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Robert Herbold had been at Procter & Gamble for twenty-six years when he left to become COO of Microsoft. The culture shock quickly caused him to wonder if he had made the right decision. While brilliant at creating products, Microsoft seemed to lack the most basic operational controls. In this excerpt from Harvard Business Review, Herbold discusses his first moves to balance creativity with discipline.
Needed: operational discipline
In fact, the freewheeling business environment I witnessed in those first few weeks was the very reason Microsoft had hired me. Although some practices I saw were hallmarks of the company's innovative culture and ability to turn on a dime, others generated chaos rather than creativity and actually impeded quick course corrections by creating unnecessary complexity in the organization. These "worst practices" also sucked up dollars that would otherwise have fallen to the bottom line.
My job was to bring some discipline to Microsoft without undermining the very characteristics that had made it successful. I hoped to do this by creating central systems that would standardize certain business practices and give managers instant access to standardized data on each business and geographical unit.
Incompatible systems and divergent practices companywide were causing all kinds of problems. |
Robert Herbold |
Despite having spent my entire career at Procter & Gamble, my background was somewhat eclectic. During my time at the consumer products company, I had zigzagged between positions in information technology and marketing. My first job, which I took just after getting a Ph.D. in computer science, involved running computer simulations of chemical reactions, and I later became chief information officer. I also served as vice president of market research and spent my last six years there as senior vice president of marketing.
Still, in the newly created position of Microsoft's chief operating officer, my responsibilities would cover an even broader range. I would oversee areas such as finance, manufacturing, information technology, human resources, public relations, and corporate marketingbasically everything but the product and sales organizations. The aim of handing me this portfolio was to remove day-to-day operating issues from Bill's desk and give me the authority needed to streamline company business practices.
Microsoft did get more efficient in the years that followed. One indicator was our increasing profit margins. While revenue grew fourfold from fiscal years 1995 to 2001, net income, excluding special items, grew sevenfold. A number of factors contributed to the increased margins, including healthy revenue growth, streamlined IT operations, and reduced production costs resulting from such moves as the outsourcing of manufacturing. But much of the increase came from simply tightening our business processes. In fact, during those same six years, operating expenses fell from 51% of net revenue to 40%, a savings of more than $2.7 billion, based on Microsoft's fiscal 2001 sales.
I don't take sole credit for this. Bill's supportand later, Steve Ballmer's, when he became CEOwas crucial to implementing the disciplined practices and global systems. And I certainly didn't arrive at Microsoft with all the answers; for one thing, Procter & Gamble, while a highly structured organization, had shied away from some of the approaches we used at Microsoft. But I think I can take credit for keeping the idea of operational discipline at the forefront of Microsoft's priorities, which ultimately not only unlocked tremendous profit potential but, somewhat counterintuitively, also made the company even more flexible and able to respond quickly to changes.
Microsoft has certain unique characteristics. But I believe that the steps we took and the lessons that we learned can benefit any large company trying to improve profitability by balancing centralized discipline and individual innovation. See if you don't agree.
Cleaning up the financial mess
I'd been on the job a few months when Bill and I met one morning with the chief financial officer. The financial quarter had ended several days before. Bill was, to put it mildly, eager to know where we stood. "So where are the results?" he asked. "I know they're in your laptop somewhere. Come on, guys, do you want me to go in there and figure out how to piece it all together myself? Do you want me to write the code? I'll do it over the weekend!"
This outbursteven if it was laced with humor and punctuated at the end with a grinwas a sign of Bill's exasperation not only with Microsoft's financial processes but also with many other company operations. Incompatible systems and divergent practices companywide were causing all kinds of problems. Bills from suppliers weren't being paid on time. We never knew precisely how many people worked for the company. Business units set projections using incompatible frameworks and measures that prevented comparisons of their performance. This operational mess was particularly ironicnot to mention embarrassing, when customers saw signs of itin a company that clearly had tremendous systems expertise.
Take finance. The general managers of Microsoft's business and geographical units would sometimes decide to redefine or change, for their purposes, a key measure used in financial reporting. Some would develop financial information systems tailored to their particular needs. Others would analyze their financial performance in a way meant to reflect the environment of their country of operation. There was nothing seditious about this. Left to their own devices, they simply followed human nature and did things their own way.
But it led to disastrous results. People in corporate financeas the CFO's face-off with Bill highlightshad to spend weeks harmonizing diverse data before they could close the books at the end of a month or quarter. The top management team was often forced to make decisions with outdated financial information. Geographical and business unit managers often squandered resources building up local IT staffs to design and run such customized systems. And because these systems were incompatible, each quarter the company shipped to managers around the world countless sheets of paper presenting the company's and individual units' financial results.
To harmonize this hodgepodge of practices, we created a single, global financial reporting system and implemented it in less than a year. The system was based on packaged software from an outside vendor. But to make the financial information easy to access, the software was programmed to generate a variety of data, which we stored in a central data warehouse. This meant that most employees wouldn't have to deal with the complex software; instead, they could use simple Web-based menus to view the data.
The system yielded tremendous benefits. For starters, we could close the books in three days instead of twenty-one. And managers worldwide could access the company's monthly and quarterly results almost instantly, which eliminated the double delay of waiting for the books to close and the printed reports to arrive.
The software gave the top management team all kinds of up-to-date financial information. For example, within seconds, executives could see any geographical or business unit's operating expenses, stated in dollars and broken down by type of cost, while also having each type measured as a percentage of revenue. These numbers could be compared with historical figures and current ones. And, because we had standardized the financial definitions companywide, top management could easily benchmark business units against each other. The global approach also allowed us to drastically reduce the number of financial information systems and databases, as well as the number of IT staff needed to build and support them.
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