Yesterday, in an internal memo intended to rally employees, Microsoft CEO Steve Ballmer discussed his plans to cut $1 billion in annual expenses while concentrating on future products such as Longhorn, the next major OS release, and Microsoft Office 12, the next version of the company's best-selling office-productivity suite. Ballmer has a lot of work ahead, however. In the memo, he noted the company's problem of moving decisively. And with employee benefits ebbing at a suddenly alarming rate, the enthusiasm of the Microsoft software troops is likely at an all-time low.
  
Microsoft's problems involve more than just a lack of employee enthusiasm, however. Security problems beset the company's most successful products, causing Microsoft to step back from far-reaching projects such as Longhorn to concentrate on near-term security-based solutions. Meanwhile, smaller, faster companies such as Apple Computer are able to steal pages from the Longhorn playbook and implement new features, such as instant searching, more quickly. And open-source competitors such as Linux are starting to win formerly lucrative Microsoft software contracts at an alarming rate.
  
"Will we be first with important innovations?" Ballmer asked his 57,000 employees rhetorically in the memo. "Will process excellence lead to greater ability to make an individual difference? Will our focus on costs hurt employees personally, and will it hinder new investments? Will we grow, and will our stock price rise? Will the PC remain a vital tool, and will we remain a great company? Yes."
  
Ballmer wants Microsoft to operate as a leaner, meaner company, and he's set a goal: The company must save $1 billion in operating costs by the time its next fiscal year ends on June 30. In the past year, the company's operating costs rose sharply--to $18.97 billion from $16.46 the previous year. More important to the bottom line, perhaps, is news that the growth of Microsoft's expenses has outpaced its revenue growth for 3 consecutive years. The company doesn't plan to lay off workers, however, and plans to hire at a rate that's consistent with the past year. Ballmer is asking employees to be more accountable for their work and to prioritize five to seven "measurable commitments" per year.
  
That money is a problem for the cash-rich software giant is somewhat ironic; after all, the company has more than $56 billion in the bank. But profits--which grew at 52 percent annually from 1995 to 1999--have been flat for 3 years. And revenue growth, while healthy at 13 percent since 1999, is down significantly from the 34 percent growth the company experienced from 1995 to 1999.
  
As ever, the Microsoft CEO is bullish on software, noting that PC sales will continue to be key to the company's growth. Ballmer expects the number of PC users to grow to 1 billion by 2010, up from about 600 million today. And he expects the ever-delayed Longhorn to rejuvenate Microsoft's long-term prospects. Longhorn isn't a "short-term revenue pop," he said, unlike the past few Windows upgrades. And although Ballmer doesn't explicitly say as much, he hints that Office 12 will now ship before Longhorn ships. Microsoft has changed its Office 12 plans several times recently. Originally, the company planned to ship Office 12, which the company said then would work only on Longhorn systems, alongside that OS. Earlier this year, the company decided to make Office 12 run on both Longhorn and pre-Longhorn systems, a nod to the fact that user migrations to the new OS will occur over a long time period, not immediately. And now it appears that Office 12 will in fact ship before Longhorn ships and won't include any Longhorn technology, as previously expected.
  
Meanwhile, Microsoft's less-established products haven't fared as well as Windows and Office have. But Ballmer expressed his happiness with up-and-coming businesses such as the MSN Web services and Xbox video game system.