Consulting » THE FINANCIAL DIRECTOR INTERVIEW – ‘When I’m cleaning Windows’.


Bob Herbold, Microsoft's finance and IT chief, also has a few other jobs on his mind. As PR boss, there's that soiled company reputation to work on. Then, as a beta tester, he's got to polish up Windows 2000.

A job to die for

At first glance, it’s a job to die for. Take a look at the financials you’d be working with: sales revenues of $19.7bn for the year ending 30 June 1999; net income of $7.8bn; plus a $17bn cash pile (that’s down from $22bn after spending $5bn on a stake in US telecom giant AT&T a few months ago). No debt, of course. Oh yes, and a market capitalisation of $470bn as at 1 December 1999, making this company the USA’s most valuable corporation ever.

The company in question, of course, is Microsoft, the 24-year-old Seattle-based software giant. And the job? Well, it’s not that of Microsoft’s CFO Greg Maffei. Instead, it’s the slot that’s filled by his boss, chief operating officer Bob Herbold, who in addition to heading the finance function, also commands half a dozen or so other departments including IT, corporate marketing, manufacturing and distribution, human resources and also public relations.

Not all of these jobs are quite as easy a ride as managing the financials.

From the PR perspective, for example, the coverage of the Microsoft anti-trust trial is widely judged to have been a disaster: there was Bill Gates’s prevarication and forgetfulness on video; charges that demonstration videos were faked; even – worst of all, perhaps – the moment late last February, when judge Thomas Penfield Jackson lost it completely, screamed “No! Stop!”, and stormed from the courtroom to calm down.

What has Microsoft learned from this? Not that much, it seems. We met Herbold in London within a day or so of the bombshell Finding of Fact (the statement issued by the US Department of Justice, which declared that the company was, in fact, the monopoly that had been claimed). But he was in a combative mood. “We’ve certainly learned that in a lawsuit like this, snippets of e-mail and snippets of deposition can be crafted in such a way so as to portray people in their worst light,” he says.

“Is it wrong to take a piece of e-mail from here, and a piece of e-mail from there, knowing full well that you’re capturing the casual conversation of employees, and to piece it together so as to suggest some behaviour in a general sense? Well, we think that it’s inappropriate.”

The notorious video

And the notorious Gates deposition video? “The tape was to be a historical capture of that deposition – one that would never be exposed to the press and never be exposed in the courtroom,” Herbold insists. Microsoft was dismayed, he concedes, when the prosecution lawyers won permission to show out-takes at the trial – and, what was worse, give copies of them to the press.

The point is, he stresses, that all the Microsoft employees whose e-mails and conversations formed such damning evidence were simply doing their job. He proffers a sporting analogy to drive home the point. “A year ago, the New York Yankees were playing the San Diego Padres for the world series.

A very feisty pitcher named David Wells stood up in front of 250 reporters, thumbed his finger on the podium, and said, ‘We’re gonna crush the San Diego Padres.’

“Now, should we arrest David Wells because he threatened physical violence to the San Diego Padres? No. Because what he was doing was stating the policy of the New York Yankees, which was: We’re going to have seven games with the Padres, and we’re hopeful that in four of them, we’re going to score more runs than they do.

“Now, the fact is that he was being enthusiastic about his job. And it’s OK to be enthusiastic about his job. He wanted to win. And is it OK to want to win? Yeah: it turns out that it’s OK to want to win, and to want to have a product that’s better than the competition. And we tell our people: hey, our customers are counting on us to try and improve our products, and to make them the best in the marketplace. And it’s OK to want to have the best products in the marketplace, and it’s OK to be enthusiastic.”

Of course, now that the US Department of Justice’s Finding of Law has stated that Microsoft has acted illegally, Herbold’s argument looks disingenuous.

Rabidly enthusiastic about the job

Wanting to win is one thing – breaking the law is quite another. But, at the same time, it is easy to see how Herbold could quite genuinely believe what he says – 30 seconds in his company is enough to discover that he is rabidly enthusiastic about his job. Clearly, after a career that had taken him close to the top at Procter & Gamble, Herbold relishes the opportunities offered by his 1994 move to Microsoft.

One reason for this may be the opportunity he has been given to pick up threads dropped twenty years earlier, when he completed a PhD in computer science – back in the days when computers were programmed with punched cards. He chuckles at the memory, and for a moment we reminisce about Fortran, compilers and paper tape storage. “You know, this is an industry that has been incredibly blessed by the fact that Mother Nature allows us to see vast improvements in the core components of the technology each year,” he says.

“That’s rare: there are very few industries where the core technologies are improving at any significant rate. For example, when I was in the consumer products industry, chemical engineers and chemists would work for five years to figure out how to take a Merlot wine stain out of a white shirt, and create enzymes to do that. Those are hard, hard problems.

“Moore’s Law has enabled us to move from 500,000 instructions per second 15 years ago, to 500 million instructions per second today. I’m confident that in 15 years we’ll be talking about 500 billion instructions per second.

It’s awesome to be in an industry where you’ve got that kind of incredible growth.”

Maybe so, but how closely does the job of being a company’s chief operating officer really get you to that technological cutting edge? Closer than one might think, Herbold suggests: he also heads up the company’s IT function – a function, he emphasises, that puts the company in the front line of using its own technology. Microsoft’s next big product launch is Windows 2000, the company’s first operating system to extend right the way across the enterprise, from desktop to massive server. The distinction is crucial.

Levels of bugginess and crashing that are (just about) acceptable to the user forced to re-type a few cells on a spreadsheet are totally unacceptable to the enterprise that grinds to a halt because its PeopleSoft servers are out of action.

“My information technology group is charged with getting early experience of Windows 2000, so that we know what it’s like to run a company with Windows 2000,” he says. “In essence, Microsoft becomes a pilot plant for its own technology before we go out and offer it to customers. So 52,000 desktops within Microsoft (and at partner companies) are operating on Windows 2000 – as well as the majority of our servers.” These desktops include Herbold’s own computer, which, it turns out, has so far had four versions of Windows 2000 running on it.

The dialogue between the company’s software developers and Herbold’s information technology department is much more than just, “Here’s the latest version: run this.” Over the past few years, since Microsoft began eating its own dogfood – as the phraseology within the company puts it – the in-house deployment has become an extension of the beta testing programme. “When the product is for sale,” notes Herbold, “you can be assured that Microsoft has made the conversion to it, and is running its own business successfully on Windows 2000.”

Microsoft’s hefty SAP installation will also be a “Win2K” program. It was started in 1995 – “the second time in my life I’d implemented SAP” – and when completed three years later it had replaced 30 legacy systems.

Herbold makes great play of the thoroughness with which old systems were thrown away and the temptation to write nifty interfaces resisted. “When done with discipline, you wind up with something that’s cleaner, takes less time to implement, uses fewer people, and costs less,” he enthuses.

If you’re Microsoft, you also wind up with something that, according to Herbold, has become something of a showcase application, and one that neatly dovetails into Microsoft’s present commercial enthusiasm for what it calls “knowledge management”. “We think we’ve got an incredibly terrific knowledge management system at Microsoft, which we’ve developed over the past three or four years,” he gushes. “What we’ve done is taken our core processes – such as sales, or finance, or human resource management – and then define and capture on a global basis the information that we need to manage each of them.” (As the above shows, just as with the Internet, and one or two other areas of IT, Microsoft is not above redefining the odd term. So, no, knowledge management to Microsoft doesn’t quite mean what it means to everybody else.)

Naturally enough, the entire SAP implementation is Microsoft-based, with huge slugs of Microsoft technology, and as little as possible of anybody else’s: SQL Server and Windows NT are de rigeur, whatever the temptation might be to let someone else do the pioneering. So, if you want to see a truly massive NT/SQL Server/SAP installation just get on that plane to Seattle. The system is also there to demonstrate that the company practises what it preaches: as much functionality as possible has been exported to Web-based systems. “We’ve taken all that data, bundled it in a data warehouse, and arranged it so that we can throw Web-based browsing tools at it,” says Herbold.

Switching on the laptop

With that comment, the irrepressible Herbold switches on his laptop for an impromptu sales pitch. It would be a particularly cloying product demonstration, except that there isn’t a product to sell. “Think of it like a report that’s created specially for you, exactly as you require it,” he enthuses.

“You drill down, layer by layer, looking at what you want to examine, and having the information displayed on the screen on ordinary office productivity applications like Excel and Access that millions of people around the world know and use everyday.”

Best of all, he adds, his IT people have equipped Microsoft’s managers around the world with customised “dashboards” to suit their function and level of seniority. “Every time someone buys another copy of Office, or calls our support lines, or we hire someone new – the data in the data warehouse changes, and minute-by-minute the picture on everyone’s digital dashboard changes.”

What does Microsoft do with the money?

Clearly, some of the information on Herbold’s own dashboard shows that the Microsoft behemoth is nicely on course. Like the mounting cash pile – all $17bn of it. But what on earth does Microsoft do with the money?

Herbold leans forward in his chair, his hands metaphorically chopping the cash into separate piles. “My treasury team splits it into five buckets.

The first bucket is very liquid, and fairly conservative. The second bucket is a little less liquid, and a little less conservative – all the way out to the fifth bucket, which is a lot more exploratory, and has a lot more risk. What we owe the board of directors of Microsoft is sound management of those buckets, and of course we compare our performance on those buckets with industry norms. And we’re doing just fine.”

Hmm. But not every dashboard indicator presents such a reassuring picture, surely. As the executive in overall charge of the human resources function, Herbold must have noticed an awful lot of top employees leaving the company – and not just because they want to spend more time with their money, the classic (and oh-so-understandable) reason usually proffered by departing Microserfs. In recent months, top managers and technical wizards such as Brad Silverberg, Nathan Myhrvold, Peter Neupert and Ben Slivka have all departed, often to join – or found – Web-based start-ups.

So serious has the problem become that Microsoft – never a top payer, and preferring to reward people with stock options, rather than high salaries – gave 15% pay rises across the board earlier this year, with some of the most talented employees receiving rises of 40%. Even so, this only puts Microsoft in the 65th percentile of the industry. Gates himself has asserted that if the company lost its top 30 people, Microsoft would quickly surrender its pre-eminence, so after the latest departures, a group of executives including Gates and Herbold held a crisis meeting on 21 October to find ways of combating the brain drain.

“This is a very, very important subject to us,” concedes Herbold. And within the context of the IT industry as a whole, he says, retention is a major issue. “If you take the United States, there are 3.5 million IT-based jobs – of which around 13% are vacant, because people can’t find individuals to fill them. That’s around 375,000 vacancies. We want to use our recruiting capability to hire for new jobs we have, not use it to fill existing jobs because people are leaving. That’s why we watch the attrition numbers closely.”

But those numbers, he insists, are reasonably reassuring. “In the 12 months from 1 July 1998 to 30 June 1999, we had an attrition rate on a global basis of 7.4%. Go back four years, and the number was 8.9%. So what has the industry average been over the period? As high as 17.1%, and as low as 15.1%. We think we’re doing pretty well.”

But what about a departure closer to home – Herbold’s own? He is, we joke, somewhat older than the average age (34) of a Microsoft employee.

Predictably, the question is ducked. “I’ll retire one day – retire as a human being!” he laughs. But retire from Microsoft? No way. “It’s fun,” he says. “It really is a fun company in a fun industry, and you’re working with people who are very stimulating. So it’s a great environment.”

Can Microsoft take on the US government?

But is it an environment with a future? Beset with adversaries on a number of technology fronts, can Microsoft really take on the US government?

Herbold is deadly earnest. “Five years ago, we were dreadfully worried about whether or not we would continue to be successful,” he concedes.

“Three years ago, we were dreadfully worried about whether or not we would continue to be successful. And today? Today, we are dreadfully worried about whether or not we will continue to be successful. That’s just the nature of the business: in this industry, you’re not required to have a lot of capital or a lot of people in order to create capabilities that can be immensely successful. (Intel co-founder and chairman) Andy Grove was dead right: you must be appropriately paranoid to survive in this industry – and I guarantee we are as paranoid today as we have ever been.”


Name: Robert (Bob) Herbold

Age: 57

Education: Bachelor of science degree from the University of Cincinnati and both a master’s degree in mathematics and a PhD in computer science from Case Western Reserve University.


1968-94: Procter and Gamble

A variety of positions including head of marketing and chief information officer.

1994-present: Microsoft Corporation

Vice president and chief operating officer.

Herbold on HR: You know what we see as Microsoft’s real core competency? Hiring people. And do you know what we look for when we hire people? Two things: smart folks who are fired when it comes to technology – and people who want to use that knowledge to change people’s lives and the way organisations work. And that’s it. The list stops there.

Herbold on performance management: In terms of performance appraisal, we grade people with numbers, and then we force those numbers to fit into a ‘normal’ bell-shaped distribution on a manager-by-manager basis. This really drives a quality dialogue between individuals and their superiors in terms of their performance. We know, for instance, that 25% of the organisation is going to get a score that is going to say to them, wow, I’m not doing nearly as well as I thought I was, and it’s time to have a serious conversation with my boss in regard to performing better.

Herbold on logistics: Four years ago, 70% of the units we sold came in a box, on floppy disks, with a manual. Now only 30% do – for the other 70%, our organisation ships our customer a master CD that they make copies from. And four years from now an increasing proportion will be directly downloaded off a server on the Internet. That’s how quickly the software business is changing.

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