The challenge

Microsoft’s investment portfolio is a multi-asset class portfolio with more than US$100bn in assets under management (AUM) comprising assets across fixed income, equities, private equity, venture capital, real estate and commodities. Historically, the risk and scenario analysis sensitivity reported on the company filings have used an outsourced investment risk model.

When Microsoft started doing this over 15 years ago it was the right business decision.

At the time, both its investment and operations teams lacked the systems, resources and expertise to efficiently compute and monitor the risk metrics for the different portfolio positions. The cost of the outsourced service, that amounted to hundreds of thousands of dollars per year, was justified. Since then, its business needs, priorities, and expertise have changed. The treasury investment team’s capabilities have evolved, and the team has successfully developed and implemented several new and sophisticated systems and processes.

Lack of complete understanding: what the company gained in outsourced execution benefits from the third-party model, it lost in full control, complete understanding and visibility to the underlying process. The outsourced model computed the interest rate, credit spread and FX risk sensitivity numbers for the investment portfolio and revenues which it reports in its 10-K and 10-Q filings. In recent years accounting standards have changed and its revenues and investments have increased tremendously, and its internal and external stakeholders have taken a larger interest in the computation of the scenario risk numbers that are reported. Given the third-party model was a black box, at times it was not clear what exactly impacted the model’s results and why the results would change quarter over quarter.

Operational issues: prior to this project, Microsoft’s scenario risk computation process through the outsourced model was slow, manual and less intuitive. Investment positions were uploaded to the third-party platform through a series of time-consuming steps that no one really understood.

Operationally, the objective was to shorten the cycle between risk analysis runs and to better understand the process, model and output to explain to stakeholders/regulators if needed.

Time and costs: the outsourced risk model’s methodology was a black box and there were several precursor steps that Microsoft needed to perform using different systems that required a lot of time: greater than three hours per risk run and investment in different third-party systems and maintenance of legacy desktops since that was the only system the model ran on. The other major challenge faced was convincing the stakeholders, namely the tax team, accountants and legal team that the new process was accurate, more effective, easily explainable and easily repeatable since this was an important output that was published in the company’s quarterly company filings.

Key objectives of the project were to create a new scenario risk analysis process that is faster, cheaper and easily quantifiable to both external regulators and internal stakeholders.

The solution

“We built a risk model and process that addressed all the challenges and saved material costs,” says Kulin Chheda, Group Portfolio Manager.

Microsoft use Blackrock’s Aladdin system as its primary portfolio management system. It wanted a ‘one-stop-shop’ solution to provide a consolidated view of risk sensitivity and compute sensitivity/scenario analysis for the revenues and the entire portfolio while doing away with the outsourced model.

“We identified that although Aladdin’s risk tool was good at computing certain risk metrics; it could not provide the complete risk solution for a portfolio as complex as the one we have and thus we could not rely on it completely. We did, however, come up with an innovative solution where we used a combination of the Aladdin tool along with a proprietary Excel risk model that was designed and built internally,” explains Chheda.

“The Adam Smith awards are the industry benchmark for best practices, excellence, and innovation in treasury management. To me winning this prestigious award serves as an important reminder that to be the best; one needs to be always learning and curious and have a growth mindset that is very much imbibed in the Microsoft culture and way of doing things.”

Kulin Chheda, Group Portfolio Manager

Best practice and innovation

Microsoft took advantage of internal expertise in investment risk management and created a bespoke solution that computes risk sensitivity across interest rates, credit, equity, and FX and teamed that with portfolio positions already present in its portfolio management system to come up with an intuitive yet powerful solution for the company’s investment and revenue risk reporting needs.

Key benefits

• Cost savings.

• Process efficiencies.

• Increased automation.

• Improved visibility.

• Errors reduced.

• Manual intervention reduced.

• Increased system connectivity.

• Quality accreditation achieved.