Strategy ShiftStrategy Shift

Microsoft, whose fortune has been built around a computer operating system, is gaining influence on how things get done in an operating room. For the past few years, the software company has been hiring doctors, nurses, and other health-care professionals in an effort to establish internal expertise about the medical industry's IT needs. The strategy is paying off in new accounts and an expanding footprint within the sector.

"We really want to have a dramatic impact on this industry," says David Lubinski, managing director of Microsoft's business unit that sells to health-care and life-sciences companies. "We think we've got a contribution to make."

Already, Matt Maynard, CIO of Pathology Associates Medical Laboratories, credits Microsoft with understanding his business "better than lots of health-care vendors." Yet others see risk in Microsoft stretching too far. "The less Microsoft knows about health care, the better it is for all of us," says Craig Feied, director of the Institute for Medical Informatics at MedStar Health. "The last thing we want is an overengineered set of solutions built around yesterday's or today's problems."

What Microsoft is doing in health care is a sign of a major strategic shift, one that raises questions in other industries, as well. From the time it was founded 28 years ago, Microsoft's focus has been on the software that goes inside computers. Increasingly, however, the company is assessing the business processes of specific industries--and writing software products to support them.

Microsoft has customized sales and support teams for industry segments in the past, starting with a team to serve federal agencies nearly 14 years ago. But it wasn't until five years ago that the company really began to divvy up its customer base, forming teams for financial services, communications, and government and education, followed more recently by automotive, retail and hospitality, health care, manufacturing, and media.

Now Microsoft is expanding the number of industries it targets, injecting industry-specific code directly into its core software platforms and hiring business-technology professionals steeped in the sectors at which it's aiming. Earlier this month, it hired Stuart McKee, the CIO of Washington state, to be U.S. national technology officer of its public-sector and education practice, joining a two-star general and former Coast Guard and Department of Homeland Security officials on that team.

CEO Steve Ballmer describes a two-pronged strategy of selling customizable applications directly to small and medium-sized companies via Microsoft's Business Solutions division, while serving larger companies through partnerships with other technology companies. In both cases, Microsoft engages its wide network of independent software vendors to build apps that run on top of its own software stack. "At the end of the day, we don't provide the vertical capabilities," Ballmer says.

But that's changing. Microsoft engineers are creating software add-ons, called accelerators, aimed at business processes common to companies in a given industry. For financial-services companies, there's an accelerator to help with the trend toward straight-through processing, an automated means of moving a transaction through multiple stages. For health-care companies, there's an accelerator to facilitate information sharing using the Health Level 7 messaging standard.

And Microsoft Business Solutions has begun inserting what it calls "industry-enabling layers"--software that serves the needs of a broad base of companies in a particular sector--into its enterprise applications. Its latest addition is bookkeeping software to deal with the idiosyncrasies of not-for-profits, schools, and other public-sector organizations, acquired in April from Encore Business Solutions Inc. The new functionality will be added to the next release of Microsoft's Great Plains applications suite and is the first time Microsoft will integrate technology for the public sector into its software. It has created similar software layers for manufacturing, wholesale distribution, retail, and professional services.

Like everything Microsoft does, the strategy generates polarized opinions. Those like Feied of MedStar Health, who don't welcome an industry-specific interest from the company, aren't necessarily anti-Microsoft. MedStar created a Windows-based IT infrastructure that Feied describes as fast (subsecond response times), flexible (software modules introduced daily), and scalable (35 terabytes of data). "Our system is highly malleable," the onetime emergency-room physician says. "When you go to our finance division, you see the financial analysis and management system. In the clinical area, it's full of lab tests and MRIs. It becomes pretty much any working environment people need it to be."

But Feied believes Microsoft's energies are better directed toward building innovative technologies with across-the-board possibilities than, say, a Microsoft-branded collaboration platform for doctors. "We're grateful every time Microsoft adds something to the OS or adds hooks and links from one product to another. We leverage those things very highly," he says.

Microsoft's vertical-industry push has implications for ISVs, systems integrators, and consultants that make their living serving manufacturers, hospitals, insurance companies, or other specialized sectors. By creating its own industry-specific software, Microsoft is drawing a new and fuzzier line between what it considers core technology--the plumbing common to many companies--and the highly specialized capabilities it leaves to others. "There are people who question what Microsoft's intentions are," admits Dave O'Hara, VP of business development with Microsoft Business Solutions.

John Gomez, chief technology officer of Eclipsys Corp., maintains he's unconcerned. Eclipsys, a software company with 1,500 customers in health care, can focus more of its own resources on improving patient safety by leaving the software plumbing to Microsoft, Gomez says. Eclipsys is porting its applications to work closely with Windows and Microsoft's other products. "The partnership allows us to use Microsoft as an extended development team," he says. Gomez believes tight coupling with Windows will help Eclipsys lower application costs and cut deployment times from 18 months to six.

The Microsoft unit that works with independent software vendors has reoriented around vertical industries, too. Until 18 months ago, Microsoft determined its relationships with those vendors by the type of horizontal applications they developed--say, business intelligence or enterprise resource planning. Now Microsoft identifies needs in a particular sector, recruits partners that can fill the need, and jointly creates so-called solution maps of software and services. "We've got a huge pipeline," says Mark Young, Microsoft's general manager of ISVs.

Those partners that aren't threatened by Microsoft's ISV strategy sense an opportunity. Microsoft has so far dealt with manufacturing as one sector, with the exception of specialized service for automotive companies. It's in the early stages of slicing the sector into smaller pieces, planning internal teams for sales, marketing, technology, and support to serve the aerospace, chemical, consumer packaged-goods, high-tech manufacturing, and oil and gas industries. "I'm thrilled," says Ira Dauberman, a VP at UGS PLM Solutions, of Microsoft's plans to target aerospace companies. Boeing is among UGS PLM Solutions' top accounts. "Putting a focus on aerospace is long overdue."

Microsoft is far from the only software company with a vertical strategy. IBM realigned its software division around vertical industries in December and, since then, has delivered preconfigured software bundles for 12 industries. SAP and Oracle go further, developing entire suites of vertical applications. Oracle, for instance, sells applications for real-estate companies and airports. Oracle president Charles Phillips says Microsoft "talks vertical with a horizontal product and tries to package it, twist it, and tweak it." SAP CEO Henning Kagermann contends that Microsoft's heavy reliance on independent software vendors increases complexity. "If you have too many partners in vertical applications, it's always a risk," he says.

Yet Microsoft has a major edge in extending its strategy: Call it Microsoft's Foot In The Door advantage.

When Cooper Tire and Rubber Co., a 90-year-old maker of after-market tires, set out 18 months ago to create a product-life-cycle-management system for designing and building new products, it assessed software from PLM specialists, custom software, and Microsoft. Cooper Tire chose a Microsoft approach, using the company's SharePoint portal software, Project project-management application, and Visio diagramming program.

It was a pragmatic decision: Cooper Tire's license agreement with Microsoft already covered the products needed, so the tire company faced development costs but no added application expense. The other approaches would have cost at least $1.5 million, and Cooper did it for less than half that. But what does Microsoft know about the tire manufacturing? "That's what we were wondering, too," says Todd Wilson, project manager of technical systems in Cooper's tire division.

Microsoft brought in a systems integrator--Avanade, a joint venture between Microsoft and Accenture--and bore some of the cost. "The people they've brought in have been experienced manufacturing people. We haven't had to teach them," Wilson says. Microsoft and Avanade spent three months developing a prototype to prove its tools could meet Cooper's needs.

The resulting system helps the company get new tire designs to market in about nine months, half of what it used to take. That scored points with management because speed to market is key to Cooper's strategy of developing high-performance and racing tires to compete with Chinese tire companies. "We were a fast follower. We want to be more of a leader," Wilson says.

Another industry in which Microsoft has well-established customers is retail--it estimates 70% of the computing infrastructure in stores runs on Microsoft software. Yet the company is depending on creative thinking to convince retailers to use its software in more, and more strategic, ways.

An initiative called Smarter Retailing, launched in January with 17 partners, sets the lofty goal of revolutionizing the shopping experience through emerging technologies such as using a fingerprint reader in lieu of a credit-card swipe or a smart phone for one-to-one marketing in a store. Retailers have earned a reputation for treating their best customers the worst, says Janet Kennedy, managing director of Microsoft's retail and hospitality sector, which employs 170 sales, consulting, technical, and service staff to serve 105 top accounts. "The bread, milk, beer customer gets the fast lane," Kennedy says, "and the mother with three kids and $300 worth of groceries gets the slow lane."

Early participants include the A&P supermarket chain and Smart & Final, which operates a chain of warehouse stores. Smarter Retailing could serve as a model for similar undertakings in other areas. "You may see a Smarter Financial Services initiative or Smarter Manufacturing," says Gerri Elliot, VP of worldwide industry solutions.

The big question for Microsoft is whether customers' familiarity breeds comfort--or contempt. For example, in retail banking, Microsoft technology is widely used on the desktops of branch-office employees, says Jerry Silva, a senior analyst with TowerGroup, which advises financial-services companies. That leaves Microsoft well positioned to provide the server software that runs branch operations and, eventually, data-center workloads as well. But some aren't convinced Microsoft has the chops to do that. "To get into the middle office, you have to focus less on cost and more on scalability and reliability," Silva says. That includes improving Microsoft's poor reputation for security. "Banks are risk averse," he adds.

Microsoft is moving quickly, expanding industry-specific sales and support teams, developing application accelerators and industry-enabling layers, and seeking more partnerships with vendors that have deep industry roots. In just one day this month, Microsoft Business Solutions revealed a customization guide and other technical resources to assist partners implementing its Retail Management System, while Microsoft and BearingPoint disclosed plans to jointly develop IT systems for government users.

How much more is there to do? Consider that Microsoft Business Solutions sells to approximately 80 industries in Europe (a result of its acquisition of Denmark-based Navision in 2002) but only about a dozen industries in the United States. That leaves more than 60 industries to go if Microsoft mimics its European strategy here at home.

CEO Ballmer sums up his company's overall vertical push this way: "We've made great progress. We have great capability today that we didn't have a couple of years ago. Yet I believe there's a whole lot more that we can and need to be doing."

Microsoft has already made its mark on the technology industry. Your industry may be next.