This is a special episode featuring Kyriba’s Senior Vice President of FX Sales and Advisory Services, Andy Gage. For nearly 20 years, Andy has been helping multinational companies automate and optimize their currency risk management programs. Prior to his current role, Andy served as VP of FX Risk Management Solutions at Kyriba. On this episode, Andy discusses how to harness automation and smart analytics to run an effective corporate risk management program, the effects of inflation on markets globally, and being better prepared for the next crisis.
This is a special episode featuring Kyriba’s Senior Vice President of FX Sales and Advisory Services, Andy Gage.
For nearly 20 years, Andy has been helping multinational companies automate and optimize their currency risk management programs. Prior to his current role, Andy served as VP of FX Risk Management Solutions at Kyriba.
On this episode, Andy discusses how to harness automation and smart analytics to run an
effective corporate risk management program, the effects of inflation on markets globally, and being better prepared for the next crisis.
Quotes
*“The FX job within the treasury and finance function is one of those odd jobs, because they know they've done their job when nobody is talking to them or asking them questions. That's when they've really done really well. So when I talk to some of my colleagues that I've worked with over the years, they say, ‘I had a great quarter. Nobody talked about FX in the last quarter earnings release.’ That's when they've done their job.”
*”A tailwind can be just as complicated or problematic as a headwind, because it implies a lack of control on your risk management, or your ability to manage currency impacts.”
*”When it comes to the earnings call, when it comes to the end of the quarter, when it comes to the board briefings, currencies is not a topic. Because it's been effectively neutralized. Now you may get questions, you know, because of, especially what's happening in the markets right now. But the proper response from a CFO or treasurer to those questions is, ‘We understand our exposure. We've taken appropriate steps to minimize the impact of the volatility in the markets. And, for all intents and purposes, it's really not having a material impact on our financial results. If you can articulate that to the board and the investors, that is the perfect response to that market situation that we're dealing with right now.”
*”What's complicated right now is the recent surge in inflation. The reactions by central banks, such as the federal reserve here in the U.S., to increase interest rates, to try to knock the inflation down… I think everybody feels that in their own pocket books today. But when you increase the interest rates, what a lot of people don't appreciate and understand is the interest rates are directly impacting the cost of hedging. And so what we're seeing right now on top of that large increase in risk in volatility and pressure to earnings, treasury teams are faced with a very difficult challenge of keeping their FX budgets where the CFO set them, because the cost of hedging is increasing as well.”
*”Just because you have an amazing accounting system like SAP or Oracle doesn't mean that the people are recording things correctly in those systems. And we see issues right there. If you don't have technology that streamlines this process, the spreadsheets that I've seen people use to calculate their foreign exchange exposure are literally some of the most complicated and risky. There's so many potential points of failure in those spreadsheets. And I've seen situations where we've audited a company spreadsheets, and they were trading currency in the wrong direction. So what they thought was reducing risk was actually adding risk.”
*”If you step back and a CFO really looks at all of the financial risks that are under he or she's responsibility, currency risk is arguably the largest financial risk that they have to deal with. And now that you're seeing the succession of of currency crisis, fueled by macroeconomic and global events and various other crises, I think the risk management teams are getting a lot more focus and a lot more attention and a lot more enablement… I'm now seeing the CFOs saying, ‘Okay, we now need to invest in automating this because we'll see another one of these crises. And the unfortunate thing is we don't know when it's gonna hit us next.”
Time Stamps
*[4:46] Andy’s path to FX risk management
*[9:06] Which kind of treasurer are you?
*[12:25] What’s the difference between a head wind and a tail wind?
*[18:59] The key litmus test of whether your risk management program is effective
*[20:14] Understanding the current market
*[22:27] How inflation impacts the cost of hedging
*[26:05] Why is risk management one of the hardest jobs in finance?
*[29:44] What an effective risk management team looks like
*[33:42] The role of an FX risk manager
*[40:43] Tools for managing FX risk
*[44:36] Different strategies for managing risk and gaining confidence
Sponsor
The Invisible Vault is powered by the team at Kyriba, the global leader in cloud treasury and finance solutions, empowering CFOs and their teams to transform how they activate liquidity as a dynamic, real-time vehicle for growth and value creation. To learn more visit www.kyriba.com
Links
Connect with Daniel on LinkedIn
Andy Gage: If you step back and a CFO really looks at all of the financial risks that are under he or she's responsibility, currency risk is arguably the largest financial risk that they have to deal with. And now that you're seeing the succession currency crisis, fueled by macroeconomic and global events various other crises, I think risk management teams are getting a lot more focus and a lot more attention and a lot more enablement. Whereas before, a CFO said, I don't care how long you work. I don't care if you got spend all weekend filling out these spreadsheets and getting your currency which right. I'm now seeing the CFOs saying, Okay, we can't perform like that anymore. We now need to invest in automating this because we'll see another one of these crises. And the unfortunate thing is we don't know when it's gonna hit us next.
Narration: Hello and welcome to The Invisible Vault.
This is a special episode featuring Kyriba’s Senior Vice President of FX Sales and Advisory Services, Andy Gage.
For nearly 20 years, Andy has been helping multinational companies automate and optimize their currency risk management programs. Prior to his current role, Andy served as VP of FX Risk Management Solutions at Kyriba.
On this episode, Andy discusses how to harness automation and smart analytics to run an
effective corporate risk management program, the effects of inflation on markets globally, and being better prepared for the next crisis.
But before we get into it, here’s a brief word from our sponsor…
So please enjoy this interview with Andy Gage, SVP of FX Sales and Advisory Services at Kyriba, and your host, Daniel Shaffer.
Daniel Shaffer: Welcome to the Invisible Vault. I'm your host, Daniel Shaffer. And today we have a very special guest, Andy Gage from Kyriba. thanks for joining us on the Invisible Vault.
Andy Gage: Daniel been looking forward to this, always a pleasure have a chat with you. So looking forward to our session today.
Daniel Shaffer: Excellent. So today, Andy, as you know, is a really special episode we're focused on FX, risk and really this current market condition. I know you have a lot of insight to share with our listeners. We're really excited to have you today. Our aim is to bring on leaders in finance who have unique experiences and insights into the financial markets. And those who have really pioneered new thinking to create new opportunities for growth. And we call that unlocking cash, money and liquidity. Our guests have shared with us a ton of information, really their firsthand experiences, some successful, some difficult, some unexpected. And that's the invisible part, right? The track here is not foreseen. We're mapping new routes, live and in real time, but in doing so, our guests are giving back some useful tips to the finance community and really helping up and coming CFOs and treasurers better navigate this wild market that we live in today. So today your expertise is really gonna help us understand how to better leverage technology and develop end to end risk management solutions for some of the largest companies in the world. I know that you've worked with, and I can't wait to hear your sage and timely guidance so that our community can benefit from your experience. Andy, there's many ways to make money and to invest in opportunities to grow, but to manage risk, to ensure that you are not losing money. That's the challenge. In fact, our episode today will focus on the staggering, escalation of risk, and the reasons why so many corporations have restated guidance on their financials. How are CFOs able to do that? And aren't they on the hook for pulling their teams in to really control those unexpected hits to their EPS? What does EPS at risk really look like? Don't we wanna keep it to 1 cent? And as our recent guest Alex Song at Ramp shared, you can make money in many ways, but to lose money, that is a risk management problem. So, Andy, we're gonna get into that in a minute, but before we do, I'd really like to hear about you, your recent career path. So a couple of questions for you. How did you get into this risk business? I mean, what are the companies you work with? And what's fun about supporting your clients? Let's start with that. Sound good?
Andy Gage: Yeah, that sounds great, Daniel. you know, to your point, I think this is a very timely episode. The currency markets and just the markets in general are very complicated, but you know how I got into this I actually didn't start out foreign exchange. My background was really more in the manufacturing side. And when I started my career, I worked in manufacturing plans. I worked on information systems. Helped implement systems like SAP spent several years in the consulting industry. And my fascination was how to apply technology to improve business processes and improve quality of products. And, you know, I think I've transitioned into the arena of foreign exchange, that background that lean management lean manufacturing six six mindset has really served me well as I've engaged with a lot of companies, because a lot of the concepts that you applied improved the quality of processes and products that are being delivered in a manufacturing plant are directly applicable to the finance function. And I've really enjoyed kind of merging those areas. But, my background in, helping companies deal with currency risk goes about 15 years back. I was one of the early management team members that helped launch the company FiREApps, which Kyriba acquired a few years ago. And that was really a groundbreaking company. The founders of the company, Wolfgang Koester and Corey Edens saw major gap in the treasury landscape of technology. And they had spent several years helping companies manage currency risk and really doing it as what they referred to as a core sourcing process, where they, for all intents and purposes became the foreign exchange department for a number of companies. What they saw and they were somewhat surprised that they saw this is that everything was done manually. Everything was done in spreadsheets. And you really had to have a very smart person that understands currencies and currency risk to do this well. And they felt there was an opportunity to improve upon that. They wanted to take their best practices that they had developed working with major corporates as well as as governments and, and banks, and really codify that technology. And that was really the starting point. And so in the very early days, what we thought was solving a problem for the mid-market very quickly transitioned into something that was really eyeopening for us. There was the same issue at a much larger scale in large caps and in the very early days, we were very fortunate because one of the early board members for FiREApps was with John Connors. And for those of you who know anything about Microsoft history, he was the CFO at Microsoft with Bill Gates, and Steve Ballmer were there. And he took a strong liking to what we were doing because he had seen firsthand the multitude of spreadsheets that people would bring in to try to explain the foreign exchange impact that Microsoft is taking. And so, he took us under his wing and in the very early days, he took us on a road show going up and down the San Francisco Bay Area, visiting a number of companies. And we were really surprised how many of these companies struggled with the same problems that we'd seen in the mid-cap arena. And we thought there would be technology to, to fix that problem. We were very, you know, quick to understand that issue was much larger and much more consequential. You know, some of our early customers were companies like Yahoo and Google, and some of those companies were some of the most sophisticated companies at the time. And they immediately saw the value of automating the foreign exchange process, which historically had been done, you know, through manual efforts and spreadsheets was kind of hit or miss in the results there. And so that was really the catalyst to get me started. And, you since then, I've worked with companies across the globe you know, lots of companies in Europe, AsiaPac the Middle East certainly here in North America. And it's been really fun to, to help develop technology and a methodology that really solves one of the largest financial risks that face corporates today. Interesting background. Tell us, you know, that Six Sigma I could definitely see in streamlining operations and how that would come into play. You told us a little bit about what was fun in supporting clients, but, you know, I can't imagine a client not wanting to have a more streamlined and automated operation. What type of pushback do you typically get when you're talking about improving FX operations?
Andy Gage: You know, it's really interesting. I ask myself that question a lot, Daniel and as I have observed, the treasury organizations I've worked with over the last 15 years, I kind of look at treasurers in sort of two basic profiles. There's what I call strategic treasurer, these are treasurers and with their teams, they're really looking to improve the overall business and lead the business better off and than they inherited it. The second class what I refer to in, in kind of loose terms as what I call custodial treasurer. And these are people that don't necessarily have that mandate or that vision. And they're really just, you know, doing the things that they've done for quite a while. They're sort of, set with, you know, what we've been doing is working okay. The problem is and this is again, I'll go back to my early encounter with John Connors. he said, you never know how good your risk management systems and processes are until you hit a crisis. And I do think there's a lot of companies that have taken a more reluctant approach to leveraging technology and modernizing their treasury organizations that are coming to terms with that fact. And for you, someone with that Six Sigma background, it's almost like the world that you live and breathe is about streamlining, simplifying and getting greater results, more optimization, but you still got a lot of pushback, right? So you're like, wait, we're showing you how to make more money or how to control costs or how to eliminate risk and you still got that pushback and you said, The biggest, competitor out there was accepting status quo.
Andy Gage: Yeah, absolutely. And, you know, we still see that today. I think fortunately in the last 15 years, Daniel, I think the market has started to mature a bit. And you know, in the early days, anytime you launch new technology, you go through that early adopter cycle. And you gotta find those companies that are comfortable understanding your vision and seeing where you want to go. And they're willing to, you know, take a bit of a be on a, early technology player out there. but since then, we've really, become sort of the predominant standard out there, in major pharma's distribution companies, chemical companies, some of the largest chemical companies in the world have adopted this technology. I think we've effectively crossed that chasm but there's still, you know, resistance to, adopting data technology. But in general we're seeing more and more companies, you know, see that this is a really important aspect of having a modern infrastructure, especially given how much more currency volatility and currency risk and how many currency crisis we continue to see they seem to be coming at us faster and faster. Certainly more so than we saw in the early days building out this technology in this marketplace. So, you know, the markets the maturation of cloud services has really kind of come together to make this a very relevant important part a company's infrastructure.
Daniel Shaffer: Let's take a moment pull back. We're talking about FX, we're talking about technology and the current environment. Let's just pull back a little bit and I'm sure all of your clients know exactly what you're talking about when you talk about FX challenges. Let's pull back a little bit for better broader listeners here and talk about like, what is risk management? What's the difference between a headwind and a tailwind? Just for example, as a starting point.
Andy Gage: Well, you know, in, financial terms, a headwind means that the currencies are, you know, working against you. So if you're a U.S. corporate and you're selling products internationally, especially in the market that we're seeing right now, a lot of companies that are U.S. dollar functional that are gonna be trying to bring back monetary value of the things that they've sold overseas that headwind, it can be as you're translating those results back to your U.S. dollar reporting currency and trying to, you know, account for that appropriately there. A tailwind would just be the opposite. So, you know, for a similar company that that is affected by headwinds when the dollar is very strong if the dollar weakens, which it will do from time to time as other economies, you know, start to take off and we might go through a recessionary environment we might see a tailwind. And so as the value of the dollar, reduces against, let's say the Euro you're gonna get more money back then you would have otherwise, So, you know, a tailwind, Daniel, is really gonna be the opposite of the effect of a headwind. So for a company that, is affected with a headwind and when the dollar's strong, they're likely to see a tailwind when the dollar weakens against other currencies. So, you know, that's the, main aspect of that.
Daniel Shaffer: A headwind sounds very unfortunate. A tailwind sounds like you found the, gold at the end of the rainbow, but
Daniel Shaffer:
Daniel Shaffer: Is that really good? I mean, is a tailwind valuable? I thought the risk manager's job was to create more predictability.
Andy Gage: Yeah. Well, that's absolutely the case. So whether a company facing a headwind or tailwind, the goal of any FX risk management program for any corporate is to basically have as close to zero impact. A lot of treasures and CFOs that I've worked with, if they had their way, they'd love to do all of the business in a single currency so they could focus on the organic performance of their business in terms of how well they sell, how well manage expenses and show that, Hey, we run a very good company here. and I've had companies come or, you know, treasures come out and say, you know, we would've done great if it weren't for currencies. So the goal corporate risk management program is, to get as close to zero plus or minus zero. And so, if seeing a lot of volatility in the marketplace, companies are typically take action. Sometimes those actions are through internal efforts to reduce the overall exposure. And oftentimes they're having to use a hedge to counter the potential losses or potential gains. So to your point, Daniel, the goal is to really neutralize the effect. And, you know, the FX job within treasury and finance function is kind of one of those odd jobs because they know done their job when nobody is talking to them or asking them questions. That's when they've really done really well. So it's kind of interesting when talk to some of my colleagues that I've worked with over the years, they say I had a great quarter. Nobody talked about FX in the last quarter earnings release. That's when they've done their job.
Daniel Shaffer: Well, that's an interesting litmus test. So the tailwind really isn't that good. You're saying zero plus or minus zero. Aren't there unexpected operational expenses related to a tailwind, even though it may yield windfall?
Andy Gage: Well, this is where it gets a little, complex because if you look at an income statement, currencies can literally impact virtually every major line item in an income statement. It can have a negative impact on your revenues or a positive impact on your revenues. That's typically what a lot of companies are talking about in terms of headwinds or tailwinds, but it can also drive up your cost. So you could see, a tailwind on your revenues and you know, arguably technically, a head went on expenses. So cost could go up as a result of currency fluctuations. And that comes in and actually impacts gross margin, which is certainly a key metric that CFOs and CEOs are reporting to the street and to their investors and to the other analysts that are looking at their company. So it's not as simple as looking at, you know, what direction the dollar is against other currencies. You gotta look at how currencies flow through the business. Where does it impact me? Where does it impact my revenues? Where does it impact my expenses? Where does it flow through to the balance sheet in terms of the value of my payables, my receivables, and how does that ultimately flow through my debt income and other income expense? And then ultimately, how does that impact your earnings per share? So that's one of the interesting aspects currencies is it can literally impact you throughout your income statement you have to be very alert to what's happening in the business across the entire business, not just on one aspect of your revenue expenses. So, currency risk management one of the most complicated aspects a finance team's responsibilities because of all the different places that currencies can impact. Your income statement and your balance sheet. But the goal for a risk manager is to effectively neutralize that impact. A company's gonna do whatever it does to manage the business. And, if they're taking on a loan, they're doing that to finance activities or to, you know, subsidize activities in another part of the world. That will have a foreign exchange consequence. And so you need to understand that and you need to be prepared. And ideally, and this is when you know you have a really good risk management team, whether the currencies are working against you or they're adding to, you know, the value of your assets and liabilities or your revenues, you don't care. Because you effectively manage that risk and manage the expectations ahead of time. So, for my customers, when they're seeing the volatility in the market, they're saying it's not a problem. You know, we've already effectively put in place the framework to neutralize that. For those companies that haven't, the consequences of their business actions are magnified by the currency volatility and they are seeing significant impacts there. And especially when you're seeing large directional moves in the markets like we're seeing right now, those impacts are amplified.
Daniel Shaffer: Got it. So just to rephrase, The reality is if you're not able to manage the risk of unexpected inflections, whether positive or negative, you're actually not doing your job.
Andy Gage: That's correct. That's a very fair summary. You know, I think Daniel, you know, a tailwind, to your earlier point, it can be just as, complicated or problematic as a headwind, because it implies a lack of control on your risk management, or ability to manage currency impacts. So, a really good program, you know, at the end of the day, a great litmus test is, as I mentioned earlier, is that when it comes to the earnings call, when it comes to the end of the quarter, when it comes to the board briefings, currencies is not a topic. Because it's been effectively neutralized. Now you may get questions, you know, because of, especially what's happening in the markets right now. But the proper response, you know, from a CFO or treasurer to those questions is we understand our exposure. We've taken appropriate steps to minimize the impact the volatility in the markets. And, you know, for all intents and purposes, it's really not having a material impact on our financial results. If you can articulate that to the board and the investors, that is the perfect response to that market situation that we're dealing with right now.
Daniel Shaffer: This is a very complex scenario indeed. But one that has material impacts on just about every publicly traded company in the world. And clearly depending on how large your cash reserves are or how large your market cap is, one point could make a massive difference. Let's really dive into the market and that current four X landscape . Can you paint a picture of the what's happening in the market today? And you talked a little bit about the strong dollar earlier. How is that affecting people?
Andy Gage: Yeah, well, it is a really complex marketing. I've been helping companies deal with the currency risk for, as I mentioned earlier, about 15 years. And I honestly can't say I've seen a market with this many variables moving at the same time. We've certainly seen surges in the dollar. We've certainly seen surges in volatility. And that in and of itself can have an impact on financial results. So typically when you're, again, as you're seeing a strong dollar, that's gonna put, the, accounts balances transactions that you're doing in other markets, that's gonna have effect on the net value try to bring that back to your U.S. dollar reporting books. And you want to try to mitigate that through hedging or other actions there. But what's also complicated right now is recent surge in inflation. The reactions by, you know, central banks, such as you know, the federal reserve here in the U.S. We saw similar action by the Canadian central bank to increased interest rates, to try to knock the inflation down, which is a really important aspect. I think everybody feels that in their own pocket books today. But when you increase the interest rates, what a lot of people don't appreciate and understand is the interest rates are directly impacting the cost of hedging. There's a part of hedge pricing that includes the interest rate differentials between various currencies and the economies that you're buying and selling into. And so what we're seeing right now on top of that large increase risk in volatility and pressure to earning. It's more expensive to in many cases, not in all cases, but in many cases, treasury teams are faced with a very difficult challenge keeping their FX budgets where the CFO set them, because the cost of hedging is increasing as well. So that's, again a much more complicated scenario than we've seen probably in the last 10 or 15 years is balancing that cost and risk.
Daniel Shaffer: So. You're talking about a landscape that's changed on multiple levels. And hedging has been a standard tool to mitigate risk but it's now more expensive. What are the factors that are impacting the cost of hedging?
Andy Gage: Well, when the interest rates are increasing, they can have an impact on increasing cost of your hedging. Again, depending upon which direction you're hedging there. And, a lot of the companies that we deal with are managing, many currency pairs. So, I've seen companies that have 10 currency pairs that are affecting their business. I've seen 40, I've seen 50. Some of my very large companies, you know, they've got hundreds of currency pairs that they have to hedge. And depending upon how the interest rates are impacting the price of those derivatives, you can see a very significant increase in the cost. One of the clients I was working with a couple of weeks ago, just in the last two to three months has seen a half a million dollar increase in the cost of their hedging of their portfolio. And they're now asking, is there a smarter way to do this than what we've done in the past? And there certainly are better techniques around that, but it really comes down to when the interest rates are moving. That has a direct impact on how the price of a derivative determined. And that is definitely felt by the corporates that are putting those hedges on.
Daniel Shaffer: So, we're seeing a lot of companies restate guidance on two to three, 5% based on headwinds and these FX impacts. Is this causing a lot of stress or is it just an operational expense that people expect?
Andy Gage: I think for companies that don't have a good solid risk management program, I am definitely seeing a much more heightened awareness and a desire to fix some of those cracks in the foundation of the risk management programs. And it really kind of goes back to how they define FX exposure and risk. And again, this is where you know, the technologies that, we've developed over the last 15 years are really fundamental. Let me see if I can kind of paint a really interesting picture for you. If a treasurer that's responsible for managing risk has accurate information and is complete, they can see all their exposure and they trust that information and they have that information when they need it, the act of hedging is a fairly straightforward process. I expect, you know, a potential loss to this level. And so I wanna buy a hedge to offset that or vice versa. The problem with that, any treasurer will tell you is that the act of putting the hedge on is not that complicated, you know, there's systems that actually help do that for you. The problem is getting that exposure right. And there's so many variables. And this is what makes foreign exchange such an interesting area of focus from industry practitioner standpoint, is the currencies that companies are doing business with, that's the, lifeblood of a company. You know, they're buying and selling products, literally in services all over the world, different currencies every single day. And to be able to keep track of all that information is a daunting challenge. You know, I have some companies that have a single accounting system like SAP. They can pull the information from there. It's okay. I have some companies that have 10 or 15 or 20 different E R P systems. And having to look at that, all that information out of all those systems is a daunting challenge. And some companies would say, it's, I can't even get my head around trying to do that without a good strong foundation to bring that information in. So. if the company struggling currency risk, it's usually because they don't understand their exposure and there in lies fault in their program.
Daniel Shaffer: I'm interested to know why the risk management job is so complex. I mean, why is risk management, one of the hardest jobs in finance?
Andy Gage: You have to step back and kind of look at all of the variables that a risk manager has to solve for. And then you have to take another step out and say, well, if I don't solve those variables, what are the consequences of that? So let's start from the outside in. The consequences of getting it wrong. Right off the bat, a company could miss its financial guidance to their investors. That could have a direct impact on their stock valuation. Very bad scenario. They could incur, you know, significant foreign exchange losses that erode their liquidity position because they do need to, you know, deal with the cash impact those losses at some point in time. In some situations I've seen companies where they've had debt covenants that are in place that are affected by potential impacts to the overall foreign exchange position there. I've seen scenarios where the results were so far from what they had expected, that they've had auditors coming in and asking a lot of questions. So if you're kind of going around that circle there, there's a lot of financial and operational and compliance related issues that come from getting it wrong.So then you go into, how do I get it right? Well, I've gotta deal with bringing in data. In some cases, every single day. need to be able to understand that data. I need to trust that data. Because it can have flaws in it. Just because you have a an amazing accounting system like SAP or Oracle doesn't mean that the people are recording things correctly in those systems. And we see issues right there. If you don't have technology that streamlines this process, the spreadsheets, oh, Daniel, the spreadsheets that I've seen people use to calculate their foreign exchange exposure are literally some of the most complicated, and risky spreadsheets. And what I mean by risky is there's so many potential points of failure in those spreadsheets. And I've seen situations where we've audited a company spreadsheets, and they were trading a currency at the wrong direction. So what they thought was reducing risk was actually adding risk. So a complex set of variable. You know, and on top of the market dynamics. So it's really difficult. I think that one of the things that people need to recognize about a foreign exchange risk manager is they don't own any of the data that they need from their business to manage that risk. They are completely reliant upon getting data from the business. And they have to, you know, work very hard to get that data. Without automation, they're Imposing extra work on people in the business to supply them that information. So there's a ripple effect that comes from that as well. Right. So, you know, it's just a, it's a lot of different variables that, that have to get dealt with there. And that's why when companies start to really understand the magnitude of those issues, automation smart analytics become very attractive very quickly.
Daniel Shaffer: So current complex problem of managing FX risk is impacting companies worldwide. Kyriba's recent currency impact report, in fact, just showed that multinationals that are reported on in this report over 1200, in the North America and Europe had a 24 billion dollar hit total impacts there, both headwinds and tailwinds. And what you're saying is the challenge has a multiple downstream effect all the way to the shareholder.
Andy Gage: Absolutely.
Daniel Shaffer: Andy you've shared that risk management is the hardest job in finance, but what does a real culture of FX management look like? And what are the tools required in order to enable the CFO and their teams to do a good job?
Andy Gage: Well, I think the C suite, you know, I'm gonna put the CFO, the CEO into to a certain extent, the the board and the audit committee at that same level. They really need to define the risk appetite of a company, cuz it all trickles down from there. And what I mean by that is, you know, they need to appreciate that, yes, we're an international company. They need to appreciate the investor, community and their bankers and other stakeholders have an expectation about how that company is going to perform. And if the company is not, really. Aligned with that, there's a challenge right there. So they need to understand what's the expectation. Then once they have that, that understanding of the expectation, they can define what their risk tolerance is. And I'll give you an example of a risk tolerance. Given our international footprint, we do not want to see foreign exchange results impact our financial results by more than an, a penny per share, or on an EPS basis. That's one benchmark. It's very common benchmark that we see in the marketplace. Then that sets the mandate for the treasury team. And, you know, typically the treasury team and somebody within the treasury team has that responsibility for managing foreign exchange. Obviously, as you get into larger corporates, there's gonna be different, you know, functional focus areas within the treasury team. But, for a, decent sized company, they're gonna have a distinct foreign exchange team. They may have a back office and a front office and a capital market team that's hedging there. But one of the most critical aspects of that is the team that is responsible for identifying what the overall exposure and risk is. And then taking that risk appetite, making sure they're operating within risk management policy that everybody's been signed off. And that goes all the way up to the board. And that policy is gonna say, we're going to be performing hedging to reduce our exposures, our policy is that we're managing our risk to neutralize the effect. We are not taking a speculative position in the marketplace. And you actually see that in a company's financial disclosures that they do not speculate on currencies. And the expectations are gonna, you know, within a certain level of, control, manage that risk down to that acceptable level that's been defined by the board. So that's the mechanics from governance standpoint that get us to the point where we understand how we wanna approach managing that currency risk. And they may get into more detail on the type of exposures and risks that they wanna manage there. Then from a technology standpoint, really what you're looking for is three fundamental processes with the assumption that a company's actively hedging their risk. The thing that a lot of companies have missed out on and, are now much more readily adopting this is the pre-trade part of that. And that pre-trade is all about, that very hard job of aggregating, defining, and measuring the exposure, having the analysis around that exposure to determine what should I do with that? And then you take that into the next step. So you go from pre-trade into trade, which is now I determine what I'm gonna do. I'm gonna execute those trades and I'm gonna, leverage, banking portals trading platforms to execute the hedges. And then from there, I need to take the results of that. Bring that in, and keep track of the derivatives. I need to. Value those derivatives. I need to account for them. I need to post the resulting accounting entries back into my ARP system. That's a very modern, holistic end to end process. It can be fully automated. And you are seeing companies, much more aggressively pursuing that full automation because getting it wrong in this market can have, as we've already discussed very significant consequences on the company's overall valuation.
Daniel Shaffer: And you've given us a lot to think about there on the culture of risk management, but how's the responsibility of an FX manager changed in the last 10 years? What kind of skills do you think have evolved?
Andy Gage: Wow. That, you know, this is actually a really interesting question, Daniel, because I see sort of two schools of thought on the role of an FX risk manager. There's some companies that I've worked with where people that have managing risk have been doing it for years. You know, some of my customers, I had the same customers for 10, 12, 13, 14 years, and they're really passionate about they're really good at it. And the other end of the spectrum is where you have a large company. I see this a lot in consumer products or organizations, same thing in pharmaceuticals where the foreign exchange responsibility is part of that finance team rotation, where they're bringing in up and coming young executives that have a potential to, to move upwards in, in the company and they want expose, you know, that person different parts of the business. And so, for the people that, are in position for a long time, one of the things that I see from those people is that they always wanna be taking advantage of the next level of technology and functionality to continue to optimize. Once you've got a program under control, just like, you know, back to my conversation around lean manufacturing, six Sigma, you're always trying to turn the dials to further optimize that program. Can I reduce that risk even more? Can I take out some of that additional cost? And as I engage companies, periodically, through the year, we'll go in and we'll do, our, you know, yearly strategy sessions with them. And the first question I ask the foreign exchange team is what's your goal for your program this year? Are you moving into new markets? Do you need to be prepared for that? Are you looking at reducing the cost of current program see if you can get, the same risk reduction with a lower cost? Those are the kind of things that they really, you know, seasoned long term risk manager are always focused on is how can I take that next notch in performing program? Those companies that go through the other end of the spectrum, where they're rotating people through, that's a real dynamic challenge there. And in both cases, you know, I think technology plays a critical role there, but for those companies that have people rotating in and out of the FX responsibility, having really strong technologies, very well documented processes are critical, because you literally can't miss a day. If you somebody's moving out and somebody else is moving in, that FX program has to execute the same way each day, each week, each month. They can't take their eyes off the ball. And so that's where technology and really strong documentation and really strong collaboration is critical to long term success there.
Daniel Shaffer: So in particular, in the last 10 years has FX risk management been at really the top of everyone's mind, as it seems to be today? You go to the Financial Times, the Wall Street Journal, Reuters, Bloomberg. It seems like all the headlines are about FX and currency hits.
Andy Gage: Wow. You know, if I go back to when we first started looking solving this complicated problem, there really wasn't that much volatility in the market. The approach that we took in the early days was trying to help companies find a way to manage their risk more cost effectively because the volatility wasn't as much of a problem, but, you know, starting with the, financial crisis, you know, that kicked off by the Lehman collapse, we have seen one crisis after another. They just keep coming at us one after another. Russian, you know, Ruble devaluation. We had the threat of the Euro falling apart when, Greece in Italy and some of the other countries Europe were. worried about their sovereign, debt crisis. We saw, certainly over recent times with the constant impact COVID and then the supply chain disruption various, conflicts around the world. it seems like these crises are coming at us much faster and much more severely than, when I started in this business. So how have companies responded to that? Well, I think looking at this responsibility as much, much more important because honestly, you know, if you step back and a CFO really looks at all of the financial risks that are under he or she's responsibility, currency risk is arguably the largest financial risk that they have to deal with. And now that you're seeing the succession currency crisis, fueled by macroeconomic and global events various other crises, I think risk management teams are getting a lot more focus and a lot more attention and a lot more enablement. Whereas before, a CFO said, I don't care how long you work. I don't care if you got spend all weekend filling out these spreadsheets and getting your currency which right. I pay you to do your job. I don't care how hard you work. And I've literally been in meetings with CFOs talking to their treasurers in those terms. That's way back. Now they're more around, okay. This is a much more serious situation. And I am asking my team a lot harder questions because of the volatility, because of all these various movements out there. And now they're expecting that team to come back to them with much faster, much more accurate responses and in situations where they don't have access to that information, you know, after the decals, after the crisis, I'm now seeing the CFOs saying, Okay, we can't perform like that anymore. We now need to invest in automating this because we'll see another one of these crises. And the unfortunate thing is we don't know when it's gonna hit us next. So that has definitely changed over the last, you know, especially the last, I would say eight to 10 years. That the succession of crisis that we've seen since 2008, 2009, have really changed the mindset towards, you know, benefiting from automation analytics to keep on top of this very problematic risk factor.
Daniel Shaffer: Andy, that's really in line with a lot of what we're hearing on the Invisible Vault in other facets of the business. But certainly in some of our, even more recent episodes, we've interviewed CFOs who talk about the value of data, in real time being able to understand and change their behaviors or the direction of the company with really a lot of confidence. And that is from what I'm hearing about FX management role especially in this environment of constant hits or impacts to the company that you really do need to have that automation and efficiency. So that leads me to thinking about another question for you. you've talked to us about a lot of the shifts and changes in the attitudes around FX management in the last 10 years in the context, why. I'm just curious, where does the CFO start to decide, okay, here's how we're gonna invest in this technology to make it better. And are they going in-house to do that? Or are they better served going outside to find a vendor to help them out?
Andy Gage: if I go back to the original vision that, that Corey and Wolfgang had back in 2005, 2006, what they really seeking to do was take their incredible experience that they had gained working with some of the largest, most sophisticated companies and governments in the world and make that available to the masses. And so in their early engagements, as they were building out their methodologies, they were working with a lot of small mid-cap companies. And that's where they felt it was an underserved market because these companies couldn't, you know, like an IBM other really large companies, they couldn't afford a very sophisticated capital markets team. And so they really wanted to take what they had learned dealing with companies of that size and bringing it to the masses. And so that spirit thinking has still exist in our world today. Let me give you a really good example of that. In response to what we're seeing in the markets right now, with the rise in volatility, the strong dollar, the interest rates, as we've discussed earlier, the cost of hedging is becoming more of a problem, and as well as the risk. And so historically large cap companies were able to work with their banks, or they could have data scientists come in and build very sophisticated models that can model the overall risk of the portfolio of currencies that they're dealing with. And then they could do different types of analysis and scenarios, and the bankers might come in and look at it from a overall structuring standpoint, here's different ways that you could look at this. And that's how they drove their program, but you've gotta be really smart. You know, we're talking, you know, Masters, if not PhD in math to kind of build out these models here. So our mindset is to take that similar approach that we started with and take those very sophisticated models that were really, you know, the purview of very large corporates and democratizing. We wanna make it available to everybody. And, you know, we've done some recent releases of new technology that a CFO 500 million revenue company could take advantage of the same technology as a $50 billion company. And that to me, I think is a huge advantage out there because, you know, dealing with companies across the spectrum that, that I have, they're all facing the same set of challenges. I need to understand my exposure. I need to understand my risk. I need to take appropriate actions. I need to manage expectations on that. And just because I'm in a smaller company doesn't mean I shouldn't be leveraging the same level of sophistication. And so that's the beauty of technology and cloud services. And I think that Kyriba, mindset in general is we're taking the best learnings from a broad community over 2000 clients. And building that into a constantly evolving and constantly improving set of functionality. And FX is no different than that. And I'm really proud how we've helped companies of all sizes take advantage of the same technology that, you know, only large caps were able to use in the past. And I think huge advantage of the cloud movement.
Daniel Shaffer: Andy, what I'm hearing from you today just even more, how complex this process really is. But analyzing why hedge is needed is not only is it complex, but if the analysis is wrong, it's just really expensive for the company. And in time of rising interest rates those margins are becoming more thin. So there's not a lot of room for error that will be accepted, not by the board, not by the market. So, tell me about gaining confidence in your program. Where do you really get those efficiencies? You started telling us about technologies and you've been doing it for a while. Can you bring in some dialogue about the VAR strategy versus a core strategy and how that confidence is really enabled with some automation and real time data support?
Andy Gage: We've done customer advisory meetings in the past, we often sit down in a round table discussion with our customers and we ask them for feedback, what are we doing well, what do we need to improve on? And what do you see the most value in, in our approach to helping you deal with currency risk? And, you know, we had all sorts of ideas on what we thought we were good at. And, as is usually the case, the customers will very quickly, you know, tell you what you're good at, and they'll tell you what, you're not good at. One of the things that really surprised us and quite frankly empowered us, was this incredible consensus around what our approach based on our technology provides to our customers is confidence. And that confidence comes from the fact that when they look at their overall exposure and risk information and the systems that we provide within the Kyriba platform, they can trust it. They know it's right. They know how we approach bringing in the data. They know how we approach cleansing the data to get rid bad data overcoming data integrity issues in the underlying accounting systems. So when they look at their data, they know that it's right. And that is incredibly empowering for them because right there, we're tackling biggest challenge with any sort of analytical framework is that garbage in, garbage out syndrome. So we've invested millions of dollars in eliminating the garbage in, garbage out syndrome. Once that confidence is in place, then the sky's the limit. Now I can really take advantage of very sophisticated analysis and I can run different routines on that. So you asked the question about these new value, risk scenarios that we're providing to companies. So, in the markets, you know, oftentimes, companies are hedging, their exposures without necessarily looking at the relative volatility of the. Currencies that they're dealing with. Their policy that, again was set by their executive team and pushed down from a, you know, risk tolerance perspective, oftentimes the policies have been about, I'm gonna hedge 80%, 90% or a hundred percent of the exposure that I can see, and have responsibility for. Unfortunately, in, in a market like this, that can be expensive. Because, you know, as we, talked about earlier with the rising interest rates, those currency payers can be, or those currency hedges can take on additional costs there. So again, with that idea taking sophisticated capabilities that large cap companies have used and making that available to anybody that you know, wants to improve the cost effectiveness program, we've enhanced our, solutions to be able to look at, can we see some correlation between different currencies? And can we leverage that correlation to find more optimal ways to reduce the hedging cost by looking at that trade off between the risk reduction that I'm gonna get and the cost of hedging. And that is a very acute focus right now for a lot of companies of all the things that I'm talking with companies right now, this is usually a number one or number two priority for them is how can I more effectively manage the cost given very expensive hedging environment there. So this is an example of us investing, you know, taking that, and this is something we did we co-designed some of our sophisticated companies in Europe. And we're now, again, making that available to the masses. It's really all about again, if I have the right data and I have absolute confidence that I understand that data and it's accurate, then I can take more sophisticated approaches on how I manage that. And, you know, know that when I do something, the markets it's gonna have the intended results there. And that's one of the things I'm probably the most proud of our team right now is having that, that understanding of, you can't solve one problem without solving confidence and the accuracy of the data. That's fundamental. But once you've got. We can help companies do a lot of different things to reduce risk and do it in a very cost effective way.
Daniel Shaffer: Cost effectiveness is something that we need more today probably than in years past when there's less stress on interest rates for sure. So CFOs are naturally gonna wanna move towards that confidence, whether it's a portfolio of our strategy or a better way to analyze cross currency correlations, they really want to determine with data driven confidence, what should be hedged and how it should be done. But as a CFO, they want to know that their teams have full control over any possibility of having to make a statement about FX impacts during earnings calls. I hope our guests have enjoyed the session. I look forward to coming back in the future and having you on our show again.
Andy Gage: Well, thank you, Daniel. I always enjoy our conversations and hopefully, the people listening in on this will, find it useful and, the story's not over. We still have a long bumpy economy currency market to deal with here. So come back anytime you'll have me.