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Wednesday, July 07, 2004 - Page updated at 12:00 A.M.
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Microsoft CEO tries to "rally the troops" in cost-conscious time

By Brier Dudley
Seattle Times technology reporter

Steve Ballmer is chief executive officer at Microsoft.
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Excerpts of memo sent to employees
First, Microsoft employees lost the stock-option program, then the laundered towels in company locker rooms. Now, company bean counters are tinkering with the free supply of sodas, and it's not going over well in Redmond.

It's a new, more cost-conscious time at the world's largest software company, and Chief Executive Steve Ballmer addressed employee concerns about it yesterday in his annual "rally the troops" memo.

Previously, Ballmer and Chairman Bill Gates used the memos to change the company's course and tackle challenges such as computer security, customer satisfaction and the potential of the Internet.

This year, Ballmer directed the memo inward. He explained changes that have been happening, acknowledged concerns, highlighted accomplishments and outlined priorities in the year ahead.

Yet in an interview, Ballmer said Microsoft employees are content and well compensated. From his perspective, employees are not griping as much as they are getting involved in changes at a place they love.

"People aren't saying let's not change, people are saying let's make sure we're getting better," he said.

"People see this as a change, and they want to know, 'Why, why, is there another shoe that's going to drop? What should I be thinking? Why are you optimistic and at the same time you're working on our cost structure?' "

Cost-cutting and benefit changes began in earnest a year ago for the company and its 57,000 employees, about 28,000 of them in the Puget Sound area.

Last July, Microsoft ended its stock-option program, replacing it with stock grants. Employee benefits were trimmed in May, towels were removed from the locker rooms last month, and yesterday Ballmer said the legendary free-soda program is being scrutinized.

But cost-cutting is just one aspect of Microsoft's changing culture that has some current and former employees concerned about the company's direction.

One issue is the layers of new management processes employees must navigate and their effect on the company's entrepreneurial spirit.
 
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A former Windows executive said he found himself spending less and less time pursuing new ideas and more time on process.

"I had heard from a number of people that it was getting harder and harder that a single person could make a positive difference," said the executive, who asked not to be identified. "People were feeling more and more like a smaller piece of a bigger machine, which you might think is natural for a company that is growing."

The executive said it's a challenge for Ballmer because he has to create a culture that encourages new ideas, but he also has to have strong processes to run the sprawling company and to improve the quality of its software engineering.

One employee, an analyst, said he's exploring other job options — not because of towels or soda pop, but the cultural tone set by the changes.

"The term has been streamlining, we're streamlining processes," he said. "If streamlining means cutting benefits, well, none of us would like to work for IBM, none of us like that culture. I certainly wouldn't want to be in that suit-and-tie MBA-like culture."

Despite such thinking, Ballmer insisted in the interview that the benefit cuts and changes have had "zero" effect on attrition and recruitment.

Microsoft remains a popular destination for computer-science students, said Daniel Miller, a professor who coordinates the computer-engineering program at the University of Waterloo in Ontario, Canada.

"They might complain openly, but secretly go to work at Microsoft," he said of his students. "I think they end up, arguably, doing something interesting and the pay is good."

Among Ballmer's biggest challenges since he took over the company in 2000 has been managing its transformation into a bigger, slower-moving company, from David to Goliath, without losing steam. In the memo, he said more management is a necessary part of this change.

"This will be a place with some structure, but structure that aids teamwork, not politics and bureaucracy," he wrote. "Nothing solves 'big company' ills quite like a strong focus on accountability for results with customers and shareholders."

Ballmer is also trying to sustain growth while a new version of Microsoft's most important product, Windows, is being prepared for a launch in 2006 or later. One way to maintain its financial performance is to cut costs, and this year he and Chief Financial Officer John Connors hope to cut expenses by about $1 billion.

The biggest cuts are coming in places such as advertising, but employees are seeing changes that affect them directly as the company's finance executives comb through expenses in search of savings.

In May, as part of a plan to save $60 million, the company trimmed some health-care benefits, reduced new-employee vacations from three weeks to two and stopped giving temporary workers free bus passes.

Last week the company stopped providing towels in locker rooms for employees who bicycle to work or exercise during lunch.

And yesterday Ballmer confirmed that even Microsoft's vaunted free soda pop may undergo changes. One of the company's famous perks is the unlimited supply of free beverages available from coolers throughout every building on its campus.

"We're looking to take cost out of the delivery of soda pop," he said. "That may mean going from coolers to soda dispensers."

In his memo, Ballmer also rejected employee suggestions that the company soften its benefit cuts by dipping into its $56 billion cash pile to cover expenses. Later this month the company is expected to announce its plans for the cash; analysts are expecting a larger dividend or special payouts to shareholders.

"Using the cash reduces profits, which reduces the stock price," he wrote. "The cash is shareholders' money, so we need to either invest in new opportunities or return it to them."

Ballmer also defended the company's compensation package, saying Microsoft is a place people "can have a better opportunity to meet their financial dreams than a lot of other places.

"We still have absolutely the best benefits program in the world."

Yet employee satisfaction appears to have fallen in recent years, said Matt Rosoff, an analyst at Directions on Microsoft in Kirkland.

"Some of that has to do with economics," Rosoff said. "When times weren't good, a lot of people were happy to work with a strong, stable company — there were not a lot of options there. Now, with the economy picking up, people are starting to look around at their options."

As for the management processes, Ballmer said it is necessary to have "integrated innovation" across the company's divisions, especially with 16,000 employees now working on the next version of Windows.

"We need to have good systematic, high-quality engineering process, whether it's around security to make sure the software we release has the kind of security characteristics that our customers expect, whether it's to help manage the dependencies that exist or should exist between our groups," he said. "In effect the process, if we do it right, will facilitate higher quality, better integration and better teamwork."

Brier Dudley: 206-515-5687 or bdudley@seattletimes.com

Copyright © 2004 The Seattle Times Company

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