CBI – 2009 Annual Lecture: ‘Thriving and Surviving’

STEVE BALLMER: It is a real pleasure for me to have a chance to be here with you today. I want to thank the CBI for the invitation; it is fun to have this opportunity. I do have to say that the requested talk made me a little apprehensive in terms of the title. I know it is the thing to talk about these days, but ‘Thriving and Surviving’; I am not sure if that was the given talk, I think it was ‘Surviving and Thriving’. I told my people, ‘we have got to be a bit more optimistic and upbeat than that, let us start with thrive’. They said, ‘yeah, just make sure you cover off the survive part as well’. I will try and talk a bit about that.

From the perspective of a company in the IT industry, I will give you a particular set of biases on how I see potentially the chance for broad economic growth, and I will talk about how we as a company have navigated the waters so far. We are one company, but the more I hear folks share their views of what they are doing in this economic environment, the more good ideas I get to apply to my own business, so hopefully some of that is of value to you.

I want to start out with my thesis on how we got to where we arrived, and everybody’s thesis is entitled to be different. I am sure that there will be economists who write down exactly what happened at some point in the past, but it is important for every CEO to have a perspective on how we got to where we are, and therefore what is likely to happen going forward. Everybody has a different view of where the economy goes from here: there are the so-called W people; there are the double dippers; there is the go down – stay down, I guess those are called the U people. I have a particular perspective shaped by a number of our folks; particularly, ironically, a British guy studying the American economy for me, who has never lived through an economic downturn before, since he is about 27 years old, but he has stimulated my thinking on this.

Our private debt to GDP ratio – no government debt, just consumer and business debt as a percentage of GDP – hit 160% before our Great Depression, then things fell apart, debt came back under control, and then largely grew without boundaries, particularly in the 1990s and 2000s, and then again we had a reset. For quite a period of time we may have been confusing ourselves that there was real productivity growth that was driving GDP, and yet a lot of GDP growth was fundamentally coming from borrowing against our future. Some of this private debt has now been moved over to the government, and it will be worked more slowly out of the system as government debt than private debt. The story is different, but similar, in the UK and in many other developed economies.

Productivity Growth

Why is this important? It does speak to the fact that once you come down, debt is not going to explode again anytime soon; regulators will not want it to happen, people will be conservative, the shock of the situation does cause different behaviour patterns. I say to myself; OK, we are going to come down and then the only thing that is going to bring us back up from here is going to be real productivity growth that drives GDP, and that productivity growth is both in the form of improved work processes and classic productivity, but also innovation. If you were to really step back and say, what is the No. 1 growth driver, why does GDP grow faster? It is partly because we figure out new ways to do things, but it is also partly because we figure out new things to do, and new things to do that are perhaps more valuable than some of the things that have been done before. I am not sure most people would say the internet, for example, is a productivity driver, but it is actually far more efficient to distribute the world’s information over the internet then it ever was through the paper formats that dominated for most of the last 400 years. It represents a productivity driver in a GDP sense, and yet we think about it primarily as an innovation driver.

If you look at US productivity growth, non debt related, by far the greatest source of GDP growth has come from investments in IT; that should not come as any kind of a surprise. IT represents about 50% of capital spending by businesses in countries like the US and UK. The countries in which I and you live are increasingly based on services as opposed to manufacturing, and if you will, the productivity driver in a services business is better and more efficient use of information, which is the key catalyst behind information technology. Sometimes it is hard to point to how the computer translated directly into the productivity gain, or in a micro-economic sense someone might want to say that the computer actually distracts their people, because they are surfing the internet instead of working on their business. Yet, in a variety of ways, the IT industry has played a unique role in driving real GDP growth.

IT Industry

The question for us now is – given that it will not be debt, given that we have reset, given that debt is not going to come back – what are the things that are going to generate real productivity and innovation growth? I will speak to this primarily from the perspective of our industry. The IT industry has grown dramatically, and it has grown on the back of an unprecedented wave of innovation, probably going back to the late 1940s, when we got the first computer. Looking at most cycles of innovation, they have 30, 40, or 50 years to run: if you think of rail in the late 1800s and what it meant; or steam; or various technologies. We have had about a 60-year run in the computer and IT business, and people ask whether our run is over, whether the world is going to move to other areas, and the IT industry will slow down and will no longer be the same kind of driver of innovation that it was in the past.

My response is, no, quite the contrary. I see more opportunities to do innovative work in information technology in the next five to 10 years then in any other period, and I have been at Microsoft almost 30 years; almost half the computer revolution. Almost half the computer revolution I have been at Microsoft, and yet these next few years are going to be the best yet; we really will have a world of information that finds us and floats to us where we need it, on our phone, on our computer, on our television or big screen. We really will be able to control these. You will ask a question, ‘can you show us the private debt to GDP ratios in the UK?’ I will just turn and I will say to the screen, ‘bring that up will you?’ and there will be a camera, and there will be a microphone built into this thing, and it will recognize, find, and go and get that information for me. That is what we can dream about over the next several years.

Innovation

We will talk about a world in which not only will these computers be smarter and they work with you, but things that we think about today as manual processes will become automated. I know every business will tell you they are super-automated; they are not. Go visit a hospital; it is still not an entirely digitised business. Go to any port and watch the process that is used to load and unload containers; that is almost entirely a paper-based process. I take a look out here in the audience and I see a lot of people have papers and pencils with them; a couple of people have computers here, why? Even I have a piece of paper in my pocket. We will have digital screens that are this thin, this light, and this flexible over the course of the next five years.

Five years ago I used to feel terrible every time I saw somebody with a video camera at a speech, because I had never met a human being who watched any of the videos. Now they get webcast, and a few people will watch them. Yet, your ability to have a dialogue with somebody who works with you about what happened at this lecture is limited. You cannot write an electronic note during the session, and have it immediately cue to the place in the video where you are saying, ‘I did not understand what Steve meant here, was he making any sense?’ If you write that note you want the person to whom you transmit it to know where I was and what I was saying, and what I was talking about. I am trying to convey some of my fundamental enthusiasm about the innovation that is coming and is possible.

IT is more critical then ever; it has got a more important role to play. We see this just in our own operations here in the UK. We have a network of business partners who employ almost 240,000 here in the UK, and those companies generate about £20.5 billion ($32.6 billion US). We are not just seeing this from our own perspective, but a world of business partners in this country and others. We look at the potential for job growth; there will be about three times as many jobs created in IT than in the economy at large: 78,000 new jobs over the next four years or so here in the UK. That is because of what IT permits in terms of productivity growth. Some say that IT has one problem; it makes you spend money before you get any productivity gains, and that they cannot afford to spend any money. That is true in every business, and as business leaders it is going to force many of us to think about what we want to cut, because in this economy we may have to cut more deeply just to free up the things that let us invest in future productivity, and in future efficiency gains.

New Efficiency

People love to talk on TV in the US about the ‘new normal’, which is fantastic; although I am not sure exactly what it means, it fits with my view of the world. We are launching some new products, and one of our clever marketing guys said, ‘we should start talking about “the new efficiency”; that is what people want in the new normal’. What does it mean, how are we, as an industry, and as a company, going to help people to drive efficiency? In the IT industry, almost every product has one or three, four or five basic marketing positions; if it is an end-user product you like to say it is simple but powerful, or powerful but simple. If it is a business product you like to say it is powerful but efficient, or efficient but powerful. A few years ago we ran a marketing campaign for one of our products, where the campaign was Windows Server: do more with less. I told all of our marketing guys, why do we not just dust it off, but in this environment say: with less, do more. It is probably appropriate for this day and age.

The pressures to do more are not going to subside. People still want to serve customers in new ways, bring new products to market, and need IT to support that. Yet, we have to enable fundamental cuts. We have got to enable people to cut out headcount that is running operations that can be more easily moved to cloud services. We have got to give people the tools and technologies to reduce the kind of money that we are spending in the data centre. We have got to give you the technologies that let you drive what I call IT based product innovation. You can model the physical world in the virtual world today like never before and that is changing, whether it is geo-science and the energy business, bio-sciences and the pharmaceutical business. You can model the economy for what that is worth; it certainly changed the banking business, maybe for better and maybe for worse in some cases.

The ability to know what is going on and really do micro marketing and pricing, which is a form of efficiency gain, to get access to the information that you need to make a decision; when I talk to CEOs, their frustration with IT is that they spend a lot and they still cannot find the information they need when it comes to the time to make a decision. There is just amazing advances, whether it is in search technologies, UI technologies, and business intelligence technologies, all that can power the new efficiency.

Microsoft

Our company has not been immune, and our industry has not been immune. Capital spending, as I said, 50 percent IT, and we have found basically that business IT spending was of 15 to 20 percent post the repercussions of the second half of last year. Certainly consumer spending, which we are also subject to, was impacted. We had to decide how to cut; we went through, we suffered the first revenue declines in our company’s history; they were a few percent. I had a journalist say to me, ‘severe revenue decline’, and I had to concede that any revenue decline felt severe if you have never had one, and yet it was a few percent. It was like a cultural reformation for us; we asked what we really have to care about, we cannot just continue to invest the way we have. First, we locked the R&D budget. We will not necessarily grow it the way we might have, but we spend more on R&D than any company on the planet, partly because we are in more areas and partly because we believe more in the future.

We made sure we kept the money we need to continue to establish us in new businesses; we are trying to give Google a little competition in the search business, they may be trying to give us some competition in some other ways. We saw that in the UK we have got 3 percent of the search market, where Google has got 85 percent, and we thought we had better keep some money in the plan if we are going to keep investing and stay committed to new businesses and new products. Our culture has been an invention culture, not an operations culture. They do not have to be inconsistent, but you have to work hard to have both muscles. A lot of businesses I know are very good operationally and then they always want to talk to me about how we are so innovative. Well, we have an innovative culture; I would like them to talk to me about how we get better at grinding through the regular operation of the business. We have really dialled up, from a cultural perspective, in a way that lets us improve costs.

We took a huge amount of cost out of our business. We were supposed to wind up at about $30 billion a year of operating expenses; we chopped $3 billion out of that, and our total operating expense as a company is now around $27 billion. We told our people that we did not really know what was happening in the economy, so I will not say stop worrying about your budgets, but we are not sure whether the budget is the best measure of success. How you do relative to competition is a great measure of success, and how you do on customer satisfaction is a great measure of success. We redefined our success measures; they have always been there – market share and customer satisfaction – but they rose above revenue in prominence this year, because they really sit as controllables even in a volatile economic market.

I am enthusiastic about the possibilities for the future, for business at large, and for IT as a propellant of that. There is a set of things we have got to continuously remind ourselves about: talent, talent, talent. Whether as a company, an industry or society, we have to really focus in on developing the talent that we are going to need. That probably means more investment, from my perspective education, particularly in science and technology, in engineering and in math. These are areas in which the UK, the US, the developed economies just are not investing in quite the same way that we see happening in some of the emerging economies – infrastructure investment – ensuring that we have the physical capital in place to enable these new scenarios. That mostly has to follow the private business, but with the right kind of regulatory framework for the development of the internet, and these other tools.

We are going to need both business and government leadership to get us to the next level. Sometimes you hear the dialogue, at least in the US, and it sounds like government has got to solve all these problems, on the other news channel it sounds like business has to solve all these problems. The truth of the matter is innovation will solve all these problems, but in the mid-term we need to ensure that businesses are performing and that government is handling society well, and creating the right framework for ongoing innovation and investment. With all of that the future can be bright; we may be down for a while as an economy, but that should not keep us down, we should be able to survive, and we should be able to thrive by recommitting to innovation, be it IT oriented or not, but the innovation that is going to get us back on to the path of long-term economic growth. Thank you for your time, and thank you to the CBI.