Share

Every decade or so, a new platform emerges that reduces the cost of running an IT department to such an extent that vendors have no choice but to embrace it or die. In the 1990s, PCs with powerful operating systems spelled the end of mainframe development and ushered in the client/server era. Today, cheap servers and high-speed internet connections are triggering a move away from traditional desktop PC software and towards software as a service, hosted by a third party and delivered over the internet.

No company has as much to lose from this shift as Microsoft, which dominated the client/server era on the strength of its Windows operating system. Microsoft is currently enjoying a moment in the spotlight thanks to Windows Vista the fruit of more than five years of development and what Microsoft chief operating officer Kevin Turner calls the "biggest R&D investment in the history of Microsoft and arguably the history of business".

But Vista is not a part of the software-as-a-service trend, and all the pomp and circumstance around its release mask a growing concern inside the company, one that comes through in executives' demeanour, internal communications and candid conversations about what the IT world will look like five years from now: software as a service is a threat unlike any the company has faced before, and Microsoft must make dramatic changes if it wants to remain the most important technology company in the world.

Microsoft has started to develop a software-as-a-service strategy over the past year. Its initial offerings – the Windows Live and Office Live programmes – provide web-based mini-applications. But these services are only a small part of the grand vision that chief executive Steve Ballmer, Kevin Turner, chief software architect Ray Ozzie and others hope will make Microsoft as indispensable to the Web 2.0 enterprise as it was to the client/server era.

In a series of exclusive interviews with CIO, Microsoft executives explain that web-based applications are just the beginning, and that the company's future lies in developing the tools CIOs will need to manage the software-as-a-service environment. "It's easy to whip up a web app, throw it online, and say it's for businesses," says Ozzie. "But that's a naive view of what CIOs have to go through."

To Microsoft's way of thinking, the web services world will make a CIO’s life messy and difficult. While each software service that a company subscribes to will be cheaper and easier to operate than its client/server counterpart, collectively they will make the enterprise exponentially more complicated, unless CIOs have tools to provision and manage those services as a suite. Microsoft vows to develop these management tools and make them the centrepiece of its enterprise business.

Once the tools are built and deployed, Microsoft says, it will not matter if the applications an IT department supports are web-based services hosted by an outside party, client/server software hosted internally, or a combination of the two. CIOs “have to have a way of provisioning an account, providing the initial connection and user interface", regardless of an application's source, says Ballmer. "At least that's our vision."

But even Ballmer admits that right now, a vision is all it is. Microsoft has accepted and internalised the idea that the software market has shifted ineluctably to services, and the company has seen there a critical opportunity to move forward. But to succeed – to change its corporate strategy, identity and DNA – Microsoft must overcome equally critical barriers of technology, strategy and culture, analysts say.

Where Microsoft sees its opportunity

The widely preached gospel of software as a service says companies willing to give up the control that comes from running applications internally will save money by not having to maintain and host the applications and, by freeing up these resources, will become more agile and productive.

CIOs running services, the gospel goes, do not have to buy and operate farms of servers or trudge from desktop to desktop upgrading software. Instead of a model that encourages long, costly upgrade cycles – the very model on which Microsoft built its enterprise empire – software as a service allows for small, steady, incremental improvements. This is just one reason why it could kill CIOs’ appetites for traditional client/server software like Microsoft's.

All a user needs to access a web-based application is a browser - not a robust operating system tightly integrated with the application. So unlike in its past battles with Netscape and others, Microsoft cannot rely on its Windows strength to compete. And while Microsoft argues compellingly that it would be foolish not to take advantage of all the processing power a PC offers, the company is simultaneously planning for a future that will rely on less powerful mobile computing devices and ubiquitous high-speed internet connections.

The hard truth is that Microsoft has no choice but to confront software as a service. But rather than fighting it, Microsoft looked for an opportunity. And, it says, found one.

"Some people say that [software as a service] is a panacea and that everybody should immediately switch off everything they have and go to this world," says Andy Lees, vice-president of Microsoft's server and tools marketing, his sarcasm foreshadowing what comes next. "But here's a problem with it: the first service that you have is beautiful, the second service that you have is kind of nice – from then on you have all of the same problems that you had before."

In other words, the CIO still needs to manage a lot of applications - it is just that this time the applications are hosted somewhere else. CIOs are aware of the problem, even if the conventional wisdom (and enthusiasm) surrounding software as a service often ignores it.

"Managing multiple services applications - as well as the things you run yourself - is going to be a challenge," says Joseph Devenuto, CIO of US private hospital firm Norton Healthcare. "You're looking at a world of headaches."

When someone leaves a company – for dramatic purposes, let us assume a disgruntled accounts clerk is fired for gross misconduct – instead of deleting the employee’s account from the internal systems, a CIO in a services environment would need to make sure that all software providers – covering everything from email to customer relationship management (CRM) – make the change in their systems, Lees says. Since the disgruntled ex-employee can access the hosted applications through a browser on any device, the risks multiply.

"Quick, get all the IT guys and dial in to those six, seven, 15 different systems that you no longer own," says Lees.

Obviously, this could be done, says Ballmer, but the problem is that it will devour a disproportionate amount of time and resources. Microsoft's vision is to come up with products and services that allow CIOs to manage web applications -- as well as internal client/server applications -- from a single place. In addition to providing a central place for provisioning, Microsoft will let CIOs set rules and enforce policies – for example, that all orders must be processed by 3.30pm, Lees says. Workflow features will help CIOs automatically manage exceptions, he adds. Today's CIOs "spend all their time configuring and changing and monitoring", Lees says.

CIOs feel as if “cost and complexity weigh them down”, says Ballmer. "I want to make sure we're eliminating that cost and complexity and letting them focus on taking advantage of new innovations and things that can add value to the company."

What's the answer? Steve? Kevin? Ray?

Microsoft is a product company, and for the past decade its Windows and Office products have stood head and shoulders above all others. Historically, those two business units have been responsible for almost all the company's earnings. But this has changed over the past few years. Revenue for Windows and Office has remained relatively flat, while the server and tools division has posted double-digit revenue growth for 16 quarters in a row. Today, the server and tools division is almost as large as the veteran groups -- generating 22% of Microsoft's $44bn (£22bn) revenue, compared with 29% and 25% for the Windows and Office business units respectively.

If the company is going to reinvent its enterprise business around one of its units, this is the one to pick, says Rick Sherlund, an analyst who covers Microsoft for Goldman Sachs.

But creating tools that allow CIOs to manage, configure and provision a suite of disparate applications is both a technical and strategic challenge. And no one, inside the company or out, can articulate exactly how Microsoft is going to get there.

Ballmer says Microsoft has many of the tools in place but that they are "certainly not anywhere close to sufficient", adding that "no one product is this vision". But he believes Microsoft has the right combination of enterprise and web experience to pull it off. Oracle and SAP, he argues, have a scope limited to their suite of products. IBM has reinvented itself around consulting services. No other company besides Microsoft, says Ballmer, combines as much enterprise and web experience with a rich understanding of business process.

Analysts, however, say Microsoft's competitive position may not be as strong as Ballmer describes. For starters, managing a customer's computing resources is something that Microsoft has historically left up to partners. "They have to piece about moving toward managing services," says John Rymer, an analyst at Forrester Research. Microsoft knows how to help CIOs manage its own products, but incorporating other companies' products is a substantial leap, Rymer says.

The biggest leap, without a doubt, is that Microsoft's vision requires it to embrace a heterogeneous computing environment. Yet Microsoft executives, historically averse to working with anything they have not built themselves, seem united in their commitment to supporting non-Microsoft technology.

"We want to do it whether you're developing [applications] or whether you're consuming them, and whether we're delivering them or whether someone else is [delivering] them for you," says Lees.

One factor could make Microsoft's work supporting this plethora of applications easier: software-as-a-service applications all have the same delivery mechanism – the internet, which requires that they be built with a specific set of standards. These standards – XML, SOAP, WSDL and UDDI – are the same ones that Microsoft and IBM helped push through standards organisations like the W3C and Oasis at the beginning of the decade. Microsoft will have an easier time using these standard protocols to integrate with web-based services than it would integrating with a more traditional client/server application that uses a proprietary standard, says Dwight Davis, an analyst with Ovum Summit.

There is probably a market for Microsoft's vision, says Dave Girouard, general manager of arch-rival Google's enterprise division – and it may not be that difficult to achieve, since software-as-a-service providers are going to want their applications to work with a CIO’s existing infrastructure. But provisioning and single sign-on are one thing – deeper integration, such as porting data from an online CRM system into a legacy enterprise resource package, will be complicated, promises Girouard.

In the end, superficial integration will not be enough to charm CIOs. The reason companies will adopt a particular software as a service is that its features are a good fit, says Roger Kay, president of consultancy Endpoint Technologies. Giving CIOs a single place where they can manage their software services is a great idea -- but only as long as the management interface preserves the array of features that drove a company to choose a particular software service in the first place, Kay says.

Can Microsoft truly make all sorts of web applications communicate well and play nicely? "That's really ambitious," says Kay, noting that Microsoft will have to interact with all kinds of proprietary file formats. "It doesn't mean that they can't do it, but it will be hard."

If Microsoft really wants to be the vendor that companies turn to for managing their IT assets, it will have to learn how to support all of a company's IT assets – and support them well. "They have to be willing to go cross-platform, and historically Microsoft hasn't been willing to do that," says Goldman Sachs' Sherlund. "It's a bold strategy that will require broad support of other platforms and knowledge of other systems."

At the moment, all Microsoft is offering is talk. But at least it is talk that CIOs already using open source software want to hear.

"The reality of the world is a lot of companies are built through acquisition," says Ron Markezich, Microsoft's CIO. "As you build through acquisition you have a lot of different platforms, and the CIO doesn't always have the power or the budget to standardise." Markezich says it will be up to Microsoft to learn how to work with the other systems. "Take open source," he says. "We interact with it now, but it's difficult. But it's something we have to do."

For a Microsoft executive, using "open source" in a sentence without an introductory pejorative is the first step in what promises to be a struggle for several years.

Can Microsoft pull it off?

Putting the technology challenges aside, there are other reasons to doubt Microsoft's ability to execute its vision. "Their approach has always been 'put in our stuff,'" says Forrester's Rymer. Changing that will require a large cultural shift for a company that has more than 71,000 employees and is about to lose its guiding visionary, now that chairman and co-founder Bill Gates has announced that he will leave the company in 2008.

Another challenge is that this cultural shift will have to take place while the company is marketing Vista and Office, two products only tangentially related to Microsoft's long-term strategy. Over the next year or so, it is unlikely that CIOs will be able to turn on their TV or read a magazine without seeing an advertisement for Office or Vista. This will keep the company's marketing and sales organisations squarely focused on the company's old product-oriented business model. In fact, for all the talk about the Live initiative in the business and IT press, trying to find out about it from Microsoft's sales department is very difficult. Barbara Gordon, Microsoft's vice-president of enterprise sales, says she does not sell the 'Live' services and does not know when her organisation will. It is focused on selling Vista.

Customers see this reality too. "I don't think that Vista is the link between the current environment and the web services one," says Norton Healthcare's Devenuto, who has been beta testing Vista for Microsoft. It is a more secure operating system, he says, "not a transitional tool".

And, while reinventing its enterprise line, Microsoft is taking on Google and Yahoo in consumer applications, and Sony and Apple in consumer devices - game consoles and music players. "If I were a CIO I would wonder if the investment in MSN and Xbox is a distraction that will not allow them to deliver [on their enterprise strategy]," says David Yoffie, a professor at Harvard Business School. "Any company, no matter how large, has a limited number of A teams. Do you put that team on search or Xbox or the vision that you described?"

Microsoft counters that it does not comment on the make-up of its project teams but that the number of people working on the software-as-a-service management tool will increase as Vista and Office development efforts wind down.

But even if it is able to redirect significant energy to the enterprise, the new vision requires that the company move outside of its traditional comfort zone.

Microsoft's management offerings, such as the Microsoft Management Console and Active Directory, “have historically been spotty", says Davis, the Ovum Summit analyst. "So it doesn't arrive at the table with any overarching credibility."

Microsoft's executives are all saying more or less the same things about the company's need to embrace a heterogeneous IT environment and the opportunity that managing software as a service presents. That has to continue for Microsoft to reinvent itself. "Talking the talk is step one when you are trying to change culture," says Laraine Rodgers, a change management consultant.

But while Microsoft's executives are preaching the gospel, their language sometimes betrays the company's famously closed culture. Lees, for example, introduced the concept of supporting applications built on non-Microsoft platforms by saying this was "what's called interoperable", as if no one in the room had ever heard the term before. Slips like this demonstrate just how large a change Microsoft is trying to make.

Ozzie, the man replacing Gates as the chief visionary, says supporting a web services environment is just a logical extension of the expertise Microsoft developed in the client/server era. And at the end of the day, Ozzie says, the same skill set that made Microsoft the most important vendor then - understanding of business issues like security, manageability and compliance, as well as its experience with development tools such as .Net - will prove to be the most important factors in the software-as-a-service world.

Microsoft has the experience to build the tools that will make the services era manageable, he says. "It's unsexy," Ozzie says, "but it's what's going to make [hosted] services as important as technologies inside the datacentre are today."

Closing Windows, opening doors

Operating system and applications revenue, once the stars of Microsoft's financial reports, continue to lose their lustre. The company's future plans emphasise the server and tools division, which the company believes will produce an increasingly large slice of its overall revenue pie.

1999 Total revenue
$19.7bn (£9.9bn)

Applications
39%

Windows
34%

Server and tools division
17%

Other
10%

2005 Total Revenue
$44bn (£22bn)

Applications
25%

Windows
29%

Server and tools division
22%

Other
24%

The big upgrade

Now that the marketing onslaught for Microsoft's new Vista operating system has begun, CIOs in mid-market firms will have to present upgrade plans to chief executives, many of whom will probably get their information about Vista from that marketing. CIOs who have been beta testing the new operating system say business users will like the security improvements, but will want to roll out slowly for reasons that include Vista's beefier system requirements.

Past versions of Windows made control over desktop settings an all or nothing proposition, but Vista lets CIOs give users more freedom by treating each configurable element differently – for example, giving users permission to change the system clock time but prohibiting them from loading information through USB drives. This flexibility should particularly appeal to mid-market firms with smaller and more time-pressed IT support staffs. So too should the security improvements, including myriad fixes to holes and bugs in Windows XP, and a new feature called Bit Locker, which encrypts local files and makes it harder to access data on a stolen or lost laptop.

In Microsoft's estimation, companies currently standardised on Windows XP can reduce IT labour and support costs by $35 (£17.50) per PC by moving to Vista and around $340 (£170) per PC by upgrading to all the Vista-related infrastructure products, including firewalls and Active Directory.

But it is unlikely that mid-market companies will be able to do either because of the new operating system's hardware requirements. Microsoft advises enterprise users to run Vista on computers with at least 40GB of storage, 1GB of memory and a 1GHz 32-bit or 64-bit processor -- meaning that most mid-market companies will have to buy brand new computers in order to support it.

"We can't replace every desktop," says Joseph Devenuto, CIO of US hospital company Norton Healthcare. His firm will upgrade to Vista on its normal technology refresh cycle, which covers about 25 per cent of its 5,000 machines each year. Microsoft's Brad Goldberg, a general manager in the Windows division, suggests that mid-market companies doing phased rollouts should start with laptops, since the security benefits will be felt most by mobile users.

Devenuto has one other concern. "The look and feel of Vista is different," he says. That means that mid-market firms could end up with an unplanned additional expense: training. "You'll need at least an hour to teach people the intuitiveness of it," he says.

Now comes the hard part

To provide products and services that will help chief executive officers manage disparate web applications, Microsoft must overcome at least three serious technological challenges.

  • 1. Building management tools. Microsoft is not known for providing management tools, says John Rymer, an analyst at Forrester Research. Right now it leaves that to partners like Amberpoint. "[Microsoft] has products that let you manage Microsoft servers," says Rymer, "but I dare say that if you talked to the 10 IT shops that are using it, they would say it was for the development tools - not management."
  • 2. Supporting applications built on non-Microsoft platforms. Microsoft has promoted some open standards around XML and web services, says Rick Sherlund, an analyst who covers the company for Goldman Sachs. But actually supporting applications built on non-Microsoft platforms is not something that the software giant has done. "I hear them say [Microsoft's future enterprise environment] will be heterogeneous, and maybe there are things they can do to help people to bridge that environment," says Sherlund, "but we haven't seen the pieces of that." One place to look for clues as to whether Microsoft is making progress working with cross-platform technology is in its Longhorn server, which is slated to be released by the end of 2007.
  • 3. Preserving the unique features of services while integrating them. Companies will choose one software service over another based on features. Microsoft's challenge will be developing technology to work as a common interface with these applications without eliminating some of the more specialised features, says Roger Kay, president of consultancy Endpoint Technologies. That will require Microsoft to develop technology that interacts with all sorts of file formats. And if it cannot deliver, “why would you bother with it?" he asks.