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You Call This a Midlife Crisis?

From: Dave Farber <dave () farber net>
Date: Sun, 31 Aug 2003 07:51:20 -0400

August 31, 2003
By STEVE LOHR and JOHN MARKOFF

REDMOND, Wash.

MUCH of what Microsoft has done over the last year or so
might suggest a company settling into middle age.

It has overhauled its management structure, tightened its
financial controls, expanded its financial reporting,
started paying dividends and abandoned the high-tech
currency of stock options in favor of risk-free grants of
shares to employees.

All the moves are sensible, pragmatic steps, but they have
the feel of concessions to an era of reduced growth and
diminished expectations for Microsoft, the premier
technology growth company of the last two decades.

So, is this it? Is Microsoft's corporate metabolism finally
slowing? The senior management team at the company has a
ready answer: not in your dreams.

The recent organizational and financial maneuvers, the
Microsoft executives say, are the preparations of an
ambitious company on the cusp of a new cycle of opportunity
and growth. The changes in how people work, play and
communicate using digital devices of all kinds, they say,
are really just beginning, and software - especially
Microsoft software - will make them happen.

"Our innovation challenge is that there's this big
opportunity to change many things," said Bill Gates,
Microsoft's chairman. "The actual achievement of software
in delivering benefits to customers is, say, 20 percent of
what it will be even by the end of this decade."

Only Microsoft, Mr. Gates says, has the skills, money and
focus to put all the software pieces together - a concept
the company calls "integrated innovation" - to deliver the
promise of the digital world, at low cost, to hundreds of
millions of people and hundreds of thousands of companies.
It is a bold vision, and an inspiring one to those toiling
at Microsoft's sprawling corporate campus here, outside
Seattle. Yet as Mr. Gates himself observed, "Vision is
pretty cheap stuff."

Even for a company with Microsoft's wealth and power, the
challenges are daunting. For perspective, consider a few of
the similarities between I.B.M. 20 years ago and Microsoft
today. In the early 1980's, I.B.M. was emerging from a
protracted antitrust battle with the Justice Department,
just as Microsoft is now. Back then, I.B.M. was reaping
enormous profits from its virtual monopoly in mainframe
hardware and software, as Microsoft does today from its
dominant positions in personal-computer operating systems
and personal-productivity software like word processing and
spreadsheets. I.B.M. was facing emerging competition from
computers using low-cost microprocessor technology.
Microsoft is confronting a similar bottom-up assault from
Linux, a free operating system, though one supported by
rivals of Microsoft led by I.B.M.

OF course, I.B.M., struggled badly trying to make the
transition to post-monopoly corporate life, reluctant to
abandon its old ways until it nearly collapsed amid huge
losses and layoffs in the early 1990's, before it turned
around.

No one is predicting a similar fate for Microsoft today,
and its leaders, Mr. Gates and Steven A. Ballmer, are the
main reason. In particular, the two appear to have finally
adjusted to their new roles, with Mr. Ballmer as chief
executive and Mr. Gates playing the part of in-house
technology guru.

The two men, who met as Harvard classmates, have been in
business together for 23 years. It is probably the most
effective, and certainly the most lucrative, partnership in
modern corporate history. By all accounts, including
theirs, the relationship is the business equivalent of an
old marriage, tested by time and events but very solid.
They have had their differences, but they know each other's
strengths and weaknesses, and they are united by their
belief in Microsoft.

They went through a tricky transition for about 18 months,
after Mr. Gates handed the chief executive's job to Mr.
Ballmer in January 2000. The move was made to give Mr.
Gates more time to focus on technology and product
strategy, as well as the company's legal troubles. (Those
troubles are largely behind Microsoft in the United States
today, but the European Commission's antitrust
investigation continues.)

Yet Mr. Gates had been at the helm since 1975, and some old
habits changed slowly. Besides, he was still Microsoft's
chairman, chief technology strategist (officially chief
software architect) and largest shareholder. And Mr.
Ballmer had to get a feel for his new job. "We were both
kind of frustrated with each other in terms of, well, who's
driving this car," Mr. Gates said.

They had disagreements, company executives say, with Mr.
Ballmer less enthusiastic than Mr. Gates about some of
Microsoft's big investments in telecommunications companies
and its costly plunge into the video game business. But
such differences, the executives say, were mainly part of
the give-and-take between the two, rather than any
fundamental break.

"I think they probably managed as well as you could manage
it," said John Connors, Microsoft's chief financial
officer. "And if you've been here a long time, you're used
to seeing those guys disagree on topics in meetings."

Jeff Raikes, a group vice president and Microsoft veteran,
offered a bit of corporate folklore by way of explanation.
Soon after Mr. Ballmer, a former assistant product manager
at Procter & Gamble, dropped out of Stanford's M.B.A.
program to join Microsoft in 1980, he told Mr. Gates that
the company ought to double its work force, to more than 30
people, to handle all the work it had taken on. According
to Mr. Raikes, Mr. Gates replied, "Steve, you go out and
hire one good person and then we'll talk about the second
one."

Today, the two have settled comfortably into their roles.
"We don't have many rough patches," Mr. Ballmer said in a
joint interview in Mr. Gates's office.

Mr. Gates added, "Yeah, we really don't."

They often
finish each other's sentences. They swap calendars and
scrutinize each other's schedules, using what Mr. Gates
described as "crazy spreadsheets."

"We have a pretty good understanding of how each other
thinks," Mr. Gates explained. "Steve likes to think hard
about things, come in and talk about it. I like to think
about it, and send long e-mails. We get a lot of bandwidth
back and forth."

The back-and-forth dialogue, "bandwidth" in Microspeak,
continues on weekends. Mr. Gates will send e-mail, and Mr.
Ballmer will mull it over.

"On the weekends, until about 4 p.m. on Sunday, my wife
knows she loses me because that's when I catch up on
e-mail," Mr. Ballmer said.

Mr. Gates added: "Steve reads e-mail on Sundays. If I see
him Monday or Tuesday, he's really thought hard about what
I said and he will either just say, `Yes, I agree,' or
`We're going to have to talk more about that.' "

As chief software architect and chairman, Mr. Gates says he
spends 60 percent of his work time on technology strategy
and product reviews and 30 percent on business matters like
management and budget reviews. (The remaining 10 percent is
spent on his philanthropic activities.) The percentages
were reversed, he said, when he was chief executive. He
says he misses nothing about being chief executive, adding,
"I have the ideal job right now."

Mr. Ballmer's stamp on the company is increasingly evident.
The changes in management structure, compensation,
financial reporting and the effort to improve relations
with customers and partners have been mainly his handiwork.
In the last year, the company has been reorganized into
seven business groups - the Windows desktop operating
system, the Office suite, server software, business
software for small companies, software for hand-held
computers and cellphones, video games, and MSN, the
Internet service. Each now reports its own revenues and
profits or losses.

The goal is to decentralize decision making, and
accountability, in a company with a tradition of having the
important decisions made at the top - by Mr. Gates on
technology and products, and by Mr. Ballmer on sales and
marketing.

In a company with 50,000 employees and several businesses,
the traditional structure was too top-heavy. Decisions were
not being made, and managers were frustrated, which
contributed to the departures of talented people,
especially during the dot-com boom.

"In our company, too many things, I think, were just having
to run through two guys," Mr. Raikes said. "So that was a
big point of change."

Mr. Ballmer led the overhaul of Microsoft's compensation
policy. The shift from stock options to stock grants for
all employees, announced in July, has attracted most of the
attention. But another change may have greater impact on
Microsoft's corporate culture. The company's top 600
managers will now have their performance-based stock awards
- which can be a majority of their total compensation -
determined mainly by how well they satisfy customers, based
on surveys conducted by the company. In the past, the stock
bonus program for senior management was based on meeting
sales and profit targets.

The new policy was set in a contentious meeting of the
senior managers at a four-day retreat in February 2002 at a
ski resort in Bend, Ore.

A large contingent of managers at the retreat expressed
concern that the company's reputation as an arrogant
monopoly, obsessed with its own profits and often
insensitive to customers' needs, would hurt Microsoft in
the long run, people who attended the meeting said. That is
certainly not Microsoft's image of itself, but nearly
everyone at the gathering recognized the problem, people
who attended said.

There was resistance to tying compensation so tightly to
customer satisfaction because it is so much more difficult
to measure fairly than sales and profits. In the end, the
customer satisfaction advocates, strongly encouraged by Mr.
Ballmer, prevailed.

The Oregon session was a turning point, according to
Orlando Ayala, a senior vice president. "We changed in that
meeting," Mr. Ayala said. "We changed our mission as a
company."

It was part of the broader change at Microsoft as Mr.
Ballmer has more and more taken charge. Inside and outside
Microsoft, there were doubts about how well he would run
the company, first after he became president in 1998, then
after he became chief executive two years later.

NO one questioned his brilliance; instead, the doubts were
about whether he would really listen to others, delegate
authority and put systems in place to decentralize a lot of
the decision making. After taking over, Mr. Ballmer spent
three months talking to the top 100 technical and product
people at the company, not telling them what to do but just
listening.

"Steve has matured substantially in his C.E.O. role at
Microsoft over the last five years, including the two-year
transition as president," said Craig Mundie, a senior vice
president.

Brad Silverberg, a former senior executive at Microsoft,
said, "Steve transformed himself to become chief executive,
and he has led an incredible transformation at Microsoft."

And Mr. Ballmer, far more than Mr. Gates, seems suited to
the industry fence-mending needed in the aftermath of the
long-running federal antitrust case, which tarnished
Microsoft's image by depicting the company as a bullying
monopoly. Mr. Gates often appeared to be the government's
prime target in the case, because he wrote much of the
e-mail that served as evidence. Mr. Ballmer's name, by
contrast, rarely surfaced in the e-mail evidence. And
temperamentally, colleagues say, Mr. Ballmer is the obvious
choice for striking a new tone. "Steve can stand up and
say, I'm sorry, we have to be better partners," said a
Microsoft manager, who asked not to be identified. "Bill
just doesn't have that in him."

Mr. Ballmer has his work cut out for him as Microsoft seeks
growth in new fields. The financial reporting by business
group, which began in 2002, points to the company's
quandary. The Windows and Office desktop products are two
of the most profitable large businesses ever, with pretax
profit margins of about 80 percent each. The server
software business, where Microsoft is strong but not
dominant, does well, with profit margins of about 30
percent. But the other four businesses - software for small
and medium-sized companies, software for hand-helds and
cellphones, video games and MSN - all lose money.

"The critical issue for Microsoft now is that the
businesses that really matter for Microsoft are flattening
out, and nearly everything else is losing money," said
David B. Yoffie, a professor at the Harvard business
school.

Inside the product teams at Microsoft's Redmond campus,
however, the talk is all of nearly limitless opportunities.
"Shame on us if we can't innovate," said James Allchin, a
group vice president. "I'm up for a good competitive
fight."

Microsoft has identified business software for small and
medium-sized companies as a market ripe for growth. The
idea is to use software to make e-commerce easy and
affordable for these companies in the Internet era, much as
the electronic spreadsheet gave them a tool for financial
tracking and modeling in the personal computer era.

New versions of Microsoft's small-business server products
will go on sale this fall, starting at less than $1,000,
including the computers from Dell, Hewlett-Packard and
others. The goal is to make Web sites, online brochures,
sales, billing and customer service as easy and automated
as possible for small businesses, with the final
customization often done by the local technology
consultants who are Microsoft partners.

Today, this software business generates about $500 million
a year in revenue, but the target is a $1 billion rate a
year from now. "That is what attracted me to this
business," said Mr. Ayala, who became the executive in
charge of the small-business software group in March.
"There are very few businesses that can grow 20 percent or
30 percent a year. This is one. We believe this can be a
$10 billion business for us someday."

"This is a test of the growth model," he added.

Of
course, overall annual growth for Microsoft these days
simply cannot match the 20 percent to 30 percent of the old
days. For a company that now has revenue of more than $32
billion a year, this is largely an inevitable byproduct of
the law of large numbers. High single-digit growth, without
acquisitions, would be impressive over the long term.

The company is maturing in other ways as well. Mr. Gates
and Mr. Ballmer built Microsoft into the powerhouse of
computing thanks to a corporate culture renowned as "hard
core." The term was long a matter of pride at Microsoft,
and it meant tireless work, aggressive competition and
absolute commitment. In the early years, there were signs
of that commitment - notably whose car was first to arrive
in the parking lot in the morning and whose car was last to
leave at night.

But Mr. Gates and Mr. Ballmer, both 47, have families and
other interests now. Mr. Raikes recalled skipping a senior
management meeting one afternoon last year to attend an art
show at his daughter's elementary school. Mr. Gates was
there as well, because his daughter, Jennifer, attends the
same school. "Hey, aren't you supposed to be at that
meeting?" Mr. Raikes asked.

ALTHOUGH 16-hour workdays are no longer the rule, Mr. Gates
and Mr. Ballmer typically work 12-hour days, colleagues
say, and sometimes longer. One business review in January,
Mr. Ballmer recalled, began at 8 a.m. and concluded at 5:30
a.m. the next day. "I'm not sure if I'm bragging about it,"
Mr. Ballmer said. "I'm probably apologizing for it."

Still, long days remain part of a work ethic that is duly
noted by anyone with ambition at the company.

Asked how he would describe the Microsoft culture today,
Mr. Ballmer replied, "I'd still say hard core works pretty
well - but I'll put one little difference on there. Hard
core means passionate. Hard core means intense. And hard
core also needs to encompass this value we call open and
respectful, which is you can be hard core, sometimes so
passionate, so excited, so over the edge that you're not as
respectful as you need to be to other people."

Is there any current equivalent of watching cars in the
parking lot? "If e-mail's not turned around in reasonable
speed," Mr. Ballmer replied, "that's bad form."

http://www.nytimes.com/2003/08/31/technology/31MICR.html?ex=1063311468&ei=1&en=ab53af7dc8cf1f35


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You Call This a Midlife Crisis? Dave Farber (Aug 31)