Treasury Today Country Profiles in association with Citi

Microsoft

Microsoft, Winner, Best Trade Solution

Irfan Butt, Bank of America Merrill Lynch, Barbara Harrison, Citi, Jose Luis Marti, Jayna Bundy, Anita Prasad, Microsoft and Roger Fleischmann, J.P. Morgan

This submission was the result of a conversation which began at the 2014 Adam Smith Awards Lunch in London. The culmination is a solution comprising three banks, each of which took on an equal role. It really is a uniquely collaborative solution for supply chain financing.

Photo of Irfan Butt, Bank of America Merrill Lynch, Barbara Harrison, Citi, Jose Luis Marti, Jayna Bundy, Anita Prasad, Microsoft and Roger Fleischmann, J.P. Morgan.

George Zinn

CVP and Treasurer

Anita Prasad

General Manager, Treasury Capital Management

Jayna Bundy

Director, Treasury Capital Management

Shreyas Kulkarni

Treasury Manager, Worldwide Online Credit Services

Founded in 1975, Microsoft is the worldwide leader in software, services and solutions that help people and businesses realise their full potential.

in partnership with

The challenge:

In the summer of 2014, Microsoft was starting to integrate the Nokia handset acquisition. As the company got deeper into the process with its manufacturing teams, Microsoft realised that the payment terms were inconsistent across the two businesses teams. The vendors would naturally ask them to update the combined commercial agreement with the most favourable payment terms. This was clearly not in the best interests of Microsoft. Some vendors were also looking to increase the cost of goods sold since the vendor’s ability to access working capital was declining or getting expensive given the global liquidity situation, especially for electronic component suppliers. Microsoft therefore set about developing a supply chain finance solution that would allow the company to:

  • Achieve consistent payment terms across their businesses and vendors and keep them in compliance with the company’s standard payment terms.

  • Monetise their strong AAA/Aaa ratings and help their suppliers achieve a lower cost of funds. This would not only help their financial stability, it would also allow them to ensure they were able to negotiate improved commercial contracts.

  • Solve issues around having a very high overall cash balance but limited cash in the US.

  • Respect the fact that although any of Microsoft’s banks would be willing to go alone on the programme, they had capital constraints with new regulations such as Basel III.

  • The company also wanted to make sure they managed counterparty risk by working with more than one bank.

The solution:

“We typically see supply chain financing used to achieve working capital benefits whereby a company sets up the programme with one bank, or sets up separate programmes with several banks,” says Anita Prasad, General Manager, Treasury Capital Management. “Our benchmarking indicated, however, that this can result in a sub-optimal financing solution, which creates confusion for a company’s vendor base, potentially hurts its banking partner, and can create operational issues for a company’s AP systems.”

For Microsoft, a collaborative solution with a number of banks was needed – and the day after the Adam Smith Awards lunch in 2014, the team met with Bank of America Merrill Lynch, Citi and J.P. Morgan in London and proposed their unique collaborative solution for supply chain financing.

“The banks were each very professional in their response but it was clear that this was not a standard operating procedure,” says Jayna Bundy, Director, Treasury Capital Management. “They kept bringing up the idea of one bank leading and others joining as participants to help with their balance sheets. Obviously, each one wanted to lead.”

Microsoft insisted they wanted true equality and they would pitch this to their vendors as a financing offer from three banks. After covering a lot of emotional, legal, regulatory, KYC and financial challenges, the three banks agreed.

Best practice and innovation:

In doing so, the company has been able to get global coverage for billions of dollars of financing from a single process and pricing that is managed jointly by the three banks. This helps as they bring in vendors who may have commercial contracts with them in more than one country/region. They are managing two distinct SAP environments here given the acquisition aspect so consistency and a single process with all the banks is critical. Shreyas Kulkarni, Treasury Manager, adds, “the company also managed to implement an automated process for handling credit memos in both SAP environments; a rare achievement based on our benchmarking study”. Most importantly, they wanted all three banking partners to get equal credit and financial rewards in a world where most people believe that banks compete and cannot co-operate with each other.

The focus is on collaboration. George Zinn, CVP and Treasurer of Microsoft explains: “our experience has consistently shown that if we take the right approach and promote open honest dialogue, co-operation can be achieved and everyone wins. It does not always have to be a win-lose; it can truly be a win-win.”

He elaborates, “this transaction also demonstrated strong partnership between Treasury, AP and our hardware manufacturing teams. Together they delivered impactful results to drive consistency in payment terms and enable cost reduction while supporting the financial health of our supply chain. Finally, the timeline for this complex transaction is an amazing testament to the participants – right from the start of initial discussion in June 2014 to going live in two SAP environments in April 2015.”

Key benefits:

  • Risk removed/mitigated.

  • Improvements in the cash conversion cycle (CCC).

  • Improvements in days payable outstanding (DPO).

  • Process efficiencies.

  • Reduced reliance on bank credit lines.