Standardizing Customization for Global Financing Solutions

Congratulations to Microsoft, winner of the 2021 Gold Alexander Hamilton Award in the category Best Practices in Restricted/Emerging Markets!

Emerging-market businesses need cloud-based storage and services as much as companies in the developed world do—if not more—and Microsoft has stepped up globally to meet those needs. That’s one reason why analysts are predicting that sometime next year Microsoft Azure will surpass Microsoft Office as the company’s largest source of revenue.

At the same time, though, Microsoft has found that demand to extend payment terms is acute in emerging markets. In some cases, this boils down to the fact that working capital is at a premium and Microsoft’s cost of financing is lower than most customer organizations can get from their financial institutions. In other cases, customers may not have access to external credit at all, whether due to the local banking landscape, the country’s compliance requirements, the company’s credit history, etc.

Some cloud customers already needed help with financing prior to 2020, but Covid-19 exacerbated the issue. “Consider a business like an airline or a movie theater,” says Rahul Daswani, the group finance manager within Microsoft Global Treasury and Financial Services (GTFS) who’s responsible for customized financing solutions for markets outside the Americas. “These companies were hit hard in the pandemic. As the global economy comes back, they need Microsoft technologies, but they haven’t yet gotten back to normal cash flow.

“They want a much longer payment term than we normally offer,” he continues. “We could just tell them to figure it out. They might go out and find a loan themselves, or they might turn to the competition. But if we can offer them a financing solution, we can ensure we get paid on time while saving them from the stress of having to change how they’re managing cash flows.”

Microsoft generally prefers to deploy programmatic financing solutions that are standardized across customers and across markets. But in the developing world, the corporate standard isn’t usually an option.

“Across Western Europe, there are fairly consistent legal frameworks dictating how banks operate and how organizations transact,”explains Jayna Bundy, who leads the Financial Program & Analytics organization within GTFS and is responsible for financing program development across GTFS. “This common regulatory framework enables us to define standard payment financing programs that apply to all our large European customers. We can specify how the transaction will flow, how the banking relationship will work, and what the documentation will look like. Obviously, we work individually with each customer on the specifics of the deal, but these transactions flow smoothly in Western Europe because we utilize a standard operating process.”

Financing in other parts of the world cannot always follow the same process. “In markets like South Africa or Israel or United Arab Emirates or India, the regulatory framework is not the same as in the U.K. or Germany or France,” Bundy continues. “In those markets, we are faced with two choices: First, we can do nothing—but that is contrary to the charter of the GTFS group, which is tasked with supporting business growth. Second, we can develop nonstandard, ‘customized’ financing solutions that meet the needs of the specific customer, the local bank, and the country’s unique regulatory framework.”

A few years ago, Bundy’s group began creating bespoke financing for each country where the corporate programmatic solution wouldn’t work. Offering one-off financing options enabled salespeople to close more deals, sooner, all over the developing world. Unfortunately, it also created significant operational inefficiencies for the GTFS group.

“We weren’t approached by a large group of customers all at once demanding a solution,” Daswani explains. “We would get one request related to the challenging circumstances in a particular country, and we would create a pilot project to try to solve for that situation. But once the pilot worked, we would start doing more of these transactions. The volume of one-off financing transactions was growing rapidly, while the resources available to manage them didn’t increase. We needed a common offering that was built to scale but still customizable for local conditions.”

This reflects a challenge that is not uncommon within big multinationals. “To thrive, any large company needs very good processes,” Daswani says. “We want to offer a common customer experience, common documentation, and common operational processes around the world. Anytime we develop a nonstandard way of doing something, that creates a little bit of internal tension.” He says the GTFS team set out to develop a process that could accommodate each country’s regulations without reinventing the financing wheel for each customer.

What they needed was a non-recourse solution that would fund receivables across a range of emerging markets without adding debt to Microsoft’s balance sheet. Developing such a solution required innovative thinking. “Even a provision like assignment of receivables, which is incredibly simple in U.S. law, is not possible in some markets,” Daswani says. “In Saudi Arabia, you can’t do it easily, as there is ambiguity on the law around assignment. In other places in the Middle East, there is preference to have a negotiable instrument, like a check, before you can do a receivable-financing transaction. In India, assignment is fine, but you have to lodge the documentation under a factoring act. The legal frameworks are so different across countries that we would need a different set of documentation in every market.”

The situation was further complicated because some multinational banks that Microsoft works with were reducing the credit risk and transactions they were accepting in certain markets. Since 2008, compliance has driven up the cost of capital in emerging markets, Daswani says, and global banks may not always be competitive with local or regional banks.

Microsoft’s GTFS group evaluated their options in each country and selected institutions that could meet their needs. In addition to making adequate funding available, the banks needed to ensure cross-border settlement costs would be accurate, documentation would be expeditious and error-free, and the reporting platform would be modern. Legal agreements across banking partners needed to have similar operational compliance, and the timing of costs needed to be matched to revenue.

See also:

Daswani’s team collaborated with an assortment of banks and internal stakeholders to establish a process for managing financing requests and approvals in markets where the corporate programmatic solution will not work. They built a web-based tool through which Microsoft salespeople can request financing for a specific transaction. The tool then routes the request to the appropriate approvers. Using a third party add-in to Office 365, the team can generate bank transaction documentation in a fairly automated fashion, as well as electronic signatures for seamless processing. Reporting is automated, as it comes from a tool that pulls bank settlement information into Microsoft’s enterprise resource planning (ERP) system at the time of cash application, and displays financing details via a SharePoint portal.

Standardizing the fundamentals of this process required a great deal of effort up front. The payoff is that now Microsoft has consistent financing policies across all markets and a common approach of how to execute financing agreements. “We can add custom features to the tool here and there, as needed to serve a specific market, but the underlying process is standardized,” Daswani reports. “And although documentation obviously varies from country to country, those variants are increasingly aligned to a common Microsoft standard.”

Daswani explains that both customized and programmatic financing processes coexist, as they provide the best outcome for meeting customers’ needs. He and two other GTFS team members now handle  millions of dollars’ worth of financing annually. Without the new financing program, Daswani says, “these transactions might not have happened, or they would have taken longer to close, or would have happened only with different pricing or terms and conditions. Salespeople report that our financing solution has been extremely impactful, helping them close deals and enabling Microsoft to grow our cloud business faster in the developing world.”

And perhaps the success of this project can serve as a guide for future initiatives. Daswani believes the biggest takeaway from development of the customizable financing solution is that making iterative improvements is the best way to move the company forward. “Starting with what you can do now, and then building on it later, is the right approach for most treasury projects,” he says. “We are living in an age where everything seems to be changing daily, so once-and-done solutions are not possible. You cannot come up with a blueprint for the best, final solution and expect it to work perfectly for years. Instead, when you see a need, do what you can today, and then keep building on it over time.”

Adds Bundy: “Delivering customized solutions in a standardized manner has been very effective in solving extended payment term needs in emerging markets. We are leveraging these learnings across geographies to make available the best options for our customers.”

Recommended Stories