• Sidebar: Excerpts from June 2003 Ballmer Memo

In a memo sent to all Microsoft employees and quickly picked up by the media, CEO Steve Ballmer expressed concerns about changing IT priorities, customer satisfaction, and the company's near-term financial performance and suggested steps the company should take to address these issues. However, although Ballmer appears to understand many of the problems Microsoft faces, fixing these problems will take time and require some structural changes that may not be easy for the company to make.

Internal Consumption Only?

Executive memos to Microsoft employees are often intended as rallying calls to get employees moving in the right direction, such as then-CEO Bill Gates's famous Dec. 1995 memo urging employees to get "hardcore" about the Internet, or Ballmer's Dec. 2000 memo outlining Microsoft's seven core businesses.

However, given the fact that any e-mail sent to more than 50,000 employees will inevitably be circulated outside the company, executive memos can also contain messages for the outside world. Ballmer's June 2003 memo seemed as much intended to reassure customers and partners that Microsoft understands their complaints as to rally employees.

In the memo, which was unusually long at more than 6,000 words (for reference, this article is about 1,900 words long), Ballmer expressed concerns about changing IT priorities, customer dissatisfaction, and the company's near-term financial performance, and he suggested ways that Microsoft will address each concern.

Changing IT Priorities

Because of the tepid global economy and belt-tightening at many companies, Ballmer says that many businesspeople he speaks with are reluctant to take risks on new technologies and will buy new IT products only if they are cost-effective and fit in with their existing infrastructure.

Ballmer cited this mentality as one reason for the rising popularity of low-cost alternatives to Microsoft products, particularly Linux and Open Office—although these products offer fewer features than Microsoft equivalents, many executives consider them to be "good enough."

Shifting IT priorities could also make it hard to convince customers to upgrade to new versions of Microsoft products, particularly the Windows desktop OS and Office. Ballmer acknowledged that many companies have bought upgrades to Microsoft products but not yet deployed those upgrades, in large part because the old versions are good enough.

The memo touched on several different ways Microsoft can increase its appeal in the current environment:

Centralized approach. Although many components of Linux and other open-source products have individuals who take development responsibility (such as Linus Torvalds in the case of the Linux kernel), open-source products lack a centralized body of decision makers guiding the development and integration of disparate pieces such as the OS kernel, graphical user interface, and server applications.

In contrast, Microsoft's product teams can—at least in theory—work together to ensure better integration between Microsoft products and can maintain a consistent approach and set of technologies for important feature areas, such as manageability (exemplified by the Dynamic Systems Initiative, a long-term plan to build self-monitoring applications) and security (exemplified by the Trustworthy Computing initiative). With these arguments, Microsoft hopes to convince customers that, although the initial costs associated with open-source software may be lower, a centralized approach to software development will lead to lower costs in the long run.

Useful innovation. Because of its massive resources, Microsoft has a natural advantage over the open-source community when it comes to research and development. But for customers to be interested in innovative new products, Ballmer suggested, these products must solve real customer problems, must work well with other products from Microsoft and other companies, and must be simple to use out of the box. Ballmer cited Windows 2003 Server, Tablet PC, and the company's various SharePoint products as examples of this type of innovation.

Additionally, Ballmer highlighted the importance of making upgrades easy to deploy and backward-compatible, and he said that deployment was "as critical a goal as selling the product." He also noted a plan to offer unspecified "managed desktop services" for enterprises to reduce the cost of rolling out new features—one possibility is an antivirus service using technology from Microsoft's recent acquisition of Romanian antivirus company GeCAD.

At the same time, Ballmer indicated that Microsoft does not accept the idea that it should focus exclusively on incremental innovations. Like other Microsoft executives, Ballmer painted the next Windows client, code-named Longhorn, as a revolutionary release that could be "even bigger, perhaps, than the first generation Windows release." (For selected quotes on Longhorn and other subjects, see the sidebar "Excerpts from June 2003 Ballmer Memo".)

Segmentation. Microsoft has often built products with a wide range of features that appeal to many different types of customers, then charged a uniform price for those products, occasionally stripping out features to create a lower-priced version. Ballmer suggested instead that the company must build products tailored to specific market segments, such as small businesses, students, and home users, and price them accordingly. He named Small Business Server, Office Student and Teacher Edition, and Microsoft's Network Attached Storage (NAS) products (see "Windows Server 2003 Drives New Storage Server") as examples of well-targeted products, and he suggested that plans to componentize Windows would also help in this area. In addition, the company will closely align its sales force with its seven business units so it can focus sales initiatives on more specific segments—the recent creation of the Small and Mid-Market Solutions and Partners (SMS&P) Group under Group Vice President Orlando Ayala is an example of this type of sales force focus.

Customer and Partner Dissatisfaction

Ballmer acknowledged that customers have expressed dissatisfaction about certain aspects of Microsoft’s business practices, and he covered two broad areas in which the company could improve: communications and consistency.

Communications. Many of Ballmer's suggestions can be summed up under the general theme of improving communications. For example, the memo suggested that Microsoft needs to implement better customer support and documentation, and that representatives at headquarters should talk to a broader range of customers—not just business customers, but also end users, consumers, and even schoolchildren—to build enthusiasm for Microsoft products.

In addition, Ballmer highlighted the need to build relationships with a wider range of developers—"from 5th graders to the Fortune 500"—to increase support for the Microsoft platform. The company has done considerable work in this area, such as encouraging employees and representatives to participate in public developer forums such as gotdotnet.com, but Ballmer said "there is more we must do," and specifically noted a plan to pair Microsoft developers with developers at ISVs.

Consistency and predictability. Ballmer noted that the shifting deadline dates associated with the shift to Licensing 6.0 in 2002 taught Microsoft a "hard-learned lesson": customers value consistency. He defined consistency as making sure "customers understand what you're doing, why you're doing it, and the timeframe for whatever the transition is."

In addition to avoiding wrenching licensing changes, Ballmer also suggested improved consistency in other areas—for example, not changing which customers have dedicated account managers from year to year, and not "randomly" changing which partners the company is working with on particular initiatives.

Near-Term Financial Picture

Ballmer expressed some concern about the company's financial picture for the next year, noting that results for FY'03 (which started July 1, 2002) gained a unique and somewhat artificial boost from two factors: the shift to Licensing 6.0, which caused a rush of business customers to sign multiyear licensing agreements to meet a July 31, 2002, deadline; and a shift from consumer-priced Windows 9x desktops to more-expensive Windows XP Professional desktops (XP Pro, rather than XP Home, is required for accessing corporate resources like file servers in a Windows domain). Ballmer warned that these were one-time occurrences, and that FY'04 results would "return to normal."

Although not explicit, these statements could be read as a subtle warning to employees with stock options (as well as investors) that net profits could remain flat in FY'04, and that Microsoft intends to focus on long-term innovation and growth rather than taking extreme measures to maintain quarter-to-quarter growth.

In addition to the actions previously mentioned, which Microsoft hopes will grow revenues, Ballmer said the company was working to reduce costs by streamlining marketing and advertising initiatives, and by cutting operational costs in unprofitable businesses, such as MSN, Home and Entertainment, and Business Solutions.

Changes Will Take Time

Executive memos at Microsoft don't always lead to immediate action. For instance, Microsoft did not appoint leaders for its seven business segments until Apr. 2002, more than a year after Ballmer's original memo outlined these business units (in the interim, one of the original seven segments, the .NET development platform, was merged into the Server business, while another unit, Home and Entertainment, was added).

In a similar vein, most of Ballmer's examples of important future innovations, such as Longhorn and the Dynamic Systems Initiative, will not be available until 2005 or later. Between now and then, Microsoft will have to address some deeply ingrained habits to meet Ballmer's goals:

Decentralized product teams. Although Ballmer talked about the benefits of creating a "comprehensive and integrated" set of products, Microsoft is such a large company with so many products that its development teams are by necessity decentralized and somewhat Darwinian in nature—for instance, the company still has two separate teams working on management technologies, and its consumer entertainment products are split between the Windows and Home and Entertainment Groups. In addition, because program managers are under pressure to meet shipping deadlines, they tend to avoid dependencies on other product groups that might cause them to be late. As a result, many product teams would rather create their own instance of a particular technology (such as patch installation and management) rather than wait for a companywide standard to be developed. The company will have to enforce better cooperation among product teams before it can deliver on its promise of a truly integrated platform.

Expansion into partners' territory. Ballmer pointed out the importance of partners in helping to build and promote an integrated platform, saying that Microsoft must "enhanc[e] the worldwide ecosystem of complementary hardware, software and services partners." However, because Microsoft's two biggest profit generators—the Windows desktop and Office—have achieved a high rate of market penetration, the company must expand into new business areas to continue growing its revenue, which may alienate partners. For instance, the purchase of Great Plains and subsequent creation of the Business Solutions Group has been viewed as a threat by ISVs such as SAP and Siebel. To maintain a strong partner ecosystem and address partner dissatisfaction, Microsoft may have to temper its expansion or exit certain product areas.

Resources

For background on the Dynamic Systems Initiative, see "Long-Term Plan for Manageability Announced" on page 11 of the May 2003 Update.

For more on Trustworthy Computing, see the Sept. 2002 Research Report, "Trustworthy Computing: Making Software More Secure."

For more on SharePoint, see "Windows SharePoint Services Supports Office Collaboration" on page 3 and "SharePoint Portal Server Radically Redesigned" on page 8 of the June 2003 Update.

For background on Office 2003, including Student and Teacher Edition, see "Office 2003 Lineup Announced" on page 15 of the May 2003 Update.

For more on Orlando Ayala's SMS&P Group, see "Ayala to Lead New Sales Force" on page 27 of the Apr. 2003 Update.

For background on how the shift to Licensing 6.0 boosted revenue, see "First Quarter Sees Record Revenue" on page 29 of the Nov. 2002 Update.