The hard truth is that Microsoft has no choice but to confront software as a service. But rather than fighting it, Microsoft looked for an opportunity. And, it says, found one.

"Some people say that [software as a service] is a panacea and that everybody should immediately switch off everything they have and go to this world," says Andy Lees, VP of Microsoft's server and tools marketing, his sarcasm foreshadowing what comes next. "But here's a problem with it: The first service that you have is beautiful, the second service that you have is kind of nice; from then on you have all of the same problems that you had before."

In other words, the CIO still needs to manage a lot of applications. It's just that this time the applications are hosted somewhere else. It's a problem that CIOs are aware of, even if the conventional wisdom (and enthusiasm) surrounding software as a service often ignores it.

"Managing multiple services applications — as well as the things you run yourself — is going to be a challenge," says Joseph Devenuto, CIO of Norton Healthcare, a hospital chain in Kentucky. "You're looking at a world of headaches."

When someone leaves a company (for dramatic purposes let's say a disgruntled accounts payable clerk is fired for gross misconduct), instead of deleting her account from the internal systems, a CIO in a services environment would need to make sure that all the software providers — everything from e-mail to CRM — make the change in their systems, Lees says. Since the disgruntled ex-employee can access the hosted applications through a browser on any device, the risks multiply.

"Quick, get all the IT guys and dial in to those six, seven, 15 different systems that you no longer own," says Lees.

Obviously, you can do that, says Ballmer, but the problem is that doing so will devour a disproportionate amount of time and resources. Microsoft's vision is to come up with products and services that allow CIOs to manage Web applications — as well as internal client/server ones — from a single place. In addition to providing a central place for provisioning, Microsoft, according to Lees, will let CIOs set rules and enforce policies — for example, all orders must be processed by 3:30 in the afternoon. And workflow features will help CIOs automatically manage exceptions, he adds. Today's CIOs "spend all their time configuring and changing and monitoring", Lees says.

"[CIOs] feel like cost and complexity weigh them down," says Ballmer. "I want to make sure we're eliminating that cost and complexity and letting them focus on taking advantage of new innovations and things that can add value to the company."

What's the Answer? Steve? Kevin? Ray?

Microsoft is a product company, and for the past decade its Windows and Office products have stood head and shoulders above all others. Historically, those two business units have been responsible for almost all of the company's earnings. However, that's changed over the past several years. Revenue for Windows and Office has remained relatively flat, while the server and tools division has posted double-digit revenue growth for 16 straight quarters. Today, the server and tools division is almost as large as the veteran groups — generating 22 percent of Microsoft's $US44 billion in revenue, compared with 29 percent and 25 percent for the Windows and Office business units respectively.

If the company is going to reinvent its enterprise business around one of its units, this is the one to pick, says Rick Sherlund, an analyst who covers Microsoft for Goldman Sachs.

But creating tools that allow CIOs to manage, configure and provision a suite of disparate applications is both a technical and strategic challenge. And no one, inside the company or out, can articulate exactly how Microsoft is going to get there.

Ballmer says that Microsoft has many of the tools in place but that they are "certainly not anywhere close to sufficient", adding that "no one product is this vision." However, he believes that Microsoft has the right combination of enterprise and Web experience to pull it off. Oracle and SAP, he argues, have a scope limited to their suite of products. IBM has reinvented itself around consulting services. No other company besides Microsoft, says Ballmer, combines as much enterprise and Web experience with a rich understanding of business process.

Analysts, however, say Microsoft's competitive position may not be as strong as Ballmer describes. For starters, managing a customer's computing resources is something that Microsoft has historically left up to partners. "They have to piece about moving toward managing services," says John Rymer, an analyst at Forrester Research. Microsoft knows how to help CIOs manage its own products, but incorporating other companies' products is a substantial leap, Rymer says.