Resolve and Fortitude : Microsoft's ''SECRET POWER BROKER'' breaks his silence

by Joachim Kempin

  To keep the troops alert, Bill and Steve were fond of depicting an atmosphere of chilling paranoia, of predators waiting to devour us. Monsters in the darkness, a competitor du jour—IBM, Lotus, WordStar, DRI, any of them. Their warnings instilled far more than merely in-depth comprehension of the company’s goals and objectives. They made certain we stayed on our toes, putting competitors on notice while vigilantly attempting to predict their next moves. But the wildfires of fear and obsession sputtered for me at times. The rants became a bit theatric, a match in the wind. The German-born mathematician would have preferred more realistic and analytical evaluations, and many of my colleagues shared my belief. To inspire us to jump in the trenches and blaze away as if our lives depended on it, the top guys led us to believe an army of dangerous Huns was always advancing over the horizon, fully intent on annihilating us. Competing for our execs meant keeping enemies constantly in sight—the favorite tactic from their portfolio of persuasion. The only one! Fearful explicitness was their form of communicating competitive dangers to all employees, painting competitors in vivid black and white; shades of gray did not exist. Did this gladiator goading induce ever-greater aggression and anticompetitive behavior among the foot soldiers? I might never know.

  CLEANING HOUSE

  “We have an unfair advantage, and we intend to keep it that way.”

  This is how VP Jim Harris, the predecessor in my new job, described how he had run the business. I was appalled and wondered what else was wrong with him or my new group. By the spring of ’87 MS had gained a dominant position in the OS market for IBM PCs, and I didn’t believe a market leader needed to express such arrogance when dealing with clients. Yet Jim, the entrenched pit bull—as some called him—insisted.

  This intense sales executive had joined MS from Intel in ’83 and, through grit, charm, and exhaustive effort, developed a healthy $50 million OEM business for the company. However, my first meeting with him surprised me. Not only had he cleaned out his desk, but he also indicated his desire to stay at home for the next three months, preparing for his move to a new destination. Sure, he would take my calls and make introductions to key customers, but otherwise, he would be hands off. I was tickled by his confidence. Retreating so quickly nevertheless felt strange!

  Getting acquainted with my new colleagues and charges and fully coming to terms with policies and procedures of the OEM branch was next on my agenda. A journey chocked with jolting revelations! What I discovered absolutely rocked me. The OEM group consisted of roughly thirty-five salespeople along with five logistic personnel plus several administrative assistants contributing largely by selling MS-DOS and a much smaller number of MS Windows units. The sales team was divided into four groups. Three were serving the larger customers. The fourth was dedicated to a staggering number of smaller ones. There were no marketing people whatsoever, and no written policies and procedures could be found.

  By far the most extraordinary black hole in the OEM universe, salespeople were prohibited from possessing the official price guideline (PGL). Jim had designated the maintenance of this top secret document to one of his lieutenants. No one else had direct access. Management feared the covert document could fall into customer hands. Not having faith in the sales teams relegated them to lowly messenger roles. My first thought: No trust, no power, no customer respect, change ASAP. My management style differed sharply when directing people. Right then I realized a little grassroots empowerment in good old German military tradition would go a long way with my new crew!

  To test my conclusion, I began dropping into offices to get to know my new cohorts, showing interest for special customers’ projects, their plans, and high-profile challenges. My new teammates, not overly accustomed to management addressing them directly and soliciting advice, initially hesitated to respond. What was going on here? Languishing on this, I rapidly recognized that gazing into history served no purpose. I needed to urgently move on, introduce my kind of trust-generating management style. Auftragstaktik to the rescue!

  Attached to the group were several attorneys responsible for developing standard contracts for broad-stroke clientele and unique versions negotiated mostly with large customers. A knowledgeable and reliable controller handled revenue reporting and billing. The group overall was roughly the same size as the one I’d left behind in Germany but was raking in twice the proceeds.

  An evident impediment to progress led me to attack the PGL matter first. In Europe we had carefully fashioned and put into motion a single one for all countries. Jeremy Butler, who was now VP in charge of all non-US business, was pleased when I approached him, proposing unified worldwide pricing. In confidence he told me Jim Harris had been adamant about maintaining his sovereignty and staunchly resisted constructing a one-size-fits-all global list. My pact with Jeremy thoroughly pissed off the current PGL keeper, inciting hostile arguments. I glossed over them, and being the spreadsheet expert I was, I single-handedly engineered the new PGL from then on with MS Excel. Both Jon and Bill were pleased with our decision. A first and important step in treating all customers around the world equally! Unified contracts were next.

  I perceived contracts as a necessary evil to conduct business, as I preferred handshakes. In German, a contract is called ein Vertrag. It originates from the verb vertragen, which I prefer to translate into “to live in harmony” instead of “to agree.” Thus, agreeing in the moment gets superseded in spirit by expecting to live in harmony forever. If attorneys would compose agreements with that intent in mind, prosperity and peace would undoubtedly be fostered. Let’s see how MS postulated her intent to live in harmony with her OEM customers.

  Until ’83, MS licensed MS-DOS on a flat-fee basis to OEMs. After paying it—typically around $50,000—OEMs could preinstall a copy of MS-DOS on every PC they cared to produce but were restricted from distributing MS-DOS stand-alone. Only IBM was exempted from that general rule.

  All licenses were version specific. Product versions were identified by a primary version number, and two additional numbers behind a decimal point reserved for smaller upgrades. Licensees received the lesser ones for free, enabling them to keep their PCs up-to-date. Adding major new features to an OS was indicated by changing the number to the left of the decimal point. For these, a new license was needed and a new flat fee became due.

  Even with several hundred OEM customers, MS could hardly turn a profit using this business model since, as a rule, two to three years normally expired between major releases. As MS-DOS matured and grew in size, development costs increased exponentially. MS was left with few choices for making that business profitable. Bumping up the flat-fee price was one, charging for smaller upgrades the other. Instead she chose to ask her customers to pay a royalty for every OS unit they shipped. Introducing the change gradually by navigating the sea of expiring agreements and new product versions, the company eventually converted all customers. From then on she received a smoother and vastly enhanced revenue stream, making this segment of her business finally profitable. DRI, her toughest competitor, had always licensed her OSs on a per-unit basis; therefore, no competitive disadvantage was experienced.

  OEMs were offered two choices under the new scheme: The first option resulted in a pay as you go accord—a “per-copy license” as we called it. This type of agreement gave OEMs maximum flexibility in deciding which PC would be shipped with or without our OS. The second option required OEMs to install it on all PCs with the same model name. We labeled such an accord a “per-system license.” This reduced royalty rates by $1 per PC. The reduction was justifiable because the per-system commitment made had the potential to produce a more dependable and larger revenue stream.

  Extra volume discounts were made available for firmer purchases. To earn them necessitated OEMs to make an unwavering annual “minimum commitment”—a typical and well-accepted practice in most industries. Customers reported their unit shipments quarterly, and based on their stated volume and royalty rates, MS invoiced them. To remain in good
standing, they typically had to pay their bills within thirty days.

  As accountable and enduring business entities, our customers typically planned their PC models twelve to twenty-four months ahead. Estimating PC sales even for such a period was a challenge—more art than science. Business assumptions had to take several factors into account: economic uncertainties, demand fluctuations, technology advances, and the competitive landscape. Important tactical decisions such as timing product launches, setting attractive price points, and determining appealing configurations influenced the outcome as profoundly. Most OEMs understood the risks in forecasting future sales and were circumspect in doing so. Incorrect targets based on reckless assumptions resulted in inventory that was difficult to sell or, worse, forced a company out of business. Most of our customers, unenthused about overcommitting, played safe by projecting realistic sales objectives.

  Entering into an annual guarantee with us became pretty straightforward. We probed customers’ assumptions, and if they were deemed too ambitious, we wanted them turned down. Our sales reps were not incentivized, as we never paid any commissions. Encouraging customers to enter into the impossible was deemed counterproductive and was discouraged all the way up the chain of command. Some overly ambitious CEOs nevertheless insisted on achieving a lower per-unit price, hoping that committing the company to a larger unit target might dial up long-needed sales mojo. Unrealistic or not, leaders do take risks, and asking them to scale back the lofty underlying assumptions is not always an easy task. If all attempts to haze a customer back to a more sensible commitment level failed or—worse case—a viable competitive threat surfaced, winning the business superseded lingering objections, and an unrealistic deal was concluded. Shame on all of us!

  When bitter realism caught up with pipe dream–like projections most customers saw the signs on the wall and renegotiated their payment horizons in due time, paying higher per-unit prices. Too often, however, an accord ran out unrevised with customers expecting nothing less than mercy. Nobody wanted to kiss overpayments good-bye by just writing them off. The argument we heard most: “Yes, we have prepaid for licenses, but we have not consumed them either. Therefore, payments made for nonconsumed goods should be paid back or credited.” Their voluntarily signed agreements expressed the opposite, and they cavalierly forgot that the extra discounts they had received were in exchange for paying us for the contracted units.

  Finding ourselves in legal arguments with customers, though, was an unwholesome predicament that almost always headed for troubled waters. Deep inside, I was sympathetic to their claims. In all honesty, we had not earned the money, and we certainly desired to continue to grow a healthy business relationship. But the overpaid money in its entirety wasn’t simply heading back their way. Most sinners understood our lucid and logical position when we offered to accrue a reduced amount for future purchases. I blamed my sales reps and their managers as much for these painful predicaments as the irresponsible customers—aren’t they always right? With a little common sense and oversight, most of these train wrecks could have been avoided.

  Negotiating settlements of this nature was undoubtedly one of the least appreciated jobs. The simple fact of customers not making sales projections, often right from the beginning, cast a dark shadow and had the potential to turn into an ugly fight. Our cold-blooded competitors accused us of setting the bar artificially high for minimum commitments to deliberately lock them out. Far from the truth as explained above.

  If OEMs had bought too many CPUs8 from Intel, would she have taken excess back and returned the money? Not on your life. They would probably have wound up on the black market. Intel, like MS, prohibited OEMs from selling products without having them installed inside a PC. The difference between Intel’s CPUs and the prepurchased OSs: our customers bought a license and no physical goods. Licenses could be used up later. CPUs, on the other hand, had a shorter shelf life, and their value deflated over time. How else to view this? Business, with all its quirks, permutations, and natural checks and balances, has thrived and evolved with vigor in the real world since the Cro-Magnon man swapped spears for skins. Once I’d traded my best six spears for your oxhide, I wasn’t giving you the hide back because you had only used three of them. You’d thought you needed all six getting the mastodon. Now we should trade them back, with me receiving what—a worthless half hide?

  Condemning our minimum commitment practices, competitors further claimed that OEMs only continued licensing OSs from us from fear of losing their overpayments. Customers had better reasons to stay with us. They and their clients obviously liked and appreciated our products. Staying loyal, they put their trust in a vendor viewed as having marketplace longevity through steadily increasing product values. Their bet was on the forward-looking standard setter!

  After licensing a competitive OS, OEMs returned to us for a reason. They believed in our vision and leadership, willingly accepting higher royalties. You will always pay extra for the leading brand. If one wishes to drive a Porsche, one pays for a Porsche; if a Chevy, then a Chevy. Sharply different experiences dictated by volition, demand, and quality! Our customers committed along with us.

  Last but not least, let me mention MS policy for recognizing OEM revenues. Our accountants always accrued overpayments. They never contemplated recognizing them fully until OEMs reported actual shipments. Therefore, my group never received any credit for the accrued sums. In other words, there was no incentive for my sales group or me personally to encourage customers to inflate purchasing guarantees.

  The new PGL was completed just in time for the 1987/88 financial planning exercise. I was astonished to see my controller, Tim Beard, doing most of the work instead of the individual sales reps. He struggled with a dearth of data, doing his best to generate a valid bottom-up, OEM-by-OEM, and system-by-system forecast. This concept had worked nicely in Germany, enhancing planning acumen especially when the data was derived with customers’ input. Afterward, management compared the final numbers with easily obtainable top-down market estimates from independent analysts. No one in my new group had been trained to apply these simple safeguards. Eventually, we finished the budget on time, but it contained an uncomfortable degree of ambiguity. Luckily, my first fiscal year ended with us achieving the projected numbers. Comfortable only with exceeding forecasts—a personal disappointment. Perfecting the flawed process was made a high priority.

  Having concluded I had a dysfunctional management team, I replaced its members within the next year—one by one. Meanwhile, my outstanding controller, the evolving management team, and our experienced attorneys volunteered to take a stab at scripting a basic operating procedure. Together we bore down with inspired intensity, reviewing long- and short-term team goals, and basic day-to-day ops principles engineered to provide a solid framework for ensuring success. Eventually, a new ops manual was given to every salesperson, including standard licensing contracts and an up-to-date price guideline. My salespeople finally had the basic tools to excel in their profession and act with confidence.

  To make my own office functional, I asked our facility group to fit me out with a desk containing no drawers. Drawers encourage putting things off. I preferred a couple of larger filing cabinets in my admin’s office and a conference table with chairs in my own. I made a point of sitting down with employees at my conference table instead of staying at my desk. Lowering the employee-boss barrier made meetings less intimidating and more productive. On top of my desk, documents I was currently working on were in plain sight for their perusal. No reason to conceal the tasks at hand. Every time I observed managers with chronically empty desks, I couldn’t help but wonder how hard they were really working. Perhaps I’m making too much of my personal habits, but the top performers in my group never had a clean desk even when on vacation.

  RENEWING CUSTOMER FOCUS

  “Know your customers and you know your business.”

  This is a principle my predecessor seemed to have neglected during the last year
of his reign. Instead, he and his team spent excessive time in never-ending weekly review meetings. So I cancelled them. Assuming my instructions were crisp and precise, anything beyond monthly reviews felt like babysitting and endangered the empowerment principle I believed in.

  Emphasizing customer understanding and encouraging visits made the account teams redefine account strategies with the goal of enriching client relationships and expanding our business. For mission control, I insisted on inviting top management to join us, soliciting exec input before we plotted our next steps. Bill and Jon especially liked to participate and offer encouragement, fanning the flames of progress and future engagements. They contributed fabulously and were appreciative of our degree of preparedness. Both had considerable history with and insight into most of our key customers and didn’t hesitate to challenge the account teams. Imagine the awkward moments of embarrassment when one of our execs displayed a deeper familiarity with a client’s account than the presenting sales rep! Serving an all-for-good and enlightening purpose, I learned a ton while observing the painful and often rib-tickling entanglements in good humor.

  These synergizing and invigorating powwows served as confidence boosters bolstering our sales reps. No longer doubting the mission, they strengthened sales abilities and injected an exhilarating pioneering spirit when serving a customer-driven world with renewed purpose. As I had anticipated, encouragement and backup from top management produced astonishing results by slowly but surely turning our SRs into confident and empowered customer advocates. They savored the results!