For much of the past year, the treasury at Microsoft Corp. has been actively pursuing a single global communications platform for its cash management. While the treasury team knew about consolidation services, such as Citigroup's award-winning TreasuryVision, Microsoft ultimately wanted something it could control in-house. The software giant began the process by joining member-administered closed user groups (MACUGs) at six banks where it did not already enjoy electronic connectivity. But before Microsoft could piece together its vision, international banking network SWIFT opened its doors to corporate members through a new program called SCORE (Standardized Corporate Environment), and Microsoft saw a ready-made solution.
Of course, Microsoft is pushing the envelope as one of the first multinationals to take advantage of SCORE and bypass MACUGs in favor of the SWIFT single direct link to the vast majority of Microsoft's 1,000 bank accounts worldwide, pulling in next-day and even intraday bank account data. "By getting electronic visibility in one snapshot of nearly all of our cash in something approaching real time, we are finding a tremendous opportunity to move that cash and make it more productive," says Microsoft's treasurer George Zinn. "We're looking at a powerful infrastructure play."
No doubt, Microsoft is creating a vision of a centralized cash management that will become the standard for 21st century treasuries–the new competitive imperative. The aim: perfecting working capital management or what at Microsoft they call "the life cycle of the dollar." Fortunately for Microsoft and other companies even less likely to build their own solution, a series of technological and standards-setting initiatives, similar to SCORE, are providing shortcuts to the kind of control and transparency over global cash holdings necessary to push the envelope on working capital management. With names like SEPA, ISO 20022, FpML, Target 2, MACUG and TSU, the new banking programs open communication lines and standardize financial transactions to move the needle on straight-through processing and real-time data flow. "This is a really exciting time," enthuses Richard Moseley, head of global transaction banking–corporates for HSBC. "We are getting closer to straight-through processing, complete visibility of all cash around the globe, the replacement of paper with electronic communication, and the evolution of sophisticated value-added services based on emerging new standards."
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Microsoft's Zinn agrees. "We're starting to see daily visibility into our accounts at banks where previously we had no visibility until the end of the month," Zinn reports. "That allows us to manage our cash more precisely."
The new technology will also provide a better framework for risk management. "In our Sarbanes-Oxley world, I can have a deficiency if someone in Turkey opens an account at a Citigroup branch without notifying central treasury," Zinn points out. "With a global view of all our bank accounts, we gain the control framework that gives us the visibility and compliance we're expected to have."
Essentially, this ideal of centralized cash management can be best described as global liquidity management limited not by imperfect knowledge about cash as it has been in the past, but only by legal restrictions and tax considerations. According to treasury experts, the standards and technologies now being developed will permit the kind of close to real-time numbers that Microsoft is beginning to realize and the kind necessary to see significant improvements in working capital management. "The biggest rewards will flow to the most centralized treasuries, and that will goad treasuries that have not yet centralized to make that move," predicts Joergen Jensen, director of treasury products for Wall Street Systems, a vendor of core treasury software for multinational corporations (MNCs.
Two recent developments are particularly significant–opening SWIFTNet to direct corporate access in January 2007 and implementation of the Single European Payments Area (SEPA) and Target 2 standards by January 2008. Neither of these initiatives separately might have been enough, but with making these available almost simultaneously, the result is watershed for the cause of centralization.
Microsoft embarked on its centralization project in the summer of 2004 with the implementation of an SAP treasury module. Microsoft started receiving reports from six primary banks that fed automatically into the SAP system for posting, reports Ed Barrie, group manager in Microsoft's treasury. "We were looking for a way to broaden our reporting coverage and found it in SWIFT, which could give us a single communications pipe with many of our banks, provided we joined the MACUG of each of those banks," he explains. With SCORE, Microsoft will get that single pipe without paying the plumber for all those MACUG joints, he adds. "That was certainly good news for us."
Having chosen SCORE, Microsoft had another major decision to make: build its own SWIFT infrastructure at a substantial cost; outsource management of the infrastructure to a bank consolidator; or use a third-party service bureau. Microsoft decided to build and own the infrastruc- ture, Barrie explains. Not every multinational will want to own its SWIFT infrastructure, he cautions. "There is hardware and software to install and configure. Each company will have to weigh the money, time and training involved and decide which approach is most cost-effective," he says.
The value of SWIFTNet depends, among other things, on the number of banks a multinational uses and the type and amount of messaging traffic exchanged with them, according to Barrie. "If you're communicating with 50 banking partners, it's a lot better to have one pipe instead of 50. If you're communicating with three, the cost may be harder to justify." The SWIFT solution for Microsoft will be both global and domestic, he adds.
While the big payoffs are still to come, Micro- soft already is seeing results. Just getting the MT940s from three banks "gives us daily visibility into bank account cash balances where we never had visibility before," Barrie says. "It lets us leverage SAP functionality for auto-posting transaction activity to the GL, replacing what had always been a manual operation with an automated operation. We have over 1,000 bank accounts, and 900 of them have been reconciled manually once a month. Now we're starting to get daily what we once got monthly. We're already saving time, and when we get most of those 1,000 accounts to post automatically, we'll save a lot of time and be using much more current information." Just treasury and a limited number of subsidiary bank accounts are configured for daily auto-posting to the GL in the first phase, but A/R transactions may auto-post and auto-reconcile in the future, he suggests.
The ROI on the SWIFT project will be modest, Zinn says, if Microsoft just switches platforms, even though the new platform offers a one-pipe solution. The big gains will come from re-engineering business processes so that the pipe is not just an efficient conduit, but a potent tool for making good things happen, he notes.
Microsoft won't be able to auto-post reports from all of its 1,000 bank accounts through SWIFTNet, but it will get most of the major ones and might use a multibank reporting service, like Citigroup's TreasuryVision, to bring in the stragglers, Barrie says. "We'll leverage multibank reporting services where it makes sense."
Microsoft is also looking for a way to consolidate "most of our financial messaging through one pipe," Barrie explains. For example, Micro- soft is backing a SWIFT proposal to report OTC derivative transactions to the Depository Trust and Clearing Corp in FpML format via SWIFTNet. "That would be a break for us," Barrie notes. "We want trade confirmations to be exchanged via electronic messages, preferably over SWIFTNet. And we want to expand our use of SWIFTNet beyond banking into investments and the capital markets. For all that, we wanted our own direct link."
Although SAP has announced plans to make SWIFT message standards native within future releases, Microsoft won't accelerate its scheduled 2009 upgrade. In fact, it likes using middleware to sit between SWIFT and SAP and get them to talk with each other because that middleware is a Microsoft product. The BizTalk Accelerator for SWIFT is an add-on component to BizTalk Server, Microsoft's middleware application. "It allows us to showcase the value of BizTalk Server to other corporates and financial institutions, as well as give Microsoft product managers real-world feedback about how the products work and where they could be improved," Barrie says. Even after Microsoft upgrades to the next version of SAP, it will still use BizTalk Server, he says.
What else is on Microsoft's reengineering agenda? Just-in-time funding of subsidiaries, for starters. "With better information and better controls, we can operate safely on thinner liquidity cushions once we connect to more banks through SWIFT," Barrie notes. "That will allow us to increase our invested cash."
And then Microsoft also has an interesting project called "payment on behalf of" disbursements, which is a refinement of the popular payment factory concept. In a payment factory, Zinn explains, the process of making payments is centralized in one or a few shared service centers, where systems are centralized and workflow is streamlined. However, the payments still come out of the accounts of the various legal entities that are paying. In a "payment on behalf of" structure, one or a few legal entities can be authorized to pay on behalf of other legal entities. When that happens, the bank accounts can be consolidated to just one or a few disbursing accounts for the whole enterprise, he explains. "With fewer accounts and greater visibility, it's easier to fund those accounts as needed and reduce idle cash," he points out.
More companies will surely follow Microsoft down the SWIFT path. At a recent client roundtable, reports Thomas Berqvist, product manager for treasury at Wall Street Systems, "We took a quick poll and asked how many were using SWIFT directly. About one-third raised their hands, mostly financial institutions. We asked how many expected to be doing it in three years, and almost every hand went up, including some small corporates."
Direct access to SWIFT could radically alter banking relationships, making companies with their own gateway freer to switch banks when they wished. "If another bank offers the same service at lower cost," Berqvist notes, "there [will not be the technology issues] to prevent a corporation from taking advantage of the lowest prices."
But for companies that don't own their SWIFT infrastructure and use a bank consolidator, the bank ties may become more binding. "It could be more costly to change a consolidator bank," Berqvist says. Using a nonbank service bureau would allow a corporation to duck the cost of maintaining its own SWIFT link and still have flexibility to change banks, he adds.
Looming behind SCORE, SEPA and the other payment and data communication initiatives is a new XML message format created by the International Standards Organization, known as ISO 20022. As global organizations like SWIFT and the EU migrate to ISO format, corporate treasuries are expecting to see big gains.
SEPA is the first large-scale initiative to incorporate ISO 20022 XML payment and collection standards and may be a catalyst to the more widespread acceptance many corporates are hoping to see, notes Karoline von Richthofen, head of corporate high-value payments, Global Transaction Banking–Cash Management, Deutsche Bank. The ISO 20022 financial messages based on XML standards will have a big impact on financial messaging and business processing, Barrie predicts. "It will provide a much greater level of granularity around transactions–richer data in an XML message wrapper. It will make it easier for us to get lots of pieces of data in a very standard format and then map that data to wherever we want it to go, and hopefully in a much more real-time manner than what is available today."
But ISO 20022 only delivers that payoff when every participant in the data chain has adopted it. "It's only as good as the weakest link," Barrie reflects. "We understand that SWIFT will continue to support its FIN message formats, but that all future development will go toward supporting ISO 20022 XML for cash management." While Microsoft will start with SWIFT FIN messages, it will be pushing its financial supply chain partners to move to ISO 20022 XML. "We'll be letting our banks know we want to move to 20022 and asking them about their plans to support it," Barrie says.
Getting better payment information means supplying better payment information, which for many U.S. treasuries means supplying BICs (bank identification codes) and IBANs (international banking account numbers) for every payment that will be made into EU countries. "Including IBANs is part of the SEPA rules," notes Walter Pickell, director of currency risk management for SunTrust Bank, Atlanta. European banks can reject a payment if there is no IBAN." Yet, U.S. corporations have been slow to adopt the use of IBANs, he reports.
"SEPA is part of a process of standardization and consolidation that should lead to significant working capital benefits," explains Naveed Sulpan, head of EMEA cash management in Citigroup's global transactions services unit, "but each company will have to develop its own strategy based on where it is today, where it wants to go and the resources it can provide for managing change." Cheaper payments across the euro zone is the quick fix many treasurers are expecting on Day One. "SEPA is important," Zinn says, "when it helps us reduce costs for cross-border payments and helps us migrate to the new business drivers and payment methodologies that are emerging in Europe."
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