Cost Control: Microsoft Learns From GE

By eweek  |  Posted 2001-01-01

At this time last year, the IT outlook was ebullient if not giddy. Demand for IT skills was off the charts, with the backlog of unfilled jobs approaching 1 million, according to government estimates. Now that 2001 has arrived, the forecast is decidedly bleaker, with IT spending trending down, driven by doubts about the economys health.

The business press recently made two observations about the grimmer forecasts: There is no fundamental reason, such as a war or oil shortages, driving a recession, and yet it is swiftly taking root. PC market saturation is about the only significant recessionary condition. Regardless, the financial markets have been telling us something all year.

One company reeling from the slowdown is Microsoft. As a result, its adopting a new modus operandi. The company in October acknowledged it is studying the success of General Electric and the tactics of its leader, Jack Welch. For all his success, Welch has earned the moniker "Neutron Jack" for shuttering businesses that were failing to perform up to his growth standards.

Perhaps the GE connection is why Microsoft CEO Steve Ballmer has placed a high premium on cost containment, as indicated in a year-ahead memo to his top lieutenants. After Welch took over GE in 1981, he relentlessly sold underperforming businesses throughout the next decade, preaching cost control as if it were a religious mantra.

On the other hand, Microsoft will spend heavily to keep employees. Some of those generous salary increases Microsoft plans to hand out will come from discontinuing volume licenses for older versions of Windows. As Peter Gallis story on Page 1 points out, they will become history in the next six months as Microsoft tries to steer customers to its newer and more profitable products.

Naturally enough, Microsoft has always encouraged customers to upgrade to the newer products. In the past, it discontinued older products outright when new ones superseded them, but that was when its installed base was in the millions, as opposed to the hundreds of millions today. The world is not prepared to make an overnight transition to Windows 2000 or Whistler, the code name for the next version of Microsofts Windows suite and its first 64-bit operating system, due out this year. So now the company pressures customers in more subtle ways.

Declines in PC sales and IT spending have taken a toll on Microsofts habit of forecasting—and then beating—conservative quarterly growth figures. It broke that pattern for the first time in a decade on Dec. 14, when it warned of a 5 percent to 6 percent revenue shortfall.

While companies like Microsoft are behaving as if the big chill is already upon us (maybe the recession were expecting is a subconscious reaction to Decembers cold snap across much of the country), bear in mind that fear is fueling the idea of recession. And fear can be beaten if enough of us recognize that that is whats turning us into nabobs of negativity.

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