From the November 2011 issue of Treasury & Risk magazine

Gearing Up With a Team Effort

Microsoft wins the Overall Excellence Award for the fourth time in AHA history.

CFO Peter Klein, Treasurer George Zinn and the treasury team CFO Peter Klein, Treasurer George Zinn and the treasury team

Innovative and forward-looking describe all the treasuries that have won Alexander Hamilton Awards over the last 16 years but none more so than Microsoft. With its fourth Overall Excellence Award in 2011, the technology giant extends its lead in winning the most overall honors since the program began in 1996—when the first ceremony was held at the Breakers in Palm Beach (for AHA trivia buffs). Microsoft first won Overall Outstanding Treasury Achievement in the third AHA competition in 1998.

Then-treasurer Jean-Francois Heitz (now retired and an AHA judge for the last six years) smiled on the cover of then-Treasury & Risk Management magazine. Microsoft finance executives would smile on two more AHA covers, in 2001 and 2003.

In 1998, T&RM wrote that Microsoft’s “feats in the competition”—two golds in the categories of Investor Relations and Insurance, and silvers in Cash Management and Treasury Technology—“resulted from two things: the widespread use of the company’s considerable technology expertise and a truly concerted team effort.” It noted that the company’s treasury team of nearly 40 “grafted Microsoft’s in-house technological prowess onto its own functions and in so doing turned their unit into a faster, fuller and even more complete partner to the overall corporation.” Heitz said at the time: “We leverage technology to improve efficiencies—and to optimize the risk and return [ratio].”

The big picture hasn’t changed much, except “now you’ve got to run faster all the time,” says George Zinn, who joined the company as a financial analyst in 1996 and became its treasurer and corporate vice president in 2004. Now there are 479 staffers and vendors working in treasury and collections around the world.

In 1998, Zinn co-led, with Lori Jorgenson, who now runs the risk management team, the project that won silver in the Insurance category for developing a framework to analyze risks to business continuity—natural disasters, loss of key personnel, competitor disputes, financial market downturns and product catastrophes. In 2000, young Zinn’s photo accompanied TR&M’s Financial Risk gold write-up on a new way to aggregate the company’s derivatives risks across equities, fixed income and foreign exchange silos. Visibility across the enterprise in risk and cash management would distinguish Microsoft’s AHA entries over the years, though that’s by no means the only theme.

“It’s so important how treasury has used technology to get that sort of real-time visibility which allows you to actually manage risk and make decisions,” says Peter Klein, who joined Microsoft in 2002 and became CFO at the end of 2009. “That’s the philosophy in a lot of the work these guys have done. It reflects an overarching approach: How can we be innovative in our processes and in the use of technology to gain much better and quicker visibility on issues we can act on?”

“Everything has sped up in the last four years,” Zinn emphasizes. “The financial crisis forced us to question assumptions we never spent time on before.” In the forefront lately are “what if” scenarios and contingency plans for “euro land,” he says, adding that Microsoft doesn’t invest in peripheral sovereign bonds.

During the credit crisis, when accounts were frozen in Iceland’s collapsed banks, the treasury team figured out how to make payroll for employees left out in the cold by routing funds through “the Denmark contingent,” Zinn says, though he declines to elaborate further. “Since then we’ve used the same sort of strategies to make payroll in Egypt—where the ATMs were empty and the banks were closed—and in Libya, and to develop the playbook that will help us make payroll for our employees regardless of what happens in the euro zone.”

One scenario: What will happen to bank accounts in a country that opts out of the euro? “Obviously increasing the frequency of sweeps is a proactive measure,” he says. Actually, Microsoft this year takes the gold in the Cash Management category for creating a global zero balance account structure with same-day automated sweeps and just-in-time funding.

“We have a large banking portfolio in euro land. What would happen if one of the banks were nationalized?” says Zinn. “Then there are other things we are trying to track in terms of being a more strategic partner to the business.” These include thinking about how to respond to customers who ask to extend their payments and different scenarios to help Microsoft’s partners in a crisis. “Also, in euro land, we sell direct to enterprises and the public sector, not just the federal government but also the local governments,” he adds. “We’re working on that playbook now.”

The problem is that everyone’s prepared for the last crisis, Zinn observes. Speaking of which, Microsoft has also ratcheted up business continuity planning in the last three or four years. The company, whose Redmond, Wash., headquarters sits on a fault line, has developed a plan “to relocate to the other side of the mountain,” where it has a hot site for key staff.

In his office Zinn has a handset, “effectively a short-wave radio, so I’ll be able to communicate with staff if all the cell phone networks go down,” he says. “The bar is raised and you have to be more vigilant where you weren’t before.”

Meanwhile, two years ago Zinn led Microsoft’s first debt issuance, which was awarded a triple-A credit rating. The low interest rate environment makes borrowing very attractive. Even though Microsoft is sitting on a mountain of cash, a larger portion of it is overseas, as is the case for many large corporations, Zinn says. “Essentially domestic money is used to pay all your bills, like payroll, for dividends and buy backs. Currently, the money internationally is permanently invested overseas. It’s unavailable for corporate uses without paying a rather large tax.”

Investing for growth and new strategic initiatives, like the cloud for online services, and really interesting growth-oriented acquisitions, such as the recent Skype purchase, are part of the game plan, says Klein.

On a high level, Microsoft is really about delivering “compelling digital experiences for people, whether they are at work, at home, or on the go with mobile devices, which can be a tablet or a phone,” Klein says. Microsoft not only has software like Excel and Outlook, but instant messaging, corporate conferencing and web conferencing. “Skype will bring us together dramatically, extending the reach of our communications network both inside and outside the corporation and broadly across all of the modalities,” Klein says. Skype’s very low-cost video conferencing is exciting because “we think it’s going to be an increasing proportion of how people will communicate and collaborate,” he adds. “It fits into everything we have been doing.”

What’s Klein’s biggest challenge as CFO? “Microsoft is a big, important, complicated company that participates in a lot of interesting markets. When I think of my job as CFO, probably the biggest thing we do is resource allocation. I have to understand where the opportunities are and how do I most effectively allocate our resources to take advantage of those opportunities in a very fast-paced and competitive environment.” That involves partnerships and developing systems and processes “that give us insights to help make that resource allocation, and building a finance and treasury operation that can have the most impact on the business,” he adds.

Spending more time on data analysis and not on data validation allows treasury to increase its impact on the business, Zinn says. To that end Microsoft has been a leader in embracing SWIFT and its newest standard, ISO XML 20022 v.2, and promoting electronic bank account management (eBAM). Microsoft’s Operation Bald Eagle, which advances those aims, wins the silver in Liquidity Management this year.

SWIFT’s new central utility hub ensuring standardization of message formatting in ISO XML will help move things along, says Zinn. The banks need to make eBAM a priority and devote more resources to the effort, while companies need to make it clear that they are on board with the standard, he says. Microsoft’s third award, for Solution of the Year, involved working with Northern Trust and other vendors to set up a central location to host all its derivatives exposure.

While Windows 8 is in the wings, the company is looking for growth in its mobile technology with Windows Phone 7.5, which will be helpful in emerging markets, says Zinn. Xbox, whose Gears of Wars 3 game sold 3 million copies in the first week, will be moving into next-generation TV entertainment with Xbox Live. And Windows 8 tablets have been just released to developers and employees, Zinn says.

Microsoft expects to continue to develop its payment and collecting abilities in emerging markets, as it did when it began accepting local payment types in Brazil for the first time earlier this year. “The reality of the world is that no one size fits all in paying or collection,” Zinn says. “We are developing capabilities for all emerging markets and we’re going into all markets, including frontier markets where they don’t have electricity.”

Zinn says that when he first started in treasury, Microsoft was involved in credit and collections mostly with OEMS, like Dell and Hewlett-Packard. Now it’s dealing with large, medium and small businesses, opening a retail store network and collecting from other retail stores, in addition to collecting from online advertisers and users of its Xbox Live service, taking credit cards and selling 99-cent apps in various countries.

“We’ve gone from collecting from some of the people on Earth to collecting from all of the people on Earth,” he says. “If Mr. Gates gets a call from another planet, we’ll have to go figure something out.”

 

To learn more about Microsoft treasury’s use of technology, read Microsoft Marches to XML. 

To read about the company’s previous Overall Excellence Award, in 2003, see Two Steps Ahead.

 

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