Case Study: Microsoft Takes its Liquidity Structure to a Whole New Level

Microsoft runs a centralised treasury for more than 350 legal entities in 118 countries. The software giant has more than 1,100 bank accounts with 100 plus banking relationships worldwide. At the height of the global economic crisis in 2008 and 2009, each US dollar held in local subsidiary managed accounts faced increased counterparty risk, sovereign risk, foreign exchange (FX) fluctuations, and fraud considerations so the process began to find a long-term solution.

Many of these former concerns are once again key considerations as the eurozone crisis and economic uncertainty once more raises its head, making Microsoft’s recent introduction of a fully automated international zero balance account (ZBA) structure even more timely. During such volatile times few things are more important than having effective working capital management and oversight. “Now, Microsoft has a ZBA structure that sweeps each account to zero every day and creates journal entries with no manual involvement. And the solution has no negative impact on the operations of finance staffs in the subsidiaries,” explains George Zinn, corporate vice president and treasurer at Microsoft.

As one of the non-aligned corporate treasurers on the judging panel of the gtnews Awards for Global Corporate Treasury 2012 pointed out, “the fact that Microsoft has developed a scalable, cost-effective platform that allows it to reduce counterparty exposure and gain [cash] visibility is very impressive”.

Background

The global cash management (GCM) and the global cash operations (GCO) teams within Microsoft’s large centralised treasury department in the US are responsible for ensuring that hundreds of worldwide legal entities only have enough cash for operations, and that all collected cash balances are concentrated efficiently.

Microsoft has 175 actively funded subsidiaries and the process to fund them for payroll, accounts payable (A/P), taxes, and so forth is an exceedingly time-consuming and manual process. Additionally, the cash planning manager works with each subsidiary to repatriate any cash balances not needed for operating expenses. For the GCO team, the ultimate goal is to promptly transfer available balances to the parent account in order to maximise the investment return. However, it is time-consuming to manually sweep hundreds of worldwide bank accounts and Microsoft were unable to perform same-day funds transfer for European and Asian accounts due to the time zone differences.

With these challenges in mind, the treasury at the software giant realised the need to develop a cost-effective strategy to reduce average daily balances by automating the collection sweeps and implementing a just-in-time funding model for subsidiary disbursements.

The GCM and GCO teams in the treasury, which lead the initiative, conducted kick-off meetings one year prior to the ‘go live’, with the project getting underway in August 2010 with a planned completion date of Q311. The goal was to develop a cost-effective strategy to reduce Microsoft’s average daily balances. Many joint working sessions were scheduled internally with IT resources and externally with project partners, Citi, to outline the existing challenges and brainstorm a solution. During this initial planning stage it was quickly determined that the establishment of inter-company ZBA structures would be the optimal solution.

The Project

The project required close coordination and collaboration between numerous key stakeholders. The initial scoping meetings were held with the aim of developing a strategy to reduce Microsoft’s average daily balances by increasing the frequency of collection sweeps and implementing a just-in-time funding model for subsidiary disbursements. The GCM and GCO treasury teams soon realised that while introducing a new cross-border inter-company ZBA structure could meet both goals, the current IT infrastructure was not up to the job. It could not handle ZBA transactions within the SAP in-house cash centre (IHCC), meaning that key changes needed to be made to SAP.

Numerous conference calls over a 10-month period were held with Citi and SAP developers to outline and test new configurations. Meanwhile, the treasury controllers group at Microsoft completed six months of comprehensive accounting testing to ensure that the planned new solution would impose no operational challenges. Once all this testing was completed, the GCM team held conference calls with all subsidiary stakeholders to advise them of the changes. The success of this project is largely due to the hard work and co-ordination of all these various stakeholders involved in the improvement drive, and their early engagement eased the process along.

Microsoft faced two significant obstacles in the execution of the plan:

1. The need for a ZBA with customised text capability: Although many multinational banks have a ZBA product, no single bank offered a solution to contain customised texts in the transaction details. However, this is critical to the subsidiary identification function of the Microsoft IHCC. In fact, a ZBA transaction without this specific text will not be recorded automatically by the treasury’s SAP enterprise resource planning (ERP) system, causing inter-company imbalances. Microsoft, therefore, partnered with Citi to develop and implement a new global cash concentration product called the Global Concentration Engine, which allows the required customised text to be included.
2. The need for automated accounting: Despite ZBAs years’ of history, there has not been an inter-company ZBA solution that allows automated accounting within an IHCC. If Microsoft were to automate the collection of sweeps and enable just-in-time disbursements for hundreds of accounts, the resources required to manually post accounting entries would be overwhelming. Therefore, the treasury had to make a series of developmental changes to SAP to enable automated accounting. It did this by triggering the general ledger entries, based on the customised text, which is included in every ZBA transaction.

Challenges Along the Way

In response to the European debt crisis in 2011 and more recent events, Microsoft worked to re-prioritise the ZBA implementation schedule, bringing forward the original start date to Q311. According to Microsoft, the company was able to promptly put its Ireland, Italy, and Spain accounts into the ZBA structure. This greatly reduced Microsoft’s cash exposure to high risk European countries, which have been suffering due to sovereign risk concerns amid the trials and tribulations of the eurozone.

Within the past year Microsoft has been able to reduce its balances in Ireland, its largest regional operating centre, by more than 99%. The successful completion of the project late last year has allowed the treasury to create a proactive offensive strategy that mitigates risk instead of playing defensively.

The key benefits of the project have been:

• A reduction of time. It no longer takes so long to monitor cash balances and cash sweeps at subsidiaries.
• A significant reduction in unreconciled balances, which is due to the automation of the accounting entries.

Benefits

The new inter-company ZBA structure at Microsoft’s treasury has not cost a penny extra in terms of IT costs, with much repositioning and programming of existing equipment undertaken, and it maintains a zero balance in more than 150 accounts. It also:

• Automates cash concentration for hundreds of bank accounts.
• Creates a just-in-time funding model for operating accounts.
• Enables 100% accounting automation.

The associated new global cash concentration product went live with Citi in nine countries, with more being added throughout this year. The following results have flowed from the rollout:

• Reduction of more than US$250m in worldwide average daily balances.
• Increase in monetary gain: More than 250,000 interest gains due to collections are now promptly transferred to interest-bearing concentration accounts.
• Reduced risks as subsidiary accounts are maintained at zero balance, which lowers sovereign risk, particularly in vulnerable countries such as Greece.
• Decrease in bank fees: wire volumes have been significantly decreased by more than 40%.

In addition, the treasury team at Microsoft has seen improvements in operational efficiency, with hundreds of work hours saved that were previously spent reviewing subsidiary cash balances to ensure that cash was effectively used. The new automated system also means that excess cash is transferred to the centralised portfolio account as a matter of course.

The accounting team has also saved countless hours that were previously wasted manually posting general entries. Subsidiaries can now devote more time to selling Microsoft products, instead of managing cash which should also have long-term benefits.

• This case study is based upon an entry into the gtnews Awards for Global Corporate Treasury 2012, sponsored by Bank of America Merrill Lynch (BofA Merrill). The winners of this year’s annual awards, now in its third staging, were only revealed at a gala dinner on 24 May at the Sofitel Grand Hotel in Amsterdam, the Netherlands, after the opening of the two-day gtnews Forum for Global Corporate Treasury conference. This winning Microsoft entry is shared here from the Working Capital Project of the Year category as a best practice guideline and commentary. To see a full report on all the Awards winners and the gala dinner on 24 May please click here.

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