Microsoft Targets Bigger Slice of Government Pie

Microsoft Targets Bigger Slice of Government Pie

By Nick Wakeman, Staff Writer

Microsoft Corp. has reconfigured its government unit to pursue a bigger piece of the public-sector market and go head to head with two of its biggest competitors ? and critics ? on their own turf.

Redmond, Wash.-based Microsoft has long had a unit dedicated to the federal marketplace, but the company is reorganizing its resources to chase more of the larger, complex projects, such as command and control systems, said Pete Hayes, who is heading the new unit as industry vice president of Microsoft Government.

"Typically, this is the domain of Sun [Microsystems] and Oracle, but you are going to see a lot more of Microsoft in there than you have in the past," Hayes told Washington Technology. "We have the platform that will do a great job there, and we need to get much more focused around that."

As part of the reorganization, which took effect July 1, Microsoft also has created a new unit within the government group to concentrate on opportunities with state and local governments. Eventually, the state business will be bigger than the federal segment, Hayes said.

In addition, Microsoft Government is establishing a team dedicated to electronic government opportunities.

Microsoft government business has about 300 employees and represents about $1 billion of the company's $5 billion in U.S. revenue for 1999. Overall, Microsoft took in $22.9 billion in revenue for the 12 months ended March 31, compared with $18.1 billion for the same period a year earlier. Net income also rose for the period to $9.2 billion through March 31, up from $6.9 billion a year earlier.

Although Hayes declined to cite how fast the government business is growing, he did say the growth rate is faster than Microsoft's growth rate as a whole.

"We will be a growth leader at least for the next three to four years," Hayes said.

While better known as a provider of desktop applications and operating systems, Microsoft is a part of several large enterprisewide projects in the government. For example, Microsoft is on all five teams that won a piece of the General Services Administration's $1.5 billion Smart Card contract. The winning contractors will provide microchip-equipped cards capable of supporting multiple applications, such as granting access to computer networks and buildings.

Microsoft also is working with the Defense Intelligence Agency on the Merlin Project, which will allow a single workstation to access intelligence information from multiple sources, such as data feeds from aircraft, ships and tanks as well as human intelligence and electronic signals intelligence.

High-end, server-based applications are where the money is at in the government market, said Kevin Plexico, an analyst with the market research firm Input Inc. of Chantilly, Va. "You are getting at the center of an agency rather than the periphery," he said.

But while Microsoft's government business has won projects beyond the desktop, the efforts were not concentrated or coordinated enough, Hayes said. "We had pieces over here doing some and pieces over there doing some," he said.

By pulling together the people who have experience and knowledge about enterprisewide, complex applications, the government unit can do a better job of marketing and winning new business, Hayes said.

With the release of its operating system Windows 2000 in February, Microsoft also now has the technology to go after large applications, analysts said.

"One of the historical problems with Windows on the server was scalability and reliability," said Aaron Scott, analyst with the financial service company Advest Inc. of Hartford, Conn. With Windows NT, "you couldn't get more than 2,500 users on a server without major stress on the system," he said.

But Windows 2000 addresses that problem and seems to be winning acceptance, Scott said.

Microsoft needed an operating system that could handle a large number of users, because more applications are being deployed to high-end servers, which is the domain of Sun Microsystems of Palo Alto, Calif., and Oracle Corp. of Redwood Shores, Calif., said Paul Dravis, an analyst with Banc of America in San Francisco.

But Oracle officials said Microsoft has not yet penetrated the high-end space in the government market.

"We see them at the desktop level," said Steve Perkins, senior vice president and general manager of Oracle's federal business.

The federal market is following a pattern very similar to the commercial world, with organizations turning to large-scale servers that can consolidate databases and can be used for electronic government and services to the citizens applications, Perkins said.

"We welcome the competition," he said of Microsoft's push into large-scale computing.

With Windows 2000, Microsoft is chasing projects that just a few years ago it would not have bid on, Hayes said. For example, Microsoft is on all four teams bidding on the Navy-Marine Corps Intranet, a $10 billion contract to outsource all of the desktop computers, network and telecommunications services for 400,000 users.

With Microsoft pushing beyond the desktop, its mix of desktop applications vs. server applications has shifted from about 80 percent desktop and 20 percent server three years ago to about 60 percent desktop and 40 percent server today.

"The growth on the server side is there because we are going into markets where we didn't play before," said Mitra Azizirad, general manager of the federal business under Hayes.

This changing mix has come as Microsoft has educated both end-user customers and its systems integrator partners, she said.

The changes in the government unit will help build better relationships with its partners, Azizirad said. "We want a much more close and collaborative relationship with our partners, especially with our new products like Windows 2000, Active Director and Datacenter," she said.

In the past, Microsoft has tended to release a new product and then move on. But to win more server-based business, it has to work more closely with its partners and tell them what Microsoft is capable of, Hayes said.

Selling high-end, server-based applications is a different ballgame than selling desktop applications, said David Langley, executive vice president of Epipeline Inc., an Atlanta-based provider of marketing and sales management services to companies serving the government market.

"It is a more complex sale cycle and more hands on," he said. "It is about relationship building."

Relationship building is one of the keys beyond Microsoft's push in the state and local market, Hayes said. Before the restructuring, Microsoft's state and local business was scattered among its 20 regional offices.

But with the restructuring, state and local efforts are being consolidated under Frank Giebutowski, general manager of state and local government sales. This will give large systems integrators, such as Science Applications International Corp. and American Management Systems Inc., that do both state and local and federal business a single contact at Microsoft for both markets.

The state and local unit will share people and resources with the federal group. "We see a lot of synergies between federal and state and local," Hayes said.

Giebutowski said he is building a team of salespeople and technical specialists, in addition to people with line-of-business expertise in areas such as human resources, public safety and electronic government.

Microsoft has won major projects in California, Pennsylvania and Washington state. "But we need to do a better job," he said. "That state and local market is a great growth market."

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