By Paul DeGroot [bio]
Posted: Sep. 16, 2002

• Sidebar: New Information Workers Group Formed

While Office remains at the core of Microsoft’s client applications business, related Microsoft client applications offer more opportunities for growth than this mature product. To generate more revenue from desktop clients, Microsoft plans to put more muscle behind marketing its desktop productivity applications to large customers, promote better integration of desktop clients with server applications, and redefine who in the corporate world is a client for productivity applications.

The strategy is intended to maintain the value of the desktop client in the face of competition from lightweight clients, such as Web browsers, and convince corporate buyers to keep upgrading Office to take advantage of new features that are not only built into Office itself but are provided by complementary products and integrated solutions.

As a result, the complexity of desktop products is likely to increase as Office is positioned less as a standalone, do-everything suite and more as the client interface for collaboration or comprehensive solutions built on Microsoft server applications.

Coping with Success

Despite launching a new version of Office just before its 2002 fiscal year, revenue from Microsoft’s desktop applications business grew less than 2%, suggesting that many customers feel little need to upgrade (although new licensing deadlines late in the year did kickstart application revenues).

Another reason: incentives for Microsoft’s sales staff were previously based largely on sales of desktop software through volume licensing agreements, but in its 2002 fiscal year the company began tying performance bonuses to sales of server software as well. The result was a modest increase in server sales, at the cost of some momentum in desktop sales.

The company’s new strategy for server growth—integrated solutions primarily aimed at enterprises—has yet to address this problem, because the company has yet to build tight links between Office and many of its integrated solutions. The most serious danger for Microsoft here is that customers—and even its own product groups—will bypass Office and other desktop applications and instead emphasize the client capabilities of the Web browser, a commodity product that generates no revenue for Microsoft. Any victory of the "thin" (browser-based) client over the "smart" (Office-based) client might spur server-based solutions, but at significant cost to Office. Thus, the company’s move toward integrated solutions must ensure that Office and related products are essential components of those solutions.

Pirated copies of Office are another problem for Microsoft: the company estimates that 150 million of the 300 million copies of Office in use are pirated. The company has an effective solution, in the form of product activation technology that limits the number of PCs on which a copy of Office can be installed, but it is available only in the latest version of Office, Office XP. The new push behind desktop clients is aimed indirectly at piracy, because convincing some users of pirated copies to upgrade to the latest versions will reduce the number of Office pirates.

Finally, competitors that were once considered vanquished by the Office juggernaut are popping up again. Although little more than an annoyance, products like Sun Microsystems’ StarOffice and Corel’s WordPerfect have scored some public relations coups, largely by attacking Microsoft’s pricing and licensing for Office. (For more about these tactics, see "OEM Deals Boost Competitors".) Office needs to be seen as offering better overall value and performance beyond mere content creation, which its competitors come close to matching.

Two-Pronged Strategy

To ensure Office’s future as the preferred business desktop, Microsoft is pursuing a two-pronged strategy.

First, Microsoft hopes to redefine who needs to use (i.e., license) the company’s software. Although Office is used on more than about 85% of existing business desktop PCs, only a few employees make extensive use of more than one component of the Office suite. Many employees spend most of their time in a single Office application (e.g., Word). In distant orbit around Office are employees and managers who use Office primarily to read or view documents created by others, and millions of other employees who do not use Office (or even PCs) at all in their daily work. Microsoft wants to create new versions of Office, Office add-ons, or entirely new client applications that better address what this larger universe of employees actually does.

Second, the company wants to sell more Office-based solutions and software to the current installed base of Office users. Although Office’s long list of capabilities offers only limited room for growth, Microsoft can integrate Office better with its server products and with its Microsoft Solution Offerings (MSOs). By making it easier to access other Microsoft features or services from Office, Microsoft Office itself becomes more valuable to customers.

Another way to sell more software to the installed base is to position Office-related software, such as Visio and Project, as essential tools on the business desktop. These products have yet to penetrate the business desktop to the extent that the Office bundle has, and convincing business customers that they are essential could significantly boost Microsoft’s revenues from desktop applications.

To implement its strategy, Microsoft has developed new marketing programs, reorganized product teams, and increased the size and specialization of its sales force. Specific actions include the following:

• Improving Office integration with other applications and solutions, including new Web services
• Redefining the client application market as "information workers" rather than the more specialized (and therefore smaller) group of "knowledge workers"
• Forming a Business Productivity Solutions Group to identify new business productivity needs and work with Microsoft partners to provide solutions
• Creating a new category of salespeople called "Business Productivity Advisers" to help business customers and business decision-makers use Office more efficiently and broadly and to make greater use of Office services and related client applications for business productivity solutions such as work management, collaboration, and business intelligence.

Improve Office

Office has reached the point where new features rarely offer dramatic improvement, but it is too important to Microsoft to let it languish. The company wants to evolve Office beyond content creation, making it a core collaboration tool and the front end for common and critical business processes.

Beginning with Office 2000, Microsoft has steadily added features that focused particularly on workgroup or departmental collaboration, making it easy for individuals to share documents, use each others' data, or pull data from external sources into their desktop documents.

Add-ins such as a new Visio SDK and the Office Web Services Toolkit extend the utility of the Microsoft desktop applications.

The company has also begun to take small steps toward better integration of Office with its server applications. For example, a Content Management Server component enables publishing to a Web portal directly from Word, and special Excel workbooks have been developed for the company’s new Solution for Business Intelligence and for analyzing corporate financial reports.

Add-ins like these demonstrate the power of the smart client by employing the number-crunching and analysis features of Excel in ways that would be difficult to accomplish with a Web browser, for example.

Office 11 (the temporary designation for the next version of Office), due in 2003, will continue the collaboration trend and will make greater use of XML interfaces to better integrate with Web services and line-of-business applications.

SharePoint Team Services, an intranet workgroup site bundled with some Office XP versions, FrontPage 2002, and Project 2002, is evolving as a core component in Microsoft’s productivity infrastructure. It will be available to Windows .NET Server 2003 customers by mid-2003, ensuring that basic collaboration capabilities are provided automatically for customers who use Microsoft’s desktop client software with its servers.

Information Workers vs. Knowledge Workers

Although Microsoft commonly uses the term knowledge workers, coined by Peter Drucker in 1959, to describe the legions of people who use desktop PCs and business applications in their daily work, the company has recently begun to use a different term—information worker—to describe the market for its desktop productivity applications. The distinction is subtle but, in Microsoft’s view, significant. According to Jeff Raikes, group vice president of productivity and business services, an information worker is "anybody who is an active participant in a business information flow or business information process."

Unlike knowledge workers, who are assumed to be document creators or managers, the information workers category includes the increasing number of employees, many of whom make little use of Office or do not even sit at a PC, who rely on digital systems to get their jobs done. An information worker need not create documents in Word, build spreadsheets in Excel, design PowerPoint presentations, or access databases with Access (the core Office products). Even reading a document created with Word is theoretically enough to establish an employee as an information worker. More realistic examples include an analyst who works largely with analytical software or enterprise resource planning software, a warehouse worker who enters inventory data on a personal digital assistant, or an airline pilot who taps into digital weather maps or flight plans.

If Microsoft can convince customers that more of their employees should be consumers of applications or data generated by integrated solutions, it can significantly expand the number of seats that need to be licensed for its software.

The Business Productivity Solutions Group

To develop technologies that will encourage both deeper (use of more functions and services) and broader (use by more people) adoption of client software, Microsoft has formed a Business Productivity Solutions Group. This group reports to a newly hired vice president, Joe Eschbach, who heads a new Information Worker Product Management Group. (For more information, see the sidebar "New Information Workers Group Formed".)

The group will work with Microsoft’s field sales staff, partners, and customers to help them make better use of software they already have purchased, determine new solutions that could make customers more productive, and promote the idea that better use of new and existing technology will result in greater productivity.

This group plays a critical role in promoting, both internally and externally, new desktop client applications and solutions that are part of a larger Office "family," sometimes called the "second suite," suggesting that they might someday rival Office itself in importance.

These products also serve a more general evangelical purpose, convincing companies that running client applications on a PC provides more power and flexibility than using commodity Web browsers and letting most application functionality reside on the server.

Microsoft’s goal is to position Office as the central user node in broader solutions (digital "ecosystems" in Microsoft parlance) composed of many linked applications.

Business Productivity Advisers

Business Productivity Advisers (BPAs) are a new addition to Microsoft’s field sales force, and their focus is to rekindle interest in Office and related products among corporate buyers who have taken Office for granted or who aren’t fully employing the features of Office and related applications.

Although Microsoft’s field staff have placed great emphasis on selling desktop software through volume licenses, BPAs represent one of the first sales efforts specifically focused on software and solutions rather than the licenses. Aimed at business managers and senior executives rather than technologists, they are intended to evangelize Microsoft’s vision of a more comprehensive desktop to corporate executives who have come to see products like Office as basic commodities.

BPAs will promote new solutions offerings, wider use of products such as Visio and Project, partners who complement Microsoft’s vision of the desktop by developing specialized Office-based productivity solutions or by selling complementary desktop software, and Microsoft server products that integrate well with Microsoft’s desktop client software, such as SharePoint Portal Server and the accounting and business management products from the Business Solutions Group (e.g., Great Plains applications and Microsoft’s new customer relationship management offering).

Integrated solutions with many component applications promote not only volume software purchases but also require businesses to buy the Client Access Licenses required to access most server products. They also help fend off competition: integrated solutions work best with a common, standard desktop. "Foreign" products, such as StarOffice, WordPerfect, and Linux, will cost so much more to integrate into these solutions that Office will seem cheap by comparison.

Resources

For more information about the Office "family" and Office’s role as a client for .NET applications, see "Office Becoming Client for .NET" on page 21 of the Aug. 2001 Update.

New components for building Office Web services are described in "Office Web Services Toolkit 2" on page 19 of the Sept. 2002 Update.

Microsoft Solution Offerings are described in "Integrated Solutions Push Server Software Sales" on page 10 of the Jan. 2002 Update.

Use of Excel as a client in an MSO is described in "SQL Server Accelerator for Business Intelligence Available" on page 12 of the July 2002 Update.

The basic features of Office 11 are described in "Next Office More Connected" on page 23 of the Aug. 2002 Update.