Category: INFORMATION / KNOWLEDGE MANAGEMENT & RISK MANAGEMENT At Microsoft, leveraging internal technology and expertise is the key to creating value.


Greg maffei seems a little uncomfortable with all the attention he's been getting lately, even though most of it is the kind that any CFO would be happy to have. He's proud of his accomplishments as senior vice president and CFO of Microsoft Corp., but he worries that his finance team won't get its due share of credit. And he was already the subject of a recent cover story for this magazine ("Smooth Operator," August), so it's understandable that he'd rather spend less time with reporters and more time on the affairs of his company.

Nevertheless, attention must be paid. That's because Maffei is the winner of two awards in this year's CFO Excellence competition, for information/knowledge management and risk management. And though he received plenty of help from his colleagues in Redmond, Washington, the value of his leadership is clear.

Some might think that Maffei's victory in information/knowledge management is a little too pat. Microsoft, after all, is arguably the world's leading vendor of information- management software, and it has a workforce of techies eager to use it. But in fact, the award was anything but a gimme putt. Like many other companies, Microsoft used to have financial systems that barely kept up with growth. Finance had trouble responding to new information needs -- it required two weeks to close the books. And like many a corporate Luddite, Microsoft used to rely solely on hard- copy reports, distributing more than 350,000 a year.

If the software giant was more advanced when it came to risk management (thanks in no small part to Maffei's work in his previous job, as treasurer), it still faced stiff competition from the other finalists. But in the end, Microsoft's innovations in managing both financial and general business risk -- including, of course, a sophisticated, Web- based risk-evaluation system -- put the 39- year-old Maffei on top.

Characteristically, Maffei sees these results as a benchmark of collective progress. "Finance was not viewed as a cutting- edge place in the company five years ago," he says. "We have tried to build a place that has intellectual challenge and competence."

Based on the evidence presented here, he's succeeded.

Information Management: A Digital Nervous System

While it is hard to believe that Microsoft wasn't always on the cutting edge in information management, it's easy to see why it needed to get there. Consistent annual growth of 30 percent­plus sent net revenues soaring, from $800 million in 1988 to nearly $20 billion in fiscal 1999. And until a few years ago, that stellar growth exposed glaring inefficiencies in financial reporting. For example, there wasn't a master chart of accounts for the company's financial groups (now numbering 54) to work with. At one point, Microsoft had more than 30 separate general ledgers around the world, with inconsistent data definitions.

To bring order out of chaos, Microsoft, starting under former CFO Michael Brown, set out to build what it calls a "financial digital nervous system" (FDNS). Based on common policies and processes, the FDNS was intended to provide a coherent, worldwide replacement for the company's disconnected systems. It would deliver fast, global access to information and financial reports, and it would provide an infrastructure for knowledge management and collaboration.

In short, Microsoft wanted "a world-class information system," says Maffei, who stresses the team effort in its development--and, in particular, controller Scott Boggs, whom he calls "the driving force" behind the system.

The FDNS was built on three primary technologies: an enterprise transaction- processing system, SAP R/3; data warehousing, which extracts SAP's transactional data for analysis; and a financial intranet, which knits together the financial groups and allows employees to access both SAP and the warehouse from their desktops.

The core of the system, R/3, was selected in 1995. Its financial modules were implemented in seven months, along with a single chart of accounts. At the same time, Microsoft upgraded its network bandwidth to accommodate SAP data traffic. Today, the system serves 2,000 named users and, thanks to its integration with the intranet, 39,000 total users--that is, Microsoft's entire workforce--in 62 countries.

To consolidate the SAP information and make it available for analysis, Microsoft created a financial data warehouse and reporting system, dubbed MARS (Management Reporting System). Refreshed daily, the warehouse's database system is Microsoft SQL Server. It's augmented by OLAP Services, Microsoft's online analytical processing engine. Microsoft Excel provides a standard user interface with drill- down capability; a custom tool, called MS Reports, enables deeper, multidimensional analysis.

Finally, to share all this information, Microsoft created a financial intranet, FinWeb, in 1995. Detailed financial reports are now posted on FinWeb and updated daily. In addition, virtually every financial group has a site on the intranet. From their desktops, employees can visit FinWeb sites to submit expense reports, purchase goods and services, review P&L and headcount reports, and transfer capital assets.

Having Your Dog Food and Eating It, Too Today, the world-class information system produces world-class benefits. Microsoft now closes its books on a worldwide basis in three days; the ultimate goal is a continuous close. Financial reporting has become "hugely efficient," says Maffei. All management reporting in the company is now processed by just 30 employees, including IT staffers.

Managers can make faster, better-informed decisions, thanks to their ability to summon and parse relevant data in near-real time. Expense reporting, procurement, and invoicing are now 98 percent paperless, including reporting and approval capabilities.

Maffei readily concedes that the development of the nervous system was aided by the fact that Microsoft is Microsoft. "It was driven by an intimate knowledge of and familiarity with Microsoft tools; that's a great foundation," he says. "We have a willingness to 'eat our own dog food' -- to use the latest tools, the latest features. We have a group of people willing to accept the challenge of new technology."

Risk Management: An Enterprise Approach New technology also lies at the heart of Microsoft's risk-management efforts, but it's far from the whole story. In risk management as well as information management, Maffei and colleagues are spectacularly multitasking.

Microsoft is a pioneer of the enterprise approach to risk management, dating back to the creation of the Microsoft Risk Management Group in fiscal 1997. Under the direction of Brown, Maffei, assistant treasurer Jean- François Heitz (now treasurer), and then­risk manager Scott Lange, the group conducted a thorough risk assessment of the entire company. Today, the group watches no fewer than 144 separate risks, from market share and pricing wars to industrial espionage and workforce skill-sets.

One result of the assessment was an umbrella insurance policy, crafted in fiscal 1998 to cover a variety of risks. But perhaps more important was the promotion of a heightened awareness of risk throughout the company. Microsoft wants managers in every function to understand the risk embodied in every decision they make. And to help them do that, the company developed a Web-based knowledge tool in 1997 called RISKS (Risk Information System for Knowledge Sharing).

Residing on the intranet, RISKS has eight major components, including a menu of risks organized by type; contacts for internal experts on risk subjects; anecdotes of lessons learned from dealing with risks; and best practices for minimizing risk in the design of business processes. Before launching any new projects, managers are encouraged to consult the system.

Meanwhile, to manage financial risk, treasury has pioneered hedging techniques and improved on existing ones. For example, starting in 1994 under treasurer Maffei, Microsoft was one of the first companies to write put warrants on its own stock, in order to reduce the cost and risk associated with its stock-repurchase program.

"It was something I had to do at the time--the market was starting to heat up," recalls Maffei. The company periodically repurchases its stock to prevent dilution of earnings per share through the exercise of employee stock options. Selling put warrants on its stock partially defrays the cost of the buybacks. Moreover, the strike price of the puts is set at a level that the company would be willing to pay for its stock anyway. The warrants also have a "net share settle" option that allows Microsoft to issue new shares in lieu of cash.

So far, no puts have been exercised against Microsoft, but premiums from the warrants have reduced the cost of the buyback program by $2 billion, or more than 15 percent. Who buys the puts? Not investors betting on the direction of the stock. "We are selling volatility," says Maffei.

Embarrassment of Riches

Maffei also pushed Microsoft to take a systematic approach to foreign-exchange hedging. Starting in 1997, the company began matching the time horizons of hedges with the horizons of exposures. Treasury staffers run Monte Carlo simulations to determine probability distributions of future exchange rates; the distributions are used to compare the effectiveness of different hedges with their costs.

The revamped hedging program consists of two parts. The net-revenue hedging program, which manages risk for 12-month periods on a rolling basis, has so far delivered more than $86 million in insurance payouts, net of hedging costs. And the cash flow hedging program, which manages risk for short-term foreign receivables, has added another $3 million in profits.

There's no speculation afoot, though. "The vast majority of programs are straight hedges," says Maffei. "I expect that they will continue to make money, but we don't run [hedging] as a profit center."

The cash flow from Microsoft's hedging is a trickle compared with the returns on its portfolio, which has ballooned to $26 billion in the form of fixed-income, equity, and foreign-exchange holdings. Such a monster would have seriously strained the company's old treasury systems, which were assembled on an ad hoc basis and poorly integrated. Treasury data wasn't centrally managed; senior managers had difficulty appraising the market risks being assumed.

All of these weaknesses have been eliminated with a new, integrated treasury system, called Gibraltar. Consisting of a transaction system, an investment data warehouse, and a risk analysis and reporting tool, Gibraltar enables treasury staffers to optimize performance of the portfolio.

Heady stuff, all this, but Maffei has the bandwidth -- and, of course, the finance team - - to handle it. "We're blessed," he says. "Microsoft is the kind of place where there's a culture of hiring smart people. It starts with Bill [Gates]. We push to hire smart people, and offer them financial incentives to do interesting work."

The rich get richer. Somehow, it doesn't seem fair.


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