After the company's profit warning Thursday, Microsoft president Steve Ballmer sent a memo to employees calling for the software company to change its business priorities. He outlined seven major points in the 4,000-word memo, obtained by CNET News.com.
But to get there, Microsoft must do something it hasn't had to do in a long time: cut back on expenses and investments.
In a tone more befitting a failing dot-com than the world's leading software maker, Ballmer said, "We all have a big incentive as shareholders to re-ignite the kind of cost-conscious culture that marked Microsoft's earlier years." He said the Redmond, Wash.-based company would better control "discretionary expenditures like travel and entertainment."
"I expect us to reduce planned expenditures very significantly both in the short term and over the longer term," Ballmer wrote, adding that the company also would tighten the review process for large-scale expenses. "These efforts alone have the potential to save us tens of millions of dollars a year."
Ballmer conducted a Webcast virtual company meeting on Tuesday for Microsoft employees to talk through the measures outlined in his letter. A Microsoft representative said the company holds these types of virtual meetings from four or five times a year, typically after "major corporate events."
Microsoft plans to reduce its resource investments from its original plan for the 2001 fiscal year. "Although we are a profitable company with good growth prospects, we do not have the financial resources, the people or the interest in doing things that are not consistent with our priorities," Ballmer wrote.
How can Microsoft rebound?
Chris LeTocq, analyst, Gartner
These changes mean tough choices. Microsoft removed two features from the next version of Office, partly to focus on the next release of the SQL Server database software, Ballmer explained.
"The tougher decisions that we will be making going forward focus on technologies in core areas," the memo states. Microsoft continues "to invest resources in technologies where customers no longer benefit much from our innovation," he said.
Ballmer emphasized that "resource reductions don't translate into employee layoffs." Microsoft views as critical "hiring great new people and investing in our existing employees. That is a super high priority."
While the company plans to cut expenses, Microsoft will continue to emphasize employee compensation, taking into account recent stock price drops. "People really are our most important asset," Ballmer wrote.
Ballmer outlined the following milestones Microsoft must achieve in 2001:
Microsoft is betting big on the next consumer version of Windows, code-named Whistler, which relies on technology from Windows 2000. "Whistler will be the most significant Windows release since Windows 95," Ballmer wrote.
"Whistler is a critical opportunity to reinvigorate the PC and get millions of consumers even more excited about the power of personal computing and galvanize the industry around a single code base," he emphasized.
Microsoft regards the next upgrade of its productivity suite, code-named Office 10, as an important product offering.
The company also is banking on a new technology code-named Yukon "that will be key to our next-generation storage, database, file system, email, and user interface work," Ballmer wrote.
While the technology is "two years or so off, (it) is a core .Net and Windows technology and we will ask all development groups to organize their product plans to have new versions available in that timeframe based on Yukon and our .Net programming model."
Ballmer noted that Microsoft faces "strong competition from technologies like Linux and companies such as Sun, Oracle and AOL." He also emphasized Microsoft is confident it "will remain as one company," as the software giant seeks to overturn the court decision that would split the company in two.
"While the company's short-term financial results are likely to be affected by the current economic environment, our long-term outlook--both for the industry and for Microsoft--is bullish," Ballmer wrote.
But he also recognized that Microsoft is a company in transition. "To successfully navigate this transition we must do three things well: have a razor-sharp focus on executing our priorities, eliminate unnecessary costs and continue to focus on our people."
Ballmer outlined seven business priorities essential to Microsoft's continued success: Windows, productivity software, enterprise server software and tools, MSN, smaller business applications, devices, and .Net.
Ballmer sees Windows as essential to the advancement of the personal computer. "If the PC ever gets boring, it would be because we let that happen," he wrote. Microsoft's addition of "natural language, speech and vision technologies" is an essential part of Windows' evolution, he said, as is "investing in new form factors like the Tablet PC and entertainment PCs."
But Windows is important for another reason. "The PC is also the filter through which tens of millions of customers see Microsoft," Ballmer wrote. "That's why the launch of Whistler is so crucial. Although the PC business may never again be a 20 percent-a-year growth business for us, we need to continue to push into new areas in terms of PC penetration."
Ballmer also extolled the virtues of Office. "It's through the Office business that we've forged the closest relationships with many of our customers," he wrote, adding that new projects such as the Tablet PC and .Net will unfold the productivity suite's full promise.
With its enterprise business bringing in $4 billion in revenue, Microsoft has established a foothold there. "But we have only begun to scratch the surface of competing in the market with the 'big iron' companies like Sun, Oracle and IBM," Ballmer concluded. To expand this side of its business, the company will work more closely with developers toward more integrated business-to-business features, as well as toward using server technologies to better manage information and worker knowledge.
The MSN online service will be the vehicle for reaching the consumer market, which Ballmer said "holds tremendous upside for Microsoft and is critical for our future growth." By offering services and other features "we can drive key trends in the consumer market, including the continued adoption of PCs in the home."
Microsoft sees a potential boon in supplying businesses with smaller applications that are easier to manage. The company hopes to take advantage of PCs and the Internet as well as its bCentral Web site to simplify computing.
As the personal-computing market matures, Microsoft will increasingly look to other devices, such as the Pocket PC, Tablet PC and "smart" phones.
Microsoft's final emphasis is the .Net strategy, which Ballmer described as "the underlying connecting force across all of the previously mentioned priorities."
Staff writer Mary Jo Foley contributed to this report.