Microsoft's group CFO, Chris Liddell

There’s a lot of things we’re looking forward to finding out about Chris
Liddell, the chief financial officer of Microsoft. For one thing, he’s a Kiwi,
not an American. He’s neither a techie nor an accountant; by background he’s an
investment banker with a civil engineering degree. He’s been the CFO of a quoted
company then the CEO of another, and now he’s back in finance. He’s not worth
billions of dollars like Bill Gates, nor is he someone who’s been with Microsoft
since the days when it launched its first spreadsheets.

So, obviously, our first question has to be, what’s it like working with
Steve Ballmer? “The great thing about Steve is, externally and internally, he’s
exactly the same person,” Liddell says. “So what you see on the outside is also
what you see on the inside.”

He appreciates the point of the question: Ballmer, Bill Gates’s right-hand
man, is renowned for his cardiac-inducing presentation style, whipping his
audience into a frenzy and manically hollering “I looooove this company!”

As CEO, Ballmer is also Liddell’s boss. “Steve is just a ball of energy and I
really like him,” Liddell says ­ and we believe him. “So if you like people who
are energetic and enthusiastic and are always sort of ‘go, go, go’ then you’ll
love working with Steve. If you find that tough, then he’s a tough person to
work for. He’s very open with his opinions and he’s just emotionally charged. So
a day with Steve is very much a day of high energy.”

No one should be fooled into thinking that that’s all there is to Ballmer,
though. “He’s also a very smart person and intellectually he has an incredibly
good grasp of detail and of the business. Meetings are very challenging because
he gets to the point very quickly. You don’t go into meetings with Steve
under-prepared.”

All of this seems to tell us a lot about Liddell himself, and he admits as
much. “I get on very well with both Bill and Steve. From a personality point of
view I’m quite similar, and in terms of directness and basic understanding and
our, sort of, world view. Obviously one of the reasons why I got the job in the
first place is, culturally, I fit in quite well and pretty much from day one it
wasn’t a problem,” he says.

Did being not only a New Zealander, but the only non-American in the senior
leadership team help or hinder? “Most [New Zealanders] ­ and it’s certainly true
of me ­ have lived and travelled around the world and I think that’s always
useful to get a perspective on the world that’s slightly different,” he says. “I
wouldn’t over-play it, but from my point of view, the things I’ve learned
growing up in New Zealand and the things that I’ve learned as a New Zealander
outside have been useful.”

Having joined as recently as 2005, isn’t it a problem being the new boy when
his two seniors not only have more than 50 years’ experience between them, they
practically invented the entire industry? “One of the things about Microsoft is
it’s a meritocracy: the best concept and the best argument win, not seniority.
If you’ve got an argument that’s the best in the room ­ and you’ve got a
personality that’s willing to put it forward – that’s the thing that counts.”

Liddell joined Microsoft from Connecticut-based International Paper, where
he’d been CFO for three years, having previously been CFO, COO and then CEO at
International Paper’s 51%-owned subsidiary, Carter Holt Harvey, the New
Zealand-quoted forest products group.

Focus on growth

International Paper, he says, is about the same size as Microsoft in terms of
revenues and number of employees ­ “but they couldn’t be more different in terms
of the culture”. For one thing, being a much slower-growing business than
Microsoft, his focus at east coast-based International Paper was much more on
costs than revenues. That’s an outlook that he has brought with him to help
tighten things up a little at the west coast software business. “Microsoft had
always grown very strongly, but we reinforced the disciplines around expenses
and making sure we met shareholder commitments,” he recalls. “But that wasn’t a
180° swing, that was a 10° swing,” he insists. “The company has always
differentiated itself by an incredibly strong focus on growth in the top line.
We just needed to make sure that if we outperform on revenue, we don’t just use
it as an excuse to spend more.”

Liddell says that headcount growth is one area where there is more focus than
perhaps there used to be. “I wouldn’t categorise it as, I walked in and all of a
sudden we put in place a system that wasn’t there. It was more an emphasis. You
asked about Bill and Steve — these are people who created a $300bn company. They
didn’t create it by being financially lax. These are two guys who are more
focused on the bottom line and expense and spending than any people I’ve ever
worked for,” he says.

There’s an interesting contrast to explore, though, and that’s the conflict
between the short-term demands of meeting investors’ expectations while still
investing for future growth. “The company actually differentiates itself — and
this again comes from Steve and Bill — by its long-term focus. I can’t think of
another company in the world that takes a longer term perspective than Microsoft
— and at times that frustrates investors,” Liddell admits. “If we are faced with
a decision that we think is the right long-term economic decision and it’s going
to cost us our quarterly earnings, we’ll make it ­ and we have examples of that.
Not all companies are quite that rigorous. When I talk about discipline, about
meeting expectations, it’s about meeting things inside our control that aren’t
conscious decisions about investment for the long term.”

As CFO of a company with $51bn in revenue and $14bn in net income, we wonder
how big a number has to be before it hits Liddell’s own radar. We quickly get an
answer. “A rule of thumb would be that $100m is a cent a share for us, so if
it’s $100m, it rises to my level of significance,” he says, adding, “A dollar
makes a difference if it’s the right topic, but in terms of things like
acquisitions or major expenditures or budget variances, it has to be more than
$10m to register at my level and probably over $100m.”

Liddell has been dealing with much bigger figures than that, however. In the
last year alone, the company has bought back around $28bn of its own shares,
returning surplus funds to the market. The company started paying dividends for
the first time in its history barely five years ago, and the payout now amounts
to around $4bn a year; it’s not much compared to the share buybacks, but it’s
still a lot of cash, and apparently a lot of investors (Gates? Ballmer?) say
they like having a dividend, and a growing one.

Pile on the cash

The Microsoft cash pile peaked at around $70bn a few years ago, and Liddell has
done his bit to cut it to nearer $30bn, taking around 15% out of the capital of
the business so far. The strategy is to cut the cash “to a level that we
consider to be the right amount for both opportunity and defensive reasons”.

By “opportunity” he clearly means acquisitions. Microsoft has become
increasingly acquisitive since the arrival of investment banker Liddell buying
24 companies last year each worth between $10m and $6bn. Obviously he can’t and
won’t give any hints or details, beyond saying that “everyone inside all of the
divisions is empowered to look across the landscape and think seriously about
whether acquisitions make sense in terms of driving the growth. And we are
continuously looking at a large number of acquisitions which range in size ­ so
that’s a very indirect way of answering your question.”

Not long before our interview SAP bought the business intelligence group
Business Objects, a deal that followed soon after rival Oracle’s acquisition of
BI group Hyperion. So will Liddell buy the one remaining independent major BI
player, Cognos, to tuck it into the growing Microsoft Dynamics division? “I’m
going to give you the ‘No comment’ on that because even if I give you a
half-negative, you can turn that into a half-positive.” No kidding ­ and as it
turns out, no deal, for Cognos has since agreed to be acquired by IBM.

Company valuations in the ‘Web 2.0’ era are starting to go very high again,
though Liddell doesn’t think we’re seeing a repeat of the bad old dotcom bubble
days ­ even though Google had recently spent silly money ­ $1.65bn ­ buying
YouTube. In Liddell’s view, “You’ve seen some very high prices being paid for
selective companies, but they tend to be more opportunistic around a particular
area.” A month later, Microsoft agreed to pay a quarter of a billion dollars for
a 1.6% stake in Facebook, valuing the social networking site at around $15bn ­
or, if you prefer, $300 per active user.

Another recent event cost Microsoft a lot of money ­ e497m to be precise ­
though it’s not exactly a highlight of the year. In September, the European
Court of First Instance (CFI) ruled that Microsoft had behaved in an
anti-competitive fashion and upheld a half-billion euro fine imposed by the
European Commission in 2004. Liddell is restricted in what he can say about this
­ the official line is basically “we’re studying the judgment” (though Microsoft
later conceded defeat and announced that it wouldn’t appeal). He insists,
however, that this is just one of those things you have to take in your stride.

“I think any company has to adapt to circumstances as they evolve ­ you want
a real answer from me ­ and sometimes those are competitive and sometimes
they’re regulatory. That’s the nature of life. And any company that doesn’t
adapt, dies. So just like when we wake up and hear SAP is going to make an
acquisition, so you react to the situation as it comes up.”

Seen it all before

Microsoft has been through this kind of thing before: “The company had a huge
change in the regulatory environment a few years ago in the US. Since that time,
we’ve grown from $20bn of revenue to more than $50bn, so it was a big change ­
but it was one we adapted to.” This answer sounds a little too easy and so we
would have liked to have found out a bit more about the impact of the CFI’s
judgment on the top management team and on Liddell’s finance colleagues’ morale.
But he immediately gives us the “direct feedback” that that line of questioning
isn’t going to get us anywhere.

One intriguing thing about Liddell is that he had been a CFO, then a CEO and
now he’s back to being a CFO. What’s it like being back in finance? “I think
it’s great. I would always recommend to someone in finance, if they have a
chance to have an operating role to take it,” he says. “I think it gives you a
massive perspective on the world that you don’t necessarily get just sticking
inside mainstream finance. Seeing the world through the eyes of the person who
has to make the decisions is a very good thing to do. Dealing with your CFO and
understanding what partnership really means and what they can offer to the role
through the other side of the table is an incredibly healthy thing to do. Having
to build your leadership skills in leading a large organisation I think is an
incredibly good thing for anyone to do regardless of what role they go into. If
you throw all those things together, I think I’m a much better CFO for having
been a CEO.”

So what’s next for Chris Liddell? “I love what I do. It’s no more complicated
than that. I never worry about what I’m doing in five years or 10 years. I love
what I do so I’ll keep doing it for as long as I do. And there’s plenty I can
still do.”