CHRIS LIDDELL, CFO OF MICROSOFT
Interview by Tom Leander

Microsoft, the iconic giant of the software industry, is always being challenged. Hackers try to bust its Windows software. The company has been the target of anti-trust actions in the US and in the European Union. A whole class of software development – open source – has emerged to provide a lower cost, fewer-strings attached alternative to Microsoft products. And its long-awaited launch of Vista met with lukewarm response from reviewers and customers worldwide. Yet counting Microsoft out has proved a fool’s game in the past. The company’s lower profile businesses – from servers to embedded software to Windows 2007 – are helping the company turn in double-digit growth figures. That analysts believe Microsoft might succeed against rival Google and others in the online category has been written out of the stock price. That means there’s tremendous upside should Microsoft surprise the world by effectively competing online. Chris Liddell, 48, the fourth CFO in Microsoft’s
28-year history, explains how Microsoft is responding to its world full of challenges.

You were CFO of International Paper before this job. How does that experience compare to working at Microsoft?

Microsoft has 80,000 employees, and International Paper has 60,000. We both have head offices in the US, and a decentralized structure. And the disciplines required to run finance in each company are comparable. These would include compliance with Sarbanes-Oxley and (US) SEC requirements, structuring tax on a multinational basis, and introducing internal controls across jurisdictions. But the rate of change is faster in Microsoft so the speed of decision-making has to be faster. The culture is different, but I’m flexible: I was a civil engineer, an investment banker, the CEO of a public company, and I have a master’s degree in philosophy.

What is driving your move to ramp up R&D in Asia?

It’s the talent pools in China and India. A massive number of talented people are coming through those countries’ university systems. It would be crazy not to tap those resources. We’ve got about 2,000 people in R&D in each place. Over time, you get a critical mass and you can start to do some mainstream products, and we’ve got that now in India and China.

Does Microsoft make money in Asia outside of Japan and Australia?

If you take it from the view that we’re in the country we’re talking about forever (i.e., China), then it’s not important whether we’re immediately profitable or not. It’s more important that we’re getting the right price, combating piracy, and selling the right products. If sales in a country are growing 20% to 30% per year, we might be willing to be unprofitable if we think in five to ten years we will make money. We have to look carefully at the trade-offs: what’s our penetration, how much of our products are we selling, and how are they improving year after year?

How’s the effort to combat piracy in China going?

Piracy is still extremely high in China. It’s going to take an enormous amount of time, but we have made progress. Once you start getting people familiar with paying as opposed to piracy, you can improve. Our growth in software sales is exceeding the rate of new PC growth – that’s a positive sign. The government has given us tremendous support, with President Hu Jintao’s visit to (Microsoft headquarters near the US city of) Seattle a year ago, and with our Chinese partnerships in R&D and education. The government is very seriously trying to grasp what the future potential for a software market will be in China.

Microsoft still has very large cash reserves. Do shareholders want you to invest that cash more aggressively?

No one says you have an open checkbook. Shareholders want to see us be incredibly disciplined. As for acquisitions, we have an acquisition team, which is quite active, with the purchase of (US-based) Tellme Networks being the largest acquisition in recent years. The internal investment bank and the integration team reports to me. Acquisitions have to be able to pass through different ‘gates’ – or qualifiers – before going forward. These include a strategic gate, the second is an approval to negotiate, and the third is the signing off on the transaction itself.

Microsoft is a ‘maturing’ company. What’s the room for upside on the share price?

We’re now at the tail-end of the biggest series of product launches that we’ve ever had. Our best-known launch is Vista, but Office 2007 is just as important. Many don’t have the sizzle of a Zune music player or XBox or Vista, but products like the Longhorn server are just as important from an earnings point of view. From the CFO point of view, all of these are equally interesting.

This brings me to the old saw that Microsoft is a company that lacks dynamism compared to what Google has done with online. What’s your reaction?

In terms of agility, I think we’re extremely good. You don’t run a staff of 80,000 people like a startup. You need structure and discipline or you have chaos. Adding products that are great – and that have an organization like Microsoft behind them – is important. But a lot of products have a five-to-ten year horizon. If, in the online space, products develop in terms of months rather than years, then we need to get faster in the way that we develop new products. So we are building new skills there. In terms of the ethos of innovation and agility and pushing decision-making down into the organization, we’re extremely good for a large company.

You’re the fourth CFO in the lifespan of the company, which might suggest that your tenure will be five to six years. What do you want to accomplish?

I want to build a world-class finance department. We’re world class in most areas, but not all. Second, I want finance to be significantly influential inside the company, and in key decisions.