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									Secretary of Defense
 Fellows Program


     CAPT James H. Engler, USN
            June 1997

Executive Summary ........................................................................................................... .             3

Recommendations for DOD................................................................................................                     5

Microsoft Corporation ....................................................................................................... .             7

Background................................................................................................................... ......        8

Observations....................................................................................................................... 13

SECDEF Fellowship Program...........................................................................................                   24

Conclusions.......................................................................................................................     25

Appendices................................................................................................................... ....     26

                                       EXECUTIVE SUMMARY

In March of this year, Gordon Moore, visionary founder of Intel and namesake of Moore’s Law,
discussed the probability of a 10-Gigahertz chip with a Billion transistors by the year 2011. Although
skeptics will remain skeptical, the possibilities for believers in this pace of innovation are endless.

Microsoft (MSFT) is a global, highly competitive, highly innovative software development, production,
and support company. Conversations among employees routinely include military war-fighting terms
such as air cover, strategy, tactics, and campaigns. Although the typical MSFT customer spends less
than 2% of its Information Technology (IT) budget on MSFT products, MSFT continues to grow at an
incredible rate, with a stated goal of doubling revenue in the next three years to $22 billion. In FY 97,
which ends 30 June 1997, MSFT expects to exceed $12 billion in revenue, while investing over $2 Billion
in Research and Development.

“Intra-Organizational Communication theory”

I’ve formulated a theory based my close observation of MSFT: “The easier it is for members of an
organization to communicate with each other, the more likely it is that members will communicate, and
the more members communicate, the better the organization functions”.

Points to Ponder

The MSFT communications model generates at least two points for DOD to consider: (1) Would DOD
function better if there were a free-floating exchange of ideas up and down the organization? (2) Does
the classification system help or hinder the flow of information to and from the operational forces, i.e. are
we are own worst enemy?

Best Practices

       -           Aggressive pursuit of feedback
       -           Organizational willingness to be extremely self-critical
       -           Passion to Win
       -           Active resistance to bureaucracy as it continues to grow by thousands of employees
           each year
       -           Paranoid drive to remain nimble in the face of constantly changing threats to its
           continuing profitability
       -           Use of strategic partners
       -           Robust Intranet and extensive use of Internet
       -           Extensive use of metrics

                                RECOMMENDATIONS FOR DOD

Implement a totally interoperable network of networks. If a component of the network is not totally
interoperable with the rest of the network, that component should not normally be acquired. DOD needs
to ensure that the Services can seamlessly communicate with each other and the Pentagon. The
technology to make this happen exists today and WILL be better, cheaper, faster, and even more secure
tomorrow. The pace of technology change is moving too fast to allow an organization to wait for an
optimum solution.

Standardize the IT infrastructure as it continues to evolve. There is no room in an acquisition strategy
for personal preferences relative to either hardware or software. Countless civilian research firms
analyze these markets constantly and DOD can leverage this research to purchase the best IT products at
the lowest prices. Competition in the marketplace ensures tremendous momentum and best companies
will win out.

“Recruit smart” for the next generation military forces. As the services continue to become
incrementally smaller in order to modernize with high-tech state-of-the-art hardware, we must analyze the
demographics of our personnel and the recruiting base, or we will enter the 21st century with a low-tech
personnel force to fight a high-tech war.

Leverage C3S Technology. Communications, Coordination, Collaboration, and Sharing. All the new
software and the next generation of applications that improve decision-making and streamline business
processes can transform large amounts of corporate, departmental and individual data into accessible,
meaningful information that can make individuals more effective. For the first time in history, DOD can
eliminate virtually all paperwork and replace it with digital, electronic C3S media. Electronic
submission of travel claims, ticket reservations, and pay are obvious areas to act immediately. Efficiency
can be dramatically improved and administrative infrastructure reduced with software and systems that
are successfully deployed in the civilian sector today.
Bill Gates recently required every paper form in MSFT to be collected, analyzed and replaced by an
electronic substitute. This effort should be completed at MSFT by the end of this year. It may take
DOD slightly longer, but a truly paperless DOD is a doable three-year goal.

Reduce the non-warfighting infrastructure to the maximum extent possible. Do this by analyzing

every function within DOD, and asking “Can a civilian business do this better, and with less cost to the
government?” If the answers are Yes, an opportunity to reduce infrastructure exists.

“Partner” long-term with leading-edge companies. Strategic alliances with businesses will result in
the operational forces having the best training and equipment to fight and win in any engagement.

Exploit advances in Distance Learning. Internet and Intranet-based technologies present
unprecedented opportunities for the deployed forces to receive high-quality distance learning.

Purchase training and support of IT hardware and software. Successful companies view training
and support as business requirements and necessities, not optional expenses that tend to be the first cuts in
the IT budget. Much technology in place today is underutilized, at least in part because managers do not
invest in the training workers need to do their jobs. For IT organizations, training is needed just to keep
up with the wave of technology and the speed of change that Bill Gates recently postulated will last for at
least another 20 years!

                                  MICROSOFT CORPORATION

Microsoft was founded as a partnership on 4 April 1975, by William H. Gates III and Paul G. Allen, and
incorporated on June 25th, 1981. As of 30 June 1996, MSFT employed 20,561 full-time (plus many
contractors, vendors, interns, etc.), 13,991 in the US and 6570 in other countries. In July 1990, less than
seven years ago, MSFT revenue exceeded $1 billion for the first time. On 12 Nov 1990, Bill Gates
announced MSFT’s corporate vision “Information at your fingertips” at a major industry convention.

MSFT liberally uses financial incentives, demands hard work, hires very smart people and heavily
empowers them to find creative ways to solve business problems. Because of an equity compensation
model where employees are paid with stock options as well as regular income, they will not earn
above-average income unless the entire company meets or exceeds goals. This pay model, which relies
heavily on the stock value increasing, incents employees to a high degree of collaboration, unlike its
competitors who tend to higher compensation and less emphasis on stock value.


I spent my fellowship in the Enterprise Services division of the Enterprise Customer Unit (ECU). The
ECU has responsibility for MSFT’s largest customers. ECU executives work with MFST’s enterprise
customers around the world to learn how to best support their business and establish an ongoing business
relationship that is mutually beneficial.

Consistent with the spirit of the SECDEF fellowship program, I have an operational, not IT or acquisition
background. My experience as a Navy carrier pilot did little to prepare me for a vast new set of
acronyms and business terms.

I started the fellowship during a major reorganization of the Enterprise Customer Unit (ECU) and had to
overcome an initial caution towards me by MSFT due to recent government inquiries about alleged unfair
business practices. The corporate caution quickly dissipated, and I was warmly welcomed as a member
of the team. While at MSFT, I participated in a number of projects including defining new services,
management goals review, the Mid-Year Review process, and planning to grow the ECU customer base
in FY98 from 3200 to 8000 worldwide customers.

Enterprise Services
MSFT Enterprise Service Providers include over 3800 technical professionals and 1200 MSFT
Consulting Services (MCS) consultants. In FY97, over $350 million was generated in revenue and
expense for service and support of MSFT products. MSFT competes against the large service providers
such as IBM by utilizing a number of strategic partners such as Digital and Hewlett-Packard. The
partner model allows MSFT to create a virtual team, rather than absorbing all the costs associated with
approximately 80,000 employees like IBM’s service organization.

Unlike competitors such as Oracle or IBM that operate services businesses for profit, MSFT operates the
Enterprise Services businesses on a cost-recovery basis. MSFT values the cost-recovery model because
it keeps the price of service and support down and forces each business unit to carefully manage costs
throughout the year. It could not successfully operate on a cost-recovery basis if it did not leverage its
partners nor could it provide high quality service to such a large global customer base.

The primary measures of success in Enterprise Services are customer satisfaction and knowledge transfer
from MSFT to other business and technology professionals

The Enterprise Services component of the Enterprise Customer Unit has responsibility for developing and
constantly refining a comprehensive portfolio of technical services marketed as Service Advantage. This
portfolio, designed specifically for large organizations that make a strategic investment in MSFT
technology, includes services direct from MSFT, services from a global network of technical third parties,
and a set of information resources – all aimed at helping organizations plan, build and manage successful
systems with MSFT technology. During my fellowship I was immersed in defining many new service
offerings as the company increased the size and scope of these offerings to meet the demands of MSFT’s
largest customers.

Direct Services
This direct relationship with MSFT consultants and product support professionals worldwide offers key
services for high-availability operations in global enterprise organizations. All services are committed to
knowledge transfer, empowering customers to become proficient with MSFT technology in their
computing environments. Direct Services include Enterprise Program Management, MSFT Solutions
Framework (MSF), Technology Consulting Blueprints (TCB’s) Custom Consulting, Premier Support, and
Premier Global Support.

An Enterprise Program Manager (EPM) is a senior technical consultant who works at the company site
and learns how software is used in the customer’s business. The EPM works closely with the senior staff,
planning and managing projects with an in-depth understanding of MSFT, its technology, and where to
look to identify technical opportunities to achieve a competitive advantage.

MSFT Solutions Framework (MSF) is a process guide, created from years of development and consulting
experience, which assists organizations in planning, building, and managing software projects. MSF
includes concepts and reference models that help IT organizations identify and structure
information-intensive businesses processes and manage the overall information infrastructure. MSF is
available through facilitated training and a CD-ROM knowledge base from MSFT consultants and
selected partners. Recent efforts have resulted in a rapid shift to Web-based information, both via
Internet and the corporate Intranet.

Technology Consulting Blueprints are predefined consulting projects on specific technological topics,

such as Windows 95 Migration Planning or Microsoft Exchange Migration Planning. These blueprints
represent MSFT Consulting Services best practices in these areas and the best way for the customer to
plan ahead for a successful migration or other project. As a result, the general requirements,
deliverables, approach, and expectations are well defined in advance.

Custom Consulting delivered by MSFT Consulting Services provides business, government agencies, and
other organizations with assistance in planning, building, and managing distributed computing
environments using MSFT technology. Considerable effort is devoted to detailed architectural planning,
identifying and eliminating performance and manageability issues before they become problems.

Premier Support is designed to support enterprise-wide IT organizations that are developing or deploying
Microsoft products in distributed computing environments. Currently 85% of MSFT’s 500 largest
customers have Premier support, and MSFT seeks to expand Premier coverage to an additional 700

Premier provides proactive support planning and problem resolution for Microsoft products; rapid
response times, including immediate server-down response 24 hours a day, seven days a week; special
consulting and planning services; and access to MSFT technical support information. It also offers a
dedicated Technical Account Manager (TAM), who acts as a company representative at MSFT in the
anticipation and resolution of support issues. While at MSFT, I participated in many planning sessions
and projects dedicated to improving, expanding, and refining Premier support.

Premier represents an extremely successful endeavor on the part of MSFT to ensure its customers have
successful experiences with MSFT products. All Premier representatives including management earn or
do not earn semi-annual bonuses based on customer satisfaction, a calculated effort by MSFT to stress its
importance. The current overall satisfaction of MSFT customers with Premier is an impressive 98% as
measured by recurring surveys within the companies. Perhaps some variation of this bonus methodology
could be implemented within DOD to incent management and workers to achieve greater productivity.

Premier Global is designed for large multi-national organizations that deploy MSFT products in
distributed computing environments. It provides individualized proactive support planning and problem
resolution. It can be scaled and customized to meet the unique needs of multinational enterprises.
MSFT Global TAM’s have authority to immediately escalate any technical issue on any MSFT product
from anywhere in the world to the highest priority in the support queue until it is resolved.

These GTAM’s also regularly analyze how an organization can best use its support resources, and they
provide experienced technical recommendations for dealing with growth, migration, and changes in
distributed computing plans.

Strategic alliances are deep, mutual agreements that MSFT has with individual organizations to share to
deliver specific technologies or services. They offer the highest level of worldwide service on MSFT
products. The complex demands of multi-vendor integration inherent in most large organizations require
that those organizations have a strategic relationship with a service organization that can commit to high
availability anywhere, anytime. As computing becomes more and more ingrained in the productivity
model of large corporations, rapid service response to mission critical outages becomes mandatory.
MSFT has defined a unique, long-term relationship with these companies and participates in many
mutually strategic activities, such as joint development agreements, support escalation agreements, or
joint field engagements. Each strategic alliance organization has specific focus on enterprise customers,
extending what large organizations can do with MSFT technology. DOD should consider exploiting this
model in its dealings with the business world. Although such a model by nature creates winners and
losers, if the DOD acquires the best products and services for the operational forces, the United States


Key Microsoft Success Factors

Bill Gates, Chairman, possesses not only technical brilliance, but has superb
business sense and vision.

Strategic vision is provided by an extremely talented and diverse team known as the Executive
Committee (8 members not including Bill Gates).

The company loves a good fight. They identify their enemies, currently Netscape, the Network
Computer (NC) initiative from Sun and others, Lotus Notes, and Oracle. They focus major resources on
understanding their enemies first, and when ready, engage with overwhelming force. SunTzu and
Clausewitz would be proud.

There is a crystal-clear focus on the Customer. Time after time, I witnessed decisions made based on
what's best for the customer, regardless of the implications to the company. Business travel is oriented to
building or strengthening customer relationships.

MSFT’s symbiotic relationship with key partners. Where would MSFT be if Intel failed to advance the
microprocessor? Companies like Compaq, Intel and thousands and thousands of technology, software
and service companies have bet their businesses and won by working with MSFT.

The entire company worldwide is connected by a robust Intranet as well as the Internet, and email is the
weapon of choice for most business communications.
Parenthetically, MSFT has had email since 1982. There is no noticeable difference between emailing a
MSFT employee down the hall or a MSFT employee in Australia. Video-teleconferences (VTC’s) and
telephone conferences are also routinely used.

MSFT is actually a cluster of smaller cells or business units that are heavily empowered to function with
great focus and autonomy.

MSFT is a very non-hierarchical company where junior employees are actively encouraged to feel close
to senior executives. Everyone is referred to by his/her first name or email alias, including BillG. This
protocol has a subtle side effect of enhancing the free exchange of ideas via email and in meetings. It is
extremely rare to see an executive “pull rank” in a meeting. Typically, all employees speak frankly and
every possible option is sought rather than seeking a consensus or agreement simply because “it’s the
boss’s idea”.

MSFT encourages creativity by minimizing rules and de-emphasizing positional perks such as designated
parking spaces. All offices are relatively similar in size and shape.

MSFT maintains a vigilant awareness of headcount, costs, and infrastructure.

MSFT will leave a job unfilled if they can’t find a highly qualified applicant. It always tries to hire from
within and relies heavily on internal referrals.

Employee Success Factors
The company has recently developed six key success factors they use in evaluating their employees:
                Individual excellence
                Passion for products and technologies
                Long-term approach
                Customer feedback

Each area is measured and the corporate philosophy is that the ideal employee has balanced strengths in
each area. The six elements are viewed as zero-summed. An imbalance might come from too much
emphasis in one area such as “individual excellence” by an employee, resulting in not enough emphasis in
another such as “teamwork”. The six factors are plotted as evenly distributed points on the
circumference of a circle. Imbalances are easily identified and discussed at each review. The company
also uses regular “one on ones” where an employee has scheduled time with his/her manager to discuss
on-going projects and to review performance.

IT Personnel shortage
There are literally hundreds of unfilled jobs at MSFT, even though the company receives over 100, 000
resumes per year. High-technology companies, plagued with rising salaries and diminishing numbers of
computer programmers and engineers, are looking for new ways to find and keep talented people in the
fast-paced, ever-changing field. This shortage exists today, and is only projected to worsen over time.
DOD needs to be aware of the challenge this presents to recruiting a high-tech force.

According to a study by the Information Technology Association of America released in February 1997,
the number of college students graduating with degrees in computer science fell by 43 percent to 24,200
in 1994 from 42,195 in 1986.

ITAA, which surveyed large and mid-sized U.S. companies, found approximately 190,000 vacant
information technology jobs nationwide, including one open position for every 10 information technology
employees at tech-related companies.

Some 82 percent of the companies surveyed said they expected to expand their technology staff, while 68
percent cited a lack of skilled and trained workers as a barrier to their companies' future growth.

Starting salaries in the field currently range from $36,000 to $38,000 per year, higher for students with
advanced degrees.

The DOD must not assume that military recruits will have either the computer skills or the desire to join a
military with an uncertain future. The war-fighting force continues to shrink. Speaking from an
operational perspective, as we search for scarce resources to fund modernization, we cannot forget that
state-of-the-art aircraft still need pilots with skills that are in high demand in the civilian airline industry,
and maintenance personnel who must understand highly technical systems and airframes. At a
minimum, DOD should direct the services to benchmark the computing skills of recruits and officer
candidates in order to better understand the actual skill set of these future war-fighters.


The term "metrics" is used all the time at MSFT in meetings and discussions, as well as in business
reviews and performance evaluations. Metrics are measurements, and metrics are used extensively to
measure performance. The ultimate metric at MSFT is Customer Satisfaction. Additionally, many
charts/graphs/tables etc. are produced monthly and quarterly to measure performance relative to costs,
revenue, time management and other areas.

At MSFT, most employees feel that metrics are "inspections" of individual and team performance.
Although above-goal performance is rewarded at MSFT, substandard performance isn't necessarily
penalized. The managers I spoke with felt that the company has very few "failures" and agreed that one
of the guiding principles is "to help everyone succeed."

The primary reward for above-goal performance is a semi-annual bonus, and each bonus can represent
from 0-15% of one's annual pay. Bonuses are linked to performance metrics such as a measurable
increase in the % of customers who are Very Satisfied with MSFT products and support.

The primary reward for demonstrated future value of an employee is the use of stock options. The size
and value of the option seems to increase with the level of the employee, i.e. success at higher levels of
responsibility earns a larger stock option. Other rewards include promotions or lateral moves to other
areas of the company.

Organized Chaos
After one month at MSFT I would have described the work environment as chaotic. As I complete my
fellowship, I now characterize the environment as “organized chaos.” Superimposed over the creative
workplace is a formalized planning process, which starts at the Mid-Year Review with a highly detailed
look at the first half of the fiscal year, by business unit. After the Mid-Year Review, the current FY
business plan is fine-tuned by senior executives. Then the senior managers join senior executives in a
Worldwide Regional Directors Meeting where relatively detailed guidance about products and services is
provided for FY 98 business planning. A short time later, this group expands to include the next lower
levels of management at a Worldwide Sales and Marketing Meeting, where education and evangelism
continue. After these meetings, individual managers develop business plans for the next FY. All
employees participate at some level in very granular end-of-year business reviews. The culmination of
the planning process is the MSFT Global Summit, a huge annual gathering financed by the company
where literally thousands of MSFT employees of all levels gather to celebrate the success of the current
FY and gain inspiration to tackle the next FY with renewed passion.

The Positive Feedback Phenomenon

The “positive feedback cycle” has direct applicability to MSFT and applies indirectly to DOD. In this
cycle, the more consumers choose a particular product, the more valuable that product becomes, which
increases its value to additional consumers. Eventually this cycle leads to domination of that product in
its marketplace. Relatively recent examples include the VHS standard winning over BETA in
videocassette recorders or Compact Discs over LP records. MSFT executives routinely refer to “critical
mass” when discussing the proliferation of a new product or service. Once critical mass is achieved,
market momentum as described in the positive feedback cycle takes over and that product possesses
highly coveted market share.

DOD should thoroughly understand this phenomenon and take advantage of it to aid in acquisition
decisions. Rather than attempting to influence the outcome, DOD needs to embrace the winners. There
is little room for fairness in business decisions. The companies that best articulate business value to
DOD should receive government contracts.

MSFT outsources to avoid growing the non-technical infrastructure, and by outsourcing also avoids

incurring the costs of benefit and compensation packages associated with regular MSFT employees. I
constantly asked myself throughout the fellowship, “How would MSFT attack the DOD infrastructure
issue?” After witnessing this lean, nimble 20,000+ employee company from the inside, I can only
postulate that MSFT would take all necessary steps to dramatically shrink the support infrastructure with
a specific focus on staffs, support facilities, and any and all agency functions that can be outsourced.
While at MSFT, I witness the outsourcing of all receptionists, one further step in the company’s
continuing desire to concentrate its resources on operational vice support personnel.

Even the executives and managers who reside there consider corporate headquarters overhead. There is
a palpable sensitivity on the part of all employees as shareholders to maximize efficiency, eliminate
wasted effort, and most significantly minimize the size of the corporate staff while adding value to “the
field.” I’m unable to suggest how DOD can duplicate this mindset in a non-shareholder organization,
except to relay how effective the MSFT model is at incenting highly productive behavior.

Global Executive Roundtable

One of the keys to MSFT”s success is listening to what customers say. MSFT collects, analyzes, and
incorporates customers ideas and suggestions. This process, which sounds simple, is actually the work
of hundreds of MSFT customer support engineers who collect customer concerns and suggestions via
phone, fax and email and relay them to product development teams. MSFT also conducts extensive
usability testing. Customers are invited to work with existing products as well as products in
development, to help MSFT understand how to improve products from the user’s perspective. MSFT
product development consultants, who work directly with the product teams to help ensure that significant
customer feedback is incorporated into the final product, complete the product feedback loop.

Semi-annual Global Executive Roundtables are an integral part of MSFT’s executive relations program
and customer feedback cycle. The business attendees include CIO's and IT VP's of some of MSFT's
largest customers. The GER is an aggressive attempt by MSFT to actively seek feedback from its
customers on MSFT products and services. Although there are typically several hours dedicated to new
product information, the primary value of these meetings comes from interactive sessions.

When I attended in October 1996, Steve Ballmer, Executive VP for Sales and Support, and Bill Gates,
Chairman, both participated, showing top-level commitment to their customers. I have been routinely
impressed by the openness of the leaders of MSFT and their willingness to take hard questions head-on.

The audience communicated a desire to see MSFT (1) continue introduce new and better products into the
marketplace (2) explain the functionality and dependencies of the new products, and (3) describe a
time-phased plan for implementation over the next 6, 12, 18, 24 months. The audience also sought
stability, a long-term commitment from MSFT, and more skilled consultants to help with implementation
of new products.

They were also very interested in MSFT providing a “roadmap” describing where MSFT planned to
proceed in the future, to help these customers make better buying and implementation decisions. At the

time of this writing, MSFT has now created a detailed draft of an Enterprise Computing Roadmap,
specifically in response to customer input.

The company has also developed an accurate cost measurement model, is addressing TCO in all its
products, and taking a leadership role in the industry to drive TCO down. Paul Maritz, (Group VP -
Platforms Group and member of the Executive Committee) is leading a comprehensive study within the

Total Cost/Value of Ownership (TCO/TVO)

As technology change becomes more and more rapid, the need to establish a consistent, ubiquitous
infrastructure, which is at the heart of lowering TCO and raising the Total Value of Ownership, is even
more apparent. MSFT has worked to identify the critical issues that affect TCO/TVO, and is developing
plans to help ensure its products and services contribute to easing the cost burden on large corporations
and entities such as DOD.

MSFT has faced many of the same IT issues that other large corporations face. It has not always been an
"all-Microsoft corporation”, as some would believe. Microsoft has been migrating away from legacy
software and hardware platforms toward a total client-server solution for the past several years, and has
needed to overcome the same integration and migration issues that other large companies face.

Nor does Microsoft IT avoid the traditional budget scrutiny issues. It conducts a rigorous planning
process to be competitive in delivering technology solutions, just the same as its enterprise customers.
The IT budget to support MSFT operations is similar to that of other global corporations. Microsoft has
the same global infrastructure concerns, with subsidiaries in 51 countries, and nearly 30,000 fixed and
mobile users. This infrastructure is the medium for knowledge transfer and business transactions at
Microsoft, so the decisions concerning maintaining and upgrading that infrastructure are absolutely
critical to the corporation.

The challenge for DOD is to not only think long-term about IT infrastructure, but also to standardize the
infrastructure. Too often, even with attempts to standardize on technologies to reduce costs and speed
development and deployment, random elements are introduced into the IT environment due to personal
preferences of decision-makers or artificially attractive cost/benefit studies. If standards and long-term
directions are published, and technologies to be retired are outsourced, I submit that the most objective
resource decisions would be made.

To optimize the process of evolving IT personnel from legacy systems and expertise to new hardware and
technology, employees need time to understand the business and IT direction of the company, and ample
opportunity to obtain training to help them change with the company.

Outsourcing maintenance of non-strategic technologies according to the long-term IT plan ensures that
people with particular areas of expertise don’t create work around a technology scheduled for retirement
to perpetuate outdated legacy technology. Instead, decision-makers are necessarily focused on the future
direction of the company.

Finally, there are many "people" issues to consider as technology skill sets change in IT organizations.
Managing change through retention of quality personnel and training as well as outsourcing should be
high on the list of DOD IT priorities.

“We eat our own dogfood”
Microsoft distributes software internally to its employees, thus using the company as a test platform for
its products. The employees can provide feedback to the product groups to improve the quality of the
released version, and also find “bugs” before consumers do. MSFT also participates in cooperative

programs with other large enterprises that wish to implement its products in the beta stage of
development. Early adopters receive the benefits of implementing MSFT products before most others,
and Microsoft has additional large corporate testing grounds for the products, heightening the quality of
products. New products are in effect globally tested before they ever hit the consumer or business

There is large cadre of analysts who earn their living criticizing MSFT and other excellent companies.
The analysts serve a valid purpose by pushing these companies to constantly improve, but wield too much
power in the marketplace. If analyst earnings predictions are $3.40 per share for a given fiscal quarter,
and the company reports $ 3.39 per share, the stock may drop several points as soon as the earnings are
announced. Although MSFT spends significant time attempting to “win over” the analysts, they also
accept analysts as a fact of life and lose little sleep over what is written unless it is flagrantly inaccurate.

                               SECDEF FELLOWSHIP PROGRAM

I unequivocally support continuation of this program. It is cost-effective and will meet the objective of
creating a cadre of officers who understand best practices from cutting-edge companies. The full value
of the fellowship program may take years to be realized as lessons-learned are incorporated into
management and procurement decisions.

 There is also potential for similar programs drawing on personnel in other areas of DOD such as
acquisition personnel and the Office of the Secretary of Defense. It is difficult to properly quantify the
value of witnessing the energy and talent of successful companies as they fight business “wars.”

Many times throughout the fellowship, I had the opportunity to explain the nature of the SECDEF
fellowship program to MSFT customers, government officials, and present and former military officers.
Usually there was initial disbelief that the Federal government would participate in such a non-traditional
exercise, but once I fully explained the nature of the program, every person appreciated the incredible
value of such an interchange of ideas.

These fellowship assignments should be designated as joint billets.
The fellows were a truly “joint” group (two USN, two USAF, one USMC, and one Army). We were
“direct representatives” of the Secretary of Defense and Deputy Secretary of Defense in major US
corporations, and we routinely participated in superb JPME at Johns Hopkins SAIS and 20XX joint
wargame planning.

Because of the continued emphasis and necessity for “jointness” in the 21st century military, Joint
designation and joint credit for this assignment would enhance the value of the fellowship.


I was given a tremendous opportunity to witness one of the most talked-about companies in history from
the inside. I started the fellowship with few preconceived notions about Microsoft, and left with great
respect for a company where every employee works very hard every day to make the company even
better tomorrow.

A very special thanks goes to Kevin Johnson, General Manager of Enterprise Services at Microsoft, and
Sandi Baldock, his Administrative Assistant (a title which remarkably understates her daily contributions
to the success of Microsoft).

Kevin served as my sponsor, mentor, facilitator, and personal knowledge base regarding the semi-baffling
lexicon of the software industry. The continuous support of countless members of the Microsoft team
during my fellowship experience is gratefully noted and appreciated.

Very soon computers will not require system administrators touching each desktop to configure or
upgrade it. Long term planning will underestimate the incredible pace of change in computing. There
is consensus among the leaders of the industry that computers will soon see, hear, speak, and listen.

Bill Gates is clearly sensitive to IBM's deterioration in the 80's after that company experienced record
years. The leadership of MSFT is very aware of its many competitors, and is determined to continue to
produce innovative products. The company has proven itself capable of routinely reorganizing to stay
competitive and increase market share. Rather than trying to speculate about the future, Microsoft truly
defines it.

Appendix (1)

                                                    Financial Information:

Fiscal Year ending June 1996
Net revenue $8,670,000,000
Net income $2,200,000,000

Fiscal Year ending June 1995
Net revenue $5,940,000,000
Net income $1,450,000,000

Fiscal Year ending June 1994
Net revenue $ 4,650,000,000
Net income $ 1,150,000,000

Fiscal Year ending June 1993
Net revenue $ 3,753,000,000
Net income $ 953,000,000

Domestic Only Headcount:
Male 9,708 69.99%Female 4,162 30.01%Total 13,870
Age Breakout (Domestic Only):
Under 20 3 < 1% 20-29 3,320 23.94% 30-39 7,502 54.09% 40+ 3,045 21.85% Total 13,870

Average Age (domestic)
34.2 years.

*As of 12/31/96
Functional Breakout (Worldwide):
Division Employees Research & Development 8,243
Sales & Support 9,852
Operations 3,203
Worldwide Total 21,298
* As of 2/28/97

International Revenues:
Account for 58% of Microsoft's total revenues

Appendix (2)
                                    “Ten attributes of a good employee”
                                              By BILL GATES
Bill Gates Column (NYT Syndicate) 4/23/97I'm often asked how to be a good manager, a topic I've taken on in this
column more than once. Less often does anybody ask an equally important question: What makes a good employee?

Here are 10 of the qualities I find in the "best and brightest" employees, the people companies should attract and

If you have all of these attributes, you're probably a terrific employee.

First, it's important to have to have a fundamental curiosity about the product or products of your company or group.
You have to use the products yourself.

This can't be stressed enough in the computer world. It also carries special weight in other knowledge-based fields
where technology and practices are advancing so fast that's it's very hard to keep up. If you don't have a fascination
with the products, you can get out of date--and become ineffective--pretty quickly.

Second, you need a genuine interest in engaging customers in discussions about how they use products--what they
like, what they don't like. You have to be a bit of an evangelist with customers, and yet be realistic about where your
company's products are falling short and could be better.

Third, once you understand your customer's needs, you have to enjoy thinking through how a product can help. If
you work in the software industry, for example, you might ask: "How can this product make work more interesting?
How can it make learning more interesting? How can it be used in the home in more interesting ways?"

These first three points are related. Success comes from understanding and caring deeply about your products, your
technology and your customers' needs.

Fourth, you as an individual employee should maintain the same type of long-term approach that a good company
does. Employees need to focus on lifelong goals such as developing their own skills and those of the people they
work with. This kind of self-motivation requires discipline, but it can be quite rewarding.

Management can also encourage motivation, of course. If you're in sales, quotas are important tools for measuring
performance, and it's great when employees beat a quota. But if beating your sales quota or maximizing your next
bonus or salary increase is all that motivates you, you're likely to miss out on the kind of teamwork and development
that create success in the long term.

Fifth, you need to have specialized knowledge or skills while maintaining a broad perspective. Big companies, in
particular, need employees who can learn specialties quickly. No one should assume that the expertise they have
today will suffice tomorrow, so a willingness to learn is critical.

Sixth, you have to be flexible enough to take advantage of opportunities that can give you perspective. At Microsoft
we try to offer a person lots of different jobs through the course of a career. Anyone interested in joining
management is encouraged to work in different customer units, even if it means moving laterally within the
organization or relocating to a different part of the world.

We try to move people from our product groups out into the field and move field people into the product groups. We
have many people in our U.S. subsidiary from other countries, and we have many U.S. employees who work for

subsidiaries in other nations. This helps us better understand world markets, and while we do a pretty good job of
cross-pollination, there's still not quite as much of it as I would like.

Seventh, a good employee will want to learn the economics of the business. Why does a company do what it does?
What are its business models? How does it make money?

I'm always surprised to learn of a company that doesn't educate its employees in the fundamental financial realities
of its industry. Employees need to understand the "make or break" aspects of their industry so that they know what it
is about their own job that really counts. Of course, employees have to be willing students who direct attention to the
areas where it makes the biggest difference.

Eighth, you must focus on competitors. I like employees who think about what's going on in the marketplace. What
are our competitors doing that's smart? What can we learn from them? How can we avoid their mistakes?

Ninth, you've got to use your head. Analyze problems but don't fall prey to "analysis paralysis." Understand the
implications of potential tradeoffs of all kinds, including the tradeoff between acting sooner with less information
and later with more.

Use your head in practical ways, too. Prioritize your time effectively. Think about how to give advice crisply to
other groups.

Finally, don't overlook the obvious essentials such as being honest, ethical and hard working. These attributes are
critical and go without saying.

Appendix (3)

                       PC Magazine Interview with Gordon Moore of INTEL

                                                By Michael J. Miller

PC: While you were still working at Fairchild Semiconductor, you wrote a paper in which "Moore's Law" was
mentioned. Of course, you didn't call it Moore's Law at that point.
MOORE: No, certainly not.
PC: But you were talking about the doubling of transistors at a predictable rate.
MOORE: Every year, at that point.
PC: Later, it became once every 18 months.
MOORE: Well, I really said every two years. That was the fairly early days of integrated circuits. The most
complicated chip around was still a laboratory model at Fairchild at that time, which had about 60 components; that
was transistors plus resistors there. I was writing an article for the 35th anniversary edition of another magazine
Electronics-and they wanted me to predict the future of semiconductor components for the next ten years. And I was
convinced the integrated circuit was going to be important, because you could begin to see this real impact on
lowering the cost, so I looked back. We'd been about doubling every year since the first planar transistor-I call that
Year Zero, 1959-with 1 transistor. We'd gotten up to 64 in six years-in 1965-so I said, "Aha, it's been doubling every
year." I just said, "Okay, it's going to continue to do that for ten years."
So I extrapolated a factor of a thousandfold increase in the complexity of circuits, not expecting any real accuracy
but wanting to get this idea of the way the components were going to be used. For that ten years, we followed that
doubling every year really quite precisely.
Somebody else dubbed it Moore's Law. I think it was Carver Mead from Cal Tech. He tends to do things like that.
Founding Intel
PC: You and Robert Noyce left Fairchild in '68 to found Intel. What did you want Intel to be back then?

MOORE: We thought we saw in semiconductor memory an opportunity to build a general-purpose function of
essentially arbitrary complexity that could shoot at a fairly big established market, replacing cores in particular.
And we chose new technology that we thought would be specifically appropriate for memory. Actually, I called this
our "Goldilocks" strategy, in retrospect. We chose three technologies. One was a Schottky bipolar technology, and
our first product was actually a 64-bit Schottky bipolar memory. We chose silicon-gate MOS. Up to that time,
silicon gate had been demonstrated in individual devices, but it had never been put into production, and it had a lot
of attractive features. And then we were going to make a multichip assembly of these things, so we could pack a lot
of memory into a small area.
It's the Goldilocks strategy because it turns out that the bipolar was too easy-it worked so well that it was easy for
the established companies to copy it. There weren't any tough technological problems, so we didn't have a long-term
advantage there. The multichip thing was too hard-we still don't do it, at least not cost-effectively. But the silicon
gate was just right. While we were focused on it, we put all of our energy into solving the few really tough technical
problems to make it a production technology.
So we had a long time there where we had an opportunity to expand in what turns out to be the mainstream of the
technology, without much direct competition. It worked out just right.
Also at that time, after we got the first few memory products out, we did this calculator project where we changed
the design from a bunch of custom circuits-which we couldn't begin to handle with our limited engineering
resources-to the idea of a microprocessor (Ted Hoff's suggestion). And we saw we could do a lot of other things too.
PC: When the microprocessor started to get used in personal computers (1975 and then on out), did you have any
idea of how prevalent these things would be?
MOORE: Certainly I didn't, and if anybody else around here did they kept it to themselves. You know the first
MITS-I guess you'd call it a PC now-the Altair; it was just a hobby device where the inputs were toggle switches
and the outputs were LEDs. You could demonstrate the way a computer worked, but it was a tough way to do any
practical computing. And I even turned down the idea of a home computer in that time period. One of our engineers
came up with the idea that you could build a computer and you could put it in the home, and I kind of asked him
what it was good for, and the only application I got back was that the housewife could put her recipes on it. I could
imagine my wife sitting there with a computer by the stove! It didn't really look very practical.
In fact, even when Steve Jobs came over and showed us what was going on at Apple, you know, I viewed it as just
one more of the hundreds of applications that existed for microprocessors; I didn't appreciate that it was a significant
new direction.
PC: Go on another three years or so: It's 1980. IBM is around and looking for a microprocessor for what would
become the PC, and obviously you guys sold IBM the 8088. How important was that sale?
MOORE: That was a period of time when we were competing very strongly with Motorola for design wins.
Motorola had a good part out on the market, and we were concerned that this company was going to run away with a
whole generation of designs. So we put together a very aggressive marketing program, where we wanted to get
2,000 design wins. I think it was in the '79-'80 time period, over something like a year span, and we went
aggressively out to pitch every design we could.
Well, one of those designs happened to be the IBM PC. In fact, the salesman who was calling on the account wasn't
even told what the project was; it was, you know, cover the conference room with a blanket in between and ask
questions. You would answer the questions but never see what the product being worked on was. Of course,
eventually we found out it was the PC. But even IBM expected only to sell a few hundred thousand of them over the
lifetime of the product. And while we thought it was a significant design win, it was one of something like 3,000
that we had in that time. I certainly didn't realize that it was going to be the future of Intel, even when the IBM PC
got announced.
Processor Changes
PC: In the late eighties, early nineties, there was a lot of talk about RISC processors. You developed a few RISC
processors too-the 860, the 960. Were you worried that the x86 processor was sort of older technology and that this
was going to surpass it somehow?
MOORE: You know, we considered it principally marketing hype, but that was a tough sell, trying to convince
people that RISC was marketing, not technology.
There were some things you could recognize. Clearly, if you threw everything away and started with a clean sheet of
paper again, which was what the RISC people got to do, you could avoid making some of the mistakes that were
done in some of the early architectures: putting in more registers, making all the instructions the same length, things
like that. But we had this tremendous advantage: all of the software people had bought that ran on our instruction
set. We were convinced that was a very important advantage.

Everything that came along (except throwing away some of the warts on the existing architecture) we could take
advantage of. We could make superscalars; we could pipeline; we could do all of these things that were getting the
performance. It may have cost us some more transistors, but as long as we had a far higher unit volume than any of
the RISC processors, we could afford to put more transistors in to maintain the compatibility.
PC: Basically, since the 386, the architecture of the basic chip hasn't changed that much. The instruction set, until
MMX, didn't change at all.
MOORE: The instruction set has stayed the same, but we've added a lot of other things. The 486 put the floating
point on there. All the pipelining and superscalar and that kind of stuff has come on. We call that part of the
architecture, even though the instruction set stays the same. MMX, of course, is a change in that.
PC: Now you're talking about VLIW and 64-bit stuff.
MOORE: We're not talking about that at all. I mean, we're doing a 64-bit program, but we're not describing what it
PC: Does the instruction set have to change?
MOORE: Sure, 64 bits means new instructions. But it will still run the older software compatibly. You know, one
thing we have is the idea of carrying a compatible family along. Even if we have to put two processors on the chip,
one 32-bit and one 64-bit, it's going to run that old software effectively.
Manufacturing Limits
PC: Let's talk about manufacturing. When you do the Moore's Law charts, you have all of this wonderful doubling
every 18 months or so. How long do you see that going on?
MOORE: Actually, there's still quite a bit we can squeeze out of the technology, and I'm amazed at how effectively
people have been able to continue spinning the next versions. There's kind of been a generation of technology every
three years, where essentially we double the density every three years. The minimum dimension multiplies by about
0.7, and 0.7 squared is 0.49; you get the same thing in half the area. And now, for Intel, our leading production
technology is 0.35-micron, and 0.25 is moving into production as soon as we can get it cleaned up. That'll be the
workhorse in a couple of years. And that's still straight optical lithography. 0.18, which is kind of the next step,
looks as if it can be done optically without any dramatic changes in what we're doing.
The step after that to me looks a little tougher, but the guys who have to do it don't seem to be intimidated by it at
the moment. The reason is that we'll probably do it with the so-called 193-nanometer light source-the excimer
laser-and do 0.18 with that. The wavelength and the minimum dimension are about the same optically; that's not too
To do 0.13 in the 193 is a much tougher deal, because you're operating quite a bit below the wavelength. So you
probably have to do all of the tricks available-you know, phase shift masks and this kind of stuff, multilayer
resists-the ideas that exist in the industry but are not a lot of fun. You know, they're not that well developed yet, so
there may be another light source that lets us operate at a shorter wavelength.
The trouble is, if you go to a shorter wavelength, you essentially run out of transparent materials, so all the optics
have to be reflecting.
Beyond that, I guess when we get to an all-reflective system we can go quite a bit further. But we make a change
from the kind of lithography we've been doing for the last dozen years when we abandon transparent optical
materials. That's a change, and it's going to be an expensive change at least. Then you eventually get to some kind of
a physical limit, and the industry has argued about where that is for some time. I think the consensus is it's
someplace between 0.05 and 0.1 microns minimum dimension, and like most of these limits it keeps pushing further
away as we get closer.
We're getting down to the point essentially where the atomic nature of matter starts to be a real limit when you get
down there. That's a fairly fundamental limit. So that carries us well into the next century. At that time we'll be able
to put, I don't know, several hundred million or a billion transistors on a logic chip. That leaves phenomenal room
for the designers to innovate in how they're going to use those, so I don't see this as being the stopping of innovation
in the industry or anything. I just see it focusing more innovation in other directions, so things will advance for a
long time.
Future Technology
PC: On the design end, a lot of people talk about a lot of very different kinds of ways of making semiconductors,
whether gallium arsenide or multistate logic. Which, if any, do you think are really important?
MOORE: Well, somebody once said, "Gallium arsenide is the material of the future and always will be." I spent a
lot of money on gallium arsenide in the sixties and got convinced it was a fairly intractable material. It's neat for the
front end of cellular phones when you want a little bit of stuff that's high-performance, but it's not going to compete
in the mainstream. You know, we now do everything on 8-inch wafers-nobody has seen an 8-inch wafer of gallium
arsenide. We'll be at 12-inch wafers probably by the end of the century. People can't grow crystals that big in any of

these other materials! So I think the mainstream is likely to be silicon-based forever.
PC: There's a lot of talk about optoelectric chips, using light more, and holographic memory.
MOORE: I am not a real believer in optoelectronic chips to do computing. But it's interesting for communications
PC: Holographic memory?
MOORE: Holography memory? I'm not close enough to that. The densities people talk about being able to achieve
are phenomenal: a lot of information storage. It's capable presumably of giving one of those real qualitative leaps in
the amount of stuff that's available. Something may come of that. I'm not close enough. On the other hand, the
ability of the magnetic-disk people to continue to increase the density is flabbergasting; that has moved at least as
fast as the semiconductor complexity. You can get a 2.5-gig drive for 200-and-some bucks now down at Fry's [the
Bay Area electronics-superstore chain]! It's absurd!
PC: What about some of the quantum computing ideas?
MOORE: The quantum computing-that's a hot new one. Again, this is getting further and further away from my area
of expertise. I think quantum computing is a very interesting concept. I think it has no practical application
Chips in 15 years
PC: You talked about the "2011" chip.
MOORE: Oh, yeah, that was Andy [Grove]. He gave a view of that at Comdex, and I wouldn't want to take credit
for any of that. [Joking: I think somebody got carried away with his semi-log paper. They were very aggressive
PC: So you think a 10-gigahertz chip with a billion transistors on a 0.07-micron process is....
MOORE: By 2011, that's asking for everything to fall in line perfectly. A 10-gigahertz chip of that complexity, to
keep the power in anything reasonable and tractable, is really tough. The power thing really becomes a problem, and
I consider that one of our biggest challenges, particularly for laptop systems and cheap desktop systems. The power
wants to go up to hundreds of watts as you go in this direction (probably thousands of watts if we go that far), and
there aren't simple systems for taking that kind of power out.
I start to understand why the mainframe people used to circulate Freon and water-cooled and the like. You really are
pushing the power as hard as you can, and I think that's going to limit these combinations.
PC: One way or another, 15 years from now we're going to have really powerful chips compared with what we've
got now, right?
MOORE: Yeah, I'll admit that.
PC: What do you think we're going to be doing?
MOORE [laughing]: That's harder to answer. I think there are some things that are very attractive. You know the
one I always come back to is good voice recognition. I really think a computer you can talk to-it can understand
your speech, not only the words but also the meaning-is going to change the way computing is done, and I think that
is the role that is well worth shooting for.
That's the kind of thing that is going to open up computing to the 85 percent of the people who are nonparticipants
today. That requires a lot of processing and a lot of memory, but I really think it's going to be an attractive deal. You
can ask your computer to go out on the Net and get you some information. Like, I would ask my technical assistant
to go out and get me the data on such-and-such and have the computer come back with it. I think that's fantastic, and
I think it's doable.
PC: What about you? You had joked about retiring. Are you going to retire, are you here forever, or are you going to
do what Bob Noyce did with Sematech after he left?
MOORE: The last one: Heavens, no! I guess I'm semiretired now; I'm a three-day-a-weeker. But I can still keep up
with a lot of the stuff that's going on-maintain my touch with the excitement in the industry-and boy, if the
alternative is staying at home and taking out the garbage, I'm going to stick around here for a long time.

PC Magazine, Vol.16, No.6
March 25 1997 P. 236


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