26 January 2004

Keynote address by Bill Gates, Chairman and Chief Software Architect, Microsoft Corporation at the Enterprising Britain Conference

I. Opening Remarks

I am definitely looking forward to my investiture. All I know about the ceremony is what I have seen on Monty Python, so I may have the wrong impression. In today’s session I will outline some factors that came together to make Microsoft a success and talk about the economic competition between nations going forward, particularly with regard to the rapid innovation and development in emerging countries. The rich world really needs to renew its commitment to what it is best at: innovation and breakthrough products. We need incentive systems that drive that innovation in an appropriate manner, because we can no longer compete exclusively on the basis of cost of labour.

II. Building Microsoft

1. Humble Beginnings

When Paul Allen and I started the company, we knew we were on to something big but we were fairly humble. I have always said that Microsoft can double in size and grow no more; I said it when we had 100 employees and I say it now. Doubling now would create a company selling $70 billion of software per year and employing over 100,000 people.

2. Measured Growth

We coupled long-term vision, including that statement that our software would drive all computers, with a humble approach to every employee and a refusal to be complacent. That was a great combination. When I hired Steve Ballmer, current CEO of Microsoft, he said we needed another 40 people. We were at loggerheads for about 24 hours, as I was not sure the company would grow fast enough. I would give him carte blanche to add one at a time, but if we ever got ahead of our revenue growth, then I would tell him to stop. I have not yet had to do so.

3. Changing the Rules

The big opportunities come when the rules change. We did not get into the computer business to be another IBM, or NCR or Digital Equipment Corporation (DEC). When I was growing up, DEC was a venerated company and now it only exists as merged component of Compaq, itself merged into HP. Another great company was Wang, responsible for inventing word processing, core memory and the calculator. These innovations dried up and the company’s cost structure meant Wang disappeared, filing for Chapter 11 bankruptcy. These lessons taught us that the best technology companies could lose their way. Ken Olson, founder of DEC, stated that no one would need a personal computer. Why do people make negative statements that will only be remembered if they are horribly wrong?

4. Having a Vision

We believed when we entered the industry that computers would cease to be exclusively used for business and that we could build the best tool ever for leveraging creativity and advancing communications. In that environment, changing the world through invention seemed plausible. Despite starting the company at age 19, people were incredibly supportive. Initially, customers were taken aback by our youthfulness, but after we demonstrated that we knew our product, they began to believe that we knew more than we truly did. The willingness to risk working with a young company was incredible.
We believed that the chip industry would create computer engines; this was the early micro?processor. We kept telling Intel that what they had was magic and would change the rules of the game, but they only recognised this fact in 1981 when IBM and Microsoft designed the original PC utilising the Intel chip. From then they realised that micro?processors would become the key market and the product that would allow them to increase the power of computers again and again.

We have considerable stability of vision and management; I was CEO for 25 years before handing over to Steve Ballmer four years ago. The continuity in terms of the incentives we drive demonstrate that what we are about. We take software and solve the toughest problems. For example, people have been overoptimistic about speech recognition for decades, but it is exactly the kind of problem that Microsoft should solve. We can invest the most money and intellect, drawing on the best talent.

III. Taking Microsoft Forward

1. Recruitment

We have always been criticised for focusing on recruiting high-IQ people. We test applicants’ IQs during the interview process. During the interview day, the applicant would be interviewed by about eight people. If after the fourth or fifth interview it became apparent that we wanted to hire this person, we would try to get them to join the company immediately. We have identified a number of universities around the world that produced the best graduates. We would establish links with the professors and attempt to hire the best graduates from each graduating class. We do rigorous post mortems on coveted graduates who decide not to joint the company, who they did choose to work for and why.

Similarly, the loss of high potential employees provokes review sessions in which we discuss the loss. Other people believe all members of a team are equally valuable; we grade employees on a curve. Only by being very serious can you maintain that high level of excellence.

2. Learning from Failure

One of our biggest problems is that new employees do not have an idea of what does not work. Success is not a great teacher; failure is a great teacher. We try and hire people who have suffered failure and understand that mistakes in core structure, forecast or competitiveness are serious problems. We have always been ruthless in terms of making sure bad news travels fast. Organisations are naturally good at quickly spreading good news. I would receive e-mails detailing account acquisitions and I would reply by asking if we had lost every other account not mentioned. Hearing of the accounts we have retained will not inspire me to work differently; hearing about some customers that are very demanding and are going over to the competition will tell me something about the company.

In the technology industry, by the time you have lost 20-30% of your customers, it is too late to respond. There is often a two- or three-year lead-time before you can put together a software package that deals with that problem. Market demand has to be forecast by extrapolating small pieces of data. Most organisations – whether in industry, government or education – can identify its most important customer and use that as a point of evaluating the company benchmark, regardless of how high that is.

3. Continuous Innovation

We use our own technology, even before it is ready. For example, we now run paperless meetings. As a company we used to generate as much paper as all other companies. Computing has actually resulted in more paper generation. Paper is problematic. Notes have to be re-entered, you cannot delve into the details of figures. Portable screens allow you to analyse the situation as a group, yet as we bring tablet machines into meetings we need additional protocols about paying attention in the meeting. Key decision makers at any meeting are supposed to be totally focused throughout, not reading e-mails or browsing the Internet. Those less involved can listen, yet can also continue with their work, ensuring we get the best of both worlds. If I am in a meeting discussing strategy and then the discussion moves to compensation details, I can sit back and engage myself in other elements of my work, even sending e-mails to others in the room.

4. Increased Collaboration

Information technology can make companies work more efficiently and cut across boundaries. In order to increase collaboration, we created a website called SharePoint that every employee turns to for information. Cross-division cooperation is one of the greatest challenges. We constantly do employee surveys, inexpensively via e-mail. Since we ask the same questions annually, we get meaningful comparisons from year to year on key questions such as: do you believe in your division’s goals; are you excited by the actions of the Vice-President; will you be with the company in two years time; are you satisfied with your compensation package and is it fun to collaborate with the other divisions? We can gauge the movement of employee responses and act accordingly.

One of the best techniques we have produced to get people working together is to ensure that personnel flow is healthy. If inter-divisional mixing does not naturally occur, we might co-locate groups. We are willing to make employees move offices. Some employees have moved their office 50 or 60 times over a five-year period. We are not optimising for keeping people in one place; we want them to collaborate. Although there is a trend to re-locate workforces to low-cost countries, for our work, the important thing is to be in contact with the world’s most demanding customers and achieving results that are 10% better and 10% faster. Hence, the bulk of our work is done at our headquarters. We are building a unique product and we will not succeed just by doing it 20% cheaper.

IV. The International Context

1. Research Facilities

Research can be done internationally. We are very proud that one of our three international sites is located on the campus in Cambridge, which shows an openness and a willingness to work, almost unique among universities. This enables us to draw intelligent people from all over Europe to collaborate.
Our second research site is at our headquarters. Our third is in Beijing, China. Putting together that centre was an eye-opener. We gave them five years to begin contributing. They did not want to wait five years, or even one. As we were the first major company to establish a world-class research facility in Beijing, we attracted other talent from the country. Teams are either on positive cycles of IQ excellence or negative cycles. Excuses might be made about the departure of team members, but that will not disguise whether a team is successful and drawing talent or not. The Beijing Research Lab is already contributing at the same level as other facilities around the world.

2. Economic Models

Many mythical statements have been made about the engineering skills of various cultures. It was claimed that the Japanese could not make software, now they dominate the video game software market, the most innovative form of software there is. Countries have differing industrial organisational structures. In the 1980s there was concern that Japan had a superior economic model to the US. People were concerned about which industry was the next to be overcome, after the car manufacturing and electronics industries. Computer and software were perceived as the next targets.

The Japanese system had rigidities in terms of moving talent and ending uneconomic products, and they are now suffering for these inefficiencies. The world-class work of the electronics industry was not broadly representative of Japan. There are a lot of lessons to be learned from those companies, but they did not have a ‘magic code’ that allowed them to outperform companies from other countries in all product ranges.

Despite the fact that it was wrong, the humility of the 1980s drove US companies into a healthy re-examination of their flaws and challenges. The same thing needs to be taking place in every developed country. We all need to consider the situation in China and India and how we can compete and how we can take advantage of the situation there.

As we tap into the human potential of these graduates, the world gets richer and products and services get cheaper. Big world inflation has been prevented over the past decade because China has set the benchmark for world-class manufacturing. The amount of capital being put into infrastructure there is unbelievable. The quantity of cranes and efficiency metrics employed are impressive. They do not exploit their cheap labour but are ruthless about decreasing the amount required, although if labour is required the Chinese population is able to provide it and can easily bid the wage-rate down. China will not swiftly grow in wealth and allow the global situation to revert to its previous state; it will be a unique actor in the global economy and the biggest economy for the next 30 or 40 years.

This is not war, where one economy’s victory is another’s loss. We all win when these things go forward, but if we are not realistic about our strengths and how to act on them, then we could go backwards. The prescription for the UK and US economic behaviour is the same; they must be economies that build innovative products and create strong incentives around intellectual properties.

3. Intellectual Property

Despite its role in the triumph of capitalism, it is very difficult to defend intellectual property. People question whether companies should be able to charge for medicines or protect innovative software design. The US has probably performed the best in terms of intellectual property, even providing incentives for innovative research in colleges. This gives colleges the opportunity to participate in the royalty streams, encouraging them to promote these items of intellectual property. Some incredible success stories have come out of that.

4. Emerging Markets

Remaining in one country denies a company an opportunity to see the full picture. In India, the issues are IT and outsourcing jobs. It will not remain the only economy participating in these areas. I met with the President of Pakistan in Davos, and he has 168 million people he would like to create opportunities for. I was in Egypt over the weekend; the country has 70 million people, a number of universities and want to become involved. Innovative UK companies need the chance to consider which elements should transfer overseas and which should remain in-country.

5. Free Trade

The idea of free trade is incredibly important for the US and the UK, yet it is harder to make the grassroots case for than intellectual property. While China and India reach their appropriate place as literacy, numeracy and healthcare improve, the temptation will be to believe that a reduction in free trade would be desirable. Attempts to halt job growth or apply punitive taxation will appear. The consumerist and globalist arguments are difficult to make, and we have not laid the groundwork.

V. Conclusions

I am optimistic about the future and this is reflected in the decision to raise our R&D budget to $6.9 billion, making it the largest in the world. This is a serious investment and I will be measured appropriately in five to ten years, as to whether this investment provoked productivity-increasing breakthroughs.
At the moment most people underestimate IT breakthroughs. I prefer this climate to the late 1990s, when people greatly overestimated the size, speed and impact of IT developments. Long-term planning for companies and governments must not underestimate innovation. For example, in the next 20 years, medical advances, coupled with IT, will have a significant impact on medical costs. I am excited to consider and discuss this future, in which the UK has a fantastic role.

Thank you.

[Applause]