22 days ago

You Call This A Midlife Crisis?

STEVE LOHR and JOHN MARKOFF. New York Times, Late Edition (East Coast) [New York, N.Y] 31 Aug 2003: 3.1.

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 forMicrosoft, 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.''

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Copyright New York Times Company Aug 31, 2003