As most markets around the world become increasingly accessibleto foreign companies and investors, some remain stubbornly closed.Of particular concern to corporate treasury teams, currencycontrols in certain locales continue to create barriers tolaunching or growing foreign subsidiaries. A couple of years ago,Microsoft treasury faced this situation in Brazil.

The company's Brazilian sub was growing fast. “It's a marketwith a lot of potential,” says Sunnie Ho, a senior treasury managerin Microsoft's Global Cash Management group. “But Microsoft Brazilhas an increasing number of transactions with organizations basedoutside of Brazil.” These transactions were placing a drag on theproductivity of local finance staff, and the issue was growingalong with the business.

To make an offshore payment, Microsoft Brazil had to provide itsbank with invoices and other documentation to prove that thetransaction was for one or more legitimate payables. The bank wouldreview the paperwork it received from Microsoft; then, once itapproved the transaction, the bank would withhold the appropriateamount of tax based on the type of products or services being paidfor, conduct a foreign exchange (FX) transaction from Brazilianreal (BRL) to the other currency, and settle the transaction.

As offshore payments grew to cover more than 20,000 invoices ayear, worth over $500 million, it became clear the manual processeswere unsustainable. “In addition to the staff time consumed withmanaging all the documentation, we had people manually calculatingtaxes owed and summing many invoices to get the right amount for agiven FX transaction,” Ho says. “There was a chance of human errorin this process—for transactions to be the wrong size or a paymentto not be paid on time.”

Ho says that as Microsoft prepared to support growth of theBrazilian subsidiary, treasury recognized the need to change thepayment process. “That actually came as a surprise to some peopleon the project team,” she says. “We've found that a lot of peopleoutside treasury don't understand the different cash managementrequirements in different countries. They just assume that if youhave an invoice, you pay it. But it can be a lot more complicatedthan that in a market like Brazil.”

Microsoft's treasury teamlaunched an initiative to streamline cross-border payments out ofBrazil. They organized several workshops over a four-month period,soliciting feedback both from internal teams and external banks.They documented the company's current-state end-to-end processesfrom booking invoices to payment reconciliation, as well as theexact data points that banks required before transferring funds outof Brazil. They also researched the degree to which the Braziliangovernment would allow FX processes to be automated, and theybenchmarked how other companies were handling cross-borderpayments.

All this research resulted in a recommendation that Microsoftdevelop a plug-in to the company's enterprise resource planning(ERP) system. The treasury project team turned to the engineeringgroup focused on supporting Microsoft's ERP system. “They traveledwith us to our banks and to Brazil, to understand what our optionswere,” Ho says. “It was important to have the engineering teamplugged in from the beginning, to make sure they could support ourneeds.”

The ERP plug-in that the engineering team created reports allthe cross-border payables the Brazilian subsidiary owes. “Theplug-in generates a payment file that automatically calculates thetotal amount to pay offshore,” Ho says. “At the same time, itgenerates a summary report with all the information the bankrequires to make the payment. Our ERP system has a lot of tables,and the plug-in pulls each type of information from the right tableto provide the necessary documentation for our bank.”

Now, in the middle of each month, Microsoft Brazil presents itsbank with a batch payment file and a documentation file. Thecompany would like to eventually transmit this information via XMLformat with further product development from the bank. For now,secured file transfer is the most efficient transmission methodthat is acceptable to Microsoft and the bank.

The documentation file includes the invoice amount and detailsfor each payable, the withholding tax rate, and an internalreference number for the associated payment file. In Microsoft'sERP system, the plug-in records the correct reference number foreach invoice. Once the bank confirms the payment request withMicrosoft Brazil, via either email or phone call, it completes theFX transaction and makes the payment. Later, when Microsoft Brazilreceives an electronic statement from its bank, the ERP system canautomatically reconcile invoices to the payment.

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Standardizing and automating these processes has dramaticallyreduced the staff time required to provide documentation forcross-border payments, even as Microsoft has grown its Brazilianbusiness unit. It has also enabled Microsoft to get a better handleon currency risk. “The Brazilian sub's payables are in reals,” Hosays. “That means that as a U.S. company, we have exposure everymonth to the BRL. Toward the end of each month, our team looks inthe ERP system to see how many offshore invoices are being created.Then we hedge that amount on a rolling one-month basis. By themiddle of the next month, when the offshore invoices are paid, thatclears out the BRL payable liability and we start over.”

Ho attributes the success of this initiative to the fact thatthe project team involved all affected parties, both internal andexternal, throughout the process. “Working closely with our bankwas critical in making sure this was going to work,” she says.“Coordinating with internal stakeholders was also critical. We madesure that everyone who would be impacted felt like they werecontributing to the process, so no one felt that we were imposingthis change on them.

“We also made sure to have in-person meetings with all thepeople who would be impacted,” Ho adds. “Treasury speaks in ourterms; the business and international finance groups may usedifferent terminology. On a conference call, misunderstandingsmight happen. Meeting in person meant traveling to Brazil, but itwas well worth the effort.”

Microsoft treasury built this ERP plug-in solution to supportBrazil's operations, where applicable, but Ho anticipates thatMicrosoft may utilize the same solution in other parts of theworld. “Microsoft operates in over 120 countries, through more than400 legal entities,” she says. “Brazil is not the only country weoperate in that has currency controls. If our subs in othercountries feel that the paperwork for cross-border payments is toocumbersome, we can apply to them the same methodology we'vedeveloped for Brazil.”