For Intuit, 'unanswered prayers' spell success

Sometimes the best outcomes are the ones you don't want.

In 1994, Intuit co-founder Scott Cook figured that he could secure his company's future by turning it into a division of Microsoft. The U.S. Department of Justice thought otherwise, putting an end to that grand merger idea.

But being forced back to the drawing board was the best thing that could have happened to Intuit, because it prompted Cook to lay the groundwork for one of the more remarkable corporate second acts. The company has since established itself as the clear market leader in tax preparation software, leaving Bill Gates to wonder what might have been.

Intuit recently hiked revenue and earnings estimates for its current quarter and fiscal 2005--even before the quarter's official finish. Just after that announcement, CNET News.com caught up with Cook, these days holding down the title of chairman of the executive committee of Intuit's board.

Q: In 1997, you predicted that the companies that would get hurt by the Internet are the ones that "aren't very bright." Lots of companies did get hurt, but what does it say about the survivors' ability to make it in the future?
Cook: I can't predict the future, but let's look at the past. We certainly can't credit luck for the survivors. This was a downdraft of tsunami proportions: Investment funds dried up, marketing channels dried up, employees left town, stock options became underwater and worthless. So those companies who survived had something going--and a few actually had a lot going.

Crooked CEOs should go to jail and wear striped suits. Not pinstripe suits, but striped suits.

Customers did not change. They still had important problems that needed to be solved, so the demand was still there. You had a lot of riff-raff competitors who may not have had a good business but might have been able to throw money from investors at it. Those have been cleaned out. So in my view, the last few years have been a great time to invent and to put in the foundations for great growth.

Do you think the motivation is the same? Once, there was a feeling that Silicon Valley was invented to change the world. Has the emphasis shifted?
Cook: I think it's pretty much the same. They don't really change from year to year. The best people have real talents, and they want to use those talents to do something truly noble and change the world for the better. That was true in the '60s, and it's true today. The best people want more than a paycheck. Those things pretty much remain constant.

What about from the point of view of chief executive? Is it more difficult to be a CEO in these times than it was when you were starting out?
Cook: I think if you're a crooked CEO, yes--and that's a good thing. Crooked CEOs should go to jail and wear striped suits. Not pinstripe suits, but striped suits.

Do you think there are still many of those types running around the technology business?
Cook: I don't know about them being in the technology business, but I find it so disheartening that every month or two, there is yet another revelation of some skullduggery or just plain moral malfeasance--or worse. CEOs hold a sacred trust, and not just to their employees who believe in the person leading the company and setting the tone. They hold a trust to society.

There is no way that some drug dealer in the street should go to jail and that big-time CEO crooks should not go. Hopefully, justice will be done, and that will serve as a lesson to everyone in the business--that we should live up to the highest moral code.

What about Sarbanes-Oxley? Does the law make it more difficult for CEOs to go about their duties when you know there's a potential penalty if you trip up?
Cook: I think some of the elements of SOX are extremely well-intended, and some of them are quite wise. But there are some parts that are excessive, wrongheaded and a pure waste of money.

But let's recognize why SOX passed. Does it restrict CEOs from doing the right thing? No. The big things that CEOs do are inspiring generations of people to create solutions to problems. Or to improve people's lives and delight customers and make the world better-off. None of that has been changed by SOX. All those things remain.

Do you think the government has found the proper balances for intervention versus nonintervention when it comes to technology? This dialogue between Washington and the Valley has been going on for some time now.
Cook: And it will continue. All kinds of younger growth industries, even older industries, go through the same dialogue. I think that technology companies have generally enjoyed a better regulatory environment than many other industries, thanks to decisions made during the Clinton administration. Of course, there are exceptions,

and certain things don't always turn out like you want. But I think that for CEOs looking for growth opportunities, the government is not standing in the way.

You came up through Bain and Procter & Gamble. Do you think that training prepared you for what turned out to be some pretty tough times in the business?
Cook: I think so. We did have a very tough time in the beginning. We got no attention from the press, and most people believed what we were doing was wrong.

I came out of a consumer products background where things sell, on average, for 2 bucks.

I think the reason we succeeded is exactly what you described--that there was a certain culture that I and some of the other people in the company brought with us from a place like Procter & Gamble. That allowed us to understand consumers and high-volume technology products in a way that was different than most in the industry.

How so?
Cook: I came out of a consumer products background, in which things sell, on average, for two bucks. And so you have to understand customers in a fundamentally different way. You have to understand economics and pricing so you can make money at very low prices, and understand how to deal with millions of consumers. That's a different art than what is typically taught at an Oracle, for instance.

Speaking of Oracle, Larry Ellison talks about the inevitable consolidation of the enterprise software business. How do you see the pieces falling into place over the next three to five years? Will the big companies just continue to get bigger and swallow up or push aside the small fry that can't match that kind of scale?
Cook: No, I don't think that either history or the future will match that description exactly. It's more subtle because there are two trends happening at once. On one hand, you've had for 20 years a consolidation of some established software categories. How many operating systems are there today for PCs? How many word processor companies are in the game? How many big database companies? How many game software companies?

You can count them on one hand.
Cook: Yeah. There are a lot fewer than there used to be, and you see the same thing happening in Internet shopping. There used to be a ton of Internet malls. Now you've got Amazon and eBay.

I think that when you are watching a customer work, that's where the learning comes in.

There is a natural process in industries that have high fixed costs to reward the high-share players with substantial profitability. That makes it hard for low-share players because they have to amortize all those development costs over a small base of buyers. So this is not new. It has been going on for 20 years.

You've talked about that eureka moment, when you came up with the idea for Intuit. But that's not something you can really teach people. You can't say, "Go ahead now and be creative."
Cook: I think you can teach people, actually. We now put a great focus on that inside the company. People are inherently creative. They just don't know, inherently, how to go about thinking about inventing new businesses.

In other words, you're talking about teaching them to be more entrepreneurial?
Cook: Basically, that's right--to teach them not to be more entrepreneurial, but to be successfully entrepreneurial.

Are there lessons you've learned about how to compete and beat Microsoft at its own game?
Cook: Well, it's not its own game, first of all. There's no divine right to any part of this software infrastructure. They only win when you make mistakes. Lotus and WordPerfect didn't even put a team on the field. After years of trying to get Lotus and WordPerfect to write for Windows--and they refused--Microsoft launched Windows 3 with Office on Windows, and Lotus and WordPerfect didn't even have a product. They gave Microsoft a monopoly in their core business. D-u-m-b! That wasn't a Microsoft victory. That was Lotus and WordPerfect leaving the battle.

Excuse me for interjecting, but Microsoft does have a track record, in which it they usually gets things right by the third or fourth iteration.
Cook: And it shouldn't be easy for Microsoft to be coming to market with a merely acceptable product. So just stay focused on the customer. The best defense is a great offense. When Microsoft entered the tax software market, our business grew

faster that year than it did the prior year. By being more focused on the customer, delivering breakthrough superior solutions, you can beat any merely acceptable competitor, particularly if you're already established as a company.

At one time you would send folks into retail stores, watching people as they bought the product, and then ask to let them go home and watch how they install the product?
Cook: It's great for dating. [Laughs.] Actually, we still do that. We had 65 employees from our TurboTax division watch over 100 customers do their taxes a year ago. From that came immense insights and immense mind-set changes on the part of our people. They could see things they had never imagined. That led to the process changes that produced the new TurboTax.

How do you convince customers to allow perfect strangers into their homes?
Cook: You don't get a 100 percent saying yes. Half the people say no.

Still, that's quite a high percentage.
Cook: But when they know you are from Intuit, there's a matter of trust there. I think that when you are watching a customer work, that's where the learning comes in.

And how long does it take to incorporate that data into some central repository and turn that into actionable items to fix the process?
Cook: As short as a day because it's not data in a repository. It's the effect on people's minds. You want the engineers, you want the product managers, the people whose hands craft the product watching the customers. Then it happens in a day. They come back to the office, they sit and say, "The key is based on what we just saw. We've got to do this; let's try that; let's do it this way"--and then we'll take it out for another round of user testing.

That's that cultural aspect that allows people to tap into their creativity, then take some directions to produce entrepreneurial success. We want to produce entrepreneurs inside the company--successful entrepreneurs. We can really help them improve their batting average.

They can feel their own skills growing: "I know how to do things now that I didn't know how to do six months earlier. You're making me a better engineer. You're making me a better programmer, making me a better architect, making me a better project manager." Those are the people who are inventing, the team behind QuickBooks Simple Start.

We now have the best-selling point-of-sale system in the country for small retailers. That all came out of the small-team junior product manager, who discovered things about customers that were totally against what we had been thinking.

Were there any steps along the way where you thought you would have been better-off had you chosen path B rather than path A?
Cook: Oh, there are lots of mistakes I've made. There are lots of things I regret doing or not doing. Do you have another hour or two or three to hear them all?

Mmm, I'd love to, but no time. So the takeaway question: Do you think Intuit would have been better-off, had the government allowed Microsoft to buy you?
Cook: You can't know what the other path would have led to. Initially, I was disappointed when the deal didn't go through. But then I was reminded of the lyrics from a Garth Brooks song. He sings a ballad about running into a girl at an alumni gathering from his high school and how he remembers back then praying, "Oh dear God! Let her fall in love with me, and I'll be happy ever after." Well, it didn't happen, and he realizes now, having seen her, what a mistake that would have been as he looks at his wife and his kids. And the refrain in the song is, "Thank God for unanswered prayers."