ahead. But somehow we keep going, and smart people keep coming up with answers

to daily hurdles.

On Oct. 2 and 3, 170 executives braved the airways and roadways to gather at

the Parker Meridien Hotel in New York to honor some of these very smart people

in the field of treasury at Treasury & Risk Management's annual Best

Practices Summit. Despite the fact New York was still patrolled by National

Guardsmen and bomb scares were practically a daily occurrence, the need for

community and knowledge-sharing superceded fears since next year Best Practices

may have to be even that much better to overcome challenges of a scope that we

may not even be able to imagine today.

OVERALL EXCELLENCE

Best In Show

Microsoft Corp. wins overall excellence

Perhaps not surprisingly, technology was the common thread running through the

accomplishments that won Microsoft this year's Alexander Hamilton Award for

Overall Excellence in Treasury Management. Microsoft's treasury also walked off

with awards in four out of the eight categories, taking the gold in cash

management, financial risk management and technology and the silver in

insurance.

Brent Callinicos, Microsoft's treasurer, says that a few years back, when his

group looked at the rapid growth in the company's assets under management and

the complexities it faced in cash management and accounting, it realized that

throwing people at the problem wouldn't work. Technology was going to get

us there, he says. People are not scalable, technology is.

Microsoft's treasury has a definite method for deploying its technology

resources. Rather than building the systems it needs from scratch, it adapts and

links together systems that it buys from vendors.

Linking Vendors' Systems

Treasury system vendors aren't offering any silver bullets, Callinicos says. So

instead of seeking perfection, his group starts by looking for systems that are

flexible and customizable. (He gets in an ad at this point, noting that

the Microsoft stuff is the most flexible.) Then treasury's IT team uses hooks

and ladders and band aids to get the system [to] speak to the other systems it

needs to speak to

Attendees at Treasury & Risk Management's Sixth Annual Best Practices

Summit were green with envy when they heard that Microsoft's treasury has a

31-person IT team. But Callinicos argues that even a treasury with just two

technology people has more manpower to bring to bear on its IT needs than any

vendor is likely to provide. His message to treasurers who wait for vendors to

fit systems to their needs: You're going to be waiting a long time, he

says. Buy from them and build.

He cites Microsoft's move to a foreign exchange system from the Excel

spreadsheets it had been using in the forex area as an example of a successful

customization.

Everybody said, ?'We don't want to lose the flexibility we had in Excel,

Callinicos recalls. So treasury bought a foreign exchange system and then built

Excel uploaders and downloaders onto it. From the traders' standpoint,

they're still using Excel, he says. From treasury's perspective, the system

eliminates dual entry of data and provides better data control. We've had

vendors come in who were blown away by what we've done with their systems, he

adds.

Callinicos says that getting the various systems to communicate with each other

is the key element for him as treasurer, because that provides the necessary

overarching view of the company's activities that he needs to monitor risk

exposure. If you're not looking at everything in a combined fashion, you're

missing risk, he says. And surprises are never a good thing. My goal is no

surprises.

In the seven years that Callinicos has worked in Microsoft's treasury, the

department has gotten more involved in working with the company's businesses, he

says. Treasury was much more of an island seven years ago. We weren't

there as a partner in the business, we were taking money from the business and

investing it.

Treasury still operates as the company's bank, but nowadays we do many more

things that advance Microsoft's core business goals, he says.

He cites treasury's foreign-exchange programs. Microsoft sells in dollars to its

distributors, and therefore isn't subject to foreign exchange risk. But the

distributors do face foreign exchange risk if their local currency is devalued.

Since Microsoft depends on them to distribute its goods, treasury works with the

company's subsidiaries to hedge that forex risk on behalf of the distributors.

If there is a devaluation and we make money, we distribute that money to the

vendors, Callinicos says.

Marketing the Expertise

Treasury is currently considering whether it might be able to help Microsoft's

businesses by using some of the $34 billion of cash on its balance sheet to

provide customer financing.

Although treasury's goal traditionally has been to get the best return on cash,

?if we can find a way to offer credit to the customer, and thereby drive

incremental sales, that's much better for the company, he says.

It has taken some marketing to get other parts of the company to recognize the

expertise residing in treasury, he says. The flip side of the coin is that

treasury has to keep on top of what's going on in the rest of the company in

order to get its two cents in as new businesses are put together.

We've got to be joined at the hip to the business, because if you learn about

things after the fact, you don't get the opportunity to make it better or make

it less risky, Callinicos says.

CASH MANAGEMENT

Net Gains

Microsoft corp. wins gold in cash management

For many years, the bulk of Microsoft's revenues came from the Compaq's and

Dells of the world. But in recent years, the software giant has set off in

different directions and now sees a big chunk of its future on the Web with

Internet-related products for consumers and small businesses around the globe.

That means not only new ways of marketing, but also new ways of collecting

revenues. And Microsoft's treasury hasn't missed a beat.

Realizing that the new marketplace would mean a variety of payment methods,

particularly when dealing with markets outside the United States, Microsoft's

treasury set off to develop an online payment platform that could handle all the

potential payment options for online real-time buyers. The result: NetCollect,

which is making its debut at Microsoft just as the company rolls out its new

line of Internet-related products in November.

In spite of the vast universe of payment methods available globally, treasury

wanted all payments to flow through a single platform because of the

efficiencies it would provide in areas like reconciliation and systems support.

To achieve that, the software company chose one banking partner, Citibank, which

provided a single point of entry for all payment types, including consolidating

access to its three regional card-acquiring platforms in the U.S., Europe and

Asia. Treasury will be using an existing group at Microsoft, e*Bis, to serve as

the gateway for all data going to and from Citibank.

Because the treasury team was able to accomplish all this before the rollout of

the product line, there was opportunity to break down the silos, as Jeanne

Mendez, Microsoft's assistant treasurer, puts it, and to persuade business units

at both Microsoft and Citibank to adopt it. We've been selling it over and

over, and our colleagues at [Citibank] have been selling it over and over,

Mendez says. You really do get the best solutions when people stop being

territorial or parochial and start thinking about enterprise-wide solutions.

SILVER:

EDS Corp.

Restructuring its treasury operations saved EDS money and increased efficiency.

But it also allowed EDS's treasury operations team to reposition itself as an

adviser on liquidity management and foreign exchange to other parts of the

company.

These days treasury staffers spend approximately 20% of their time processing

transactions and as much as 55% of it on consulting and analysis. Before

restructuring, those numbers were almost reversed, with 45% going to processing

and a mere 22% to consulting and analysis.

Subject-Matter Experts

David O'Brien, assistant treasurer, said shifting treasury's role required the

leadership and support of senior management and a change of attitude on the part

of employees. Staff members now think of themselves as subject-matter experts,

not transaction processors, he says.

Providing consistently high-quality service is key, O'Brien says. You do

one job well and the word spreads. He notes that treasury operations now

get an average of 15 calls weekly from other parts of EDS requesting advice.

The restructuring also allowed EDS to consolidate its banking, reducing the

number of institutions by about one-third from the 193 banks it was using in

late 1999. More than 55% of EDS's business now goes through three global banks.

EDS also reduced its average daily bank balances as it cut back on bank accounts

and implemented zero-balancing and netting techniques.

EDS's treasury restructuring cut costs, shifted focus

Before

16 full-time employees

1,100 bank accounts

Average daily cash balance: $575 mln

Annual bank fees of $3.333 million

After

9 full-time employees

773 bank accounts

Average daily cash balance: $235 mln

Annual bank fees cut by $500,000, or 15%

BRONZE:

GMAC mortgage Corp.

In some ways, GMAC Mortgage Corp.'s solution to improving customer service and

realizing savings may seem a bit counter-intuitive in this Internet age. But

increasing the use of company checks in loan closings?EUR?to 46% from 17% is

cutting expenses by $1.5 million this year.

Traditionally, GMAC Mortgage, which is headquartered in Horsham, Penn., provides

funds for mortgage closings with official bank checks, Federal Reserve wire

transfers, and company checks produced on dot matrix printers at its 11

processing centers. But about one-fifth of payments made by bank check or

Fedwire were mishandled or misrouted. In fact, treasury had to devote a

full-time employee to handle inquiries and problems related to these types of

payments.

Checking Check Fraud

Still, company checks had a downside too: The processing centers' use of

preprinted check stock left GMAC more vulnerable to fraud. The solution? First,

improve the error rate on bank checks and Fedwire. GMAC's treasury did this by

by interfacing its origination system to the disbursement system for bank checks

and wire transfers. Next, GMAC tried to reduce its vulnerability to fraud. It

provided field offices and closing agents with laser printers connected to a

central system that reconciles accounts daily rather than just at month-end. The

laser-printer system reduces GMAC's vulnerability, because it eliminates

preprinted check stock, and the checks are drawn from an account that has

positive pay.

CREDIT RISK MANAGEMENT

Collectibles King

UOP LLC Wins Gold in Credit Risk Management

When UOP LLC, the leading provider of process technology for the refining

industry, revamped its receivables process in 2000, it discovered that many of

the obstacles to prompt payment originated from within UOP itself rather than

with reluctant customers.

Certainly, there aren't many corporate clients rushing to pay their bills in

the first 30 days. But we found a lot of defects in our own revenue chain, says

Treasurer George Davidson. Among them: improper invoicing, systems problems

related to the company's adoption of SAP software system and a company wide lack

of appreciation for the time value of money.

UOP's receivables problems first surfaced in 1999 during the aftermath of the

Asian financial crisis. Crude oil prices had been plummeting for the past year

or so, and an over-built paraxylene market caused its customers to put projects

on hold. The situation was exacerbated by the problems caused by the transition

to the SAP system.

The $1 billion-revenue company, based in Des Plaines, Ill., decided to adopt Six

Sigma, a set of tools for analyzing and improving processes made famous by

legendary General Electric CEO Jack Welch. UOP applied the methodology in an

examination of its entire billing process, from presale complications regarding

such items as credit checks and decisions about letters of credit to late-stage

hurdles, such as dispute resolutions.

Treasury worked on getting UOP's three business units to realize the importance

of cash flow and take responsibility for collecting on outstanding bills. To

keep the units focused, monthly meetings between the CFO and vice presidents of

the business units were held, as were biweekly chats between the credit

department and the units' sales directors. By the end of 2000, UOP had cut its

outstanding receivables to 61 days from 77 in the first quarter.

In another plus, Davidson says, the receivables problem pushed treasury beyond

its traditional focus on raising money and managing risk and got it involved in

dealing with the revenue chain, an area in which it had once only been

peripherally involved.

SILVER:

Providian Financial Corp.

Providian Financial, a San Francisco credit card company that targets consumers

with spotty credit, overcame a data shortfall to assess the outlook for

collections in an economic slowdown, a timely project given the third quarter

credit losses it reported last month.

The prospect of a recession made it critical to check whether Providian's

traditional method for estimating losses would hold if the economy weakened,

says Treasurer Richard Laiderman. But Providian's credit card business is fairly

young, and financial information on its 17 million customers goes back only 10

years too short a span to provide the data for the kind of analysis used to

estimate future losses.

So Providian assembled a team that worked with consultants on ways to get enough

data points from Providian's data to make a sound forecast. They assembled

large, statistically reliable groups and used sampling techniques to get

thousands of data points. The group then looked at Providian's experience with

customers in areas that went through regional recessions in the 90s, such as

Houston and Hartford, to measure how the rate of charge-offs was affected by

weak economic conditions. With those results, it used nationwide post-war

economic series to simulate how the portfolio would have performed during that

period. The analysis showed that Providian had more than enough capital to cover

losses.

CORPORATE FINANCE

Capital Makeover

Avon Products Inc. wins gold in corporate finance

Avon Products took the gold in corporate finance this year for a leveraged-stock

buyback in 1999 and a zero-coupon convertible bond in 2000, two bold moves that,

together with an operational turnaround, not only helped boost shareholder

return by 48% between 1999 and the end of 2000, but also dramatically cut the

company's cost of capital.

When pessimistic fourth-quarter 1999 earnings forecasts drove Avon's share price

down to $25 from its 52-week high of $55, Avon decided to take advantage of its

high credit rating and underleveraged balance sheet with an $800 million buyback

of its own stock. To do the deal, the company used a bridge facility, and then

$500 million in five- and 10-year bonds that it later swapped to floating rate.

The buyback initially generated a negative book equity level, but Avon bet the

markets would recognize the true value of its brand and sales system.

The repurchase generated a 2 cents per share earnings increase in the fourth

quarter 1999, and shares rebounded to $48 by the fourth quarter 2000, a $400

million gain on the repurchase. Avon kept its single-A credit rating, and the

floating-rate swaps have increased in value to $53 million for year-to-date

2001.

But the company didn't stop there. In July 2000 Avon issued $400 million in

zero-coupon convertible bonds yielding 3.75% with a 41% conversion premium, the

highest of any convertible in nearly two years.

Thinking Boldly

Avon's total shareholder return for 2000 was 48%, versus -9.1% for the S&P

500 Index. Given this year's market collapse, even its -1.1% return this year

through Sept. 26 looks great compared with the S&P's -23% in the same

period.

We learned that we can be bold in our thinking, says Treasurer Dennis Ling.

What we did was unconventional we increased debt significantly and maintained

our credit rating. And by buying back stock, we were able to increase

shareholder value despite reducing shareholder equity to negative levels.

SILVER:

Whirlpool Corp.

Whirlpool's decentralized approach in late 1999 to analyzing fixed-asset

financing was a problem. Inconsistency across the organization meant

transactions were less than efficient. A decision's impact on other key

financial ratios was rarely, if ever, taken into account, nonfinancial elements

went entirely unaddressed or were seriously underweighted in decisions, and new

financing structures were often adopted without being widely understood.

What was needed, management decided, was a centralized analytical process that

could be used to review fixed-asset acquisitions, identify and define objectives

and benchmarks and take the subjectivity out of decision-making. So treasury

huddled with the real estate, tax and accounting units and consultants from

Jones Lang LaSalle to create a cross-functional solution using an Excel-based

evaluation model. A prime goal: Design a program easy enough for managers

without any specialized financial skills.

Now the process of deploying capital resources and applying nonfinancial

criteria in decisions for the appliance maker with more than $10 billion

annually in revenues is consistent, centralized and efficient. And treasury has

become the focal point for project financing, with appropriate input from other

functions and units throughout the organization.

BRONZE:

American Water Capital Corp.

For years, American Water Works allowed its 25 wholly owned utility subsidiaries

in 20 states to maintain their own long-term and short-term debt financing

programs. Each used a single bank for short-term loans, with long-term financing

sold through private placement. But while capital needs were expected to keep

rising, the company's relationship banks began tightening credit in 1999 and

pushing the subsidiaries into fee-based services. At the same time

private-placement investors were losing interest too.

United We Save

To escape this administrative and logistical nightmare, the company created

American Water Capital. By aggregating its subsidiaries' borrowing needs in one

financial unit, American Water could broaden its capital-market access and

negotiate better pricing based on volume.

The strategy, which replaces the 29 individual lines of credit the units had

previously, is paying off. In June 2000 American Water Capital negotiated a

one-year, $600 million syndicated credit line with 12 banks. The pricing is

better, to the tune of some 23 basis points on average. Multiple fee-based lines

would otherwise have cost the utility company an additional $665 million.

American Water Capital entered the commercial paper market as an A2/P2 issuer,

and its initial CP issuance in September 2000 further reduced unit borrowing

costs.

INVESTOR RELATIONS

Good Neighbor

Robert Wood Johnson University Hospital wins Gold in investor relations

As a not-for-profit hospital, investor relations wouldn't seem to be the sort of

topic that should weigh heavily on the minds of Robert Wood Johnson University

Hospital's treasury department. However, the New Brunswick, N.J.-based teaching

hospital, which took in $70 million in untaxed profits during the last two

years, fashions itself more like a business than a not-for-profit and thus felt

it was important to mount an investor-relations effort to manage the various

stakeholders with a financial interest in the hospital.

As a not-for-profit hospital, Robert Wood Johnson pursues a different corporate

purpose than for-profit organizations, says John Gantner, the hospital's

treasurer. However, we are convinced that we can better pursue our

not-for-profit mission by challenging and improving our business processes.

To be sure, the hospital's investors aren't like a traditional

corporation's typical shareholders. They include federal, state and local

governments, doctors, lenders and donors and the broader community at large.

None of these people owns equity in the hospital; none expects the hospital to

operate profitably. However, all share an interest in its success because they

give it private or public funds, because they work there, because they had their

heart bypass surgery there, or because they live in the neighborhood's catchment

area. At the heart of the hospital's efforts is the year-round dissemination of

information that culminates with an annual meeting held every May at which

donors, bankers, doctors, legislators and the general public gather to get

progress reports on the hospital's activities.

SILVER:

MBIA Corp.

Call it a confluence of unfortunate events that sank shares of MBIA Corp., the

nation's largest financial guarantor of bond transactions, by 50% between 1998

and early 2000. First, there was a shakeup in the executive suite, then a

slowdown in business with the imposition of stricter underwriting guidelines.

Finally, bond issuance fell. Further, the Armonk, N.Y.-based company was hit

with what turned out to be the industry's largest loss. Under the leadership of

CFO Neil Budnick, MBIA had to act fast. First, Budnick moved to insulate the

company from potential losses on transactions that it insured. He also mounted a

public relations campaign aimed at quelling investor worries. Investor meetings

and one-on-ones became the norm. Wall Street analysts and investors got more

information from the company, which helped turn the tide in MBIA's favor,

allowing its stock price, despite the volatility in the market last year, to

return to pre-crisis levels.

TECHNOLOGY

Tech Tonic

Microsoft corp. wins Gold in technology

Microsoft put technology to work in 2000 to automate three treasury areas where

clerical tasks were soaking up too much staff time: tracking subsidiaries' cash

flow forecasts, administering bank accounts and reporting on investments. Fred

Riedman, group program manager at Microsoft, says the key to successfully

implementing a technology project is starting with a clear, crisp understanding

of what the business really wants? from the project.

A cash flow forecasting tool was the most complicated of the projects.

Previously, more than 100 subsidiaries had e-mailed monthly cash flow forecasts

to treasury's cash analysts, who compiled them manually. The information now

flows in through the forecasting tool, located on a server in Redmond. It can be

accessed worldwide without installation of software on users' desktops. The tool

resembles Excel, which means little, if any, training is necessary. With it,

cash analysts can run consolidated reports and calculate average monthly

expenses to see whether subsidiaries are holding too much cash. All forecasts

are provided in either dollars or the local currency, with the tool making all

the necessary conversions. Microsoft estimates the tool saves cash analysts 30

hours a month.

Another time saver, the Bank Account Administration Tool, eliminates the

drudgery of keeping tabs on more than 800 accounts Microsoft and its

subsidiaries maintain. It reduces the amount of paperwork and person-to-person

contact on the most elementary functions. For instance, users can submit

requests to open and close accounts and update signatures on the tool's front

end on Microsoft's intranet, and its workflow engine guides the requests through

the approval process.

Likewise, fewer trees are dying because of the company's portfolio management

group's new PMG Web site. Instead of reams of printed data, senior management

can get real-time updates on Microsoft's investment portfolio. Its Digital

Dashboard lets users define what information they need and then delivers it to

them. The group has cut time to produce reports by 90%.

SILVER:

Noble Drilling Corp.

Noble Drilling's consolidation of its U.S. and U.K. payment systems is on track

to save the company $78,400 in bank fees in 2001, or about 37% of what it had

been spending. The rationalization by the oil and gas services company also

allowed Noble to cut full-time staff by more than half.

Based in Sugar Land, Texas, Noble was making 10,000 payments a month out of 52

bank accounts when it decided to consolidate. Working with Wells Fargo, it set

up a system with planning software provider SAP to generate one monthly

electronic payment file formatted in IDOC (Intermediate Documents), which

resembles EDI (Electronic Data Interchange).

Separate Files

Wells Fargo then breaks the payments down into separate files depending

on whether they're to be made by check, ACH, wire transfer or as low-value

payments, a system that resembles direct deposit. Moore Check Printing then

prints and mails checks, but Noble has the option of having checks sent to it

when additional documentation is needed. Noble is now implementing the payments

system worldwide.

Impact of Noble Drilling's payments consolidation

Before

Annual cash management fees of $211,200

52 bank accounts

5 full-time employees doing payment and reconciliation

5 banking interfaces

After

Expected savings of $67,584 in 2001

27 bank accounts

2 full-time employees doing payment and reconciliation

2 banking interfaces

BRONZE:

Manheim Auctions Inc.

Manheim Auctions, which auctions used vehicles at 116 different sites, used the

Internet to let each auction site process its own payments to its various

consignors, including auto makers, rental car companies and leasing companies.

Atlanta-based Manheim, a subsidiary of Cox Enterprises, saw the opportunity to

decentralize payments when its bank, First Union, launched a Web-based ACH

origination system. Before this, Manheim had a system that required all its

auction sites to send payment instructions to a central treasury. Because

Manheim is usually required to pay its consignor by the end of the second

business day after a car is auctioned, the central treasury's staff was swamped

with as many as 135 ACH payments daily. Manheim began with a pilot program

involving two auction locations with large payment volumes. It then expanded the

use of the Internet site to the rest of its locations.

Getting the auction locations to process payments themselves freed up 15 hours

of treasury staff time a week. It also increased accuracy: Manheim now corrects

just one or two payments per month, down from two to three corrections a day

under the old system.

UNDER $500 MILLION GOLD:

Bar-S Foods Co.

The volatility of processed-meat prices meant the order entry clerks at Bar-S

Foods were spending a lot of time checking with the sales force before accepting

customer orders to ensure the pricing matched what the sales staff had told the

customer.

Home-Made Solution

The solution: Build a software system that would allow orders to be checked

automatically with sales before loading them into the company's order processing

system.

Bar-S, a privately owned company in Phoenix, Ariz., with about $400 million in

sales, wasn't able to find suitable software on the market. So its information

technology staff put a system together using RemoteWare from Xcellenet,

Microsoft's Visual Basic and the Access NFS Gateway.

With the system in place, 75% to 80% of all orders are being handled

electronically, and Bar-S was able to cut its staff of order entry clerks

significantly.

David McEldowney, manager of systems development at Bar-S, says the next step

for the company is a system to handle brokers' orders automatically. He's also

working on a system to manage the company's trade promotions.

INSURANCE

Claims Aid

Hubbell Inc. Wins Gold in insurance

By the end of 1999, workers' compensation claims at a commercial electrical box

manufacturing plant had soared to more than $1 million a year. Why? The treasury

department at the factory's parent, Hubbell Inc., wanted to know. With 300

unionized employees at the 220,000-square-foot plant, why were workers suddenly

more prone to injury and taking far longer to recover, at a rate that was

costing twice the typical $500,000 in annual workers comp that Hubbell had come

to anticipate?

Led by Treasurer James Biggart, Orange, Conn.-based Hubbell's treasury team

conducted an analysis of the facility. They visited the plant and observed every

step of the process used to build electrical boxes. The company's risk manager

reviewed insurance claim information with Hubbell's human resources department.

A spreadsheet was devised with the help of Hubbell's insurance company that

showed the concentration of injuries. The conclusion: Workers who built larger

boxes were experiencing fewer injuries than those who worked on smaller ones.

One possible reason: There was more repetitive motion involved in putting

together the smaller boxes. The company also learned that night-shift painters

were suffering more injuries than their daytime counterparts because the

painters working at night tended to have less experience.

Armed with that information, the company was able to act. Its first order of

business was to hire a physical therapist to be stationed at the plant. The

company also began focusing on workers who suffered repeat injuries and

determined that age and gender were sometimes factors in their injuries. New

equipment was purchased to reduce the pain and stress placed on workers' backs,

arms and wrists. A steering committee on ergonomics was convened and included

union members to ensure full participation. In addition, managers were held

accountable for keeping a lid on injuries.

In the end, the company saved 44% in workers' comp claims in 2000, and an

annualized 77% in 2001 (for the first six months of the year), well beyond the

company's initial target of 25%.

SILVER:

Microsoft Corp.

The risk management team at Microsoft Corp. has long known that traditional

insurance was inadequate to the types of risks that the Redmond, Wash.-based

corporation faces as the world's largest software company. Besides the more

traditional risks associated with multinational companies, Microsoft also has

risks associated with disruptions in business cycles and business relationships

and copyright infringement, to name a few. After a thorough review in 1998, the

company's risk managers determined that Microsoft was not adequately or

effectively covered with its current insurance.

It was time to act and make some dramatic changes. First, Microsoft conducted a

top-down examination of its risks, identifyng five areas and their attendant

risks. They included natural disasters, the loss of key personnel, competitor

dispute, a financial market downturn and a product catastrophe. Each risk then

received an aggregate-dollar value, which the company tested against analogous

case studies and industry data from Goldman Sachs and Aon Risk Services. The

result was an analysis framework that Microsoft says more accurately portrays

the financial impact of an event, and enables Microsoft to make smarter

insurance purchasing decisions.

BRONZE:

Dell Computer Corp.

Following the successful management of its Y2K transition plan, the risk

management team at Dell Computer decided not to rest on its laurels. Instead,

the Round Rock, Texas-based computer maker kept the momentum going, launching a

review of the company's business continuity plan.

Enlisting the company's business interruption insurer, Dell identified four

areas it felt were required to keep the company running: component supply,

people, IT and telecom infrastructure and manufacturing. Those four areas were

then categorized based on what the company could and could not control. Next

came the application of that analysis to the manufacturing plants Dell has

globally. The final product allowed the company to model, analyze and quantify

the earnings impact of an interruption at a plant in a specific location, which

in turn enabled Dell to better anticipate and mitigate potential risks.

FINANCIAL RISK MANAGEMENT

Hedging the globe

Microsoft corp. wins gold in financial risk management

Microsoft's $25.3 billion in sales involves nearly a dozen currencies, and its

business in long-term contracts with fixed foreign currency payments is growing.

With year-on-year revenue growth slowing from about 30% to roughly 12%,

exacerbating the potential of currency exchange rate impact, Microsoft's

treasury needed a multiyear hedging program to address the increased global

risk.

The challenge was to craft one that hedges for more than one year, but still

hews to the existing single-year program's risk/reward profile and stabilizes

the financial results through accounting treatment matching the underlying risk.

Treasury's new program meets all three, and in a year has contributed some $36

million to revenues and cut premium expense about 30%.

The first assumption: exposure to rate moves on long-term contracts is up to 25%

of a two- and three-year forecast. We needed to recognize and measure this

exposure that clearly extended beyond one year, says Michael Morrow, Microsoft's

senior foreign exchange manager.

Under its single-year program, which has offset a significant amount of foreign

exchange risk since its inception in 1995, treasury buys individual average-rate

put options that offer a limited downside, match the corporation's risk

tolerance and qualify for hedge accounting treatment. The multiyear model had to

maintain these characteristics while extending protection beyond the usual

one-year forecasts. In tackling the problem beyond one year, there was a

natural extension to simply buy longer-dated options, Morrow says. But

they become more costly. We wanted to keep our premium low and similar to

historical levels.

Treasury's multiyear strategy uses basket rather than individual put options,

saving roughly 30% of premium cost while hedging net currency exposure. But

because the basket option does not get hedge accounting, treasury decided to

break up the basket and buy single-currency, average-rate puts that do get hedge

accounting and sell a correlation option (defined as basket put minus the sum of

single-currency puts) that does not qualify. You have a set of options

that gets hedge accounting and one that doesn't but does have a nice economic

benefit, says Morrow. By breaking up contracts, you can end up with hedge

accounting where you might not have thought you had it.

SILVER:

Duke Energy Corp.

Wanting to minimize interest expense, Duke Energy sought to manage its growing,

largely dollar-denominated debt portfolio more closely. The $11 billion (as of

year-end 2000) portfolio was being managed inefficiently, management thought,

with its traditional fixed/floating rate mix favoring liquidity over cost of

money. Decisions on interest rate derivatives to fix a future debt issue or add

floating rate exposure were being made ad hoc. Duke needed a more active style

of incorporating liquidity and price risk and measuring cash and derivatives

effectiveness. Treasury's response: a new liability benchmark system, offering a

yardstick to measure new financing decisions, an interest expense level for

treasury to actively manage against and a clear demarcation between liquidity

and price risks.

After setting a cost-of-funds benchmark, Duke's treasury separated its debt

portfolio into four buckets, each representing a percentage of debt to re-price

during a given time frame, allowing management to see changing rate risk as far

as 10 years into the future. In addition, a new policy gives treasury authority

to trade derivatives within a limit of +/- 10% across each bucket to tilt the

portfolio toward floating or fixed rates, as needed.

BRONZE:

Providian Financial Corp.

FAS 133 makes hedging difficult because the ineffectiveness arising from the

difference between a marked-to-market derivative and its underlying asset can

create balance sheet volatility. The new standard requires identification of

individual assets and liabilities for hedging while disallowing portfolio

hedging. This complicates life for credit card lenders like San Francisco-based

Providian Financial, which would rather manage interest rate risk on a portfolio

basis.

Providian came up with an optimal hedge program that turns conventional hedge

thinking upside down. By assuming upfront a desired hedge position and then

finding a FAS 133-compliant asset/liability mix that triggers minimal

ineffectiveness, the model minimizes income statement volatility even for large

derivative hedging programs. Providian's method takes advantage of FAS 133′s

allowance of partial hedging into component cash flows and of hedging risk

solely due to a change in the swap curve. In the 2001 first quarter, hedge

ineffectiveness on Providian's entire derivatives book was less than two basis

points, and more recently has fallen to 0.2 basis points on new hedges.

UNDER $500 MILLION GOLD:

Pegasus Solutions Inc.

A saturated U.S. travel market led Dallas-based Pegasus Solutions Inc., a

provider of agency commission payments services, to expand overseas in late

1999. But that meant more exposure to foreign currency fluctuations as Pegasus'

foreign currency payments to travel agents rose 28%, to $44 million in 2000. To

manage that exposure, treasury tried negotiating with several banks, including

its relationship bank, but got nowhere. Pegasus also was getting hit by an

inefficient business cycle that produced poor interest income on idle cash, a

lack of a forex dealing credit line and an inability to consolidate euro deals.

Treasury introduced a bidding process for its forex activity banks, saving

Pegasus more than $55,000 last year and an estimated $120,000 in 2001. Pegasus

also bagged $2 million in credit lines, allowing same-day FX settlement.

Multiple transaction costs were mitigated by consolidating euro deals and the

company improved its interest return on idle cash by $16,000 last year. Currency

forward and swap transactions, meanwhile, generated an additional $17,000.

RETIREMENT

A step ahead General Mills Inc. wins gold in retirement

As the last century came to a close, the challenge for the people running

General Mills' pension and savings funds was clear: How could they take

advantage of the run-up in stock prices and still insulate the portfolio from an

inevitable correction? While the question was clear, the answer wasn't

particularly for the cereal giant's benefits staff which, after years of moving

judiciously in managing the Minneapolis-based company's retirement plans, was

not at all sure it was prepared to make the kind of drastic changes in strategy

that such an investment policy might require.

The pension and savings funds served some 10,000 participants and controlled

about $2.7 billion in assets. Even assuming a somewhat conservative investment

posture, the staff had realized some impressive gains as a result of increased

investments in the tech and dot-com sectors. But the more the investment

strategy moved in the tech direction, the more it veered away from the company's

mantra of taking positions in value stocks. That strategy stressed evaluating

investments on their long-term potential and more moderate exposure to downside

risk.

Ultimately, the solution went far beyond simply rebalancing the pension and

savings portfolios. The tech market was already looking soft, and the fund

managers opted to go back to their roots: On June 1, 2000, it shifted more than

$150 million out of growth stocks and loaded up on value stocks. While the funds

didn't manage to avoid the early deflation in the tech bubble, they did avoid

the market's collapse weeks later. General Mills generated a rate of return of

13.5% in 2000, compared with a benchmark return of 2.9%. The experience was

valuable for Treasurer David VanBenschoten, who says the decision represented a

larger step than his team was used to taking. But we were never too

worried about our decision because we felt strongly about it, he says.

SILVER:

Lucent Technologies Inc.

It was 1997, a year after Lucent Technologies was spun off from AT&T. After

years of relying on AT&T's investment management operations, employee

benefit officials at Murray Hill, N.J.-based Lucent now had to adjust to

independence and began looking at what Lucent was offering employees in the way

of defined contribution plans. Not only did the company discover that its 401(k)

offerings were very limited for an enterprise of its size, but due diligence and

risk management were inadequate. What's more, the fees the company was paying

were too high.

By 1999, all that began to change. The company unveiled a plan designed to boost

the number of 401(k) funds. Today Lucent offers its employees 17 different types

of defined contribution plans to choose from compared to only 13 three years

ago. It cut fees, initiated quarterly reviews of programs and set out on a

mission to education Lucent employees about their investment options. The effort

paid off: The company has saved $2.2 million annually.

BRONZE:

BASF Corp.

BASF Corp. wanted to broaden the appeal of its pension plan by offering choices

to its 12,600 employees that better reflected the changing demographics of its

workforce, but didn't want to disenfranchise older workers. So in 1999, BASF

established a policy under which employees hired before July 1, 1999, were

offered the chance to stay with the traditional pension plan or choose a new

cash-balance plan; those hired after July 1 automatically went into the

cash-balance plan.

With 52% of the company's employees opting for the cash-balance plan, BASF's

treasury faced the challenge of changing to a short-term investment strategy

from a long-term one, as cash balances are credited monthly. That meant

introducing moderate duration securities, like Treasury Inflation Protected

Securities (TIPS), as a hedge against cash balance liability. By moving

two-thirds of BASF's investment-grade bond allocation into TIPS, the company

reduced its standard deviation to 11.16% from 11.46%, while cutting the expected

return by just two basis points, to 9.62% from 9.64%.