Thursday, September 21, 2006

What ever happened to "Hardcore"?

No, I'm not talking about the adult entertainment industry. I'm referring to a term that is not precisely defined, but was often used by MSFT insiders in the 90's to describe extreme commitment, focus and/or technical depth. Executives would refer to being "hardcore" about this or that - meaning laser-focused, willing to do whatever it takes (sometimes to their legal detriment) and make the tough trade-offs required to ensure success. Importantly, it also meant shutting out other distractions regardless of their individual merit. In other words, it wasn't just about what you did, but also what you chose not to do. Hardcore was also characterized by a strict attention to cost-control. Sure, management still paid themselves a fortune back then (and even average employees were becoming millionaires within 3-5 years), but headcount increases - even as late as the late 90's - were widely reported to still require direct sign-off from either Raikes, Ballmer or Gates. This Spartan-like dedication served the company and shareholders very well through the period. It was a golden era for MSFT, and for much of the decade the company was generally regarded as one of the best run companies in the world, with one of the strongest management teams. Not surprising, many companies tried to emulate MSFT, numerous stories and articles were written about the management team and their approach, and Gates' own book Business @ the Speed of Thought was a New York Times bestseller.

Flash forward to today, and we see a very different Microsoft. Gone, seemingly, is the concept of being hardcore. Microsoft's strategy now - as best as I can discern it - is to sit back and wait until someone else either proves out a lucrative new market, poses a competitive threat (real or imagined) to existing profit streams, garners (in MSFT's mind at least) too much media attention, or simply pisses off Gates or Ballmer. Then, invariably way late to the party and often without any real plan for a successful and profitable market entry, the company plunges in. The results, more often than not, are predictable: The initial entry is poorly conceived, requiring major rethinking and redesign. Milestones, minimal though they may be, get missed by years not months. In the end, the entire exercise falls far short of hopelessly optimistic initial expectations, to the point where a positive payback is often no longer even possible/likely or MSFT is forced to retreat entirely (something that unfortunately they're loathe to do now given the $B's - or even $10B's in some cases [think MSN] - spent on these new "investments"). Joining this lack of focus on the strategy side - which a marketing friend of mine calls the "see-a-bear, shoot-a-bear" approach - is a new disregard for watching expenses. Yes, they did try to save $1B the other year by famously taking away towels (among other things). But much of that has now been rescinded and last year saw 10K new employees hired - the most since the pre-00 run-up. Then there's that recent $1B distributed to 900 senior managers for all their great work these past 3 years (cough, sputter, choke). The result? While revenue has nearly doubled since '00, net income is up only about 34%.

Seriously, if Steve Ballmer wrote a book about business management at MSFT today, would it be a bestseller? Could he even get a publisher interested? If you asked tech company CEO's who they were looking to as potential role models, how many would say MSFT versus say, GOOG or AAPL? I suspect very few. Heck, just today, long-time company follower Mary Jo Foley, in the process of switching from MicrosoftWatch to blogging independently, was asked "Why are you sticking with covering Microsoft? There are so many other companies doing cool things… isn’t Microsoft on its way out?".

So, assuming I'm correct, can what's wrong be fixed and if so, how? I think it can be, although probably not with Ballmer still remaining as CEO. Somewhere along the line, MSFT seemingly figured it was entitled to its success and didn't have to earn it any more. A big part of that, perhaps, was the wide barrier to entry (some would say "monopoly") - at least until Linux/OSS came along. But imo another key factor is/was the massive cash position. Having tons of money, while generally great, can have major detrimental effects on focus, creativity, initiative and accountability. One of the best discussions of this that I've seen, is by Greg Gianforte, CEO and founder of CRM provider RightNow. You can find excerpts here and here.

Although he's focused on startups, the lessons imo are very applicable to MSFT and deal with what happens when you have cash to burn versus when you don't (bootstrapping). For example:

Bootstrapping ensures that you build your business on a legitimate, real-world value proposition. When you’re Bootstrapping, you’re forced to deal with customers and to fulfill their needs from Day One. If you have a lot of external funding, on the other hand, you can be fooled into thinking you’ve already created an actual business just because you’re paying salaries and rent. But you haven’t. You only have a business when you have paying customers. Bootstrappers know this instinctively, and never lose that customer focus.

Bootstrappers initiate the critical sales learning process sooner, not later. Selling is the hardest job of all. You have to learn how to be absolutely great at selling your product or service, and then teach others how to be absolutely great at selling it too. If you have too much cash-on-hand, it will take away from the urgency of initiating this process—so you wind up delaying the day when you screw up your courage, pick up the phone, and ask for that First Order. Bootstrappers are forced to start selling immediately as a matter of survival, which means they become better at selling sooner than their venture-funded counterparts.

Bootstrappers don’t waste money; they make it. If you have $100,000 or $1 million in funding, what do you do? Leave it in the bank? Of course not. You go out and spend it—or, to use the commonly accepted term, you “burn” it. This has actually become an accepted practice! Venture funding actually encourages the start-up to waste money long before a viable business has been established. In a Bootstrapping model, on the other hand, waste simply can’t occur because there is nothing to waste.

Bootstrappers are less likely to make big, fatal financial mistakes. Because they don’t have huge amounts of cash, Bootstrappers can’t make the kinds of huge mistakes that often destroy venture-funded companies it.

Bootstrappers are forced into unconventional thinking. Necessity truly is the mother of invention. Without a big cushion of cash, Bootstrappers are constantly forced to solve problems creatively. This results in innovative, outside-the-box approaches to everything from product design and manufacturing to marketing and sales.

See any lessons there for Xbox? MSN? MBS? Zune? All of them imo would have been better off had they followed this approach (or may never have been allowed to start). So in a nutshell, that's what I think MSFT needs to do - get back to its roots and think like a startup. Assume that no one owes it a market, and no "emerging business" group should consider cash an infinite resource. Also, recognize that massive windfalls increasingly go to those who stake out new frontiers early - not those who belatedly enter and try to steal them. And yes, it means being 100% accountable for results - not bonusing yourself despite massive failures. MSFT has been playing defense for much of the past decade and it's not working any more. Thrilling customers with innovation (versus merely meeting the minimum needs or worse, charging them for beta-testing) is now the bar for success. Jumping in late, with largely derivative products (i.e. ZUNE), isn't likely to be successful or rewarded highly. And as we've seen, it may even piss off existing partners - which are one of MSFT's crown jewels. It's time to go back on offense, lead not follow, but with a well thought out and disciplined plan. If I hear one more MSFT executive excusing their late entry and obvious strategy/product/execution shortcomings with "Well, our goal was really just to begin a dialogue with our customers", or "Don't worry, the XYZ market revolution has only just begun", I think I'm going to puke.

Wednesday, September 13, 2006

A penny for your thoughts?

Fresh from awarding 900 executives nearly $1B in bonuses, MSFT's Board of Directors apparently found some spare change that spilled over from the executive feeding trough, and decided they'd better give it to us pesky, complaining shareholders:

In case you're following the math, that penny per quarter increase amounts to ~ $400M more per year, split across all shareholders (including insiders who hold some 15% of shares outstanding). 900 executives split $1B while every shareholder combined split an extra $400M? [cue the old Sesame Street song: "One of these things, isn't like the other; One of these things, doesn't belong"]. But wait, I'm sure the execs will point out that the $1B was for 3 years of performance, not just one. You know...the past 3 years where they managed to lose 10% of our shareholder value and underperform the market by a net 40%? Er...well maybe forget that argument.

Anyway, based on today's closing share price, that $.01/qtr. increase will take MSFT's yield up from the current 1.39% to ~1.54%. To put that in perspective, 1.54% should see MSFT move from #26 on the list of DOW 30 stocks to maybe #23. On the S&P 500, where the average yield of dividend payers is 2.06%, it will move up from #233 to maybe #226. INTC, by contrast, currently pays a dividend of 2.03% - or just below that latter average. And keep in kind that MSFT has one of the poorest 1 and 3 year stock performance records in the DOW 30 and has badly lagged the S&P since 2003. So I guess the pitch to current and prospective shareholders is "Hey, get the worst of both worlds: a below-average dividend and abysmal stock performance". And to think that people aren't tripping over themselves to buy the stock - go figure.

That aside, if MSFT sticks to the recent plan of major buybacks that actually result in a reduction of shares outstanding (versus the '00-'05 plan that saw $40B+ of shareholder cash spent on buybacks which were completely offset via dilutive payments to insiders, the net result being that total shares actually INCREASED), then I'd prefer to see the money used for that. MSFT has far too many shares outstanding, and anything that can be done to address that should be in the long term best interests of shareholders (assuming that management doesn't turn around and start diluting the hell out of the stock again). In the meantime, yearly one cent increases in the quarterly dividend, while not insignificant in % terms, aren't going to do much to alter the fact that MSFT's yield badly lags the S&P dividend-payer average and most of its DOW 30 peers. As such, it's really rather insulting especially given MSFT's strong cash flows and the $1B SPSA bonus mentioned above. But then MSFT's current management love to play their endless hide-the-pea shell games in lieu of actual performance. And I'm sure they're smart enough to know that having underperformed the market for the fourth straight year, losing $6B+ more of shareholder value and nevertheless treating themselves to $1B in bonuses, they need something to take focus off that dismal track record prior to the upcoming annual shareholder meeting. So expect to hear all about that "money returned to shareholders" via bigger buybacks and increased dividends. And of course, no reference to the stock lest us dumb sheep run the actual numbers and note that, despite all this money supposedly being "returned" to us, we once again ended the year worse off on a net basis than we started it.

Tuesday, September 12, 2006

Burgum leaves - finally!

News today that Doug Burgum, Chairman of MSFT's heretofore separate Business Solutions division, is leaving MSFT:

According to his assessment (unbiased of course), the division is in "great shape", having managed a whopping $24M profit this year (eeked out - conveniently - in the final Q of the fiscal year before ceasing to be a separate reporting entity) versus a $170M loss the year previously. Putting aside that I can't recall a departing exec ever saying their division wasn't in "great shape", I guess Doug isn't a math major because at that rate of profit, it would take some 44 years just to payback the initial $1.1B MSFT expended to purchase Great Plains (a company he founded and was CEO of). And of course, the Bus Sol buying spree didn't end there and we've had years of significant ongoing losses.

So 3-4 years later, we're left with another of those wonderful "shareholder value creation" stories that Ballmer is so fond of mentioning. Only, as usual, no obvious value has been created, but management has managed to chew through another $3-4B of shareholder money and detract from earnings (until recently) - thereby actually hurting EPS and the share price. Worse, it doesn't appear to be on a trajectory that would alter that equation, or even just provide a payback, any time soon.

Apparently, Burgum's decision to leave came after a recent meeting with Raikes (of the "Bus Sol will be a $10B division by the end of the decade" fame) and Ballmer:

Burgum said he made the decision to leave last Friday afternoon after discussing the matter with Raikes and Ballmer over the course of last week. He said he's spent little time thinking about his plans after Microsoft.

With results like those described above, he would have made that decision after I met with him too - right after I said "You're fired". Look, Burgum may be a great guy and clearly had the requisite track record on paper. He may even have battled (unsuccessfully apparently) to keep Raikes/Ballmer et al from meddling and turning Bus Sol into an Office/Server delivery vehicle versus its purported original mandate to be the leader in small and medium business ERP/CRM. But at the end of that day, Bus Sol has been a massive failure under his leadership even accounting for any positive drag through of Office and Server products. If he was constrained from succeeding due to Raikes/Ballmer meddling, then he should have quit earlier. If he wasn't constrained and just couldn't put up the numbers, he should have been fired versus promoted to the nebulous post of "Chairman" and allowed to vest an even more ridiculous amount of shares. Instead, he made a killing while Bus Sol was allowed to flounder, taking far too long to rationalize its code base and channel strategy and being far too slow to provide updates (gee, where have we heard that before?). Worse, rather than being proactive and embracing the upcoming model of software delivered as a service, they spent numerous cycles and years trying to shoot down that concept, only to end up embracing it wholeheartedly, years late, now that, Rightnow, Netsuite and others have run circles around MSFT in terms of growth and customer adoption.

And here's a surprise:

Jeff Raikes, president of Microsoft's business software division, said the company did both an internal and external search and "went through literally dozens of candidates" before selecting Nadella. The company said Nadella's experience with Web software will loom large as Microsoft develops and launches new online products, such as Office Live and Dynamics CRM Live.

So... after an exhaustive search, MSFT came up with a longtime employee to lead the effort versus say a seasoned industry veteran or CEO from a savvy upstart? Wow, we've never seen that before. Puhlease, it sounds like MSN all over again. And note how software-as-a-service - aka "web software" - is now key. Unbelievable. I sure hope Nadella actually lives up to that billing versus just being a convenient "yes sir" lap dog for Raikes.

Just once, I'd like to see an example of MSFT actually getting ahead of the curve, spending a reasonable amount of money and getting outsized returns in a timely fashion. In other words, setting the pace for both spotting the new trend and taking advantage of it. Instead, the company is constantly behind the curve, and then spends $B's and takes huge losses - in some cases for a decade - only to end up a distant #3. And for this level of business aptitude/execution, we're paying 900 executives some $1B in collective bonuses? Maybe Raikes and Ballmer should have "meetings" with a few more executives. Come to think of it, maybe the Board should be having one of those with them...

p.s. in reading this again, let me be clear that my hostility is reserved for the management team who allows/rewards this type of incompetence. I'm sure there are plenty of employees within the former Bus Sol group who are ready/willing/able to do a better job of solving customer's needs, handing and others their ass, and making this a wise area of investment for MSFT. Indeed, it is unacceptable that those employees are not provided an environment in which they can do so.

Friday, September 01, 2006

Update: Transparency and SPSA

Further to my recent discussion of the SPSA payout, there's a bunch of media coverage today, including:

They confirm the 37M share total (nearly $1B) that I referenced in my piece several days ago, as well as having some additional specifics now that MSFT has released the breakdown for several key officers. It turns out that the "Top 500" which I speculated might have morphed to 600+, is actually 900 now - itself a testament to how top heavy and bureaucratic MSFT has become. And as you might have guessed, the distribution of awards was heavily skewed:

Jeff Raikes, president of Microsoft's business division, got the biggest award -- 875,334 shares of restricted stock, according to a filing with the U.S. Securities & Exchange Commission.

I guess keeping Office sales effectively flat, is viewed as being a huge accomplishment in itself, and Bus Sol's chronic execution issues didn't end up sticking to him despite his leadership and famous (not to mention hopelessly incorrect) pronouncement that it would be a $10B business unit by the end of the decade.

Initial investor reaction is mixed, with the stock flat/negative despite an up market (continuing the pattern for the week) and supporters making this argument:

The size of the bonus payments ``might bother some investors'' considering the stagnant stock price, said Alan Davis, an analyst at D.A. Davidson & Co. in Lake Oswego, Oregon, who rates the shares ``buy.'' ``But Windows and Office are the company's cash cows and so it makes sense to look at their performance.''

Detractors, meanwhile, offer this:

"This raises a question: Should we be compensating the top officers of a public company for not moving the stock price? For all the controversy over stock options, the fact is it's still their job to create value," said Fred Whittlesey, a principal at Compensation Venture Group, a Seattle consultancy.

As I had forecast in my piece, we've been offered the new excuse for why the award period that made more sense to move from 1 year to 3 (to better encourage long-term thinking), now makes even more sense to move back to 1:

The term was shortened to enable the company to make sure the performance goals don't become outdated and accurately reflect the biggest challenges facing the company, Gellos said.

Translation: Those performance goals that we just gave executives $1B for? Well, it turns out they weren't the right ones after all. Oops.

Maybe one of those missing criteria was the stock?:

The filing does not say whether the company's stock price is a performance factor.

Which makes this bit of comic relief from MSFT director James Cash, all the more amusing - or sad, if you're a MSFT investor:

James Cash, a Microsoft director who sits on the board's compensation committee, said in a statement that the awards were set using "measurable criteria" to evaluate job performance and that their size was in line with industry practices.

So, the stock may not have been a performance factor, but at least the criteria they did use were measurable? Wow, I feel so much better now that I know they didn't just make them up. I guess when you refuse to publish what those criteria were, saying they were subsequently met and that rewards were "in line" with industry practices is pretty hard to disprove. Again, so much for supposed "transparency".

And how did the stock do over the past 3 years for which the board felt $1B in management bonuses was deserved?:

During the period covered, Microsoft shares dropped 9.1 percent, compared with a 29 percent rise in the Standard & Poor's 500 Index.

In other words, ~40% relative underperformance, not to mention all the operational screwups (e.g. Vista) that I mentioned in my original piece.

Apparently, there's some concern that many of these top executives may leave now that they've received their big payout. With company and stock performance like we've seen over the past 3 years, I say "hasta la vista" and bring in the second-string - they could hardly do worse, and they'll be a whole lot cheaper.