What Treasury Should Do to Be Prepared

From the Arab Spring to the Great Recession, and from the Eurozone crisis to Hurricane Maria, global events over the past decade have strained the ability of U.S.-based multinationals to ensure uninterrupted liquidity for employees and operations in remote locales.

“The last 10 years have been very interesting for anybody in international cash management,” says Jim Scurlock, head of cash management for Microsoft. “We experienced a few incidents that affected our ability to move money across borders. In most cases, we saw the writing on the wall and moved our cash out early. But after repeatedly seeing similar issues in different places, we focused on reducing our cash around the world and minimizing the counterparty and sovereign risks that could threaten our liquidity.”

Microsoft treasury launched an initiative to both minimize cash balances and develop a contingency action plan that different groups within treasury could use in responding to operational-risk events. Minimizing cash balances involved a three-pronged approach.

First, Scurlock says, treasury engaged IT, corporate accounting, and tax in building a multiyear project plan for expanding Microsoft’s zero-balance account (ZBA) structure. They also worked closely with their enterprise resource planning (ERP) vendor, SAP, and with Citibank, which was one of their global relationship banks. “We were one of the first pilots of a multi-country, multi-currency ZBA structure,” Scurlock says. “We were able to help Citi design their Global Cash Engine product and create their roadmap for expansion into new countries. There was a deep partnership there.”

Together, Microsoft and Citi worked on expanding the company’s existing ZBA structure to integrate more than 700 accounts across 30 countries. “The volume was very significant,” Scurlock says. Automating cross-border cash sweeps created challenges. “What happens if you have a holiday in one country, or different bank operating hours, or different expectations for central bank reporting?” Scurlock asks. “We did a lot of research with our tax team and statutory controllers. We walked through examples of liquidity challenges we had faced in the past and built consensus on what we needed to do.”

Scurlock cites the concerted effort treasury made to build consensus as a key factor in the project’s success. “We showed our A/P [accounts payable], payroll, and tax teams the benefits of our plan,” he says. “They saw that they would no longer be dependent on treasury to fund each account. This meant they could focus on making payments on their desired schedule, without worrying about whether the funds were there.”

The next challenge was to fully automate the accounting. Previously, SAP automatically recorded cross-border wire transfers, but each journal entry was triggered by a Microsoft employee’s initiation of the wire. “The challenge with our ZBA structure was that there wouldn’t be any initiation of a wire to kick off the journal entries,” Scurlock explains. “We had to come up with a way to trick SAP so that it would create a journal entry when transaction information arrived in an electronic bank statement, rather than the moment we initiated the transaction.”

Now, Microsoft subsidiaries around the world make payments on accounts that are part of the ZBA structure. Their XML or SWIFT payment messaging includes very specific text that shows up in the electronic bank statement and tells the corporate treasury and accounting teams which legal entity the transaction should be booked to. Scurlock’s team can offset transactions in the in-house bank. Then, at the end of every day, Citi initiates a book transfer—or, in some instances, a physical transfer—that brings each bank account balance back to zero. The project has been so successful that Microsoft has extended the same concept to accounts with Bank of America and HSBC, as well.

The second aspect of Microsoft’s initiative to reduce liquidity risk involved setting up multi-bank target balance sweeps out of high-risk countries. “In some countries, we need to have a local bank account for tax and payroll payments, but we were not comfortable keeping money in some of those accounts for long periods of time because the sovereign risk was relatively high,” Scurlock says. “We worked with our banks to create what is essentially a second-layer ZBA, in banks that normally wouldn’t be part of our cash concentration structure.” Every day, cash is automatically swept out of local bank accounts in higher-risk countries and into the corporate ZBA structure at Citi.

The third prong of the liquidity-risk initiative was to expand Microsoft’s pay-on-behalf-of (POBO) structure. “We implemented pay-on-behalf in 2009,” Scurlock reports. “But because of changes in tax law and in some of our legal entities, we were able to expand the pay-on-behalf structure to support a lot more of our payables and to include some Asian currencies, as well.”

Together, the three parts of the initiative significantly reduced the amount of cash Microsoft needed to maintain in high-risk regions of the world. “Prior to implementing this structure, we were funding our subsidiaries at a rate of between $1.5 billion and $2 billion every month,” Scurlock says. “Those funds were just sitting in bank accounts. By implementing real-time funding wherever we could, we were able to take almost $1 billion of cash out of the system.”

In addition to minimizing the cash at risk companywide, the treasury team simultaneously undertook development of a contingency framework that outlines the steps different groups within treasury need to take in a crisis scenario. “The goal was for treasury and enterprise risk management to adapt faster in the event of a disaster,” Scurlock explains. “We needed clear guidelines to define, for example: If an issue were to occur in a specific country, what benefits would we provide to our employees? And how would we do that?”

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Under the new framework, specific employees within Microsoft’s global cash management, cash operations, treasury operations, capital markets, foreign exchange, financial risk, and credit services teams take responsibility for monitoring certain types of risk. “We encourage each person to be focused on a specific region,” Scurlock says. “That way, if things start to pop up or there are currency issues, we can very quickly mobilize and identify the risks we see in those countries and the actions that we need to take. We can pull in other stakeholders and discuss: ‘With X risk floating up in this country, should we initiate payroll early so that employees have liquidity? Should we sweep funds out of the country? What are other things we should be looking to do?’”

All in all, these projects have greatly increased preparedness within the Microsoft treasury team. And the importance of the Boy Scout motto—“Be prepared”—is a lesson Scurlock thinks other treasury professionals can take away from his experience. “It’s easy to be prepared for the last crisis,” he says. “It’s harder to be prepared for what’s coming next. To do that, treasury needs to have conversations ahead of time with all the teams that might be impacted. Figure out what you can do now to minimize counterparty risks and liquidity risks. Walk through some sample scenarios. Deep-dive into those examples and look at how you would address them. Honest self-reflection is critical to effectively preparing for the unknown.”