Microsoft, Beyond the Office

How Gates & Co. aims to broaden the reach of its business suite

A dozen years ago, Jeffrey S. Raikes struck digital gold. He fused together Microsoft Corp.'s (MSFT ) word-processing and spreadsheet programs to create Office, a software phenomenon that has racked up more than $60 billion in sales. In the 1990s, Office became Microsoft's other, quieter monopoly, joining the Windows operating system. Following that success, Raikes went on to oversee the company's vast sales operation. Ultimately, he emerged as one of the top executives atMicrosoft, sitting just a notch below Chairman William H. Gates III and CEO Steven A. Ballmer.

But he's not sitting still. These days Raikes is tackling a crucial assignment, one that's key to growth at Microsoft: He is back at Office, remaking his own creation. The goal is to light a fire under Office, whose growth had slowed to an anemic 1% in the year ended June 30. Raikes intends to increase that growth by a factor of nine, doubling the size of Office to $20 billion in annual sales by 2010. In coming months, Raikes and his team will be launching a host of products, from software for a new tablet computer to programs that help workers quickly analyze oceans of data. The key question now, for Microsoft as well as for the rest of the industry, is whether Raikes can hit the jackpot a second time with the same ticket.

At first, that very question stumped Raikes. After moving from sales to Office in 2000, he struggled to figure out how to put oomph back into his old business. But just before he officially stepped into his new job, he heard former General Electric Co. boss Jack Welch speak at Gates's home, and he understood what he needed to do. Welch argued that dominant companies in slow-growing businesses should redefine their market. Your share of this broader market will be smaller, Welch said. Your opportunities, however, will grow.

This crystallized Raikes's thinking. He decided to look far beyond his 40 million core customers in America, folks who work overtime on Powerpoint and Excel. His new Office would reach to anyone who used information, even if they didn't create it. This meant new Microsoft products for such workers as pilots and nurses, factory workers and truck drivers. Microsoft figures there are about 117 million people in this country who fit the bill. It's a bold strategy: To reach new customers, Raikes is pushing Office out of the office.

The challenges are considerable. As Raikes pushes into additional markets, competitors abound--from SAP (SAP ) in business applications to Hyperion Solutions Corp. (HYSL ) in business-intelligence software. And in new areas where there are no established markets, Microsoft has to convince customers to buy technology they don't know they need.

To come up with winning ideas, Raikes is sizing up the world of business and searching Microsoft's trove of technologies. He's spending $80 million this year to hire 400 sales advisers who will practically live with corporate customers and advise them on how they can get more out of the software Microsoft already makes. He has another team spotting the "white spaces" between current product categories for which all-new programs can be invented. Meanwhile, Raikes is testing the company's latest innovations in his new Center for Information Work, a prototype of what he believes offices will look like in the future.

For the here and now, Raikes has launched three initiatives--all of which are expected to start bearing fruit in coming months. First, he moved to expand into a new market for Microsoft: run-the-business applications for small and midsize businesses. These are packages that extend from accounting to inventories and payroll programs. Over the next five years, he plans to spend $3 billion on Office, including specialized versions for small business, and products in such areas as business intelligence, which helps workers make sense of all the data their companies gather. Raikes's vision even extends to new machines. On Nov. 7, he'll launch software for the soon-to-be introduced Tablet PC, a laptop with a screen on which users can scrawl handwritten notes that they can store and easily locate later.

His ambitions are grand indeed. Raikes believes he can boost Microsoft's annual sales by as much as $20 billion in the next eight years. Half of that increase, he says, should come from doubling sales of Office suite. He also expects the small- and midsize-business unit, which generated $300 million in sales last year, to reach $10 billion by 2010. And he believes the Tablet PC, which requires a special tablet version of Office to take full advantage of the handwriting features, could spark a wave of software sales. Raikes recognizes the audacity of such targets. "It's a dream," he says. But it's also a rallying cry for the 7,500 people who work for him. "I'm glad somebody's got fire in the belly," says Goldman, Sachs & Co. analyst Richard Sherlund.

Raikes will be hard pressed to grow as fast as he envisions. While Office sales are expected to grow 10% this fiscal year, that's largely because new licensing terms imposed by the company have customers scrambling to buy the most recent version of the software. After that, Raikes needs to pack compelling new features into Office that entice corporations to order companywide upgrades. While the small- and midsize-business market is expected to explode over the next decade, Microsoft faces plenty of competition from well-established specialists making these complex applications. "Today, Microsoft sells commodity software," says Henning Kagermann, co-CEO of SAP, the German software giant that dominates the market for corporate software applications. "Now they're going into a new area."

If anybody has what it takes to pull off such a mammoth transformation, it's Raikes. He helped build Microsoft from the ground up--joining the company in 1981 when there were only 100 employees and annual sales of $12 million. Back then, word processing was a specialized task performed by secretaries. Spreadsheets required massive computing power that only top financial executives were authorized to use. Raikes ran Microsoft's Word and Excel divisions in their early days, and those two programs helped alter the way work was done. Now, he's focusing on a new set of analytical tools. The goal is to reduce what he calls a worker's "time to insight." The result, he says, "could give you, in effect, a 28-hour day."

Raikes is jazzed about his job. Like plenty of other senior Microsoft execs, he could walk away tomorrow. He's sitting on nearly $350 million in Microsoft stock. And he has plenty of outside interests. A sports fan with a 9 golf handicap, Raikes owns a piece of the Seattle Mariners baseball team. And he still keeps close tabs on his family's 2,000-acre corn-and-soybean farm in Ashland, Neb. But the opportunity to create another software revolution keeps him working the way he did two decades ago. "I couldn't be more excited about what I'm doing," Raikes says.

For inspiration, he often plumbs his own everyday experiences. He has struggled through tedious, paper-based applications for his children's schools. Why not apply online instead, he wonders. And why not set up the electronic forms so the information automatically flows into the schools' database? One of the first new products his engineers are working on is a paperless workflow application designed to allow organizations to dispense with paper forms and heaps of retyping.

Other ideas come from things customers have dreamed up. One such client is JetBlue Airways Corp. (JBLU ), the New York-based discount carrier. Federal regulations require pilots to update their flight manuals each time policies change--something that can happen several times a week. At most airlines, pilots store everything in a notebook and rip the pages out to replace them with updated versions. At JetBlue, every pilot is issued a laptop computer. Each morning, their manuals are automatically updated on a Web site using Word and Office Web software. It saves the airline 10,000 man-hours each year. "We've taken the Office package to a whole new level," says JetBlue Chief Information Officer Jeff Cohen.

In situations such as this, Raikes does not have to add new capabilities to Office to make it more useful. He just has to figure out how to show customers that they can do much more with the software he already makes--so they'll pony up for the latest versions. Inspired by the JetBlue experience, Raikes is hiring the 400 grassroots sales advisers who bypass corporate technology departments and meet directly with workers.

One of the toughest challenges Raikes faces is to market applications that don't yet exist in the pen-and-paper world, such as the ability to collaborate on a document simultaneously. "A lot of what we can do with software is stuff that customers don't think to ask for," he says. This makes it harder to describe what software does--and harder to sell it.

That's one reason Raikes has set up Microsoft's Center for Information Work. The center, similar to the futuristic Microsoft Home, will open its doors on Microsoft's Redmond campus in late September.

One technology he'll feature is RingCam, a video-teleconferencing technology created by Microsoft Research. The device, which looks a bit like a small table lamp, has five cameras circling the top and eight tiny microphones around the base to give a 360-degree view of a room. Microsoft's software matches the audio and visual feeds so that people tapping into the meeting from elsewhere automatically see the person who is talking on the largest window of their computer screen. A product could be ready within a year or two.

Even when Raikes goes after markets that are relatively well established, he plans on putting a new twist on them. Take business-intelligence software. Within two years, Microsoft will launch an application to help people extract data from various computer systems, run it through sophisticated analytic programs, and produce reports to guide their decisions. He faces competition from the likes of Business Objects and Hyperion in the $3.8 billion market. Raikes believes that business-intelligence software remains largely in the domain of power users--finance wonks and tech specialists. He hopes to make these programs much easier to use by pulling data into the well-known Office applications. "We can create business intelligence for the masses," he says.

Most corporate customers haven't shown much of an appetite for the latest and greatest technology since the tech slump began, but Raikes can afford to wait. "A lot of times, people will overestimate how quickly things might change in the short term," he says. "'But they will also underestimate how much things will change in the long term." When businesses are ready to start buying again, Raikes hopes to have a whole new generation of software to offer them.

By Jay Greene in Redmond, Wash.

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