Working Capital Programs That Work Exceptionally Well

As corporate debt becomes more expensive, working capital management will become increasingly important. Some organizations have let working capital performance slide since interest rates hit historical lows. Debt is cheap, and companies may see little benefit in holding excess cash. But now that interest rates are heading slowly upward, many companies are finding that the time is right to place a renewed emphasis on improving their working capital management.

The winners of this year’s Alexander Hamilton Awards in Working Capital Management demonstrate the benefits of focusing resources on improving the cash conversion cycle, the crucial role of technology in achieving those benefits, and the importance of well-thought-out project management.

Both consumer lender DFC Global and communications services conglomerate Omnicom Group operate diverse, and widely dispersed, businesses. The key to improving working capital management for both companies was consolidating data from across the company. At DFC Global, implementation of new treasury management and loan management systems enabled the automation of many banking processes, which streamlined internal operations and accelerated the company’s funding of customer loans.

Omnicom Group operates more than 1,500 separate advertising, public relations, and similar agencies—many of which share clients. The company undertook its award-winning initiative with the understanding that a corporate view of working capital, across agencies, would enable better decision-making and more informed negotiations with clients. Treasury convened a cross-functional team to perform a needs assessment and to plan a database that would hold a crucial set of metrics for all the company’s clients.

“Being able to roll up all this information enables managers at every level within Omnicom to assess the performance of each individual client, in order to spot performance issues that need to be dealt with,” says Dennis Hewitt, group treasurer. “This project has added considerable value to the overall corporation by helping us allocate capital to its most effective uses.”

In the Microsoft Worldwide Online Credit Services (WOCS) group, both technology and working capital management are always front and center. But that team pushed the envelope even further when they implemented a new system that automatically assigns collectors’ daily workloads based on customer credit risk scores that it generates by pulling data on customer payment behaviors and other characteristics from the corporate ERP system. The project is a showcase not only of the potential of sophisticated technologies, but also of the power of cross-functional teamwork.

“As a company, Microsoft has a strategy of moving toward One Microsoft,” explains Gladys Jin, group credit manager for North America. “Everyone from different teams is working toward the same goal of making better technology products and better serving our customers. This project got so much support because the project clearly supports the goal of One Microsoft.”

The potential impact of a working capital management improvement initiative makes it a project of interest to groups throughout even the largest of companies. Congratulations to Microsoft, Omnicom Group, and DFC Global for bringing these major cross-functional initiatives to fruition!

Centralizing Data Boosts Transparency

DFC Global is a financial services business that makes payday loans and other small consumer loans, both online and through storefronts in eight countries. The company has been in business for 30 years. For the first half of that period, DFC Global focused on domestic lending in the United States. Then it expanded into Canada, and subsequently into the United Kingdom. Then, several years ago, the business evolution went into overdrive.

“Four or five years ago, we purchased the first of two online lenders,” explains Eric Erickson, senior vice president and corporate treasurer. “That’s also when we started looking at diversifying by geography. We entered—via acquisition—Sweden and Finland, then Spain and Poland.”

These acquisitions left the company with a disjointed view of its financials. Back-office systems for accounting, reconciliations, loan management, payments, collections, and cash management differed between countries and between retail and online divisions as well. The systems didn’t communicate, leaving a wide gap in corporate managers’ views of performance.

“We did not have a treasury workstation, so we did not have real-time visibility,” Erickson says. “All our companies were running on different G/L software, and the businesses submitted their financial data to corporate treasury on a monthly basis. We could pick up the phone and call to ask where they were in terms of liquidity or working capital, but otherwise we found out only once a month.”

This opacity made the company’s core business of funding consumer loans extremely challenging. Looking to streamline and standardize collections, as well as funding of loans to customers, treasury launched an initiative to increase the company’s insight into its liquidity and working capital positions. They gathered input from accounting, tax, compliance, IT, operations, legal, and marketing. Marketing was included because treasury anticipated changing the payment options available to customers.

A cross-functional team initiated an RFP process for a new treasury management system. After rigorous analysis, DFC Global chose Kyriba. “We realized that not only could the workstation give us daily visibility into global liquidity, but we could also leverage it to serve as a payments engine and a reconciliation tool for the company,” Erickson says. “We had been using online bank portals to fund our customers. But we saw that we would be able to set up the treasury management system to function as a pipe between our different in-country loan management systems and our banks. Setting up Kyriba as our payments engine streamlined our entire payments process.”

At the same time it was implementing the Kyriba treasury management system, DFC Global was also working to consolidate loan management systems companywide, and to rewrite its internally developed point-of-sale software. Project management was crucial.

“We were leveraging the same group of people to contribute to three different initiatives simultaneously,” Erickson says. “We needed skilled project managers to ensure there was communication and coordination across the projects, and that there wasn’t scope creep. The project managers were responsible for making sure that the projects weren’t siloed, yet each project had clear lines of responsibility, clear objectives, and a clear scope.”

One individual within each function served as a dedicated project manager for the 18 months of the initiative. “This wasn’t their side job that they did at night,” Erickson says. “Making sure these projects were implemented correctly was a large part of their day-to-day responsibilities.”

DFC Global applied for, and received, a SWIFT Bank Identifier Code (BIC). The company connected its Kyriba system to the SWIFT network, facilitating a direct connection between DFC Global and each of its banks. This automated a great deal of financial data management and reporting, reducing staff time devoted to liquidity and working capital management and accelerating the funding of consumer loans.

“These direct connections with banks have shaved time off how long it takes us to send money to our customers,” Erickson says. “For example, in Canada all our loan funding previously had to go through one bank. Then that bank would distribute to our customers through a local clearinghouse. Now the funding happens pretty much in real time.”

The company has also accelerated processes on the back end. Recurring payments to vendors are now automatically generated through a direct feed from the G/L to the treasury management system. Even processes around one-off payments are automated, once the payments have been initiated in the Kyriba system.

But the solution’s most striking benefits may be its improvement in the realm of liquidity and working capital management. “We have a common global platform that is receiving balance reporting daily from our business units, so we have daily visibility into cash,” Erickson says.

Erickson attributes much of the project’s success to its executive champion, the corporate CFO. “If a project like this is the idea of one person, and that person tries to ram it through each department, you’re going to get resistance,” he says. “But if you pick a person in each functional area to represent the project, and those people understand the end-state vision of where you want to go, that alleviates a lot of the pushback you might otherwise encounter. Doing that requires resources, because you have to free up those people’s time to work on the project. And ultimately getting the resources to accomplish these things requires vision on the part of executive management.”

Companywide View of Working Capital Performance

Omnicom Group is a global marketing and communication services holding company. Its 1,500-plus advertising, public relations, and related agencies serve more than 5,000 clients in virtually every industry sector around the world, bringing in over US$15 billion in revenue last year.

Working capital is a significant part of Omnicom’s balance sheet. In early 2014, Omnicom executives saw an opportunity to further improve the company’s existing working capital management program by consolidating client information across its agencies.

Omnicom is a decentralized organization, in which billing and collections are mostly managed at the agency level. Historically, much of Omnicom’s working capital management focus has been on agency-level metrics. However, because a number of major multinational clients maintain separate business relationships with many different Omnicom agencies, the company’s decentralized organizational structure had often clouded managers’ visibility into performance at the corporate level.

“We had considerable information on some elements of working capital, such as accounts receivable aging,” says Dennis Hewitt, group treasurer. “But we couldn’t see the amount of WIP [work in process], accrued liabilities, or accounts payable related to a specific client. We wanted a consolidated view of third-party costs, companywide, to understand how much capital we had committed to a specific client, in order to more effectively and more efficiently manage working capital at the agency, network, and overall group level.”

First, the treasury team launched a needs assessment. Omnicom’s CFO, corporate finance function, agency-level finance functions, IT, and other business resources participated. Through this process, they determined that consolidating working capital information from every business unit into a centralized data warehouse would significantly improve management’s view of the corporate working capital position and would provide a significant return on investment.

A cross-functional team worked together to plan the database which would hold information on accounts receivable aging by client and on how long specific items had been in WIP. They wanted to include accrued accounts receivable, and accrued vendor liabilities, by client. They wanted visibility into client advances and unbilled accounts receivable. They also wanted statistics on how quickly invoices were getting into clients’ hands. And they wanted to compare their accounts receivable balances, companywide, for a given client with the credit limits they’d set for that organization.

“By having this information at the lowest level as well as at each of our operations, we could begin to create more efficient use of the working capital components,” Hewitt says. “Measuring capital against the profitability of a client would enable us to determine how best to improve our return on our investment in that client. We wanted to be able to manage terms more efficiently across all of our operations with a given client, to unify working capital and billing processes. We also wanted to reduce the time that elapsed for each invoice, from the end of the project to the client’s receipt of the invoice.”

Omnicom already used Hyperion Financial Management for reporting and consolidation. The project team extended the company’s existing Hyperion solution to add the appropriate working capital information. Then they developed reports in Cognos that pull data from Hyperion and from the company’s Carixa credit management system. The solution went live in July 2014.

Now managers can look at all the elements of working capital by client, by agency, by geographic region, or by business unit. Accounts receivable staff can focus more precisely on the clients in which Omnicom has its largest working capital investment. Corporate management can look at regional differences in resource allocation for a particular client, including differences in asset aging, to find opportunities to more uniformly enforce the terms and conditions in client contracts. And sales and procurement can use information about the company’s working capital investments as they negotiate pricing and terms with both vendors and clients.

“Being able to roll up all this information enables managers at every level within Omnicom to assess the performance of each individual client, in order to spot performance issues that need to be dealt with,” Hewitt says. “Having more information and being able to direct our efforts to the appropriate areas lets us do a better job of managing the capital we already have. This project has added considerable value to the overall corporation by helping us allocate capital to its most effective uses.”

The numbers support this claim: Despite ongoing pressure from major multinational clients to extend terms, Omnicom has reduced the total amount of working capital that it commits to clients on a global basis.

Treasury manager Rob Monk attributes the success of the project to a widespread buy-in throughout the decentralized organization. “There was very clear communication down through the organization that this was something the CFO saw as valuable,” he says. “We also gave the agencies an opportunity to provide feedback and ask questions. That enabled us to get momentum in terms of getting the message out on the importance to the wider business of what we were trying to achieve, resulting in buy-in and a broad acceptance across our agencies of these very important changes to our working capital program.”

Automation Improves Collections Efficiency and Effectiveness

Traditionally, Microsoft has mostly done business with large companies and large government entities across North America and Europe. But as technology and global markets evolve, the software giant is adapting. It’s putting more emphasis on doing business in emerging markets in Asia, Africa, and Latin America, and it is shifting from selling primarily enterprise licenses to doing more selling on a subscription model to consumers and small to midsize businesses.

These changes mean that Microsoft’s Worldwide Online Credit Services (WOCS) team is playing an increasingly important role in collection of the company’s revenue. At the same time, the group’s task has been complicated by the fact that more and more customers need to pay in their local currency, whether that’s the Russian ruble, the Singaporean dollar, or the South African rand—a trend that has implications for the company’s cash management, banking infrastructure, and credit services.

Two years ago, the WOCS group took a step back and evaluated how it needed to adapt as an organization to this changing environment. It started by initiating a large RFP process to consolidate its global credit management with one outsourced service provider. Microsoft selected Accenture to execute all its processes around collections and account reconciliation for the global online services business’s accounts receivable function.

Then WOCS set out to redesign the company’s cash management, credit, and collections processes to optimize both process efficiency and customer experience in the new global payments landscape. On the collections side, WOCS managers worked with Accenture and with SAP to develop functionality by which Microsoft’s SAP ERP system automatically generates work lists for the Accenture collections team.

“Each collector has an automatically generated list in the CRM [customer relationship management] interface that assigns customers to them and ranks the customers so the collectors know how to prioritize their workload,” explains Gladys Jin, group credit manager for North America. “Each customer is rated on 7 to 10 factors, including the risk of the customer’s country of operation, the customer’s payment history, whether the customer has disputed invoices in the past, whether the customer has any delinquent accounts with us, and—if so—how far past-due they are and how many dunning letters the customer has been sent. All this information is captured in SAP, and every day SAP runs the scores and populates the lists that tell the collectors who to call.”

The SAP system also generates dunning notices, customer correspondence regarding payment. The WOCS team developed templates and business rules for this automated correspondence. Once an account becomes overdue, the system begins using the templates to create dunning notices, which mail out automatically. Which type of notice a particular customer receives depends on how far past due the invoice is, what type of product was purchased, the customer’s propensity to pay, and other factors.

In addition, the system stores customer contact information, which saves time for collectors. “Before we had this interface, collectors would have to hop here and there to gather all the information they needed before they could call a customer,” Jin says. “We kept most collections information in an Excel file. Collectors would look at the Excel file, but then they would also need to log into SAP to figure out whether the information in the Excel file was up to date. Then they would log into another system to get the most accurate contact information for the customer. It would take them 10 minutes to prepare for each call. Now that they just have to look at one interface, we’ve reduced that preparation time by at least 50 percent.”

This helps improve customer satisfaction by ensuring that collectors are contacting only the customers who actually present a payment risk. For example, a customer that always pays on the second Friday of the month might not receive a call about a past-due invoice until the second Friday is past as well. Another element of the project—development of a customer portal, through which customers can see their invoices, payments, and statements—has further benefited customer satisfaction.

“Having everything concentrated in one system for our collections team makes the situation much simpler and less time-consuming,” says Jose Luis Marti, director of WOCS treasury at Microsoft. “It also eliminates the likelihood of errors that exists when you’re managing information in a lot of different spreadsheets.”

Cash application in Microsoft’s online services business has benefited from the initiative, as well. WOCS enhanced the interface between its SAP system and its transaction banks and began to automatically receive intraday bank statements every two hours. They also enhanced the algorithm for automated clearing of invoices in the SAP system. These two changes increased the automated matching of payments to invoices from about 30 percent to 52 percent. And for those payments that are not auto-matched, having so much information at their fingertips helps the credit and collections team clear invoices more quickly and more efficiently.

All told, the initiative has significantly reduced the proportion of Microsoft’s total accounts receivable that are more than 60 days past-due. It has also improved working capital, giving the company faster access to the cash those receivables are generating.

“Each of these sub-projects has been a really collaborative effort across multiple teams and across different regions,” Marti says. “We’ve worked with IT, procurement, FP&A, tax, and engineering. Our accomplishments are not the accomplishment of just the WOCS or treasury function. They’re the result of hard work by multiple teams across Microsoft.”

Adds Jin: “As a company, Microsoft has a strategy of moving toward One Microsoft—so everyone from different teams is working toward the same goal of making better technology products and better serving our customers. This project got so much support from different teams within the company because the project clearly supports the goal of One Microsoft.”