Kevin Turner: Midmarket CIO Summit

Remarks by Kevin Turner, chief operating officer for Microsoft, about the role of CIOs in a changing economyMidMarket CIO SummitRedmond, Wash.April 6, 2009
KEVIN TURNER: (Applause.) Thank you very much. Appreciate it. Thanks a lot. Thank you.
Well, good morning. It's great to be here, and certainly I actually think that the North Carolina and Michigan State game is going to be a great game. So, enjoy a little later. But thank you, certainly, for this opportunity.
You know, I thought long and hard about what can we talk about today and I really want to give you a high-level overview of what we're seeing in the marketplace, how we're responding to it as a company, and then I'll talk a little bit about some of the trends and things that we're trying to adapt to as well as internally and externally to make sure that we are adding business value in the marketplace.
And I think that when I think about the remarks today at a very high level, and then I want to open it up at the end for questions to really help you set the stage for the rest of your summit, but it's really about this idea of how do we work together and partner deeply to create business value? And I think that's a very important transition, particularly in light of some of the external forces that all of us are dealing with as we get into that.
So as I start, I want to start with a thank you. I want to thank you for your time, your participation. It's incredible. We had almost nearly 300 of you sign up and certainly that's not trivial in this time period that we're in, but it's a real commitment on your part to continue to figure out how do you advance your innovation agenda and how do you advance your business value agenda, and certainly we want to partner with you and be a part of that.
But I want to thank you very much for your participation, for your time, for your partnership, and I want to thank you for your feedback. We want your feedback, and you all have always given us good feedback, and certainly we need to feedback to continue to shape and develop our strategy of how we can better serve you, and we'll talk some about that at the end of my remarks.
As we get into it, you know, this is a very, very challenging time from a business standpoint. Certainly, we saw the world change in about mid-September last year, very, very dramatically from a business standpoint. And we actually had some early signs. When you think about Microsoft the company, we serve end users and consumers, small businesses, medium-sized businesses, large enterprises, and then the largest entities and governments in the world. So, we have every single customer audience imaginable in between. And as Christoph said, we operate in 191 countries, we have a billion people every single day use our products around the world.
So we've got a pretty good listening system in place as it relates to indications of what's going on in the marketplace. The very first segment we saw any early signs was in the small business segment, particularly when cash and credit began to really tighten up. That was the very first customer audience for us that really showed indication. And then when we hit about the mid-September to October time frame, we saw it hit across all channels and all audiences and certainly was very dramatic.
And when you step back, and we have people on staff that have studied every single – literally, every single economic, macroeconomic situation that's happened since time, so we go all the way back into the 1800s as it relates to various countries and various situations. And when you think about some of the early ones, this country and the U.S. has had 24 different macroeconomic situations, a few of them are as dramatic as the one that we're in right now as it relates to the ability to come through that. And each one we've really dissected that to try to figure out what can we learn, what was important from the success of those companies that really weathered that storm, and certainly I'll share with you our response to sort of the environment.
But it's more than just the macroeconomic environment that's really changing. When you think about the fact that the competitive landscape is really different today for most all industries, how a competitor – how quickly a competitor can come online and disrupt your business model is phenomenal. And it doesn't matter what industry you're in. It can happen very, very quickly, and new business models are being created rapidly.
And then when you think about the fact that not only is it a macroeconomic challenge, but there are societal and cultural changes that are going on. I mean, think about sustainability. Think about some of the different things that are happening from a societal standpoint and an e-learning standpoint. It's very dramatic, and there are a lot of shifts in the marketplace. So, certainly those are some really big forces that everyone's dealing with.
And then think about customer expectations. Our customers, you, your expectations are going up. Your customers, for you, their expectations are going up, and as they should. But certainly, when you put all these things together, it really is a great case for most every company to change. And truly, we believe it's important that we have to change faster than the world around us, or certainly we stand the opportunity to become obsolete.
And so this is really something that we've really grounded ourselves around to say, look, there is so much change from macroeconomic to societal to cultural to competitive to customers that it's important that we continue to really amp up the amount of change from a business-value creation inside the company. And so that's an important part of how we sort of set up the marketplace.
And then when you take a look, one of the things that we also think about is the fact that during this particular opportunity, as many call it a crisis, we actually believe that we've got to find the glass half full in this. So, we have basically a philosophy inside Microsoft that says a crisis is a terrible thing to waste. And so really centering people around what are we going to do about it. Because we know, we believe as a company that the rest of 2009 is going to get tougher, that layoffs are going to continue, that budgets are going to continue to tighten up, that credit is going to continue to be hard to get. We don't foresee it getting better.
We think that 2010 is equally going to be difficult. So, for the next 18 months, we're not betting on a recovery. We're actually betting on it to continue to get tougher and that the most important thing that we can do during this opportunity is how do we continue to drive business value so that we can improve market share and improve customer and partner satisfaction. Those are the key elements that we're really building and devising our strategy at Microsoft around.
But, certainly, we believe with the number of forces that each one of us is dealing with, that this is going to be a historical time period. And we've not seen anything like it in our lifetime, certainly when you look at the culmination of those forces. We think it's an exciting time to be on a front-row seat to history and that we've got to maximize the opportunity in the crisis. And it would be a terrible thing to waste as we go through. So, that's really what we believe from an environmental standpoint that it provides this environment for a lifetime, certainly an opportunity for a lifetime. And it really gives us a chance as a company to show what we're made of. And so I think that that's something that we talk with our people and work with our people on and as Christoph said, we had 800 leaders from around the world, all 191 countries in here really doing a strategy session, re-examining our strategy, re-examining our execution plan, and really focusing in on how do we help improve customer satisfaction and how do we help create more business value in the marketplace.
So when you look at it, I think it's also important, this is a survey that I saw recently around some of the major obstacles confronting CIOs. And one of my privileges that I get to do, No. 1. I've been a CIO, happened to be a CIO of the largest company in the world at one time, it's still the largest company in the world. But certainly that was an exciting challenge. I also have responsibility here at Microsoft for IT and continue to be very close to the issues, but I also get a chance to talk to a lot of CEOs and as well as a lot of CIOs around the world.
And so when I saw these particular results, I thought, yes, this is very consistent with what I'm hearing form both CIOs and CEOs around the world of some of the obstacles and some of the opportunities. The fact that IT is still viewed as a cost center. Certainly during this era is a very important thing for us all to get our arms around and how do we help. The burden of ongoing IT maintenance, and that's really sparked something you'll hear more about, which is our software plus services strategy, that's really sparked a lot of interest in that particular area, specifically so that people can get out of the maintenance business and put more and more resources toward innovation and really creating new business models.
The fact that top management lacks technology vision. And if you see there, the green is the CIOs and the blue is sort of corporate managers. You can obviously see that the CIOs feel more strongly about that than the corporate managers of that being an opportunity, but certainly we have a long way to go to making sure that top management sees the value in IT and how do we help create that.
Ability to attract and retain top business and technology talent, that will always be on there, I suspect. A risk-averse corporate culture and the fact that more business execs are involved in technology strategy than before, and I think that that will only escalate.
So those are a view on some obstacles. And then when you think about the spend priorities, and this is really recent from a Goldman Sachs survey that was recently done. No. 1 is cost reduction. No surprise there. Our business continuance planning, disaster recovery, a lot of that's going to be driven by Sarbanes-Oxley and boards and different things that are really requiring much, much more stringent continuancy planning and disaster recovery plan.
Server virtualization, you're going to hear from Bob Muglia in a moment, the president of our Server and Tools group on what is our strategy in this particular space, consolidation, business intelligence, security, you can see the different ones as you go down through there.
We have a product called SharePoint that actually accommodates probably four of the different areas on this list, and SharePoint is the fastest-growing product in the history of Microsoft to $1 billion, faster than Windows and Office, believe it or not. And we'll talk some about that in a moment, but sort of grounding ourselves on the top priorities. I thought this was a pretty good list, and it's very consistent with what we hear in the marketplace.
Some of the most important CIO attributes, you know, the first one there in leadership I think is interesting because actually when I think about some of the others on the list, it's really about leadership. So, the ability to execute and meet deadlines. I know that our own CIO, Tony Scott, he and I have a very rich discussion on the number of on-time, under-budget projects that he's driving. And we do a regular rhythm and he walks me through on a monthly basis the status of those top 10 to 11 projects that he's driving across the Microsoft enterprise. And so that's an important part, certainly, that we've got to continue to improve on time and under budget.
Collaboration and communication, vision, innovation, team building, and then certainly last but not least, raw intellect. I think it's important that this room also knows, but it's important that business managers know that certainly you've got to have great IQ to really lead a successful information technology area, and that's an important area as well.
So these are some – no surprise here, but certainly an important part where you can really see the ones that differentiate from the others.
Now back in 1999, one of the things that I think is important as you look back and as we look forward is in this era of '99, 2000, and 2001, the CIO role, ladies and gentlemen, was the No. 1 turnover position in corporate America. Now, prior to that it was CEO. After that, it was CEO, but during this era, it was CIO.
It is my own belief that as this round of CEOs gets cleared out, that CIO will be No. 1 again. And so I think all of you realize certainly with the questions we get from business managers that potentially, the CIO role could potentially be at the top once this new set of CEOs gets completely through the system that is really an ongoing process today.
And during this era of '99, 2000, 2001, certainly, I was working on Year 2000 compliance, looking for the runaway projects where everybody was really avoiding the big runaways where you got some long project that would take a very long time and be way over budget. And certainly those were career killers back during that time frame.
HR issues, infrastructure, stability, you know, it was really about how do you make sure that you keep the lights on, keep the place running, enable growth, and be under budget. That was really the strategy back then to get an acceptable grade.
When you flip forward let's say 10 years, when we talked to CIOs today and we talk to CEOs, it's about survival. How do we make sure that we've got the things we need to have in place to really survive all these external forces that I talked about? And certainly that's where we want to partner and certainly we want to make sure that we're helping you work through the different areas that we can.
Cost reduction, saving money, you've already seen it at the top of the list. Driving and creating value. And I'll talk in a moment about the two types of companies we see, certainly this is an important part of that. Leading and developing people, and then security, privacy, and compliance. I don't think that one will ever go away as well. But it's pretty interesting how the agenda has sort of been shaped and is being shaped for the next 10 years as we look at it, but this is what we see and hear in the marketplace and certainly where we think we're going to go.
And so when you look at it, you know, we're at a fork in the road. Do I invest in innovation and R&D, or do I cut cost? What is the right approach? And what we see in the marketplace is there's really two types of companies. First of all, every single company we see wants to reduce cost and wants to enable innovation. 100 percent of the companies we talk to are saying, "Hey, how do you make me more efficient and more effective?"
But we're also seeing a subset of those companies emerge and what we would call market makers or market leaders are wanting to take some of that savings and invest it in new projects, invest it in new innovation and R&D. And so really what we believe as we transition ourselves and how do we map our strategy to what's happening in the customer community, what's happening in the external marketplace, is how can we enable both of these things? Not one, not the other, but how do we help you become more efficient and effective, and how do we help you make sure that those that want to invest when the time is right, how do we help you with the investment in innovation to be able to lead that?
So this is really, I think, you know, all of us know that certainly we're at that Y in the road today, but that it won't last forever. And as we get through that particular Y in the road and come out the other side, we think this is a big opportunity for both CIOs and companies to really differentiate themselves and create new business models and create new monetization methods and new customer scenarios to really grow and gain market share for your company. And so that's really at the heart of how we're setting up our strategy and our R&D investment.
But I also think it's important because we see a transition from what we would call information technology and you know I'm not – I've been in IT for the last 25 years, some of you have been in it longer, and it used to be called data processing, and then it used to be called information systems, and then it was called information technology, and it's been called a lot of things.
But we really see a big push and a transformation to something called business technology. From information technology to business technology. And when you think about the term "information" certainly it's important, data is important, and data became information. Information has to become knowledge, and knowledge has to become decisions and actions.
And really, as you think about that shift in transition, it makes total sense because how do you create business value if you're not really plugged in and close to the business priorities and the alignment of what your company is trying to get done and helping enable that?
And every CEO I talked to, they want IT to push the horizon. They want IT to push the thinking of what's possible. And they also want to do it efficiently and effectively, but certainly that is the contradiction and something all of us have to come together to manage, and this transition is one that we think will be important as we develop our own strategy to support you.
And so I want to talk for a moment about what's the Microsoft response? We've talked about the macro-economic and societal and cultural environment and the changes that we're seeing. We've talked about some of the trends that we're seeing in the marketplace. We've talked about the need for creation of business value. How do we connect with you to get close to help drive that? This is our approach, the Microsoft response. It's about long-term approach to multi-core innovation, partner ecosystem, which we've got a very vast and expansive partner ecosystem, software plus services in saving customers money, which is more than an initiative, it is certainly how we're setting up to run our business.
And so let me talk about the long-term approach to innovation. Certainly, this is a company that loves to invent. This is a company that loves to – I mean, we are a technology and a software company at the heart of this company. We are not a consulting – we have a great consulting organization, but that's not the basis of our company. We are not a hardware company, so to speak. We are a software company. This is a company that wants to write and aspires to write the world's most important pieces of software.
And so it's an important thing for you to get your arms around as it relates to what do you – when you think about Microsoft, what do you think about? Well, certainly, we back it up because we invest over $2 billion more in R&D on an annual basis than the next closest technology company in the world. And I'll let you in on a little secret. When most all companies on this list are pulling back their R&D investment, you might ask the question: Well, Microsoft, what are you going to do this year?
The fact of the matter is we're going to increase $1 billion in R&D. And this isn't like something that's wildly popular with the financial analysts when we talk to them and the market about, you know, hey, what is your strategy, what is your plan for R&D. But you know what? We're not a company that's driven or run for short-term results or we're not a company that's driven or run by financial analysts' opinions. We're a company in it for the long term, so we're going to increase our R&D by $1 billion this year.
And so that's a real commitment over the long term that when you make a decision in Microsoft, you are betting on R&D, you are betting on innovation. And so that's an important thing I'd like to calibrate with you is that we are taking that long-term approach to innovation, and I'll show you the things that we're doing to invest that $9 billion.
We have four key areas of investment. So, we'll take that $9 billion and we'll put it across four key areas. So, when you think about Microsoft, these are really the pillars of innovation that I'd like you to think about. The first is the rich client area. Now, certainly, this is the area in the company that helps build the company. We've got new releases of Windows coming out, Windows 7, we've got new releases of Office coming out. We believe in the rich client, and we're going to continue to invest in that area. And it's important that you understand there will be software plus services that complement it, but certainly we believe the rich client is a very important part of our growth going forward.
Server and enterprise. This is the fastest-growing area for us in the company, and it has been for the last three years. Fastest-growing from a revenue and a market share perspective. Bob Muglia, which runs a lot of these products, is up next, and he'll go deeper on some of these, but certainly new releases of SQL Server, new releases of Windows Server, Visual Studio, System Center, Dynamics, Exchange and OCS, SharePoint, which I talked about being our fastest-growing product in our history from a collaboration and a platform standpoint, PerformancePoint with business intelligence, and on and on.
So there's a lot of big opportunities here for us as we think about being able to shape the future from a server and enterprise standpoint. And I will tell you that one of the technologies that Bob will talk about is our Hyper-V and virtualization technology. It's really, really red hot. The first three months – we launched this product in October. The first three months we were in market, we took 26 points of market share. Why? Because it's a third the price of our nearest competitor, and it's a cross-platform solution. And you'll hear much more about that, but it is an important side of how we're working hard to create that value proposition that allows you to take advantage of efficiency and effectiveness, as well as your position within your environment.
The third area we're investing in is Entertainment and Devices. This is important to us from a lifestyle standpoint. And we invest in this area because where people work, how they work, and when they work continues to have more and more overlap from the workplace to computing on the go to the living room or the home. And where people work continues to become more and more overlap.
So we believe we're uniquely positioned to continue to invest in this area to help you connect the digital work style and the digital lifestyle. And you're going to see more and more releases that allow for that connectivity between the work style and the lifestyle from Microsoft, and we're going to continue to work on that.
And that's where Xbox, Media Room, Surface, Windows Mobile -- this year we'll sell about 21 million copies of Windows Mobile. Those are where those lifestyle technologies reside.
The fourth area for us is software plus services. And when you think about Microsoft and software plus services, I want you to think about it in two ways: One, we have software plus services for commercial businesses. And this is where we have hosted exchange, our business productivity online suite. Ron Markezich will be up later to talk about that, our CRM Online tools, hosted SharePoint, Live Meeting, communications online. All the things from what you would call the sweet spot of Microsoft technology we're now putting those things and enabling those things to be in the cloud, on premise, or hosted by a partner. And I'll go a little bit deeper on that in a second.
The second set of services we have are in the consumer services space. Certainly, we aspire to continue to make progress on search, MSN, online, Windows Live, Office Live, and Live Services, and we're continuing to invest in consumer end-user services as well. And everything we learn in the consumer end user space complements everything we're learning on the business space. So, they're very complementary as it relates to getting things to mass.
And so this is an important area for you to understand how we invest, rich client, server and enterprise, entertainment and devices, and then software plus services. This is where we're putting the $9 billion investment annually.
Now, the second pillar or second platform of our response is really around how do we nail the partner ecosystem for Microsoft. And we've got an important partner ecosystem. In fact, when you think about the Microsoft partner ecosystem, I want you to think about over 600,000 capable partners. And when you look at this particular slide, we have a lot of partners because as I said, we sell from end users and consumers all the way up to the largest enterprises and governments in the world.
And so we've got a great offering and a great competitive advantage in our partner ecosystem to really bring industry-specific knowledge to bear to really combine the value of partners and localization with the opportunity that we've seen globally. And so our partner ecosystem continues to be a very important part of our strategy and certainly of our ability to better serve you, the customer. And so we're very committed to this partner ecosystem for the long term.
As I talked about the next platform, if you will, of our response is in this area of software plus services. So, I want to go a little deeper right now on the commercial business software plus services for you because we have a very differentiated story in the marketplace. We have three different types of software plus services. So, when you think about, OK, Microsoft what are you doing in this space, I want you to think about it in three ways: One, we have customer-hosted. So, this is a traditional offering that we offer today. This is the offering that says, you know, for some sets of users, for some pieces of data, for some applications, we believe most companies are still going to want to control and confine some of those applications for some of those users for some pieces of data. For competitive reasons, for privacy reasons, for strategic reasons, and that's our traditional model. And we're going to continue to enable that.
The second area is there are some partners that are going to create value, and you're going to come to us, likely, and say, "Hey, you know what Microsoft? For this set of applications, for this set of users, for these pieces of data, we would like this partner to host it." And so we're building out the capability to have a partner-led model as it relates to hosting things in the cloud.
And then we have a third model that says for some applications for some pieces of data, for some users, you may come to us and say, "Hey, Microsoft, this is your sweet spot. We want you to host it." And while we're building out the data center and the infrastructure, and the capability to be able to do that. Now, the thing I want you to think about when you think about Microsoft's software plus services is No. 1, we are the market leader in this space. Make no mistake, in the commercial business space, we are the market leader in software plus services.
In the consumer space, we aren't the market leader. We're working on that and investing in that. But in the commercial space with what we've announced and what we have in market, with the business productivity online suite, we are the market leader. But when you think about the Microsoft strategy, I also want you to think about one more thing. Our is all centered on choice.
Now, if you think about sales force or Google today that offer software as a service initiatives, their strategy is simple: Hey, let us host it or there is no software as a service. That is not the Microsoft approach. The Microsoft approach is we let you decide because we believe most companies are going to have a hybrid of these three scenarios, two out of three or three out of three of these scenarios. And that's how we're lining up our software plus services strategy, all centered and grounded on customer choice.
And so that's an important part of – and a take-away that I want you to continue to think about of how we develop our software plus services together.
We also have this idea of leveraging our infrastructure optimization model. And so we really want to partner with you to really go through and study your environment and really show you what those best practices look like and how can we work with you to really create an environment that moves all of your IT assets out to the dynamic IT line, where it's a strategic asset within your company. And we've got a great process where we, again, working with our partners, working with you, we would love at no charge to really benchmark your environment and work through how do we help you strategically move to the right on this scale.
So as customers are further to the right are utilizing IT as a strategic advantage, and have solved a lot of the opportunities and complexities of their environment and of the – particularly the current environment that we're all dealing with. And so the infrastructure optimization model is a great tool for you to leverage and use and ask us to engage with you on. Again, there's not an expense associated with that, it's something we would love to partner with you on if we haven't already done it in your company, and it's important.
Next we've got an initiative and Christoph showed part of this around how do we help people save money. And it's not just selling new stuff, it's also how do you utilize the stuff that you already own, which is part of the IO model learnings that we get when we do that process. But deploying virtualization, again, we've got a great story, you're going to hear about that from Bob Muglia in a moment, but a third the price and a cross-platform solution and allowing you to manage your environment with a single pane of glass, OK? From the physical through the virtual is a very strategic area for us. Deploying the software that you've already owned to maximize that current IT spend, Office Communications Server with our Live Meeting product really is a better, more efficient solution than let's say something like WebX.
Just do the price comparison yourself. Very, very competitively priced and something that we're going to continue to drive. And you know, I get a lot of questions on Vista, hey, what's the story on Vista? When you look at Vista, you know what? The toughness, the tough launch that we had with the release of Vista was very brutal. The first 18 to 24 months in market was tough. Why was it tough? Because we locked that product down to fix a lot of the security problems.
Vista today, post-Service Pack 2, which is now in the marketplace, is the safest, most reliable OS we've ever built. It's also the most secure OS on the planet, including Linux and open source and Apple Leopard. It's the safest and most secure OS on the planet today. Everything that we've learned in Vista will be leveraged in Windows 7, but certainly when we broke a lot of the compatibility issues to lock down user account controls, to lock down the ability to manipulate states and all the things, that was a very painful process for us to grow through, but we had to do it. And the reason that Windows 7 will be successful is because of the pain we took on Vista. Because from a compatibility standpoint, if it works on Vista, it will work on Windows 7. If it doesn't work on Vista, it won't work on Windows 7.
And so it's an important thing for you to really get your arms around what is the real issue with Vista? The real issue with Vista is we need to be able to partner with you to show you the TCO advantage you get with Vista. Not only do you have fewer patches, not only do you have the ability to do hot patching, which doesn't require a reboot when you get a patch, not only do you have the opportunity to use our power management feature, which for every 14 PCs that you deploy is the equivalent of taking one automobile off the highway from a carbon emissions standpoint, and about a 30 percent power savings, that you also have the ability to have a more efficient and effective PC environment.
And so we're actually seeing a lot of deployment right now when we work through an environment at a time on Vista as it relates to your environment and environments like yours, and it's an important process that if we've got the value to do that, if we can demonstrate that value, we'd love to partner with you on it. If we don't, we'll continue to support XP, and XP is a great operating system, but keep in mind, it will be 12 years old next year.
So not only is great TCO on an 11-year-old operating system in XP, certainly from a security, a reliability and a power management standpoint, there's compelling reasons to continue to look at the change.
Microsoft financing is another area that we have that certainly some customers are leveraging right now that we've not been in the financing business that long, but certainly it's grown like crazy through this particular environment. The online services part, that's where the business productivity initiatives are, and certainly that's an opportunity for Ron Markovich, who will come up later, to talk about.
So the last two slides. What you should expect from us. No. 1, we want to continue to listen and understand your business. This is something we want your feedback. We want to continue to have you push us to get better and to make sure that we do that. No. 2, we're going to continue to build software for a people-ready business, to create business value and move to that business technology transition that we talked about.
No. 3, we're going to work hard to help you save money. This is an initiative that's very important to us to make sure that we work to optimize your environment, optimize your investment. We get that it's a top priority, and we also want to work with you about how can we help you save total spend, not just Microsoft spend, but total IT spend because there are various suppliers today where you own products from Microsoft that we can displace and help you become more efficient and effective.
No. 4, we will help you innovate through this economic situation. So, as companies want to make the transition from cost reduction and invest some of that cost reduction and savings into R&D and into innovation, we want to partner with you on those solutions.
And the last thing before we turn it to Q & A is our main objective as an organization is to work hard to earn the right to be your trusted advisor. And certainly we want to partner with you, we want to make sure that we continue to listen and learn from you, and we want to make sure that we work hard to earn the right to be this trusted advisor on a daily basis because that's the most important thing. And if there's anything I can do to help you, Kevin.Turner@Microsoft.com, and there's my phone number. I'm a resource. I know that you've got a lot of people that support you, but certainly I want to make sure that you know you can reach me if needed, and certainly there are things that we don't get to here in the Q & A, I'd love to hear from you.
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