From the November 2009 issue of Treasury & Risk magazine

Silver AHA Winner in Credit Risk Management

As credit quality plunged in the second half of 2008, Microsoft realized that it had people attentively tracking credit risk and aggressively managing it from separate silos. One group watched the investment portfolio. Another watched accounts receivable. A third watched counterparties in derivatives transactions. Yet another kept a close eye on depository banks. What the company needed and swiftly invented was a "360-degree view," something that pulled together all its credit risks into one holistic view, explains Jared Bean, quantitative manager.

If a large bank, for example, held significant Microsoft deposits; was a counterparty for derivative transactions; owed accounts receivable balances to Microsoft for software it had licensed; and had issued securities that were held in Microsoft's $15 billion investment portfolio, the risk to Microsoft if that bank went under could only be accurately assessed if all these risks were cumulated, Bean says. So Microsoft, with its considerable information technology resources, integrated the silos and created the 360-Degree Exposure Report. It did the project within established budgets, hiring no additional staff and demanding no additional ongoing resources from internal groups. Since this is Microsoft, the report has a nifty graphic spin. Bubbles of different sizes and colors are placed within X and Y axes representing the type and magnitude of exposure.

Because the economy was deteriorating so quickly, Microsoft needed timely information on companies' financial health in addition to holistic data on exposures, so it investigated credit reporting services and credit scores that could show Microsoft executives their overall exposure at a glance. Altman Z-Scores, already familiar to the credit and collections team, became the foundation, but Z-Scores didn't cover financial institutions or private companies, so Microsoft added Financial Health Ratings from Rapid Ratings to fill this void and used both metrics where appropriate.

Better visibility means better decisions. The new reports "let our treasurer and other executives make more informed decisions on the appropriateness of these exposures and provide information on what methods would be most effective in modifying the exposures," Bean notes. In just one instance, Microsoft saved $105,000 by reducing its exposure to a customer prior to a bankruptcy filing.

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