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Founded in 1975, Microsoft is the worldwide leader in software, services and solutions that help people and businesses
realise their full potential.
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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:
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Achieve consistent payment terms across their businesses and
vendors and keep them in compliance with the company’s standard
payment terms.
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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.
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Solve issues around having a very high overall cash balance but
limited cash in the US.
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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.
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The company also wanted to make sure they managed
counterparty risk by working with more than one bank.
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“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.
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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.”
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Risk removed/mitigated.
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Improvements in the cash conversion cycle (CCC).
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Improvements in days payable outstanding (DPO).
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Process efficiencies.
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Reduced reliance on bank credit lines.
Irfan Butt, Bank of America Merrill Lynch, Barbara Harrison, Citi, Jose Luis Marti, Jayna Bundy,
Anita Prasad, Microso and Roger Fleischmann, J.P. Morgan
OVERALL WINNER
Best Trade Solution
Microsoft
George Zinn, CVP and Treasurer; Anita Prasad, General Manager,
Treasury Capital Management; Jayna Bundy, Director, Treasury
Capital Management and Shreyas Kulkarni, Treasury Manager,
Worldwide Online Credit Services
treasurytoday
Adam Smith Awards © August 2015 | 15