Reader ROI

• What tools Microsoft believes CIOs will need in a future built on Web services
• How it plans to provide those tools
• Where Microsoft will fit into the CIO's IT strategy going forward

Every decade or so, a new platform emerges that reduces the cost of running an IT department to such an extent that vendors have no choice but to embrace it or die. In the 1990s, PCs with powerful operating systems spelled the end of mainframe development and ushered in the client/server era. Today, cheap servers and high-speed Internet connections are triggering a move away from traditional desktop PC software and to software as a service, hosted by a third party and delivered over the Internet.

No company has as much to lose from this shift as Microsoft, which dominated the client/server era on the strength of its Windows operating system. Microsoft is currently enjoying a moment in the spotlight thanks to Vista (the latest version of Windows), the fruit of five-plus years of development and what Microsoft COO Kevin Turner calls the "biggest R&D investment in the history of Microsoft and arguably the history of business". But Vista isn't a part of the software-as-a-service trend, and all the pomp and circumstance around its release mask a growing concern inside the company, one that comes through in executives' demeanour, internal communications and candid conversations about what the IT world will look like five years from now: Software as a service is a threat unlike any the company has faced before, and Microsoft must make dramatic changes if it wants to remain the most important technology company in the world.

Microsoft has started to develop a software-as-a-service strategy over the past year. Its initial offerings — Windows Live and Office Live programs — provide Web-based mini-applications. But those services are only a small part of the grand vision that CEO Steve Ballmer, COO Kevin Turner, Chief Software Architect Ray Ozzie and others hope will make Microsoft as indispensable to the Web 2.0 enterprise as it was to the client/server one. In a series of exclusive interviews with CIO, Microsoft executives explain that Web-based applications are just the beginning, and that the company's future lies in developing the tools CIOs will need to manage the software-as-a-service environment. "It's easy to whip up a Web app, throw it online, and say it's for businesses," says Ozzie. "But that's a naive view of what CIOs have to go through."

To Microsoft's way of thinking, the Web services world will make a CIO's life messy and difficult. While each software service that a company subscribes to will be cheaper and easier to operate than its client/server counterpart, collectively they will make the enterprise exponentially more complicated, unless CIOs have tools to provision and manage those services as a suite. Microsoft vows to develop those management tools and make them the centrepiece of its enterprise business.

Once those tools are built and deployed, Microsoft says, it won't matter if the applications an IT department supports are Web-based services hosted by an outside party, client/server software hosted internally, or a combination of the two. "[CIOs] have to have a way of provisioning an account, providing the initial connection and user interface", regardless of an application's source, says Ballmer. "At least that's our vision."

But even Ballmer admits that right now, a vision is all it is. Microsoft has accepted and internalized the idea that the software market has shifted ineluctably to services, and the company has seen there a critical opportunity to move forward. But to succeed, analysts say, to change its corporate strategy, identity and DNA, Microsoft must overcome equally critical barriers of technology, strategy and culture.

Where Microsoft Sees Its Opportunity

The widely preached gospel of software as a service says that companies willing to give up the control that comes from running an application internally will save money by not having to maintain and host those applications and, by freeing up those resources, will become more agile and productive. CIOs running services, the gospel goes, don't have to buy and operate farms of servers or trudge from desktop to desktop upgrading software. Instead of a model that encourages long, costly upgrade cycles (the very model upon which Microsoft built its enterprise empire), software as a service allows for small, steady, incremental improvements. That's just one reason it could kill CIOs' appetites for traditional client/server software like Microsoft's.

Furthermore, all a user needs to access a Web-based application is a browser — not a robust operating system tightly integrated with the application. Therefore, unlike in its past battles with Netscape and others, Microsoft cannot rely on its Windows strength to pull its bacon out of the fire. And while Microsoft argues compellingly that it would be foolish not to take advantage of all the processing power a PC offers, the company simultaneously is planning for a future that will rely upon less powerful mobile computing devices and ubiquitous high-speed Internet connections.