responsible for medium- and
long-term financial planning, including profit/loss and budget rates. Trading ac-
tivities are managed by setting counterparty limits, which represent the maximum
exposure to a particular counterparty or group of related counterparties. Limit
calculation is based on equity, a rating factor (as delivered by Standard & Poors,
Moody’s and Fitch) and a country factor. Compliance with counterparty limits is
monitored very closely. Non-compliance is not tolerated and repeated non-com-
pliance is a dismissible offence. Exposure limits, which represent maximum expo-
sure to particular market rates, or stop loss limits, which represent the maximum
loss that a particular deal or strategy may incur before it must be closed out, are
not relevant. Middle office’s second area of responsibilities – “risk controlling” –
includes benchmarking, performance analysis and reporting, and is aligned to the
prevailing risk management objectives of the front office. Performance measure-
ment provides information about the value contribution that treasury has produced
according to pre-determined benchmarks and shows whether and how strategic
 5 Process-Oriented Systems in Corporate Treasuries 109

TC Asia TC Asia
TC America TC America
TC Europe TC Europe
AG AG AG AG

Financial
Planning, Risk Analysis, Implemen- Confirmation, Performance
Sales- orientated
Risk Strategy tation, Settlement, Accounting Analysis,
Planning
Measurement, Development Documentation Reconciliation Reporting
Limit Mgmt.

Middle Front Back Middle

Office Office Office Office
Controlling Treasury Reporting Controlling

Figure 5.4. Horizontal perspective: BMW Treasury Process Chain

requirements and goals have been reached by providing management reports.

Hence, middle office represents the process unit that is responsible for covering
the beginning and the end of the treasury process chain.
BMW’s front office is divided into several different desks with each desk fo-
cusing on a specific market. In regards to the corporate finance departments, front
office desks at BMW include the following: foreign exchange, fixed income,
commodities, money markets and capital markets. Consider the risk management
process, for instance: when risk models suggest the trader to get ready to enter the
market, hedging strategies are developed, analyzed and finally executed. In the
case of foreign exchange, the primary factor that affects the risk manager’s deci-
sion in the longer term is macroeconomic data. The results of market research as
conducted by banks, independent research institutes, global and domestic events,
political and social conditions, fiscal and monetary policy, chart analyses and
rumours are only important for the shorter term. Traders at BMW consider these
factors and sources of information and translate them into a range of hedging
strategies that are designed to match BMW’s overall objectives. The best strategy
that is also in line with BMW’s hedging policy is finally chosen. In this context, it
is important to note that decisions on financial risk management strategy and tac-
tics are seldom made independently and entirely by the front office itself. Due to
the complexity of interacting decision-relevant parameters as well as reasons of
supervision, risk management decisions at BMW are often discussed and made
within a committee, which does not include risk management officers only, but
also financial controlling experts along with corporate finance and treasury execu-
tives. Upon execution, the deal has to be documented and finally recorded. Deal
records are required for both correct revaluation and settlement. It should be noted
that online trading platforms are not relevant for BMW. Trading is not done con-
tinuously, but occasionally and hence it is sufficient to use phone and email as
communication media.
110 Christian Ullrich, Jan Henkel

The nature of the back office’s business can simply be summarized as transac-
tion processing. This involves controlling the accuracy and verification of trades
as entered by the front office. Back office further has to ascertain that all deals
have been confirmed by the counterparty and that all resulting cashflows from
these transactions will be available for cash management, settlement and account-
ing. Cash management as part of the back office is responsible for reconciling
deals with bank statements. Only when forecasted cashflows have been reconciled
with the bank account they will be posted via interface to the accounting system.
Standard agreements regarding settlement, payment instructions, confirmations,
etc. are set up with bank partners.

5.6 Business Process Support

IT systems are both drivers and enablers for changes in treasury processes. IT is
a driver because computational developments pertaining hardware and software
open up new opportunities for changing strategies and processes. However, it is
also an enabler, since its installation and application enables companies to support
existing strategies and business processes. In the following, we will focus on the
role of IT as an enabler. A key consideration for companies when selecting a treas-
ury management system is the functional requirements that the organization needs
to deliver. If the treasury function is aligned more operationally a system would be
required which is closely integrated with the planning, forecasting, and budgeting
tools within the business and to external sources of data, such as banks and capital
markets. The foundation for value-orientation then consists in a high degree of
straight-through-processing, i. e. transactions that are recorded only once and are
available afterwards for other subsystems or are automatically booked in the
ledger. However, for treasuries that are strategic to their business, information
extraction is the primary concern because such treasuries are required to perform
complex and sophisticated analysis on business data in order to support financial
decision-making. Since the BMW Group Treasury can neither be characterized as
a purely operationally aligned treasury nor as one that is totally strategic to its
business, a more differentiated view is required, that segregates operational work-
flows from decision-making procedures.
In BMW Group Treasury’s framework of organizational structure and work-
flows, the objective is the integration of all of BMW’s financial positions as
a basis for a central management of these positions in real-time and the standardi-
zation of treasury processes across all BMW entities. Figure 5.5 illustrates the IT
system architecture deployed by BMW.
It combines the strengths of an ERP as the general finance engine (SAP), inter-
facing into a best-of-breed treasury application (Trema) that is again interfaced to
back-office satellite systems, real-time news provision service (Reuters), historical
market rate database (Zentrale Kursdatenbank ZKDB) and specialized DSSs
which are not yet fully implemented.
 5 Process-Oriented Systems in Corporate Treasuries 111

TC Asia TC Asia
TC America TC America
TC Europe TC Europe
AG AG AG AG

Financial
Planning, Risk Analysis, Implemen- Confirmation, Performance
Sales- orientated
Risk Strategy tation, Settlement, Accounting Analysis,
Planning
Measurement, Development Documentation Reconciliation Reporting
Limit Mgmt.

TREMA Treasury Management System, Reuters, ZKDB

DSS SAP DSS

Legacy Systems

Middle Front Back Middle

Office Office Office Office
Controlling Treasury Reporting Controlling

Figure 5.5. IT systems support for treasury process and business process units

5.6.1 Best-of-Breed System Functionalities

Whereas, until now, the ERP solution SAP is used for data collection and high-
level reporting only, the central component in supporting BMW’s treasury activi-
ties is Finance KIT, a best-of-breed TMS from Swedish system vendor Trema.
Finance KIT uses standard client server architecture along with a portable window
environment. The system is used Group wide, mainly to guarantee operational
integrity by embracing front, middle, and back office functionalities. Intrinsic to
the design are automated transaction flows to reduce redundant keying. However,
Finance KIT also supports certain functionalities within trading and risk manage-
ment. Systematic coverage and evaluation of all corporate financial risks, market
evaluation of balance sheet positions and financial derivatives are covered Group-
wide. All BMW Group entities, namely BMW AG (Internal Audit, Financial Con-
trolling, Group Reporting, and Financial Processes Integration), BMW Financial
Services, BMW overseas entities (TCs) and network partners (Auditing, System
partners) are connected via Finance KIT. The system is available 24 hours a day
and seven days a week. It connects approximately 200 users worldwide which
access Finance KIT via internet browser. The central database is located in Mu-
nich. The system handles an annual transaction volume of approximately 680 Bil-
lion Euros. About 7000 user enquiries per year have to be tackled by BMW internal
Finance KIT support and Treasury Consulting with an increasing tendency. Fi-
nance KIT includes an interface to local systems for accounting and payments, as
well as a standardized reporting and unique system layout.
112 Christian Ullrich, Jan Henkel

Figure 5.6. Information flow in Finance KIT (Trema 2002)

The information flow in Finance KIT consists of four types of information (Trema
2002): static information, market information, transaction and cashflow manage-
ment information, and calculated information. Figure 5.6 provides an overview of
the different kinds of information and their flow in Finance KIT. Static informa-
tion is the information that usually does not change. It includes the definition of
currencies, counterparties, issuers, countries, rules, etc. and is used by most calcu-
lations. Editors are used to define and modify static information. There is a spe-
cific editor for each type of static information. Currencies, for instance, are de-
fined in the Currency Editor. The report application is a report generator which is
attached to each editor and allows creating reports from information defined in the
editors. Market information refers to the market quotes of currencies, instruments,
yield curves, equities, volatilities, etc. which are stored in Finance KIT. Market
information is used to measure and evaluate the risk of positions. This information
is typically imported from market information providers, such as Reuters, but can
also be entered manually. The Finance KIT rate board can be used to view and
modify the market information. Market rate reports can be established via a spe-
cific market rate reporting engine. Transaction information is information that is
essential to define a transaction, for example, transaction and cashflow amounts,
transaction counterparties and deal rates. Calculated information such as unreal-
ized results, market value, etc., is not part of this information. Transaction boards
are used to enter, view or modify this information. For example, deals are entered
in the Deal Capture transaction board. Some reports, such as Transaction Log
Report, Daily Deals Report and Cashflow Report are designed to report this kind
of information. A primary role also consists in calculating figures and in display-
ing them in different applications. In order to do these calculations, information
 5 Process-Oriented Systems in Corporate Treasuries 113

Figure 5.7. Finance KIT principles (Trema 2002)

and instructions are required from other parts of Finance KIT, such as static data,
market data and transaction data.
In Finance KIT, there are five basic principles that support the treasury process
chain from a systems point of view: “Transaction Flow”, “Cashflow”, “Portfolio
Hierarchy”, “Valuation”, and “Real-Time”. The entire information flow in Fi-
nance KIT is based on these principles. Due to their powerful impact on the sys-
tem’s performance, as well as on its various applications, we will describe the
ideas in more detail, according to Figure 5.7.
We start in the front office. Every trade that is entered in Deal Capture is re-
garded as a transaction. The process of transaction handling and control from
initial input to final acceptance is referred to as “Transaction Flow”. The Transac-
tion Flow is used to monitor the movement of transactions from one state to an-
other. Different applications, mainly transaction boards, are configured to control
and manage the transactions in different parts of the flow and access rights to
these applications that are limited to those people who actually use them. When
a transaction is committed in a transaction board, it receives a state and status. The
114 Christian Ullrich, Jan Henkel

Table 5.1. Entering a bond and a foreign exchange forward via Deal Capture
Bond FX Forward
Instrument Name Bond A Currency Pair EUR/USD
Nominal Amount
(Face Value) USD 10.000.000 Purchased Amount EUR 1.000.000
Price 105,043 Rate 1.1500 + 150 bps
Portfolio Bond Portfolio Portfolio FX Forward Portfolio
Counterparty Bank A Counterparty Bank B
Value Date March 15, 2007

state of the transaction determines where it stands in the Transaction Flow. All
transactions must have a state and can only have one of the following states at
a time: “Open”, “Trader Verify”, “Back Office Verify” or “Final”. In the follow-
ing we consider two imaginary transactions, a bond purchase and a foreign cur-
rency purchase that will be followed from trade entry in the front office, through
the middle office, to bookkeeping in the back office. Let us imagine that on the
morning of January 22, 2006, the trader (located in TC America) decides to buy
a government bond as well as Euros for US-Dollars. The trader enters the transac-
tions via “Deal Capture” in Finance KIT. Table 5.1 shows all the information the
trader needs to specify in order to make these transactions.
As soon as they are saved in Finance KIT, these transactions are split into their
resulting cashflows (“Cashflow” principle). A cashflow is a certain amount of
money in a particular currency that occurs at a specific point in time. Thus, each
cashflow has a value date, necessary for valuation, payment settlement and book-
keeping. The nature and processing rules of various cashflows are dependent on
the type of financial instrument that is recorded. Generally, cashflows are divided
into four groups. “Simple Cashflows” are those cashflows that actually take place,
for example a coupon or redemption. “Pseudo Cashflows” are used for calculating
the actual settlement before fixing takes place, for example in forward rate agree-
ments. “Proxy Cashflows” are used for the valuation of floating rate instruments.
“Conditional Cashflows” are used for options where the magnitude of the cash-
flows is known but the delivery is uncertain. In order to administer various cash-
flows it is necessary to further classify cashflows into different types. All cashflow
types are defined during implementation. The six main cashflow types are: “Prin-
cipal”, “Interest”, “P/L”, “Fee”, “Payment”, and “Balance”. Each cashflow type
contains subtypes. For example the cashflow type Principal has the subtypes
“Principal”, “Amortization”, “Expiration”, and “Redemption”. These subtypes are
used in money settlement applications and to define accounting rules. All cash-
flows can be analyzed and valued together as one position or divided into several
components by various grouping parameters. Table 5.2 depicts the cashflows for
the bond transaction as generated by Finance KIT.
Furthermore, Table 5.3 depicts the cashflows for the foreign exchange forward
contract as generated by Finance KIT.
 5 Process-Oriented Systems in Corporate Treasuries 115

Table 5.2. Cashflows of the bond transaction

Date Cashflow Amount Currency Description
The principal payment for the
Jan 29, 2006 -10,504,300.00 USD bond.
The acccrued interest of the bond
Jan 29, 2006 -525,000.00 USD paid to the previous owner.
Jun 03, 2008 900,000.00 USD The future coupon of the bond.
Jun 03, 2009 900,000.00 USD The future coupon of the bond.
The redemption payment of the
Jun 03, 2009 10,000,000.00 USD bond.

Table 5.3. Cashflows of the foreign exchange forward transaction

Date Cashflow Amount Currency Description
Mar 15, 2007 1,150,000.00 EUR The Euros bought.
The US Dollars paid for the Euros
Mar 15, 2007 -1,000,000.00 USD bought.

When the trader commits these transactions in Deal Capture, they obtain the trans-
action state Open. Trade tickets are printed automatically in order to document
conformity to market conditions at the time of the trade. The nominal amount of
the transaction is verified against the trader limit. When the trader commits the
transactions, they move forward in the Transaction Flow. If the transaction exceeds
the limit a warning appears on the trader’s screen and the exceeded limit is logged.
The state of the transaction defines which transactions are visible in which transac-
tion board. For example, committed transactions no longer appear in Deal Capture,
unless they are sent back to the Open state from another transaction board. In the
configuration of this case study, the next state for these transactions is Trader Ver-
ify. When transactions are in this state, each trader must review the transactions
they have entered. If the transaction is incorrect, the trader sends it back to the
Open state in order to modify or delete the transaction. Transactions reach the back
office after they have been verified by the front office traders. A back office clerk
views the two transactions that are now in the state Back Office Verify in the
“Back Office Verification” transaction board. If an error is identified, the respec-
tive transaction is sent back to the Open state for correction. The states of the trans-
actions change to Final as soon as back office receives transaction confirmations
from the deal counterparties. If the transaction data is correct and the counterparty
confirmation is received, the back office clerk confirms the transaction using the
“Confirmation” transaction board and transfers the payment to the bank. The
money is automatically transferred to the bank by either fax or file. In this context,
different payment rules are defined, which enable the system to select the correct
transfer method for each payment. The next day the bank account statement is
collected via file and is automatically reconciled against the payments sent from
Finance KIT. At the end of each business day, the bookkeeping entries from trans-
116 Christian Ullrich, Jan Henkel

actions in the Final state are automatically generated. This also requires the defini-
tion of rules in order to enable Finance KIT to identify the correct bookkeeping
account for each cashflow. Bookkeeping entries are made on the value date of each
cashflow. For the government bond, the principal payment and the interest accrued
to the previous owner are booked on January 30, 2006. The generated entries are as
follows:

Table 5.4. Bond transaction bookkeeping entries

Bookkepping Account Entry Type Amount
Cash Account (USD) Credit 11,029,300.00
Bond Account Debit 10,504,300.00
Bond Interest Account Debit 525,000.00

Once the FX forward transaction reaches its value date, the cashflows resulting
from that transaction are booked. Thus, if 1 Euro equals 1.1700 US-Dollars on
March 15, 2007, the bookings read according to Table 5.5:

Table 5.5. FX Forward bookkeeping entries

Bookkepping Account Entry Type Amount
Cash Account (USD) Credit 1,000,000.00
Cash Account (EUR) Debit 854,700.85
FX Revaluation Account Debit 145,299.15

In this example, it results in a debit entry of 854,700.85 Euros, which are

145,299.15 Euros less than the transaction exchange rate. This difference is
booked as a foreign exchange loss in the foreign exchange revaluation account of
the US operating unit. The result from the forward points is booked into the inter-
est rate profit/loss account. The transactions entered in closing books can be en-
tered at an arbitrary date. The entries are similar to bookkeeping entries, except
that the items that are booked in the closing books are not an actual cashflow but
unrealized items (for example accrued interest, net market value). The unrealized
items need to be allocated to a correct accounting period for which entries are
made at the end of every month. The effect of the two transactions can be seen in
different back office reports, including the “Delivery Report”, the “Daily Deals”
and the “Outstanding Positions” Report. The effect of sample transactions on the
liquidity position is seen in real-time in “Treasury Monitor” as soon as the transac-
tions are entered.
There are three major benefits that arise from this procedure of handling finan-
cial transactions. First, all transaction types are properly documented and recorded
in a uniform way by entering data once only. This allows for better accuracy and
correctness, since bookkeeping entries and payments are not made from transac-
tions which have not been sufficiently verified. Second, communications in the
 5 Process-Oriented Systems in Corporate Treasuries 117

business process are clearly determined which significantly improves the subject
of error processing by reducing miscommunication and the time spend on correct-
ing data inconsistencies. Third, data migration to spreadsheets and neighbourhood
systems is done from a single source, central database. This guarantees a substan-
tial reduction of operational risk by eliminating the possibility of human error that
would occur from loading data manually.
The operations that take place in the middle office are related to risk controlling
and the profit/loss supervision of the BMW Group Treasury’s positions. Positions
are administrated via so-called portfolios that can both be defined with regards to
competencies and on a product group level (“Portfolio Hierarchy” principle). For
example, let us first consider the BMW Group portfolio of competencies from
a top-down perspective. It is the Group portfolio itself that represents the parent
portfolio for each of its regions. Regions represent a second parent level them-
selves in the top-down hierarchy and consist of entity sub-portfolios, i. e. sub-
portfolios for every BMW subsidiary that are assigned to a specific region. Fur-
thermore, every entity consists of a range of businesses which are represented by
another third level of sub-portfolios. The overall treasury position is monitored by
viewing the entire BMW Group Treasury portfolio while the American Region
position is monitored by the American Region’s portfolio. Since the same data and
the same transactions will often be viewed from different perspectives, one portfo-
lio can also belong to several hierarchies. For example on a product group level,
the currency spot risk can be transferred from the currency forward portfolio to the
spot portfolio. Figure 5.8 displays the portfolio hierarchy as defined for the BMW
case study.
The transactions are entered into the bond and forward portfolios. To view the
positions of both transactions at the same time, the risk manager must choose to
view the “MAIN” portfolio. It is possible to view both transactions because both
portfolios are underlying portfolios of the MAIN portfolio. Similarly, if the risk

Figure 5.8. Example of portfolio hierarchies at a product group level

118 Christian Ullrich, Jan Henkel

manager selects the foreign exchange (FX) portfolio, only foreign exchange trans-
actions are included in the position results, because only foreign exchange transac-
tions are located in the foreign exchange portfolio and its underlying portfolios.
The portfolio tree structure thus enables powerful opportunities for consolidation
and aggregation of positions which enables the efficient control of risks and re-
sults on various organizational levels and according to various criteria.
When the risk manager has selected the position to be monitored, Finance KIT
retrieves the relevant transaction cashflows and calculates the requested key-
figures based on the cashflows and market information it contains. In Finance
KIT, risk and unrealized result calculations are based on the market value of spe-
cific cashflows at the time of valuation. Therefore, when a transaction is entered, it
is valued with mark-to-market rates in order to manage risks and calculate realized
and unrealized results (“Valuation” principle). According to the Valuation princi-
ple, the market value of a position is the present value of the cashflows in the
future that make up the position. In order to provide the market value of the cash-
flow, it has to be discounted by a specific discounting rate. The discounting rate is
defined separately for each instrument and can be either a direct mark-to-market
quotation of the instrument or a specific yield curve. By default, market value is
expressed in the base currency of the portfolio. Thus the present values denomi-
nated in the foreign currency are converted into the base currency using the cur-
rent spot exchange rate.
All cashflows in the future are discounted to the date from which the position
is monitored. This produces the present value of the cashflows on which risk fig-
ures are based. The most recent market information is always used when valuing
positions. The discount rate depends on the definitions of the instrument from
which the cashflow results. The rate can be any direct market quotation, yield
curve or zero-coupon rate available in Finance KIT. These quotations and yield
curves are usually obtained from external market information sources. The zero-
coupon rate is calculated from swap yield curves or instruments. Similarly, other
instrument specific definitions, such as date basis and price type for the interest
(periodic or yield) affect the calculations. Middle office can view the case study
in different reports, for example in the key-figure report and in the periodic P/L
report. The risk manager can request reports in which only the transactions that
have reached a certain transaction state are included. In the example used in this
case study, the risk manager keeps Treasury Monitor open on the computer screen
at all times in order to monitor the overall risk position of the treasury and to see
the change in the risk figures in real-time as new transactions and market informa-
tion are received. Limit Follow-Up must also be open in order to see how the
defined portfolio and instrument limits are used in real-time. If the risk figures
reach an unsatisfactory level, the user can examine the position in more detail in
Limit-Follow-Up, in order to determine the origin of the excess risk. To identify
the root of the problem, the user can split each key-figure by counterparty, instru-
ment, portfolio, a transaction etc. Based on this information, the risk manager can
inform the traders of possible hedging or advise other actions. As the position is
monitored in real-time, the discrepancies from the desired levels of risk can be
 5 Process-Oriented Systems in Corporate Treasuries 119

Table 5.6. Position Monitoring

Market Value Net Market Value IR Exposure
10.500.200,00 USD -4.100,000 USD 82.420,00 USD

quickly identified. In this case study, the user monitors the money market (MM)
portfolio. The bond transaction is part of the money market position and the fig-
ures below are the key-figures of this transaction. They can be seen in reports
and in Treasury Monitor.
The market value is the present value of the future cashflows of the bond. The
net market value is the difference between the purchase price and the current mar-
ket value. Interest rate (IR) exposure is the change in the market value (for exam-
ple profit or loss) if the discount rate rises by a defined percentage. The risk man-
ager can view similar profit/loss figures for the FX transaction. It is also possible
to see the effect of these transactions on the credit risk of the treasury by printing
a credit risk report.
Deal Capture continuously receives the latest market information. This informa-
tion is used in valuations in order to obtain current and reliable risk and result fig-
ures (“Real-Time” principle). Whether it is a new deal entered into the system or
updated market quotes for currencies, instruments, yield curves or volatilities, Fi-
nance KIT automatically updates all new or modified information in real-time for
all its applications without it having to be requested. Real-Time means, that all new
information is available instantly, i. e. risks, market value and other key figures are
recalculated as soon as there is a change in a market variable and/or a position. Re-
calculation occurs permanently according to the updating cycles of the market rates.
Market rates are obtained from Reuters, an external news provider. For every posi-
tion, Finance KIT calculates the P/L for the chosen periodicity (daily, monthly,
quarterly, annually) and displays realized and unrealized results, break-even-rates
and net present value. Revenues are displayed rate- and currency-specific. Reports
are not updated in real-time which means, that they must be updated manually in
order to reflect new information. The main advantage of real-time position updating
is that it enables increased trading and risk control.
All mathematical calculations and formulae for trade entry, valuation and risk
calculations are programmed in so called “Financial Objects”. Financial Objects
are procedures, which Finance KIT stores and then uses to make calculations.
Financial Objects and instrument information determine how Finance KIT handles
cashflows.

5.6.2 Decision-Support Functionalities

TMS often lack in-depth risk analysis capabilities that fit the very specific nature
of single risk factor exposures. This can be attributed to slow updating cycles from
TMS system vendors, their reluctance in addressing single customer needs, and
120 Christian Ullrich, Jan Henkel

functionally restricted applications due to high degree of standardization. In order

to replace individual spreadsheet-based solutions, large efforts are currently being
made at BMW to endorse the best-of-breed environment by statistical decision-
support system functionalities in the areas of currency hedging, interest rate and
asset management. Even if suitable system providers are selected, this is a com-
plex and time-consuming task because systems integration has to be achieved on
a variety of levels, such as complementing or even redefining existing processes,
incorporating corporate goals and restrictions, user training, etc. In Section 5.2 we
distinguished between different kinds of decision-support systems, namely model-
driven, communication-driven, document-driven, and knowledge-driven ones. In
addition, academics and practitioners have discussed building decision-support
systems in terms of four major components: (a) the user interface, (b) the database,
(c) the model and analytical tools, and (d) the decision-support system architecture
(Power 2002). At BMW, decision-support system functionalities are intended to
be model- and data-driven desktop solutions for the use of a few specialists only.
Although these solutions are generally model-independent, they are not data-
independent from Finance KIT. All financial planning data is centrally saved in
Finance KIT. Thus, automated interfaces have to be established that enable the
transfer of predefined corporate financial planning data from Finance KIT. In
addition, risk factor market data, such as rates, volatilities and correlations need to
be transferred to the system from an external database. Automation is important in
order to eliminate human error and quickly react to market events. As soon as the
systems are supplied with the required data, the treasury process is continued ac-
cording to front and middle office responsibilities (see Section 5.2).
For example, for the purpose of strategy development, analysis and im-
plementation, a front office trader may simulate a range of alternative financial
instruments via historical or Monte Carlo simulation methods in order to compare
their risk-return profiles. Implementation of intelligent optimization procedures is
necessary in order to obtain optimal solutions to decision problems, such as find-
ing the optimal asset allocation or determining the optimal mix of hedging instru-
ments, in a reasonable amount of time. Once a decision is made and a deal has
been executed – no matter if it was recommended by the system or not – it is en-
tered in Finance KIT’s Deal Capture, and all references are updated. Otherwise,
for the purpose of middle office responsibilities, market risk and opportunities can
be quantified by evaluating exposures with respective market factor scenarios
which serves as a foundation for risk reporting and strategy development.

5.7 Final Remarks

The subject of information systems architecture and process support in corporate

treasuries is receiving considerable attention. Over the years, decentralized gov-
ernance structures have resulted in highly fragmented, duplicative information
architectures that complicate information integration and increase ongoing support
 5 Process-Oriented Systems in Corporate Treasuries 121

and maintenance costs. In contrast, today’s fast-paced business environment re-

quires companies not only to simplify information flows, but also to improve their
knowledge and information architectures. Thus a conflict has to be solved that
arises from the parallel need to consolidate IT systems at the one end, while at the
same time granting a certain degree of IT systems specification. Since these two
objectives are somewhat contradictive, the problem of determining the optimal IT
systems architecture becomes a very complex one. We demonstrated in detail,
how BMW copes with this conflict by considering the current state on how IT
systems support the BMW Group’s treasury process. Uniform data records, single
data sources and standardized information flows between process partners have
enabled BMW to streamline its business processes and reduce operational risks
originating from human error. This consolidation provides the foundation for the
current implementation of context-dependent decision-support systems in the area
of risk management. Given the technological opportunities as being offered by
system vendors, we argue that there exists no single one that is able to comprehen-
sively meet the challenges that BMW faces today. As the market stands now,
BMW needs to rely on a combination of vendors in order to obtain a complete
business solution.

References

Ashlock D (2006) Evolutionary computation for modelling and optimization,

Springer
Alter SL (1980) Decision support systems: current practice and continuing chal-
lenges, Addison-Wesley, Reading/Mass
Benston G, Bromwich M, Litan RE, Wagenhofer A (2003) Following the Money:
The Enron failure and the state of corporate disclosure. AEI-Brookings Joint
Center for Regulatory Studies, Washington DC
Bank for International Settlements BIS (2005) Triennial central bank survey –
foreign exchange and derivatives market activity in 2004
Bodnar G, Marston RC, Hayt G (1999) Survey of derivatives usage by U.S. non-
financial firms. Financial Management, 27:70–91
Chan M-C, Wong C-C, Cheung BK-S, Tang GY-N (2002) Genetic algorithms in
multi-stage portfolio optimization system. In proceedings of the eighth inter-
national conference of the Society for Computational Economics, Computing
in Economics and Finance, Aix-en-Provence, France
Culp C and Miller M (1994) Risk management lessons from Metallgesellschaft,
Journal of Applied Corporate Finance
Ernst & Young (2005) Treasury operations survey 2005 results
Eun CS and Resnick BG (2004) International financial management. Third edi-
tion, Irwin McGraw Hill, New York
Finlay PN (1994) Introducing decision support systems, NCC Blackwell, Black-
well Publishers, Oxford/UK Cambridge/Mass
122 Christian Ullrich, Jan Henkel

Frawley W, Piatetsky-Shapiro G, Matheus C (1992) Knowledge discovery in

databases: An overview. AI Magazine, Fall 1992, 213−228
Gachet A (2004) Building model-driven decision support systems with dicodess,
VDF, Zurich
Greenspan A (1999) Financial derivatives. Speech, before the Futures Industry
Association, Boca Raton, Florida, March 19
Keen PGW and Morton MSSS (1978) Decision support systems: an organizational
perspective, Addison-Wesley Publishing, Reading/Mass
Markowitz HM (1971) Portfolio selection: efficient diversification of investments,
Yale University Press
Mello AS and Parsons JE (1994) Maturity structure of a hedge matters. Lessons
from MG AG, Derivatives Quarterly, Fall, 7−15
Mitchell TM (1997) Machine Learning, McGraw-Hill
Modigliani F and Miller M (1958) The cost of capital, corporation finance and the
theory of investment. American Economic Review, 48:261−97
Nguyen HT and Walker EA (2005) A first course in fuzzy logic, Third edition,
Chapman & Hall
Pacheco MA, Noronha M, Vellasco M, Lopes C (2000) Cash flow planning and
optimization through genetic algorithms. In: Computing in Economics and Fi-
nance 2000, Society for Computational Economics (eds)
Peramunetilleke D, Wong RK (2002): Currency exchange rate forecasting from
news headlines. In proceedings of the thirteenth Australasian conference on
database technologies, 131−139, Australian Computer Society, Inc
Power DJ (1997) What is a DSS? The On-Line Executive Journal for Data-
Intensive Decision Support, October 21, vol 1, no 3,
http://dssresources.com/papers/dssarticles.html
Power DJ (2000) Web-based and model-driven decision support systems: concepts
and issues. In proceedings of the Americas conference on information sys-
tems, Long Beach, California
Power DJ (2002) Decision support systems: concepts and resources for managers,
Quorum Books, Westport/CT
PricewaterhouseCoopers (2003) Corporate treasury in Deutschland, Industriestudie
Rockart J (1988) The line takes leadership – IS management in a wired society,
Sloan Management Review, Summer, 57−64
Trema (2002) Introducing Finance KIT for Unix and Windows, Version 8.0.8
Turban E (1995) Decision support and expert systems: management support sys-
tems, Prentice Hall, Englewood Cliffs/NJ
Ullrich CM, Seese D, and Chalup S (2005): Predicting foreign exchange rate re-
turn directions with support vector machines. In proceedings of the fourth
Australasian data mining conference, Simoff SJ, Williams GJ, Galloway J and
Kolyshkina I (eds), 221−240, Sydney, Australia
Unknown (2006): Treasury management systems – choosing a TMS. Treasury
Today, April, 7
Zachman JA (1987): A framework for information systems architecture, IBM
Systems Journal, 26, no 3