A Revamped Infrastructure for Intercompany Payments

Microsoft is this year’s winner of the Bronze Alexander Hamilton Award in Treasury Transformation.

It should come as no surprise that Microsoft’s 450-plus legal entities, which operate in 118 countries, engage in intercompany transactions. But the scope of that activity is eye-popping: more than 35,000 transactions, worth over US$50 billion, each year. “We use intercompany payments for everything from foreign subsidiaries’ dividend payments to the corporate parent, to ‘commissions’ that reimburse subsidiaries for products sold, to IP [intellectual property] royalties between business units,” explains Sunnie Ho, senior treasury manager in Microsoft’s Global Cash Management group.

A couple of years ago, all these payments flowed through Microsoft’s in-house cash centers (IHCCs) in a non-cash settlement process, but treasury had limited visibility into these transactions. Timing was unpredictable, and the company had to keep more than $1 billion in reserve to support intercompany cash flows.

“The subsidiaries would initiate intercompany payments at any time of the month,” Ho says. “Someone might suddenly realize that one sub needed to pay another sub, so they triggered an entry via the IHCC. We could not see who was paying whom, how much, or for what reason until it happened, so we might be surprised when all of a sudden someone triggered a billion-dollar transfer. It was non-cash, but we still needed to be aware. Sometimes funds would need to move between cash centers. Other times, the transactions would involve multiple currencies, so they would trigger FX [foreign exchange] exposure for us.”

Another issue was that large transactions would sometimes leave treasury scrambling to quickly review the paying entity’s overall cash position and to find the necessary liquidity to fund the transaction. “Some entities participate in more than one Microsoft portfolio,” Ho says. “So if their cash was sitting within one portfolio, but they were settling intercompany payments using IHCC transactions under a different portfolio, they would run into issues. They wouldn’t have the cash in the right place to make the payment, and treasury would have to initiate a transfer between portfolios so the payment could go through.”

Treasury envisioned a better way of handling intercompany payments: They wanted to move all intercompany settlements into the central treasury team and settle transactions monthly. To build support for the plan, treasury worked with finance, accounting, operations, and cash application teams from across the company.

Numerous meetings among these groups over the course of a year revealed that the primary concern about the treasury proposal was that it would reduce business units’ flexibility in making intercompany payments. After much discussion, the stakeholders agreed on a twice-monthly settlement schedule. “Compromise is important with a project like this, which is significantly changing an important, longstanding process,” Ho says.

Once the project team reached consensus on their major goals, they began working with Microsoft’s engineering group to document the change requirements and plan a new workflow and a tool for managing intercompany payments.

Now, when a Microsoft business unit needs to make an intercompany payment, a staff member opens the tool and enters all the information needed to make an accurate journal entry for the transaction: paying entity, receiving entity, currency, amount, and reference information. Then the request for intercompany payment is routed to the business manager who is the correct approver for the transaction.

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When the next bimonthly settlement period approaches, the treasury team can review the payments in the pipeline and make sure that all the appropriate portfolios have liquidity to fund those transactions. To support this process, the intercompany settlement tool includes a dashboard that extracts data from different systems to provide comprehensive information around intercompany payments, including each entity’s country restrictions on movement of cash, functional currency, and the balance impacts for both the paying and receiving entities. This information helps treasury ensure liquidity is adequate and determine whether each submitted transaction is compliant with Microsoft policies.

The dashboard continues to reflect the status of the intercompany payment request, including whether it is pending review; released, posted, or failed; or has a status of ‘G/L completion.’

“This workflow gives us visibility into the entire process,” Ho says. “We can see who inputs the information and who signs off, so when we have questions, we know who to reach out to. When everything looks good, treasury can just hit a button and thousands of payments will go to the IHCC.”

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