Halloween document ??? CN -----Forwarded by Christopher Nambale/Bushnet on 07/16/2004 04:49PM ----- Dear Business partner's As the year progress' I continue to keep you posted on what is happening in our industry. This month's newsletter focus is on 'Understanding the competition better'. Please find below, this year's edition of the Microsoft annual employee letter that discusses the aggressive challenge from Linux, Microsoft's progress in software security, and how Microsoft intends to cope with 'big company' ills. It makes interesting reading as it will help you understand Microsoft products and their strategy better. Excerpts are from a copy of the memo obtained by FORTUNE.com. MICROSOFT Microsoft CEO Steve Ballmer's Memo to Employees Following are excerpts from the memo sent Tuesday, July 6, 2004 by CEO Steve Ballmer to Microsoft's 57,000 employees. Ballmer writes comfortingly that the company has devised a strategy for dealing with the challenge from Linux and that progress is being made in software security. However, many observers would say that escalating security problems with Windows and Internet Explorer security could eventually drive customers away, perhaps toward Linux, creating a "perfect storm" that could cripple the company unless breakthroughs are imminent. Overall, though, the 4,000-word memo clearly expresses Ballmer's aggressiveness, as well as his optimism and confidence that Microsoft can retain its place as the dominant software company in the world. Excerpts are from a copy of the memo obtained by FORTUNE.com. Particularly tedious passages are deleted and marked by [SNIP]. âPeter Lewis Microsoft: Our Path Forward As I look across the company at the great products we've released to market, the R&D investments we're making and the innovations that are coming, I feel more confident about Microsoft and our ability to help people and businesses realize their potential, provide great jobs and careers for employees, and drive strong financial results than at any other time in our history. In FY04, we made strong progress on several fronts that are essential for our future. We delivered some amazing products that were widely recognized as delivering great value to our customers and creating opportunity for partners â including Office 2003, SharePoint, MSN Messenger, Windows Mobile devices, MBS releases with Office UI and SharePoint integration, Xbox Live, enhanced Web services, Microsoft TV Foundation, and improved Tablet and Media Center PCs. We improved customer satisfaction amongst key audiences this year (and our focus on security remains paramount), and we made great strides in much more deeply connecting with our customers. We favorably resolved the lion's share of the 150,000 customer issues in our field response system for non-technical issues. We have fixed nearly 70 percent of crashes and hangs experienced by customers in our key products this year by relying on our Watson technologies to statistically target our service pack work. Products like Small Business Server 2003 really show how great customer understanding and segmentation leads to better products and customer satisfaction. As a result, in the 12 months through Q3 of this year, we grew faster than key competitors such as IBM, AOL, Sun, Oracle and Sony. Windows with .NET surpassed Java in number of new projects. Xbox is approaching PlayStation's share in many markets, and Office 2003 is being deployed faster since launch than Office XP. We know how to compete with Linux through innovation, quality support execution, and facts-based customer education. We gained server market share (as did Linux ) and are poised for more progress. OSS products have yet to provide meaningful customer value on the client compared with our offerings. We put most of our legal issues behind us in a year marked by the significant affirmation of our Consent Decree by the U.S. Court of Appeals, the framing of the EU case for appeal, and milestone agreements with key competitors...." [SNIP] Looking ahead to FY05, I am excited. However, reading some of your comments in the MS Poll and in mail I have received, there are core issues that are not as clear to you as I would like. Will we be first with important innovations? Will process excellence lead to greater ability to make an individual difference? Will our focus on costs hurt employees personally and will it hinder new investments? Will we grow and will our stock price rise? Will the PC remain a vital tool and will we remain a great company? It is the desire and capacity we all have to continuously improve that gives me incredible optimism. We have a great foundation to build on, and the opportunity is ours. Our strategies and initiatives are critical, but we must also renew our culture and values â particularly accountability. Nothing breeds confidence like success â success in the hearts and minds of our customers, and success versus competitors, be they established, open source or startups. We must continue to compete as relentlessly as ever, while also reflecting our industry leadership responsibilities. [SNIP] The key to our growth is innovation. Microsoft was built on innovation, has thrived on innovation, and its future depends on innovation. We are filing for over 2,000 patents a year for new technologies, and we see that number increasing. We lead in innovation in most areas where we compete, and where we do lag â like search and online music distribution â rest assured that the race to innovate has just begun and we will pull ahead. Our innovation pipeline is strong, and these innovations will lead to revenue growth from market expansion, share growth, new scenarios, value-add through services (alone and in partnership with network operators), and using software to open up new areas. Our focus areas are:  PC Market Growth: It took more than 20 years to grow the worldwide base of PC users to 600+ million. By 2010, I expect that to grow to 1 billion, due to opportunities in emerging markets and new scenarios and form factors expected to stimulate demand. Key for Microsoft is delivering secure, groundbreaking software and compelling scenarios that captures the imagination of end users. We are also working on new PC and Windows designs to make PCs affordable to millions of additional people around the world. Longhorn is a significant step forward, and between now and then we have Tablet, digital media, security innovations in Windows XP SP2, and new Office capabilities to amaze customers. The Windows Catalog will make our partners' innovation and services more obvious to our mutual customers.  New Information Worker Scenarios: Along with PC market growth, our biggest growth opportunity is with our existing base of Office users. Delivering new information work scenarios such as collaboration, authoring, communications, planning and analysis, and expanding the toolset with new technologies such as SharePoint, Live Meeting, OneNote and InfoPath is an incredible opportunity for growth as we innovate in our product development and our marketing. Office 12 represents another breakthrough opportunity in this quest.  Enhanced Server Position: With Windows Server 2003, we can compete for every commercial workload running on Linux or UNIX today â even mainframes and high-performance computing â at lower cost, more efficiently and more reliably. In addition, we are unique in offering an integrated platform including our server and IW applications and partner ISV workloads and applications.  Reducing Complexity and Cost for IT Pros and Developers: Building applications, integration, and managing IT are still too hard for customers, but we are looking at some amazing new ways to further lower costs and speed time to deploy technology for IT pros and developers. We're already helping reduce costs and increase business value with products such as Windows Server 2003, Visual Studio .NET, SMS 2003, the Dynamic Systems Initiative, and soon MOM 2005. Going forward, we're delivering important advances for developers with the Visual Studio 2005 Team System and SQL Server 2005.  IT Services for Smaller Business and Consumers: The MSN, Windows and Office teams are working together on a set of integrated IT services for smaller businesses and consumers to enhance security, lower costs, and improve the end-user experience in areas such as communication, collaboration and desktop management.  Business Solutions: Microsoft Business Solutions continues to expand its small and mid-market offerings with key investments in technologies for CRM, online services, retail management, and small business. This is a huge opportunity to help this underserved market and grow our revenues, while creating great opportunities for ISVs and partners.  Non-PC Consumer Electronics: The opportunity is virtually unlimited to integrate the richness and intelligence of the PC world with everyday devices such as mobile phones, handheld devices, home entertainment and TV. At the center of our efforts are products such as Pocket PC and Smartphone, Portable Media Center, MSTV, MSN TV, Windows Automotive, the Windows Media Center Extender, and other electronic devices built on Windows CE and Windows XP Embedded.  Entertainment: There is significant growth opportunity in delivering compelling entertainment experiences in key scenarios such as music, TV, movies, photos and games. Our vision centers on creating new and exciting ways for people to have fun with friends and family with Media Center PCs, devices like Xbox and Portable Media Center, and all of the applications and services that Microsoft and our partners deliver including our own games entertainment.  Advertising/Information: The value that MSN and our platform bring to advertisers is already significant, as evidenced by the fact that our MSN advertising business today is a $1 billion-plus business, with annual growth of 45%. The potential to expand advertising in all our on-line offerings is huge. In FY05, we will invest in and deliver improvements in search, music and other information services that will continue to provide strong growth opportunities. Our industry has only scratched the surface in search; we are making significant investments to improve the user experience and deliver the information people want via software innovation.  Communications: Broadband and wireless technology is increasing the amount of time people spend online. Younger and savvier Net users want communications experiences to build their social network on any device. Professionals and information workers need integrated, secure functionality that helps them manage their personal and professional lives: personalized email, IM, contact management, shared calendars, relationship management. [SNIP] Integrated innovation is about a customer experience where using Microsoft products together gives you a "whole" that is greater than the sum of the parts. It is not about creating technical dependencies across groups for their own sake. Longhorn will be another major step forward on which we can add value to customers through integration. We have a lot of hard work yet to do on Longhorn to deliver the right capability. We decided to release a number of products before Longhorn so we can take the time to get it right, and to prioritize the important security features of XP SP2. But all products after Longhorn will deliver on integrated innovation by building on its next-generation capabilities. Great innovations sometimes are hard, not quick and easy. Windows 1, 3, and 2000 all took time, and all were worth it. Longhorn has even more innovation, and will be worth it too. Bet on it. We have as much opportunity to grow as any other company in the world. That's a big statement, but the opportunities we've scoped out are very big. Make no mistake - we must grow our revenues to grow profits. We cannot just cut costs. At the same time, we must ensure a competitive cost structure, or competitors will offer prices, services or innovations that we cannot afford to match. Other companies have been severe in tightening costs the last few years â layoffs, major benefit reductions, etc. We have not done those things and want to be prudent now so we avoid severe measures later. Over the past three years, Microsoft has invested significantly and as a result our expenses have grown faster than revenues. This obviously is not a trend we can continue. This year, we are targeting nearly $1 billion in efficiency improvement and cost reduction across the company, primarily by rethinking how we do things. For example, we will save hundreds of millions of dollars by driving more coordinated marketing in disciplines such as CRM and advertising. One aspect of our cost-efficacy efforts that has gotten a lot of focus internally is the recent changes to employee benefits and streamlined facility policies. Even with the changes, we still have â according to independent surveys - the most generous benefits plan in our industry. We considered and rejected more substantial changes based on employee input, the value we know benefits have to employees, the importance of maintaining employee productivity, and preserving our great culture. Even with the changes we made, our cost per employee will still rise in FY05 by 6%, and most of that is a significant rise in per employee benefit cost. For example, per-employee healthcare costs â the largest single component of U.S. benefits â skyrocketed 54% from FY01 to FY05, and for FY05, the cost of medical benefits will rise by more than $880 per employee. Conversely, the change in ESPP discount (15% to 10%) will result in a savings of $370 per employee. I believed strongly that we needed to make these changes as part of our comprehensive cost-saving efforts. We need you to understand the broader context for these changes even if we did not communicate that context in advance. The changes, though, have spurred a good number of suggestions on ways we can take additional cost out. [SNIP] Some employees have asked why we can't use some of our $56 billion in cash to avoid making the benefits changes. Using the cash reduces profits, which reduces the stock price. The cash is shareholders' money, so we need to either invest in new opportunities or return it to them. Obviously, we all want to increase the value of our stock, and we have the best opportunity to do that since the end of FY98. Our stock was around $25 then, as it is now, and we have more than doubled our operating profits since. Shareholders then were betting we would work hard for all these years to make the company worth that mid-98 stock price. We have done so. I see a number of other public companies or soon-to-be-public companies that will deal, as we have, with flat stock price for a number of years while they build adequate profits for their stock prices. The key now to growing our stock price is growing profits even more. If we grow our profits, our stock price is poised to respond. [SNIP] While customers are still feeling pain around security issues, we are building products in a way that significantly reduces vulnerabilities and customers' exposure to attack, and providing good information, tools and services to help customers get and stay secure. [SNIP] Going forward, it's crucial that we are crisp in defining and communicating the end-to-end value proposition for our products, and that we drive customer perceptions of this value. To deliver effective value propositions, we are enhancing the marketing and engineering partnership from the beginning of the product-development cycle, to create a shared vision and accountability for the value propositions we'll take to market. This goes to the heart of what we mean when we say "we build what we sell, and sell what we build." We need to deliver products and services that do more to enable the complete customer experience than we do today. We must be clear about how the features clearly demonstrate the value proposition of each product, and how those features market themselves in the product and on the Web so customers fully derive and appreciate their value. Our products must also be better segmented for different users with different needs. And we must evolve marketing to focus more squarely on the value proposition throughout the product 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. We must also work to change a number of customer perceptions, including the views that older versions of Office and Windows are good enough and that Microsoft is not sufficiently focused on security. We must emphasize key positive perceptions of the strong manageability, and developer and information-worker preference, for our platform. We are effectively using independent studies by Forrester Research, the Yankee Group, IDC, Giga, Bearing Point and many others to change perceptions of the advantages of Windows over Linux when it comes to Total Cost of Ownership, functionality and productivity advantages, support and security. We need to do work like this in every business to get customers to recognize our work and appreciate it fully. [SNIP] This will be a place for people with passion, and it will be a company that cares. This will be a place with some structure, but structure that aids teamwork, not politics and bureaucracy. Nothing solves "big company" ills quite like a strong focus on accountability for results with customers and shareholders. Innovating, growing share and profits, and serving customers all ensure that we have no time for wasted motion. To do this, we need to prioritize the things that matter the most with our customers and for the company, and then be accountable for executing on those choices. We need to reduce churn (e.g., org structure, people and strategy changes) and its impact on productivity, accountability and execution, and do a better job of executing well when change is necessary. When we're faced with a critical need to get both "A" and "B" done, we need to be super creative about how to do this, without having to choose one or the other. Better accountability means leaders thinking through these changes and priorities better, and all employees executing better on their commitments. On an individual level, I'm asking each of you to work with your manager to get clear on your review commitments for FY05. By focusing on what is really important and being clear what you're signing up for, you're not only helping yourself be successful; you're helping create an environment of accountability for the entire company. If each of us has just 5-7 clear, measurable commitments, and we all deliver on those commitments every year, not only would each of us be more satisfied on a personal and professional level, but the company overall would benefit. It would be clearer what we can do and we could plan accordingly. Be bold, not timid, but prioritize. Our managers know they share in these responsibilities. This year, we budgeted for raises consistent with inflation in each country where we operate. Managers will reward superior performers with bigger raises, more frequent promotions, and Gold Star Awards, which are special one-time awards for rare, superior performances. We will promote more than 20% of people this year, so there is great opportunity if you are doing really great work. Even after 24 years here, I still think this is an amazing company. The possibilities we can each create â to make a difference in our job, in our workgroup, with customers, in our communities and around the world â are unparalleled. We get to have superb career opportunities, a chance to work with unbelievable people, and enjoy world-class benefits and personal economic opportunity. Although Microsoft has grown in size, we are still, at the end of the day, a group of people each of whom can and does have an impact on our overall success. I just want to say how honored I am to work with each of you. This is an incredible, incredible company. We are well-positioned to help customers realize their goals and aspirations, and for us to do the same â simply by holding ourselves accountable and keeping our commitments. From the Jul. 8, 2004 Issue N¬±êï‰Ç²,µçhžØ^"wèr‰§zÜ(®Hm¶Ÿÿà "ú ¢g(º
