Photo of Natasha Condon, Citi, Anita Mehra and Rahul Daswani, Microsoft.
Microsoft has created ‘Payment Solutions as a Strategic Business Partner’. This flexible solution incorporates many facets but is already making great headway with customers.
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Structured Finance Manager
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How Microsoft’s flexible payment solutions extend terms to a diverse customer base
Microsoft wants to manage its own working capital and risk management tightly while supporting sales goals. Microsoft’s terms are typically 30-60 days for sales of software. However, end customers quite often require extended payment terms. This disparity leads to working capital challenges in the supply chain. Microsoft’s primary objective was to offer its customers an innovative solution based on extended payment terms that would allow them to meet their own company objectives and consequently strengthen the relationship Microsoft has with its customers.
This was not achievable using a single yardstick for all customers as they range from emerging market players to those in the most developed markets, across public sector, leading corporates, partners/re-sellers and financial institutions.
Microsoft needed an external banking partner who could provide a global offering with local market expertise. It needed to offer extensive trade finance experience with strong structuring ability to customise solutions for Microsoft’s bilateral arrangements with each of its customers who were from different geographies, industries and sizes.
Microsoft decided to combine a novel trade finance solution with the sales offering for the resellers. This avoided adding to the financing and sales team’s administrative burden, freeing up more of their time for strategic business tasks.
The solution uses a variety of instruments including accepted invoices, bills of exchange and letters of credit, supporting resellers and end-customers. Its roll-out has resulted in volumes of approximately US$100m since May 2017. The adaptability has already prompted an extension to cloud products, which have a different payment schedule.
The solution was introduced in Israel, Oman and the United Arab Emirates (UAE) and is now being considered for Saudi Arabia, Sub-Saharan Africa and Europe.
Best practice and innovation
Microsoft has created ‘Payment Solutions as a Strategic Business Partner’. The firm’s ‘One Microsoft’ approach has helped sales, finance, credit and corporate teams to work together towards offering a unified solution for all customer needs.
The solution starts with identifying the right trade finance instrument necessary to provide the financing solution. In certain cases, a standard master agreement-led solution was the right instrument and in other markets Citi would bring in network partner banks to backup the arrangement, or it could engage with customer’s own local banks to cover credit risk. Instruments used include the purchase of accepted invoices, bill of exchange avalisation, or letters of credit. In some cases, the right solution was a combination of instruments.
Bringing the solution to cloud sales required an understanding of the specific needs of enterprise customers when purchasing cloud ‘goods’ compared to regular products. In the former, many customers like to align investment to cash flows. The partnership created payment solutions at point-of-sale, where enterprise customers can convert obligations into instalment payments to align their expenses with usage. This allowed Microsoft to continue receiving payments on day one, with Citi providing financing.
Traditionally trade finance has been considered a risk mitigation solution before delivery, when suppliers would obtain an LC, but as Microsoft products are software, instead of traditional trade finance, it was deployed as a pre-sales solution using multiple instruments. In partnering with Citi in the Middle East and Africa, Citi was able to leverage its syndication capabilities to bring in other local banks, making it a seamless proposition.
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Solves credit and funding issues for customers and partners, especially in emerging markets.
Global master agreement and ability to customise solution by identifying right instrument/solution for every legal jurisdiction allows for expansion across multiple countries.
Circa US$100m transactions concluded: volume expected to grow rapidly.
Existing working capital position maintained, with extended terms made available by Citi through payment solutions.
Sales can focus on products in their negotiations since financing is available to meet customer requirements for longer-terms.
The solution reinforces the ‘One Microsoft’ approach.