Photo of James Hayward and Rahul Daswani, Microsoft.

This solution addresses two of Microsoft’s major transformation projects – namely a move from selling software licences primarily to large enterprises to an increasing focus on SMEs and consumers and geographic expansion into emerging markets such as India. This case study profiles an unsecured financing solution in India.

The challenge

Microsoft is undergoing two major transformations:

1. A move from selling software licenses primarily to large enterprises, to increasingly focus on selling subscriptions to small and medium sized businesses as well as to consumers.
2. Geographical expansion to emerging economies such as Africa, Brazil, India and China.

Without financing, partners are unable to pay Microsoft on usual terms, leading to overdue receipts and accounts going on credit hold. This means Microsoft will miss sales opportunities and partners lose rebates.

Financing small/medium businesses (SMEs) in India for software business is a challenging goal to accomplish. The combination of SMEs’ balance sheet risk coupled with software business risk eg not having a long history, meant that this is classified as ‘high risk’ by the banks. Even if banks were to provide lending, it would be done on a case by case basis. Banks would assess the risk of the partner balance sheet irrespective of their Microsoft partnership. In addition, they would price the transaction on an individual basis. Microsoft prefers a programme approach which leverages their unique business model and allows lighter management.

As Rahul Daswani, Structured Finance Manager recalls, “A discussion with our global partner banks confirmed they do not offer any financing solutions which can be deployed to support our goals in India. Therefore, discussion was initiated with local Indian banks/financing institutions.”

The solution

Microsoft selected Tata Capital Financial Services Limited (TCFSL) with whom a financing structure based on a unique supply chain financing model was deployed. In its credit assessment, the service provider was able to take comfort in Microsoft’s business model instead of just relying on the partners’ balance sheet. Length and payment relationship of the partner with Microsoft were taken into account. TCSFL looked at the cash collection cycle of the partner and arranged to finance Microsoft’s invoices for a period which allows the partner to convert these invoices into cash from downstream sales.

Using this model TCFSL set up a standard financing model with pricing which was significantly cheaper than market. This financing programme is run on a fully unsecured basis. However, in case payment by any partner to the service provider is delayed, Microsoft would put that partner on credit hold just as they would do for payments owed to Microsoft.

Under this financing set-up the partners double their credit period and now get a very competitive effective payment term. The service provider has no financial recourse to Microsoft.

For Microsoft Treasury winning the award for highly commended winner of the Best Working Capital Management/AP/AR solution in the Adam Smith Awards Asia 2016 is a testament to the ‘customer obsessed’ approach that the company has adopted. The Adam Smith awards have industry wide recognition and for the structured finance team it is an honor to receive this award.

Rahul Daswani, Structured Finance Manager, Microsoft

This cross functional support from many teams perfectly demonstrates the Microsoft culture and values of customer obsession and collaboration as One Microsoft.

Daswani comments, “We signed a US$30m financing programme with TCFSL in December 2016 and selected rollout for three partners who needed a total of US$8m+ limits. Joint partner and bank meetings were organised in January and February. Thanks to the fast track approval process built in the financing model, three partners were credit approved in February and by May 2016 all partners were able to even draw down limits already which reflected the excellent processing and turn-around time. Our partners have also given feedback that this financing played a key role in meeting sales targets.”

Best practice and innovation

• First ever model of ‘channel financing’ software by any bank/financial institution in India as normally channel finance is done for ‘hardware’ with lien/recourse to goods in warehouses/retail channel.
• ‘Unsecured financing’ model which has inherent risks but can be quickly deployed – which is critical for speed in ‘channel’ management.
• Preferential pricing making it very attractive for partners – at the same time coupled with ‘stop supply’ commitment reduces risk significantly.
• Develop unique selection model for accepting partners which looks at multiple factors beyond just financials.

Key benefits

• Strong ROI.
• Offers additional sales opportunities.
  • In Q3, US$3m additional sales generated.