Remarks by Chris Liddell, chief financial officer for Microsoft, on the role of financial officers during difficult economic conditions
Government Finance Officers Association Annual Conference
June 30, 2009
CHRIS LIDDELL: Thank you, and good morning. It’s a great honor to be speaking to you here on a beautiful Seattle morning, and it’s a particular honor given the state of the world that we’re in, and the crisis that we’re all facing, and the role the government is having in helping us try and get out of that crisis.
So, what I’d like to do today is give you some of my perspectives on how I see the world from Microsoft, and we have the great benefit if not only seeing the world here in North America but we’re represented in virtually every country in the world, talk a little bit about how I see the crisis, talk about what we at Microsoft are doing in order to adapt to it, and in particular the second thing I really want to talk about is how I see the finance function and how I see its importance in helping us guide through the crisis all of our organizations, and how I see it evolving at the moment in the next few years.
Third, I’d like to leave some time for questions and answers. So, I’d love to make the session interactive. Please think of some questions as I go through, and I’m happy to talk about anything in my presentation or any other topic on your mind. So, I’ll talk for 20 to 25 minutes, and then try and leave about 20 minutes or so for questions.
So, if I look at what’s happening out there at the moment, there’s one chart to me that I look at on a regular basis, which makes me think about what’s happening and gives me some perspective on it, and this is simply a comparison of what we saw in the crash of 1929 versus what we’re seeing now, and comparing it say to some of the other previous bear markets.
And I think it’s interesting. This is your 103rd conference I believe, which is amazing when you think about it. I mean, the organization has seen crises come and go, including the Great Depression. But it’s certainly we are unlikely to see anything of the size and nature of what we’re going through at the moment in our lifetimes.
And when you look at what’s happening out there from a stock market point of view, and admittedly the stock market is only a surrogate for economic activity but it’s a reasonable one, you see how extreme it is by comparing it to what happened in the Great Depression.
It’s certainly much worse than what we saw in the tech crash, which was slower and shallower. And when you look at the red line compared to the sort of light blue line, you see that it’s remarkably similar. And whilst we’re all hoping and feeling that there is optimism that we’re going to see growth from here on in, we’re not out of the woods yet, and this sort of chart tells you that. Because when you look at it, there were a number of rallies in the 1929, 1930, 1931 period on the way down to obviously the worst economic recession in the last 100 years.
So, we’re hoping and certainly trusting that we’ve got optimism in the future, but not relying on it. And you look at the scale of what we’re going through at the moment, you get some sense of it by looking at this chart.
What’s at the root of the problem? I guess this is well-documented now, but clearly private sector debt is probably the biggest single issue that we have been facing in the last year, and we’re not yet out of that. So, clearly government is having a huge role in terms of boosting the economy at the moment and replacing some of the private sector demand that’s going away, but when you look at the absolute level of debt that’s in the economy, it’s huge compared to say GDP as a measure.
Now, this is North America I show here, but a lot of countries around the world are facing similar issues.
So, when you look at it, and again we’ve all become historians over the last year or so, we’ve all looked at charts like this, but when you look at the 1930s, one of the big issues there was similarly the large amount of private sector debt in the economy, and that peaked at around 200 percent of GDP. Then we saw obviously the crash, economic contraction, a slow easing of debt out of the system.
When you look at debt that we’re facing at the moment going into 2009, 2010, we’re actually peaking a private sector debt level that is above where we were in the great recession.
So, a massive amount of private sector debt that’s grown really over the last 20 or 30 years, in particular as a result of mortgages and as a result of credit cards, which weren’t really a function back in the 1920s and ’30s; so a massive debt problem that we need to flush out of the system progressively.
And what that led to is really an inflated economic growth. So, I think we’re all realizing now that the economic growth that we’ve seen over the last few years was higher than it should have been, and higher than it would have been had we not had that huge expansion in debt.
So, what this chart shows you is on the blue bars – sorry, in the green bars is GDP as reported, so GDP growth here in North America again, a similar statistic across the world, GDP as it was reported, and then an estimate in the blue bars of what GDP would have been if we hadn’t seen that huge mortgage refinancing where people were effectively mortgaging their houses as their house price increased, and using that money to fuel consumption. So, it’s artificially fueling economic growth. So, we would have probably been reporting economic growth of 1 to 2 percent less than what we would have otherwise.
And what that does, and the way that we think about it inside Microsoft is we’re effectively going through a reset. We’re taking the economy down to a level where it probably should have been had we not had that inflated economic growth.
So, this is just a simple representation of time along the X axis and growth or dollars along the Y axis. So, we’ve seen this historic growth rate in the economy and in most companies, and we’re going through what Steve Ballmer, my CEO, calls an economic reset at the moment. So, we’re resetting back to where we were.
And the big thing that we’re thinking about now is where to from here. So, hopefully the reset will be over at some stage in the next few quarters, and we’ll start to return to growth, but what’s that growth going to look like?
And the way we think about it is it’s one of three scenarios. Either we’re going to go back to a parallel line, if you like, to the original one, so economic growth is going to return to the levels that we saw before after the reset. We think that’s unlikely because for the reasons that I said. It was probably artificially inflated beforehand. We’re going to see economic growth continue at what it should have been had we not had the inflation; so if you like draw a dotted line through those two reset periods and see what that looks like. Or what we might see is economic growth that’s actually lower than what the trend line should be, because people are so scarred by the experience of the last few years, that they’re more conservative, they save more, which is certainly what we’re seeing out there at the moment, and the patterns of consumption are lower than what they would have been otherwise as people are just more naturally conservative for a period of time. And that’s certainly what you saw back in the economic recession or the depression; people were very conservative for a long period of time.
And in most of our thinking internally we’re thinking that it’s likely that we’re going to see something between path two and path three as the natural outcome, even after we come out of the reset period.
So, we’re very conservative in our planning, and doing that we’re thinking about how should we evolve as a company, and inside finance we’re thinking about how the finance role should adapt in an environment that looks something more like two or three than the historic one growth rate.
More what we’ve done is spend a lot of time in our strategy group looking at economic lessons from history, things that we can learn from companies that did very well in the crisis, because there are still companies in any crisis who actually adapt well and perform well, and what approach we should take.
And I’ll talk generally about Microsoft here, but I believe the lessons for us and for the private sector really apply to a large extent to the public sector as well, in particular in terms of the role of finance.
So, three lessons that we found or three things that we found in our research about companies who managed to thrive, the first is they continue to invest in innovation. It’s probably not the first thing that most people think about. Most think about cutting costs. But what we found is that companies who were willing to invest and continued to invest, in particular in the long term, were the ones who came out of the reset period and into that lower growth, and actually performed very well.
So, our approach is we still continue to invest significantly. So, we’re certainly constraining costs, but we’re still spending close to $10 billion a year on research and development, so the largest single research and development budget certainly in our industry across the world, almost $10 billion.
And to us research and development is our lifeblood, so we are willing to look through the reset period and look through the growth that we think is going to be lower, and say investment is still the thing that’s going to be critically important. Clearly from an economy point of view making the right choices about investment is incredibly important as well.
The second lesson from history is that companies thrive in crises catch what we could describe as the next wave. So, even in periods of low economic growth or, in fact, economic contraction, there are still sub-segments of the economy which grow phenomenally well. So, back in the depression there were still things like radio and consumer branded products which were growing despite the fact that the economy was contracting in that time. The analogy here would be trends like virtualization or online advertising, which we still think are going to be very attractive over the medium to long term, even in a constrained economic growth period.
So, we spend a lot of time thinking about to the extent that we have resources and we’re prioritizing them and investing in them, which areas do we want to invest in, and which are the big growth areas in the future that we should tell continue to participate in.
And third, not surprisingly, companies that thrive in crises have a cost structure, in our case balance sheet, to survive and prosper.
So, liquidity is at a premium. You actually have to survive the reset period and come out the other side. What we’ve found is economies eventually get back to where they were, but not as many companies survive the crisis. So, if you like, you have the same economic pie shared amongst a smaller number of companies. So, surviving and prospering through the reset period is critical in terms of taking share coming out the other side.
So, in terms of our approach, we’re prioritizing making hard choices. So, even though we’re spending, as I mentioned, around $10 billion a year on R&D, we are much more focused on where we spend that money and prioritizing it.
We’re constraining and decreasing costs, so like everyone I note that I believe there’s about 3,500 people here. Typically you could get up to 6,000 or 7,000 I believe. We’re the same. We’re cutting back on our travel costs, cutting back on all the nondiscretionary costs. We’re still investing in conferences like you are, but we’re being much more circumspect about where we spend our money and how much we spend our money.
And last but not least, using our cash wisely. We’re fortunate certainly for a private sector company in that we have around $30 billion of cash and virtually no debt, so balance sheet is not my biggest issue. But using that cash and being incredibly disciplined about the way that we use it is just as important.
And when I think you look down and think about the government’s role, a lot of these lessons apply just as much. Continuing to invest: Clearly, in fact, the government is picking up some of the private sector lack of investment and thinking about the areas that it should be investing to pick up the slack in terms of economic growth.
Seeking out growth areas, where you spend that money, in infrastructure, things that are going to actually sit in place the next 10 and 20 years is incredibly critical.
Prioritizing and making hard choices inside the government is just as important as inside private sector companies.
And obviously you’re facing some of the cost pressures that we are as well.
So, I think the same approach that we see for companies certainly applies inside government as well.
And then taking that on to finance, I believe the same lessons are there, too. So, a few years ago, we started the transformation of the finance function inside Microsoft, and we did it around the framework that’s behind me here. In the blue we clustered the set of activities around what we’d describe as personal leadership: attracting great people, building their skills, and contributing personally. So, we had a set of activities that we started inside the personal leadership area.
And the orange color we set in place a number of processes around what we’d describe as business insight: thinking strategically, developing strategic plans, and influencing key decisions.
And lastly on green a set of activities around what we’d describe as business excellence: planning current business year’s needs, executing our key processes, and improving productivity.
So, we started the transformation even before the crisis, and what we’re doing now is picking up this same framework and applying it to the business priorities, and evolving our finance function and evolving this framework to adapt to the environment that we now see.
So, for example, the business challenges, which relate back to those ones that I talked about in terms of companies that thrive, around empowering our people, helping them adapt to the situation, investing and innovating for growth, and controlling costs and enabling efficiencies, those are the three big business priorities that we believe are paramount in this particular environment.
So, for finance empowering our people is around building what I describe is a trusted advisor, and I’ll show you some more detail on each of these in the next few slides, but really becoming a close advisor to the business and influencing key decisions and helping our business partners really think about the decisions they should be making and how they make them.
Innovating and investing for growth is around running the strategic planning process incredibly well, and thinking about how we link strategic planning or long term planning to short term resource allocation.
And lastly, controlling costs is around productivity and resource optimization. So, we are to a large extent the guardians of where we spend money. So, how we run the processes inside the company, how we, if you like, protect the company’s cost structure and run the processes around cost reduction is incredibly important.
So, I’ll take a little bit of time on each of these, but the important message here is thinking about what your organization’s imperatives are and matching your finance function activities to that. And again to my mind the things that we are doing here inside Microsoft to a large extent apply to any organization. It’s around thinking strategically, it’s around resource allocation, and it’s about empowering people to make their maximum contribution in the environment that we have, which is an incredibly tough one.
So, if we take the first one, strategic planning and performance management – I’ll just dig a little deeper into each of these in the time that I have – we have a very well-structured annual routine, which I’m sure all of you do have – all of you have as well. So, we’re a June year. We start the blue strategic planning around November/December. We have a set of strategic planning meetings inside each of our business units. We put that together as a company. That feeds through to January and February where we have midyear reviews, where we actually see how the company is doing, in particular on our sales, we readjust our strategic plans depending on the economy, and this year, not surprisingly, we totally rebooted all of our strategic plans on the basis of where we were at midyear.
We then move into budgeting, the yellow, and around March to May. So, we just finished that now. Our business performance reviews are in June, and then we move into strategic planning.
So, finance’s role is really to manage the whole circle. So, all of these activities report into me through the finance function, and we are, if you like, the guardians of making sure that how this runs and how the business cadence works throughout the year is incredibly smooth and systematic, and adaptable.
So, as I mentioned, we had to change really the blue. We ripped up our old three- to five-year strategic plans in November/December last year, because of what we saw happening out there in particular September, October, November, and really just restarted the whole strategic planning process to be much more focused on the activities that I said in terms of the lessons from history.
We clearly are, not surprisingly given we’re Microsoft, using technology in doing that. So, when we think about performance management, which is clearly a role that finance has, we’re thinking about how we use technology generally to actually facilitate that.
So, we’ve had a project for the last couple of years centralizing all of our information, getting standard taxonomy, cleansing all the data, getting a systematic set of data that we can rely on, and then creating access to that data in a useful and functional fashion, firstly through what we describe as a business insight portal, which is used as our SharePoint technology, and that allows us to do both standard reporting, scorecard analytics, and ad hoc reporting. So, it’s an incredibly flexible, powerful structure that we’ve been using in one loop of the strategic planning process that I showed you before.
So, if you look at something like the Business Insight Portal and this, this is an actually representation but dummy numbers, this is for one of our divisions, and the power that we find in something like the Business Insight Portal is it’s centralized, it’s a place where everyone can go. So, we use it not only for the finance function, but we also use it for our business leaders to come, and it’s a central place where they can get any data or information that they need in order to run the company.
It’s also configurable, so we can put anything on it, and we’re expanding its role from being more than just a finance portal to being what we describe as a business portal, so we’re putting finance information there, but we’re also putting all the information that any leader would need inside in this case the Microsoft Business Division, all information they would need in one central place.
And last but not least, it has drilldown capability. So, the power is it’s a summary page but it’s a portal. So, it’s a portal that’s access to all the information that the company has. And we find this is an incredibly simple but powerful means of getting access to all the information that we have, standardized across the company.
The other thing that we’ve been doing in the project that I mentioned is developing scorecards for the company and aligning them right throughout the organization. It’s critically important in terms of a crisis that everyone is aligned in terms of resource allocation, that there’s the minimum inefficiency across the system.
So, we have a senior leadership scorecard among the Senior Leadership Team at the company, which consists of all the business leaders, the heads of the functions, and our two Chief Technology Officers. We have a scorecard which measures our collective performance. That scorecard feeds down into an organization scorecard, a divisional scorecard, which feeds down into a subsidiary scorecard. So, if you like, it’s a balanced scorecard for the company, but it feeds down through to effectively individuals right throughout the company. And we have around 90,000 employees, so it’s a large company in terms of the number of people. And again all of this is accessed through our SharePoint technology.
Strategic planning performance management: so we have a very important role here not only in terms of running the strategic planning process, but running all the performance management aspects of it, taking, if you like, strategy and feeding it through to operational performance.
Then there’s just the day-to-day productivity and resource optimization, so the more practical how do we run the company on a day-to-day, week-by-week basis.
And again finance has an evolving and incredibly important role there, because when you look at those lessons from history, the companies that were successful were not just good at costs, they needed to be good at cost and innovation. So, it’s not only constraining costs, it’s thinking about where we actually spend our money and optimizing the benefit that we get from it.
So, finance has a role in terms of operating cost control. Clearly again we are the stewards of the company’s money, and the tremendous thing from my point of view is that our role has never been more important. We are making decisions about where we spend money, and finance is leading rather than following the businesspeople in some of those decisions.
We’re driving IT enabled efficiencies and prioritized investments. So, we’re making investment decisions. We’re also investing in our own IT infrastructure. Trends like virtualization are just as important for us as an organization as they are for our customers. Unified communications, to the extent that we have people traveling less, clearly communication becomes much more important. So, we’re investing progressively in our own technology to drive efficiencies, and again finance is working very closely with our IT organization to make the decisions about where we invest that money, and how we use it most wisely.
And the last imperative for finance in this environment, and strategy, day-to-day operations, is being what I described as a trusted advisor. Now, this is critical in any environment, but in the current environment most of our business leaders, they have constrained resources, they’ve got a more difficult sales environment, and they have to motivate their people in a difficult environment. Being what I describe as a trusted advisor is never more critical than in that particular scenario. So, working with our business leaders and creating a partnership with them is absolutely fundamental.
I talk to our people inside finance about a very simple framework, five elements to being a trusted advisor. First, make insights to your currency. So, anyone can collect information, anyone can collect and present data. Presenting it in a way that actually draws insights is absolutely critical. So, I showed the technology that allows us to draw the information out, but then it’s a person who at the end of the day takes that information and does something with it. So, making insights to your currency makes you a much more valuable partner to a businessperson or a decision-maker rather than just a presenter of data.
Taking personal ownership. So, it’s critical that at the end of the day, even though someone else might be the decision-maker, you share in that decision and you share in the personal accountability for the success of it.
And I say to my finance people, you know, don’t just think about yourself as a finance person, think about yourself as one of the team. You’re making a decision, you should own that decision, you should input into it. Someone else may actually be the decision-maker, but you should feel just as responsible as they do for both the decision and the result from it.
Building a track record. So, all of these ideas and techniques should be done with a thought of the long term. So, we’re going through a period of huge growth, a reset, and then potentially lower growth, but the decisions we should be making should be over day-to-day but for a five year or 10 year perspective. So, we do not inside Microsoft make decisions that are, if you like, short term in nature. We really are thinking about what is the track record we are trying to build as a company, and what’s the track record we’re trying to build as a person. And you clearly will be a much more of a close and trusted advisor if you are consistent in your decision-making approach, and are willing to take a long term partnership approach as well.
Be famous for something. We talk about being a Swiss Army knife. So, as a finance person you have to be multitalented. You certainly have to be strategic in some senses. You need to be very operationally focused day-to-day on other senses, and you need to be a people leader. But you also, as well as being a Swiss Army knife, you need to be famous for something. You need to have one of those skills which is really you think about yourself as world class in.
We often have these development plans where you focus on your weaknesses. I think development plans where you focus on your strengths are just as important: so what’s the thing that’s inherently good about you that’s allowed you that’s allowed you to get to the position you’re at, and how do you maximize that? Because taking that strength and bringing it to a team environment is incredibly important, and allows you to really add value over and above again just bringing information.
And last but not least be authentic, so be the real you. A lot of us obviously are in organizations where you have a multitalented team. Being the real you and bringing yourself and bringing the diversity that you have to that team is incredibly critical. People will value you for who you are as a person as much as for the information and data that you bring to the situation.
So, there’s a set of personal characteristics that we work on inside finance that allow us to not only have the tools for information, the actual information, the guardians of processes, but be a true team member that adds value.
So, when you think about that, think about your own roles, I encourage you to look at the broadest possible picture, what’s the environment that you see over the next few years. I don’t think any of us know for sure exactly what it’s going to be, but you have to take a view on it. You have to think about what the business imperatives are, or in your case the organizational imperatives are inside that environment. And then you have to adapt finance to try and meet those business imperatives, and think about the things that are truly special about your finance organization that allows you to add value.
I’ll give you one message to take away from today, which is certainly the message I give to my finance people. There has never been a better time for finance inside our respective organizations. Our role has never been more critical in terms of adding value. We are certainly at Microsoft in the front seat working with our business leaders to make the critical decisions that are going to determine whether we’re going to be successful or not in the future. I believe you’re in exactly the same position inside your respective organizations. So, it’s a tough time for the world, it’s a wonderful time for finance people. (Laughter.)
So, with that, perhaps I can thank you all, thank you for listening. (Applause.) And I’d be delighted to take any questions on, as I say, you can talk about the topics, you can ask me anything. You can’t ask me about Yahoo!, sorry. (Laughter.) But anything else I’m delighted to talk about.