Microsoft aims to save US$1B this fiscal

Microsoft Corp. customers have heard the vendor profess that its software allows them to “do more with less,” but now it’s Microsoft employees’ turn: The company is cutting back on benefits.

Microsoft plans to save nearly US$1 billion through efficiency improvements and cost-cutting in its 2005 fiscal year, Microsoft CEO Steve Ballmer said in his annual strategy e-mail message to employees on Tuesday. The company’s new fiscal year started on July 1.

Over the past three years, expenses at Microsoft have grown faster than revenue. “This is obviously not a trend we can continue,” Ballmer wrote. The company’s plan to save money includes better coordinated marketing, which should save hundreds of millions of dollars, according to Ballmer.

The efforts to reduce costs have also hit Microsoft employees. The software maker has made changes to employee benefits. However, salaries will go up consistent with inflation and superior performers will receive bigger raises, he wrote.

“Other companies have been severe in tightening costs in the last few years — layoffs, major benefit reductions, etc. We have not done these things and want to be prudent now so we avoid severe measures later,” Ballmer wrote.

One of the changes in employee benefits at is reduced coverage for prescription medicines, a Microsoft spokesman said. Employees now have to pay part of the cost of brand name drugs if a generic alternative is available, he said.

Microsoft has to overcome its “big company ills” with a “strong focus on accountability for results with customers and shareholders,” according to Ballmer. The CEO called upon employees to set clear and measurable goals and deliver on those commitments.

“It would be clearer what we can do and we could plan accordingly,” Ballmer wrote.

In the past, driven by Microsoft culture, employees had the tendency to overcommit, the spokesman said.

The e-mail message from Ballmer reflects the overall state of the company, said Rob Enderle, principal analyst with The Enderle Group, in San Jose.

“Microsoft is buttoning down for what undoubtedly will be a period of tough growth, and Steve is getting the troops ready for the belt-tightening to come,” he said. “They clearly are concentrating more and more on margins and are setting some aggressive targets.”

In the e-mail message, Ballmer also laid out focus areas for the company. The list contains no surprises and includes all of Microsoft’s current product groups. The key to growth is innovation, Ballmer wrote.

On the list of focus areas, Ballmer includes continued PC market growth, selling more software to Office users, marketing its improved Windows Server software and offering software that makes it easy to create, manage and integrate applications.

Although there have been some rumblings inside Microsoft that the company might not be as exciting a place to work as it once was, Ballmer’s e-mail message should be seen as a rallying of the troops, said Matt Rosoff, an analyst at Directions on Microsoft Inc. in Kirkland, Wash.

“It is a reminder of where they are and why Steve Ballmer still believes Microsoft is a great place to work,” Rosoff said. “There are not a lot of new priorities; everybody kind of knows what they should be doing in the company.”

Microsoft does appear to be pushing its marketing organization more than it has in the past, Enderle said. In his e-mail, Ballmer wrote that Microsoft products have to be better segmented for different users with different needs and that the products should be marketed throughout the lifecycle, not just at launch.

“So many customers have yet to deploy our most recent advances, so we must not only help them understand why to deploy, but also demonstrate the benefits of deploying before we reach the Longhorn generation,” Ballmer wrote.

Longhorn is the code name for the next major release of the Windows client expected in 2006. Microsoft is also planning a Longhorn release of Windows Server in 2007 as well as a slew of other products that take advantage of the new functionality planned for the operating systems. The products have already been delayed.

“We have a lot of hard work yet to do on Longhorn to deliver the right capability…But all products after Longhorn will deliver integrated innovation by building on its next-generation capabilities. Great innovations sometimes are hard, not quick and easy,” Ballmer wrote.

Meanwhile, Microsoft is having trouble getting customers, especially enterprises, to upgrade to the most recent versions of the products it has out today, including Windows XP, Windows Server 2003 and Office 2003.

“They are having a fairly serious problem, not so much competing with Linux but competing with their installed base of products which customers think are good enough,” industry analyst Enderle said.

Microsoft must address customer perception when it comes to upgrading as well as security and competition from open source products by emphasizing the positive aspects of Microsoft products, Ballmer wrote. Positive points include manageability and popularity of the Microsoft products among developers and end users, he wrote.

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