Innovation and discipline: an interview with Bob Herbold. (Cover Story).

Are creativity and discipline in management diametrically opposed? They don't have to be, says Bob Herbold, who draws on his experience leading Microsoft and Procter & Gamble to advise CEOs how to integrate the two and achieve their goals.

In 1994, Bill Gates recognized that Microsoft was in the midst of an operational crisis, the company's laid-back, creative atmosphere increasingly at odds with the need for corporate structure. The world's most successful businessman had his choice of top executives to help him fix this problem and, ultimately, take Microsoft to the next level. He turned to Robert J. Herbold. Over the next seven years, with Herbold as COO, Microsoft's revenues quadrupled and its profitability increased seven-fold; operating expenses fell from 51 percent of revenues to 40 percent over the same period.

Bob Herbold is an unparalleled authority on business operations, including information technology and marketing. He spent the bulk of his career at Procter & Gamble, at different times serving as the consumer-products giant's chief information officer, vice president of marketing research, and senior vice president of marketing. Although officially retired from Microsoft since February 2001, he still works for the company on a part-time basis, and he also consults to CEOs on strategy and profitability issues. In this issue, Wesley Neff, managing director of WCL, Inc. Advisory Services, talks with Herbold about how CEOs can use creativity and discipline together to enable positive change in their companies. The key, Herbold says, is defining the goal and the CEO's expectations, and then communicating those to employees.

Q what did you leave Microsoft, are you doing now?

HERBOLD. My decision to retire was a tough one that spanned the course of several years. I came to Microsoft with the intent of working there for four years. At the end of that period, Bill [Gates] encouraged me to stay on. Then there was a natural juncture, from an option standpoint, to look at it again at five and a half years. Again, Bill urged me to stay on. I did for another year. But after 26 years at Procter & Gamble and almost seven years at Microsoft, I decided I wanted to do a few other things and have some free time for myself. So that was the rationale. But it took me a long time to get it arranged, and even after that Bill and I agreed that I would work for an additional 12 to 24 months at about one-third of my time, or even a little bit more, on Microsoft issues, particularly those related to government and industry.

Q How did you find the transition from soap to software?

HERBOLD. Even though on the surface they look vastly different, there are some incredible similarities between Procter & Gamble and Microsoft. Number one, both hire really good people, and they put tremendous effort into recruiting. Number two, they both focus on their products very intently, with the clear objective of making those products preferred to the competition's as measured by objective third parties. In the case of Procter & Gamble, that means a lot of market research studies. In the case of Microsoft, it's how the third-party trade press rates the products versus the competition's.

The key difference between the two companies is the industries in which they operate. Believe it or not, it is harder to get a merlot wine stain out of a white shirt than it is to double the capacity of a microprocessor. In the consumer-products industry the innovation rate is relatively slow because there are hard chemistry problems. The information technology business is just exploding in capabilities, primarily because the core technologies are increasing their capabilities at such a dramatically fast rate. So you have to operate differently. You have to focus on speed and decisiveness. You do not have the luxury of putting a lot of thought into some of the things that you normally would in other industries.

Q. How do creativity and discipline apply differently to Microsoft and P&G from a speed angle?

HERBOLD. I think that one effect, in any company, is that, as you are rushing to meet the needs of the business, often-times you are not paying as much attention to what I call the functional areas of the business, to just how well they are operating and what the cost profiles look like. By those functional areas, I am referring to things like finance, human resources, planning, procurement, marketing, and information technology. People will tend to grow those resources and fragment them. Pretty soon you look around and there are human resources people everywhere, for example, and there are information systems everywhere, and they are not necessarily joined together all that well. Even though you have grown those resources, you are having trouble getting some of the basic financial information, you're having trouble in terms of your procurement systems bogging down. The planning process is not clean. And it is not clear what your potential for the business is across all of your businesses over the next one to three years. When you get an industry that is moving with tremendous speed, those things happen very fast. But frankly, with any industry over time, those kinds of complications -- and I call it bureaucracy -- additional costs, and lack of focus in these functional areas tend to creep in.

Q. What is the best way for CEOs to implement discipline while developing creativity?

HERBOLD. They have to set the tone for what they want to achieve in the various areas of the company. If you look at an area, be it procurement or finance, you want to be lean and you want to be agile and you want to be very responsive. What the CEO also has to ask for is a continuous driving down of costs and driving up of service. With the technologies that are available today, the standard should be set very high in terms of doing those things far more efficiently than you ever dreamed, with far, far fewer people, no paper, and with an incredible ability to get at the information with the greatest of ease. That should be the expectation that the CEO sets.

But often what happens is that as that expectation gets dealt with, so to speak, in the organization, there is not the consciousness to really lead to that level of operational excellence and improved profitability. Instead, the energies get put into those parts of the company that should be creative -- that is, developing great products that clearly excite consumers, and having great interaction with your customers, and your sales organization operating very creatively in how they execute all of that. Those areas deserve innovation and creativity. But the other parts of the company deserve a lot of discipline, and what often happens is they become second or third priorities. They tend to become fragmented. Humans, left to their own devices, will build isolated fiefdoms, and pretty soon it is hard to pull the information together that you really need on an ongoing basis to manage the organization.

Q. So how does the CEO deal with the inevitable pushback that comes from implementing these kinds of organizational changes?

HERBOLD. The CEO has to explain what the motivations are that make the change important. In the case of driving for excellence in these functional areas, you have to draw attention to the crisis to really make people rake notice and say, "Yes, we want to do it differently here." Sometimes it is a cost issue. Sometimes it is a service issue. Many times it is just a raw competitiveness issue: How come our profit margins are not what we see in the industry? How could we take a giant step forward in improving our profit margins versus the competition? It should be clear what the goal is: We want to operate far more efficiently. We want to operate at a new level of excellence, with respect to the service that is provided both internally and externally. And make those expectations clear. What is so amazing today about some of these functional areas is that you really do have the capability with some of the information systems tools at your disposal to do these things far more efficiently. One of the big problems is that oftentimes there is a comfort level that people have that is hard to break. So you have to make it clear that change is what the goal is, what your expectation is, and it is going to be meaningful in terms of its financial and organizational impact.

Q. In an article you wrote (*), you described how at Microsoft you implemented many of the principles behind balancing creativity and discipline. Where you would say that Bill Gates was most successful and where would you say that he had the hardest time as CEO in implementing these strategies?

HERBOLD. I think that Bill was most successful -- and Microsoft was most successful -- in cleaning up the complexity that existed in finance, procurement, and planning, and putting some discipline into marketing -- understanding what it is that they were trying to achieve with respect to marketing and measuring the impact of the marketing. Those are the areas that we would look back on and say, yes, those were good, both from an efficiency standpoint and from a profitability standpoint, but more important, by creating a showcase organization from the standpoint of how it operates internally. A lot of our customers wanted to see that. Information systems were part of that, but so were good management practices.

The most difficult areas we found were with respect to the geographies. We'd look at a subsidiary and have to tackle the fact that it had built up some information technology resources and systems that were independent of what the company was doing, or it had built up some human resources that just were not necessary. They tended to do what humans do, which is to build fiefdoms, and they wanted to control data and information -- especially data that reflect on their performance. Those are elements of human behavior that exist everywhere.

We're dealing with people here. Say you are sitting out there in a particular country. Before long, you start to believe that your operation is unique, and it needs its own functional resources. You start hiring all kinds of functional personnel to build systems, change practices, et cetera. But all of a sudden, those things start to get in the way in terms of how the total organization should be operating, which is as a lean, agile, global organization that is really focused on a core set of products that clearly have captured the imagination of your customers. That is where you want to be. Consequently, you wake up some morning and realize, first of all, that you cannot afford it. And second, if you can streamline that and focus just on the customers out there in the field and not try to build total organizations in every country, boy, you can be a lot more agile and focused and get a lot more sales time out of your organization while significantly reducing the number of people. So, it really can have a ver y positive impact.

Q. Bob, Microsoft is likely concerned about the future of telecommunications industry. Where do you see the industry heading?

HERDOLD. Right now there are some major challenges, and it is having a negative impact on the whole information technology sector. We need to get these issues behind us so that we can present to the consumer some exciting applications via some of the great broadband technologies that telecommunications companies will provide. The debt issues are serious ones. [The telecommunications companies] have spent a lot of money on long-distance fiber in the ground and under oceans and the like, and they have spent a lot of money on frequency for wireless. The general figure that is mentioned in the popular press today is that the debt level across all telecommunications companies is $650 billion. That is a massive amount of debt. That's a real problem. Also, hooking up individual users, via the last mile, has turned out to be quite problematic in many countries -- it certainly is in the United States, with government regulations, both national and local, being quite complicated. So we have to work our way through thos e things. The best scenario would be a total free enterprise scenario, unencumbered by regulation, where the bright ideas [for the technology] compete with one another and capture the imagination of the consumer. That is the world we should all be pushing for.

These companies have to look at what the consumer wants and what is exciting the consumer -- just as in anybody else's business -- and decide how they are going to deliver that excitement. But they also have to look at their financial structure. They have to look at their regulations. As in any business, you have to be brutally objective about what you are facing. There are usually two or three fundamentals that are holding you back -- be it what you are providing the consumer, the regulatory environment, the financial environment, whatever -- and you need to address them. If there are regulatory issues that get in the way, those need to be tackled by the industry. But let's do it as soon as we can and get those issues out of the way so that we can move on to a world where the consumer is continually winning and we are providing incredible levels of innovation.

Q. There is the perception that CEOs are being asked to do more and more different things throughout a company. What do you think about involving a CEO at the sales-call level?

HERBOLD. I think it is very important to do so for a number of reasons. First, it keeps that high-level executive totally aware of what the real world is all about as far as what customers are saying is positive, what customers are saying they need in the future, and what they are saying is hurting and not satisfactory. Keeping up a fingertip sensitivity to those issues is critical for the top management of any company. The second thing is that in certain industries it signals that the customer is very important, and that, consequently, the customer says, "Wow, that's an organization that is clearly viewing me as a valued customer." Naturally, if you are in the consumer-products industry, you are not going to do that because you have millions and millions of end users. On the other hand, you might have some customers who are intermediate points -- maybe a mass merchandiser chain like Wal-Mart -- that turn out to be very important. With each industry it is a bit different. But if you are in the information tec hnology business and you are interacting with a very large customer that is using your software, it is not a surprise that our top executives may spend time with that customer. It is a smart thing to do.

(*.) "Inside Microsoft: Balancing Creativity and Discipline." Harvard Business Review, January 2002.

Bob Herbold can be reached at [e-mail].