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Federal Government * State and Local Government US Government ISG Industry Whitepaper

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Page 1: ISG Industry Whitepaperdownload.microsoft.com/documents/australia/education/...ISG Industry Whitepaper The slowdown in the global economy illustrates the importance of having a diverse

Federal Government * State and Local Government

US Government

ISG Industry Whitepaper

Page 2: ISG Industry Whitepaperdownload.microsoft.com/documents/australia/education/...ISG Industry Whitepaper The slowdown in the global economy illustrates the importance of having a diverse

The slowdown in the global economy illustrates the importance ofhaving a diverse portfolio of market opportunities. While someeconomic sectors that dominated demand for IT products andservices over the past few years are now reeling from a collapse in thestock market and cutbacks in capital spending, government demandremains strong. In fact, government IT markets represent animmense, sustained opportunity because they are driven by theirown set of unique demand dynamics.

The implications for Microsoft’s worldwide business are significantbecause governments around the world have similar roles, are drivenby common goals and pressures, and face similar issues.Governments across the globe are undergoing a periodunprecedented change as citizens are calling for more efficiency,improved services, and increased information. However, while thereis similarity in demands and requirements, you have to approacheach government organization as unique entity.

It would be a mistake to paint the entire government market with asingle brush. Information Technology requirements varytremendously from agency to agency and department to department.For example, in the US, Homeland Security initiatives are beginningto drive many technology-spending decisions across military, civilianand local law-enforcement agencies. But the specific implementationand application of technologies are different at each level because themission and constituents of the each agency are so diverse.

The central organizing principle guiding these complex activities isquite simple. The citizen is who governments are interested inserving—whether to protect them, support them with programs andservices, provide them with the information they need to interactwith government agencies or businesses in an efficient, productiveand secure manner or stimulate the economy.

In short, the government market opportunity is at once immense inscope, but highly fragmented in its application of informationtechnology products and services. Understanding the interplaybetween these two dynamics is crucial to orchestrating effective go-to-market strategies.

Microsoft US Government and the Role of the Lead

Subsidiary:

The purpose of this document is to describe the MS USGovernment organization and begin to outline its role as leadsubsidiary.

MS US Government has been designated as the lead subsidiary forglobal government strategy and leadership. The goal is to form aloosely coupled global organization that drives incremental revenue,services and solutions. The global government team will worktogether collaboratively to develop and refine the global governmentstrategy and implement the infrastructure and tools necessary tosupport an estimated $2.5B global government business.

There are 3 key deliverables that the MS US Government team willbe responsible for in FY03

• Developing, coordinating and leading global strategy — Selectedrepresentatives from each region will contribute to thedevelopment of this strategy. Subsidiaries will implement thestrategy based on available resources and the identifiedgovernment opportunity.

• Providing a process for sharing best practices — There are manygreat Microsoft and partner developed government solutions andcreative sales and marketing plans that Microsoft should shareand implement globally. Microsoft US Government will developa process for gathering, evaluating, sharing, communicating andimplementing best practices.

• Providing/developing a network of SME’s (Subject MatterExperts) — The US organization will have several highly

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Part 1. Introduction to the Government Market

WW total Software spending ~ $35B in Year 2000

Source: G2R/Dataquest

2000018000160001400012000100008000600040002000

01998 1999 2000 2001 2002 2003

USCanadaJapanEuropeAsia/PacROWLATAM

Vision: The leading technology andplatform provider for the business ofgovernment

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qualified individuals available to help with sales opportunitiesaround the world. However in order for us to be truly effective asa global organization each subsidiary should identify their SME’sand make them available on an as needed basis. This will enableus to develop a global network of qualified SME’s to help capturethe largest opportunities in government.

In the United States, Microsoft has 20 years of experience workingwith government customers. Microsoft Federal was established as thecompany’s first vertical in 1982. Today the organization has grown inscope and responsibility to manage all State and Local accounts inthe US and all US Federal accounts globally. The US governmentcustomer spends $100 billion per year on Information Technologyproduct and services and contains approximately 10 million PC’s.

Microsoft US Government consists of eight main groups: theFederal District, State and Local Government Sales, Partner AccountManagement, Vertical Solutions Unit, Government Business Desk,Marketing, Programs/Bids and MCS Public Sector.

Microsoft Federal, State and Local Government and

the Shared Resource Teams

Following this introduction you will find detailed descriptions ofboth of these organizations. The rest of this section will describewhat we call the Government Shared Resource team. These six teamsprovide sales support and cross government strategy for partners,marketing, contract, bid, industry expertise and consulting supportto the Microsoft US Government sales teams. In FY03 their role willbe expanded to provide support for our global initiative.

PAGE 3

Mission: Deliver outstanding value toour government customers and partnersthrough innovation, leadership,individual excellence and acommitment to teamwork

Mitra AziziradGeneral ManagerFederal Systems

Frank GiebutowskiGeneral ManagerState and Local

Jack HerseyManagerPartners

TBDDirector

Vertical Solutions

Kathryn MihalichManagerContracts

Suzanne BehrensManager

Marketing / PR

Willie WilliamsonDirector

Gov’t Programs

Al HorowitzGeneral Manager/MCS Public Sector

RegionalDirectors (4)

PartnerDevelopment

IndustryManagers

LicensingExecutives

MarketingReps

CaptureManagers

EducationEM

Loretto KaneDOM / Admin

Assistant

Pete HayesIndustry VP

Microsoft Government

SalesManagers (8)

SolutionsManager

Partner AM’s

TechnologyEvangelist

PublicRelations

SystemsEngineer

ContractsAdmini

Director ofTechnology

SMEManager(s)

OEM, LAR Distribution

SolutionsEM

ManagerFAST

SLG PM

PartnerEM

FederalPM

Alan GroseMCS

Industry Arch

TBHPostal Director

Microsoft Government: Serving the Citizen

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...Government Partner Strategy

Developing, managing and growing the government partnercommunity is critical to Microsoft’s success in the governmentmarketplace. Because government is different it is necessary toapproach partnering in new ways, by focusing on customerrelevancy, vertical and horizontal solutions. Additionally, asMicrosoft technology becomes more important to business ofgovernment it will be important to offer integrated approaches tosolutions and services, providing end-to-end partnerships that arealso best-of-breed.

Microsoft Government’s partnering strategy revolves around drivingthe development of Partner Solutions Offerings (PSO’s), buildingand managing a partner led opportunity pipeline, increasing partnersatisfaction and partner skill sets at both technical and sales levels,setting an integrated vision for the government partner communityand gaining competitive market share. The team will manage andlead our partner strategy for OEM’s, VAP’s, VAR’s, LAR’s, MSP’s,ISV’s, Consulting Partners and SI’s.

In order to achieve Microsoft’s goals, the government partner teamhas evolved from an account-centric approach to a solutions-basedpartnering model.

“The purpose of a solutions-based model is to align the teamwith the way government customers purchase solutions andservices and how government partners go to market,” explainsMicrosoft Government Partner Manager Jack Hersey.

Additionally, this approach allows Microsoft to build solutions basedpartnerships that bring to market end-to-end trusted solutions withbest of breed teaming arrangements. It also provides a vertical andhorizontal segmentation of opportunities which allows partnershipsto be built with multiple partner business units within a singleorganization.

Building Microsoft Government’s partner organization requires aninternal infrastructure to support and develop a nationwide (andsoon global) partner community while addressing the needs of key“go-to-market” partners.

To support these requirements, the partner team developed thefollowing tools:

• Government Partner Portal—The portal is used to identifyand qualify all government partners throughout the US.www.msgovconnections.com

• Partner Solutions Matrix—The matrix is designed to segmentgovernment ISV’s, SI’s, OEM’s and Partners by solutionsofferings, associated services and markets/customers they serve.

• Government WinWire—This weekly internal summary is abroad communication vehicle that highlights partnersolutions wins across government.

• Solutions In Action—These customer ready leave behinddocumented Partner Solution offerings highlights MS productcontent.

As for partners, it is important to ensure that the strategy will driveboth partner relationships and communication in partner events. Ontop of that, Industry Managers and subject matter experts (SMEs)will create communities of interests made up of key customers,partners, and key market influencers in specific sub-vertical areas.These communities will provide extremely valuable feedback back toMS strategists and product teams.

... Government Vertical Solutions Unit

The government vertical solution unit will be responsible fordeveloping and coordinating the global industry strategy, providing a

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Team Segmentation Focus Partner Segments

Vertical Partner Management End to End customer solutions, PSO’s, SI’s, ISV’s, Solutions Partners, Global PartnersCross Govt Integration

Horizontal Partner Management End to End customer solutions, PSO’s, SI’s, ISV’s, Solutions Partners, Global PartnersCross Govt Integration

Global Partner and Relationship Management, Business Planning, Accenture, KPMG, Compaq, Dell & Top Tier FSLG SI’sSI assignments Program Engagement, MCS engagement

OEM and Distribution Sell through channel, DELL, HP, Compaq, Gateway, TechData, Merrisel, LAR’s

Partner Programs Cross Government engagement programs ISV’s, Developers, Partnersand Development and development initiatives

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mechanism and process for sharing best practices, and provide anetwork of Industry Subject Matter Experts (SME’s) to drive sales,services, marketing and partner engagements.

This group will be comprised of Industry Managers and technicalevangelists, led by a solution director with deep governmentknowledge. The group will be responsible for strategy, corporatedevelopment and vertical solution identification and creation withthe goal of increasing market share for Microsoft across governments.

They will provide expertise to the global industry community inhelping to understand and execute government strategy fromthought leadership to sales execution. The solutions group will lookfor trends in government, define the segments that make up theindustry (health & human services, justice & public safety,tax/revenue, transportation and defense), key issues facinggovernment, market analysis, research, and makingrecommendations on market defining solutions.

...Government Business Desk

Government customers require special pricing, terms and conditionsand legal considerations. MSG cannot be successful in thegovernment space using standard contracts, terms and conditions.The Business Desk’s goal is to create flexible customer centricagreements that are tailored to the unique needs of our governmentcustomers using Microsoft existing agreements and process as abaseline. It also developed a specialized government specificagreement called the Government Integrator Agreement (GIA) thatfits the government’s unique requirements for the use of non-LAR’sand specialized terms and conditions.

Government licensing and contracting issues are managed by theGovernment Business Desk (GBD). GBD provides overallcustomized and flexible agreements that facilitate federal, state andlocal governments’ procurement practices while maximizing revenue,increasing customer satisfaction and maintaining a consistent pricingmodel. The goals of the GBD are accomplished primarily throughcustomized licensing agreements and a consistent government-pricing model. The agreements and pricing model are based oncorporate programs and pricing but are customized by theGovernment Business Desk to meet the procurement practices andunique requirements of government laws and regulations.

Due to the varying state laws (50 unique sets) and federal lawsMicrosoft does not have the opportunity to dictate business rulesand the resulting contracts are sometimes not solely determined bywhat the parties agree to. Laws and regulations— includingprocurement rules— supersede contract terms, and must beaddressed on a case-by-case-basis. In addition to procurement lawsand regulations, there are a variety of general laws that are unique tothe government space and require constant vigilance andcustomized solutions as we sell and contract for licenses withgovernments, e.g., gift laws, organizational conflict of interest, anti-

kickback, non-collusion. Even inadvertent breaking of any of theselaws can lead to fines, suspension, and debarment from doingbusiness with any government entity.

Government contracts are public records and require disciplinecoordination and close attention to detail. Every concession ormistake is visible to all including commercial customers. The stateand local governments in particular are aggressively sharing eachother’s agreements and comparing concessions pricing etc.

The Business Desk is developing a white paper that will include acopy of all of the MS US Government agreements, outline their useand describe areas where they can be customized for the uniqueneeds of government. The GBD team is also available as a strategyconsultant for worldwide government opportunities. As part of thebest practice sharing initiative for government GBD will be able toconsolidate abstracts of key global deals and begin to develop anextension of the US Government pricing model to provide a guildfor global pricing and terms consistency (local empowerment rulesstill apply).

...Marketing

Due to the size, requirements and challenges faced by governmentcustomers, MSG’s marketing strategy is complex and unique. Themarketing organization builds upon a customized government-messaging platform that is designed to deepen its market position.This is accomplished by delivering targeted value propositionsthat resonate with customers and demonstrate the quality anddepth of the Microsoft technology platform, partner base andsolutions road map. This is accomplished by tailoring campaignsunique to government scenarios. Customizing the message for thevertical markets within federal, state and local governmentagencies is important because they too have unique business andtechnical requirements.

“Our marketing builds upon a custom governmentmessaging platform designed to communicate specific valuepropositions to specific customers. At the same time, we haveto demonstrate the quality and depth of our technology,partner base and solutions road map to the entiregovernment market,” says Suzanne Behrens, MicrosoftGovernment Marketing and PR Manager.

To highlight the value that Microsoft solutions bring to government,the marketing efforts leverage partner relationships and showcasesuccessful engagements that support government agencies’ missions.All marketing initiatives will support one or all of the followingobjectives:

• awareness — build awareness for Microsoft’s relevance ingovernment with “broad air cover” campaigns;

• orchestration — by synchronizing the company’s marketing

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calendar with the purchasing cycles and technology initiatives ofgovernment;

• messaging — through customized governmentbranding/messaging;

• lead generation — by using closed-loop marketing activities tofeed the sales engine with leads and opportunities; and

• satisfaction — by cultivating customer and partner loyalty andstrengthening these relationships.

The marketing team is organized around three segments. Theorganization chart is designed to help develop deep expertise in eachof the main focus areas of our business both inside and outside thegovernment sphere (See chart above).

Solution marketing efforts have been tailored to reflect howgovernment customers use the technology. A major emphasis hasbeen placed on broad-reach tactics across the desktop, developer andenterprise-server campaigns. However, it is also important tocommunicate deeply by discussing in detailed, operational termshow specific verticals within government—and specific types ofagencies within a vertical—can benefit from Microsoft technology,solutions, and services.

Government marketing efforts must also discuss “horizontal”government solutions—such as business intelligence, knowledgemanagement, information assurance and collaborative computing—while simultaneously placing their value into the vertical context ofthe Department of Defense, Justice and Public Safety, or Health &Human Services, for example.

Marketing initiatives that support these efforts include:• customized public relations• custom publishing (advertising supplements/collateral) • segment-specific advertising• customer evidence (case studies)• industry events• participation with government organizations/associations• direct marketing

The marketing organization has created centralized marketing toolsand vehicles that support a broad discipline of programs. It wasnecessary to develop an internal infrastructure to support thenational, geographically dispersed sales force while ensuringconsistent dissemination of sales and marketing information. Thesetools include:

• Marketing Resource Center—A one-stop shop forinformation on marketing activities.http://government/marketing

• Sales Resource Center—On-line ordering tool enablesgovernment field reps to request marketing materials anytime,anyplace, from anywhere. http://www.msftstores.com/msgov

• Government Database—Data warehouse stores customercontact information. http://www.prolist.com/microsoft

• E-Mail Tools—Government Marketing Communiqué is amonthly email that keeps the sales force informed ofmarketing activities.

• E-Newsletter—Microsoft Government e-newsletter drivesproduct news, solutions and marketing events.

• Web—Utilize the web to deliver information on products,events, solutions, etc.http://www.microsoft.com/usa/government

On the international front, Microsoft will leverage the governmentleaders’ conference (GLC) brand and move forward with the GLCregionalization program in order to reach out to a larger number ofcustomers and local partners. In addition, we will share marketingprograms that can be leveraged around the world. Marketing willutilize established communications media likewww.microsoft.com/government, as well as the Global GovernmentSolutions Newsletter (already distributed to thousands of customersand translated into more than 13 languages).

“Our global network of subsidiaries and partners provides amajor opportunity to maximize the value of our marketingactivities. With the most advanced government technology

PAGE 6

Audience Segment Product Solutions Marketing Communications Activities

Federal (Defense, Intelligence & Civilian) Desktop & Business Productivity Public Relations and Customer Evidence

State Governments Enterprise Servers Advertising

Local government (SORG, MORG, Breadth) Developer Tools Industry Tradeshows

Partners Horizontal Solutions Community Development

Vertical Solutions E-Marketing/Web Marketing

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infrastructure in the world, the U.S. public sector sets thestandards for the rest of the world. So our branding andmessaging vehicles to the U.S. government are almost asrelevant and powerful outside our borders as they are inside,”says Microsoft’s Behrens.

...Microsoft Government Programs

The mission of the government programs team is to be responsive togovernment proposals on large programs. The group was foundedon the principles that Microsoft needed to more effectively positionemerging technologies in Government programs and improve theway in which it targets and reacts to new business opportunities.MSG has dedicated resources to examine key initiatives, identifylarge scale programs, analyze relevant procurement activity, propose,track and respond to bids and prioritize investments.

Through institutionalizing the process of responding to governmentproposals, the programs team is able to track pipeline revenue for thenext 5 years as well as incorporate integrated enterprise solutionswithin each program bid.

This team will work closely with US and EMEA teams as they beginto develop a more comprehensive bid response database. That toolcan be used in combination with the program response processdeveloped by the MS US Government program team to provide fastresponses to bids, better internal and partner coordination and go /no-go bid decisions.

...Services

Services represent an important component of the solutionoffering. Microsoft Government defines its services into twobusinesses: 1) consulting and 2) premier support.

Microsoft Consulting Services

Microsoft Consulting Services Public Sector (MCSPS) provideshigh-value consulting services to U.S. federal, state, and localgovernment, and U.S. education customers and partners. Thevision of MCPS is to be the trusted advisor for the seniorleadership in the account teams’ most strategic business in thesemarkets. Realizing this vision will accelerate solutions and serversales and increase customer and partner satisfaction across,Federal, SLG and Education. MCSPS can also be a focal pointfor knowledge transfer of best practices, lessons learned and IPreuse across the Microsoft subsidiary teams working with PublicSector customers and partners in support of the U.S. as lead subinitiative.

MCSPS has core strategies that are implemented across the threesubsidiary verticals (Fed-SLG-Ed) and then specific executionapproaches that can be tailored to specific opportunities and

challenges within the three subsidary verticals. Core strategiesacross Public Sector include:

• Drive server, solutions sales, customer and partner satisfaction

• Create close alignment with sales and support; remain tightlymapped with MC’s and Account Managers and PremierSupport

• Drive repeatable solutions: Package, deliver, support reusableIP

• Scale to larger projects: Capture, manage, deliver, supportlarger and higher impact projects

• Drive quality assurance higher on all projects

• Extend impact to customers through close workingrelationships with national & local partners

MCSPS has three focused profit centers, which include, federal,state & local government, education/GM Organization staff.The federal & SLG teams are led by Practice Managers focusedon those sub-verticals. The GM Organization includes focusedEducation Managers and Practice-wide resource teams such asSolutions, Channel/ISV, Contracts, Operations, PMO &Finance. It is anticipated in FY04 the Education Managers willreport to an Education Practice Manager within a profit centerinside MCSPS.

Premier Public Sector

Premier Public Sector provides high-value technical supportservices to U.S. federal, state and local government, and U.S.Education customers and partners. Its mission is to empowergovernment & education customers through the efficient deliveryof high-quality Premier Support services. Premier Supportservices focus on incident resolution and operations consultingthrough long-term continuous engagements. Its primary goal isto ensure that our customers are fully satisfied with theirMicrosoft products, thereby building long-term loyalty.

As part of Microsoft Worldwide Services, Premier Public Sectorhas four core operating goals:• Drive Revenue Growth & Ensure Fiscal Responsibility • Ensure Delivery Excellence • Earn Customer Loyalty • Ensure Employee Satisfaction

Premier Public Sector organizes to align directly with the fieldsales teams in Government and Education. The field accountteams guide Premier Public Sector to ensure effective joint

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execution of the account management strategy. The alignment ofPremier Support teams around customer accounts provides ourcustomers with experts on Microsoft technology, as well asexperts on specific organizational business or operational issues.

Premier Public Sector is primarily staffed by personnel who haveprevious industry experience in Federal, SLG, or Education.Premier Federal has several staff with government securityclearances. This allows the Premier Federal to extend its presenceinto classified projects. In FY01 Microsoft received aDepartment of Defense facility clearance from the DefenseSecurity Service.

Premier Public Sector consists of Technical Account Managers(TAMs), Application Development Consultants (ADCs), andAlliance Support Professionals (ASPs). The TAM owns theaccount relationship for support and serves as the primarytechnical and operations advisor to the customer for their dailyIT operations. The TAM orchestrates other support servicedelivery assets from Premier and Product Support Services (PSS).TAMs are customer experts with strong general technical skills,primarily in large enterprise infrastructure operations. ADCs andASPs are technical experts in specific fields, while focused on asmall group of accounts. ADCs assist the TAMs with developer-specific issues, while ASPs assist the TAMs with infrastructureproduct issues.

...The Business Goals of Microsoft US

Government

MSG currently accounts for 14 percent of Microsoft’s U.S.business and generated over $1.1 billion in revenue in FY02.Going forward, MSG has established aggressive revenue goals tobe achieved by FY05.

MSG’s revenue target for the close of FY05 is nearly $1.5 billionwith $356 million (or 25 percent of total revenue) derived fromsales of server products. Considering MSG’s already highpenetration of Federal desktops and the rapidly growing Stateand Local Government EA growth we must pursue high revenuegrowth in the strategic server category in order to meet futuregrowth targets.

In achieving these targets, MSG faces significantchallenges, since it will close FY02 with 11 percent ofrevenue coming from sales of server products. Thestated revenue goals, however, are achievable byexecuting the comprehensive strategy that is outlined inthis white paper.

Along those lines, MSG has identified four strategicrequirements that will be essential to achieving its$1,452 million revenue target by FY05:

1) Increasing sales of server products from 11 percent of revenuesin FY02 to 25 percent in FY05 — by focusing on both horizontaland vertical solutions. These solutions will fall into 3 offeringcategories:

• PSO’s (Partner Solutions Offerings) — 192 in FY02 to 2,000in FY05

• MSO’s (Microsoft Solutions Offerings) — 22 in FY02 to 79in FY05

• GSO’s (Government Solutions Offerings) — 10 in FY02 to100 in FY05

2) Increasing government annuity revenue from enterpriseagreements (EA) from 46 percent in FY02 to 62 percent in FY05— by increasing its EA customer base among both Federal andSLG organizations and increasing server solutions sales as follows:

• Federal — 82 percent (60 percent EA as a percent of FY02)

• SLG — 44 percent (25 percent EA as a percent of FY02)

3) Increasing services personnel and responsibility margin — inorder to ensure EA renewals, product deployments and solutionsadoption Microsoft must significantly increase service resources:

• 300 Microsoft consulting services (MCS) premier support(PS) Employees, $65 million in revenue, RM $14 million byFY05

PAGE 8

Changing Dynamics…% of Total Government Revenue % of

Annuity RevenueFY01 FY05 FY01 FY05

Fed59%

Fed48%

SLG41% SLG

52%New68%

Annuity32%

New43% Annuity

57%

® Annuity Business Increases to 57% in FY05

■ SLG 11% FY02; 41% FY05

■ Federal 47% FY02; 73% FY05

® SLG Revenue Eclipses Federal in FY05

Government Revenue GrowthFY01-FY05

1,450

1,250

1,050

850

650

450

250FY01 FY02 FY03 FY04 FY05

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PAGE 9

• 150 PS employees, $40 million in revenue by FY05

4) Increasing broad based marketing, PR and governmentbranding efforts — MSG has a huge geographic territory tocover and many small-to-medium customers in the SLG area toreach. This must be accomplished through a creativecombination of sales and marketing tactics.

...The Global Opportunity for Government

The worldwide government spends $215 billion annually on IT,covering six billion citizens in more than 227 countries. This ITinvestment spans infrastructure, collaboration, application develop-ment, decision support, business processing and technical services.

Within the worldwide government IT market, MSG hasidentified the following key segments (not in priority order):

• Taxation: tax filing, social payments, & integrated servicedelivery;

• Health & Human Services: integrated case management,integrated service delivery & employment services

• Justice & Public Safety: crime statistics, most wanted lists,video arraignment & ticket adjudication

• Transportation: intelligent transportation systems, trafficflows & drivers license registration

• Defense: C3I and logistics

• E-government / eDemocracy: internal/external portals, e-procurement, electronic voting

In order to address some or all of these segments, each localsubsidiary should be able to build upon the Microsoft USGovernment strategy to take into account national variables,such as:

• Cultural and operational differences among governmentcustomers

• Rules and regulations governing IT purchasing in theirpublic-sector markets

• Geographic and temporal distribution of revenueopportunities

• Their own organizational history and resources

The ability to leverage best practices and to reuse intellectualproperty developed and scattered in the field is critical. It is alsovery important to carefully analyze local market needs around theworld in terms of technology adoption and standardization, andto institute a means for communicating such information back toMicrosoft’s product teams.

Many characteristics of government computing will prove to beuniversal to all regions and nationalities. On the other hand, eachgovernment customer’s practices will also present unique andintricate challenges that each subsidiary will need to develop ahighly specialized base of expertise to address. We will work onthis together as we develop our global plans and opportunities.

The remaining two sections of this white paper will morespecifically outline how MS US Government has developed andimplemented strategies that serve the wide spectrum of customersto be found within the U.S. Federal and SLG markets.

WW total IT spending ~ $215B in Year 2001

Source: G2R/Dataquest

120000

100000

80000

60000

40000

20000

01998 1999 2000 2001 2002 2003

US

Canada

Japan

Europe

Asia/Pac

LATAM

ROW

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Microsoft Federal is the largest and most established vertical inthe company. Launched in FY82, the business has consistentlyposted double digit growth in revenue, with accelerated growthoccurring in FY97 in the wake of significant investments madeFY95 (see part 1 for details.) The district accounts forapproximately 10 percent of Microsoft’s North Americanrevenues.

Microsoft Federal restructured the organization in FY01 tofacilitate deeper specialization that would lead to the creation ofmore focused subject-matter teams to call on the variety ofvertical markets within the Federal environment.

U.S. federal government spending on information systems andservices will increase at a compound annual growth rate of 11percent from $37.1 billion in fiscal year 2002 to $63.3 billion inthe government’s FY 2007 according to a report released bymarket research and consulting firm, INPUT. (These estimatesdo not include significant opportunities within classified nationaldefense and intelligence programs or embedded computersystems such as those found in weapons systems.)

“Homeland security and e-government initiatives are thehighest information technology (IT) priorities for federalagencies today. These two areas will drive significant near-term increases in spending even while the Office ofManagement and Budget looks to eliminate redundantprograms and spending,” says Payton Smith, Manager ofPublic Sector Market Analysis Services at INPUT.

According to INPUT, federal agencies with the greatestspending on information systems and services include theDepartment of Defense, the Department of the Treasury, theNational Aeronautics and Space Administration, the

Department of Transportation, and the Department of Justice.These five departments will represent nearly 70 percent offederal spending on information systems and services in thegovernment’s FY 2007.

Growth in federal spending will be most significant forprofessional services and outsourcing, as opposed to spending onequipment, software and telecommunications.

“A number of factors merge and reinforce each other to drivethe increase in federal government spending for informationservices, including the current administration’s emphasis oncompetitive sourcing, the federal human capital crisis, andthe increasing requirements for, and complexity of,information operations,” says INPUT’s Smith.

The federal government encompasses a broad array of verticalbusinesses that address many diverse constituencies. For example,the federal government is responsible for the nation’s safetythrough the Department of Defense (DoD) and the ArmedServices (Navy, Army, Air Force, and Marines), while otherfederal organizations regulate and manage many other vertical-industry activities, such as:• Healthcare• Aviation• Energy• Agriculture• Emergency Management• Immigration• Commerce• Postal

IT challenges currently facing federal leaders revolve aroundredefining government functions in terms of “E-Government.”This entails not only providing services to citizens through theInternet, but also calls for securely sharing critical informationacross agency boundaries. This vision of highly accessible andintegrated government systems is reflected in the followinghorizontal IT purchasing trends:

• IT Security and Information Assurance — While achievingsecure interoperability and integration has always been a goalof government agencies, it became a top priority afterSeptember 11th. A healthy 8.1 percent of the $52 billionthat federal agencies will spend on IT is earmarked forimproving IT security, with emphasis on PCs and networks.

PAGE 10

Part 2. Microsoft Federal

Federal IT Market

Mar

ket S

ize

$Bill

ion

Oblig

ated

Dol

lars

FY 2001 FY 2006

70

60

50

40

30

20

10

0

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• Knowledge Management (KM) — The structure of thegovernment workforce is also changing dramatically. Forinstance, approximately 31 percent of the Army civilianworkforce is eligible for retirement in 2004. This is raisingserious concerns over how to use technology to ensurecontinuity and smooth operations. Among the questions nowfaced by federal CIOs are:

• How can knowledge be captured from a vast number ofskilled staff?

• What skill sets should be recruited and trained to have anewer and more technologically advanced organization?

• What kinds of KM processes should be put in place?

• How can subject matter expertise be captured, managedand distributed through IT solutions?

According to Alex Bennet, the current Chief Knowledge Officerof the Navy, the “number one reason” for Homeland Security isto facilitate the flow of data among critical decision-makers.

• Outsourcing — This is an activity in the federal market thatis expected to show strong growth over the next few years.Over the past 5 yrs, the percentage of IT spending that wasoutsourced ranged from 75 percent to 80 percent. Between2001 and 2006, INPUT forecasts that the percentage ofoutsourced IT spending will continue to increase, reaching ahigh of 88 percent in 2006. A number of factors are drivingthese increases, including:

• Significant reductions in the federal workforce

• A critical lack of IT skills

• The current administration’s predisposition to partneringwith the private sector

• Remote/Mobile Networking — A key DoD strategy is toachieve information superiority over the enemy to allowquicker decision-making during wartime, reducing theinformation gap among combat collaboration teams and from“sensor to shooter.” Microsoft is focused on helping DoDdevelop network-centric warfare pilots featuring .NET, Webservices and knowledge management in this environment.This means providing advanced IT capabilities at the war-fighter level, not just at military headquarters or at thePentagon.

Yet another key trend in federal IT purchasing is the movetoward larger consolidated buys such as the Navy Marine CorpsIntranet (NMCI) contract, which covers 245,000 desktops acrossNavy and Marines shore-based facilities. The NMCI contract is

managed by EDS, which serves as the prime contractor withMicrosoft Federal providing critical server and desktop elements.Microsoft is also currently working with DoD to create a customenterprise agreement covering all DoD desktops in place ofmultiple, separate contracts for individual services. Largegovernment deals of this size require complex, customnegotiations and typically take 12-18 months to close.

In addition to common federal government trends and issues,there are a number of federal agencies and departments that haveunique missions and challenges. It is important to identify andrespond to these requirements and demonstrate that Microsoftunderstands the complex challenges. Continuing to build a salesteam rich with subject-matter expertise in each of the federalverticals is paramount, so that Microsoft can apply a consultativeand solutions-oriented approach to selling its platforms andsoftware. The verticals include:

• DoD — Army, Navy, Marines, UAF, DFAS, DISA

• Healthcare — Veterans Affairs, Health and Human Services,Center for Disease Control, National Institutes of Health,DoD Health Affairs

• United States Postal Service

• Department of Education

• Department of Justice— FBI, INS

• Intelligence — NSA, CIA, NRO, NIMA, Department ofState

• Treasury Department — IRS, U.S. Mint

• Department of Transportation — Federal Aviation Agency

• Agricultural — USDA, Department of Interior

...Microsoft Federal Organizational

Structure

Since FY01, Microsoft Federal has created vertical teams forpostal, healthcare, intelligence, and Department of Defense. (TheDoD team works under a Department of Defense Director incharge of three separate teams to address each of the armedservices: Army, Air Force and Navy/Marines.)

“Cultivating a deep base of vertical subject-matterexpertise and specialization within our own organization isabsolutely critical to government sales and customerretention,” explains Mitra Azizirad, General Manager,Microsoft Federal Systems.

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Each vertical team has been developed to better align solutionswith customers’ distinct needs, and to share best practices andtechnology solutions among different agencies inside and outsidethe vertical.

Microsoft Federal created an infrastructure designed to providecomprehensive support to the vertical account managementteams. The infrastructure consists of two teams:

• Federal Advanced Solutions Team (FAST) which hasengineering and account management resources dedicated to:• Knowledge Management • Business Intelligence• Information Assurance• E-Government• Mobility• Business Productivity

• Federal Technology Team, which consists of programmanagers who respond to security, defense messaging,directory services, and public key infrastructure mandatorygovernment requirements and standards.

Microsoft Federal has also verticalized the civilian agency teamsthat focus on the Departments of Treasury and Transportation, aswell as Justice, Agriculture, Aerospace and Energy.

“Our objective is to deliver not just product leadership tocustomers, but also a very high level of thought leadershipthrough each of these four activities. The only way to dothat is to have expert people in the field. That’s whycontinuously developing subject-matter expertise isessential to our longevity and growth expectations in thegovernment market,” says Azizirad.

...Federal Sales Execution

Microsoft Federal has created a systematic approach todeveloping opportunities in the federal market. The keyprinciples are embodied in the Federal Opportunity Framework(FOF), a framework and guideline for how to prioritize andmanage opportunities.

FOF consists of five clearly defined stages that describe roles,responsibilities, and tools for team members. The frameworkleverages the resources available to the district to create a clear,streamlined strategy for execution on Microsoft Federal’s topopportunities. Additionally, it allows the federal district as awhole to easily understand the district-wide priorities.

The Federal Opportunity Framework includes five phases:

1. Identification: During the identification phase the customer,partner, independent software vendor (ISV) or Microsoft

employee identifies an opportunity. All opportunities identifiedwithin the federal accounts are to be communicated the agency’saccount executive.

2. Planning: During the planning phase, account executivesinitiate their account planning by involving their team architect,their government account manager (GAM), fast advancedsolutions team (FAST) and/or the appropriate resource teammembers.

3. Prioritization: Once planning is complete, the accountexecutive compiles all opportunities into a standardizedforecasting template. Each opportunity in the standardizedtemplate is assigned a priority/probability figure based ontechnology, funding, account knowledge, etc. Additionally, eachopportunity is rated against at least one of three categories:

• Revenue: determine how the opportunity will contribute toFY revenue targets (via specific product platform, such asWindows 2000, Office, etc.)

• Strategic: establish if the opportunity is strategic in nature(i.e., will the win support Microsoft Federal’s long-term goalsin the account)

• Competitor share: establish if the opportunity can helpMicrosoft Federal gain market share against competitors.

Once the account plans are completed, each GAM creates aprioritized list of all of the opportunities for his or her team,along with an associated expected timeframe to close. Duringthe bi-annual account planning sessions, the general manger(GM) along with the account team and the resources teams useeach sales team’s opportunity list to develop a district-wideopportunity list. This creates a “bottoms up” approach todeveloping a clear, concise, validated forecast for the district.

4. Engagement: Once the opportunities are prioritized, theresources are identified for the engagement phase. There aremultiple vehicles for engaging on an opportunity — includingthe Federal Priority Program (FPP, see below), Partner FPP, orMicrosoft Consulting Services (MCS). The appropriate vehicle ischosen depending on the goals/requirements for closing eachopportunity.

5. Completion: This final phase of the opportunity life cycleconsists of conducting a post-mortem to institutionalizing thelessons learned from the engagement, securing the customerreference, preparing a case study, and documenting the bestpractices implemented or developed during the engagement.

At the end of FY01, the FOF was used as a basis for developingthe sales execution framework (SEF) used across MicrosoftCorporation.

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Federal Priority Program — The Federal Priority Program is adistrict-wide process for managing top-priority opportunities. Itis an engagement model designed to decrease sales cycle timesand increase the probability of securing engagements byeliminating business process or technical barriers. It typicallyconsists of a focused product or solutions pilot that has clearlydefined milestones and a defined start and end date. It concludeswith a transition from the technical specialist (TS) and/or fastadvanced solutions team (FAST) rep to a partner or an MCSconsultant. The transition plan is decided when the engagementfirst begins to ensure a smooth transition.

• Government Solutions Offerings — Microsoft Federal hascreated repeatable solutions through a process calledgovernment solutions offerings (GSO). Each GSO is definedby its own:

• Sales execution strategy• Marketing strategy• Go-to-Partners• Architecture and • Services delivery strategy.

Each GSO is validated through a customer executed solutionwhich is incorporated into the GSO as a reference story.Examples of GSOs include:

• Homeland security messaging continuance

• Secure messaging for the DoD

• Homeland security integration server

• Information for the speed of command using SPS

• Information for government decision making

• Mobile solutions for government

• Regional server consolidation

• Government portal solutions using SPS

• Secure government desktop

Additional GSO’s that will be created in FY03 include:

• Asset management

• Employee tracking

• Additional DoD focused solutions such as AF financialmanagement

Government partner solutions offerings (PSO) — such as Navyship maintenance and expense tracking

• Sales Readiness Training — Microsoft Federal has created arigorous sales readiness program that is designed to prepareaccount executives who call on federal agencies. The programis designed to help account executives put Microsoft solutionsinto an operational context that is readily understood andappreciated by prospects in the federal market. The trainingoccurs twice a month for 1.5 hrs. All training is recorded sothat it can be viewed at a later time by those that are unableto attend, or reviewed by attendees who want to reinforce thetraining.

...Federal Marketing

Though the federal government is a unique enterprise customercomprised primarily of depth accounts, the customer isgeographically dispersed across the globe. Thus, federal

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IDENTIFICATIONGAMs, ECS, MCS

Reps & TAFAST

PLANNINGGAMs, ECS, MCS

Reps & TAFAST

PRIORITIZATIONGAMs, FAST,TSM & DOT

GM

ENGAGEMENTTS, ECS, MCS Rep FAST Rep

COMPLETIONGAMs, ContractsReps & TA, MCS

Partner

Case studies,Customer ReferencesBuilding KM database ofPost- mortems on opps

Tools: Standardized Account Template

Bi-annual AccountPlanning Sessions

Standardized Account Template

FPP, Partner FPP,MCS, ECS, TS,FAST

Roles & ResponsibilitiesAcct Execs and ECS Reps — Identification, PlanningTS — Tracking, Execution during engagement, TransitionGAMs — Opportunity Planning, Prioritization, Post-Mortem, Case Studies DOT,TSM & FAST Mgr — Prioritization, Resource Assignments, Tracking, Post-Mortem, Case StudiesMCS — Engagement, TransitionContracts — Planning, CompletionGM — Prioritization

Federal Opportunity Framework

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marketing combines depth and breadth approaches. The federalaudience is a sophisticated one, requiring strategic marketingcampaigns to be delivered in a way that reflects each specificfederal scenario, mission critical applications and securityinitiatives. Microsoft federal programs are designed to specificallyspeak to the needs of the accounts by focusing federal marketingefforts on strategic federal industry events, and one-to-few/manyevents tailored to issues facing the federal government. Examplesof these marketing initiatives include:

• Vertical Enterprise Customer Programs: Microsoft Federal hascreated strategic marketing campaigns that are tailored to thehealthcare business, intelligence community and militaryorganizations. Each of these vertical business units haveunique challenges which requires marketing programs tospeak to these audiences. Specific programs include:

• Defense Programs

• DoD Newsletter — “Frontlines”: A customizednewsletter tailored to the specific needs of the USMilitary & Defense and includes input fromcustomers, partners and MCS that highlight thecommitment and impact that Microsoft has had in theDoD community.

• DOD Account Symposiums: Single large DoDaccount customer symposiums for each of the DoDbranches (Army, Air Force, & Navy) are designed tocommunicate Microsoft’s commitment to these DoD.The symposiums bring the DoD peers together fromaround the world to network and learn about how toleverage Microsoft’s technology for their missioncritical applications, as well as to get updates onspecific DoD programs and solutions. Thesesymposiums are held in Redmond and draw up to 450customers per symposium.

• Horizontal Solutions Marketing

• Annual Federal Solutions Day: Dedicated to showcasingthe latest solutions for Government, this event draws over300 BDM’s & TDM’s from federal government agenciesand our partners.

• Government Solutions Offerings Campaigns: Based on thehorizontal nature of the federal government, customizedsolutions campaigns have been developed around theGovernment Solutions Offerings that convey Microsoft’smessaging around such solutions as Business Intelligence,Government Portals, and Citizen Relationships with WebManagement as it relays to the government’s business.

Each campaign is comprised of a healthy marketing mix ofactivities centered on the principles for each of theGovernment Solutions Offerings.

• Security/Trustworthy Computing Campaign: Security hasalways been fundamentally important to the way governmentdoes business. More now than ever due to the events of 9/11,government agencies are focused on shoring up civil defenses,figuring out how law enforcements talk across lines to protectour country. With the heightened focus on security andhomeland defense, it is critical that Microsoft demonstratecommitment through marketing efforts highlight howMicrosoft technologies can secure government operations.This is accomplished through programs like:

• Bi-Annual Security Summit (East and West)

• Get Secure, Stay Secure Road Show

• Security Direct Marketing Campaigns

Government Industry Whitepaper – Federal

Partner Strategy

To keep from implementing a one-size fits all partnerframework Microsoft Federal’s partner strategies leverage theoverall government partner structure. The federal marketplacerequires a stronger focus along horizontal solutions areas—incontrast with the vertical solutions focus of SLG. However, theprogram uses a similar end-to-end partnering model thatintegrates partner management across partner types—SI, ISV,OEM and MCSP. Additionally, the Government Partner Teamcompliments how the Federal Solutions Sales organization goesto market and acts as a feeder for opportunities as well as bysupplying market solutions and partners that address criticalneeds of the federal customer.

...Federal Licensing and Contracting

Microsoft needs to conform to FASA/commercial itemprocurement rules and needs customized agreements. Microsoftmust have a customized “pure” indirect model (no contractssigned with end user government) because: 1) we do not havethe resources, infrastructure, etc, to participate in thecompetitive bid requirements, RFPs etc. 2) Microsoft’s businessmodel is not to compete with it’s resellers, and 3) we needresellers to provide an indirect contracting model to participatein the General Services Administration (GSA) contractsotherwise Microsoft would be exposed to Most FavoriteCustomer pricing, cost and pricing data and extremely intrusiveinspector general audits etc. The GSA contracts bringapproximately $120 million dollars a year to Microsoft.

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• The Government Business Desk has created special GIAagreements and associated program agreements to addressunique Federal licensing and contracting requirements.Additionally, the GIA program is made available to entitieswhich may not be LARs, but with whom the US Governmentis required by law to purchase from in lease some percentages(8a’s, women/minority owned businesses, etc.).

• The customized agreements require a government customizedLicense Agreement/PUR that is prepared and administered inthe Government space.

• As the Government programs are highly customized and arenot accounted for with corporate resources, the GovernmentBusiness Desk has dedicated its Licensing Executive time andresources to develop an agreement architecture consistentwith licensing 6.0 that meets government requirements andcan be auto-processed by MSLI. There still remains arequirement for some manual processing to addressgovernment requirements. This also requires governmentcontracting and business expertise.

• Much of Microsoft’s licensing to the U.S. Government isthrough Government System integrators and outsourcers, not“pure” product resellers. That often increases the complexityof the transactions and the required government contractualclauses that are passed to Microsoft that we must address.

• The GSA program is wholly unique to the FederalGovernment and requires customization of our agreementsand processes and management.

Government transactions in general are much larger, higher riskand more complicated than commercial transactions.

...Federal Services and Consulting

The Microsoft Consulting Services Federal practice was started inFY96. Today, the Practice has 74 people including 1 practicemanager (PM), 9 managing consultants (MCs), and 64consultants. In FY02 the organization was structured to havevertically focused managing consultants work directly with eachof the federal account teams. The federal account team guidesMCS to ensure effective joint execution of the accountmanagement strategy. The alignment of consulting teams aroundfederal verticals provides federal customers with experts onMicrosoft technology, as well as experts on specific organizationalbusiness or operational issues.

“Success in government IT consulting means showing thecustomer that your know-how not only encompasses a thoroughunderstanding of their particular environment, but also brings

profound horizontal expertise in particular IT strategies fromrelevant sources outside their organization,” explains AlHorowitz, General Manager, MCS Public Sector.

There are nine horizontal solution strategies that are beingpursued across most the federal government verticals. Theyinclude:

• Knowledge Management• Mobility• Business Intelligence• Government to Citizen• E-commerce• Server Consolidation• Business Continuance• .NET• Integration Services

MCS Federal provides thought leadership in these strategiccategories to government customers world-wide as well as tosolution providers and systems integrators serving the Federalgovernment market.

Like the sales, marketing and partnering teams, MCS consultantsuse their vertical expertise in government to help customersimplement IT best practices in their specific environments. Assuch, consulting activities drive product sales, increase referenceaccounts, and fuel the wide-scale adoption of Microsofttechnology.

Clearly, the key to executing this strategy of thought leadership isto continuously assemble consulting talent with governmentspecific experience and credentials. MCS is increasinglyrecruiting personnel with government security clearances, forexample, which allows the consulting practice to extend itspresence into classified projects. In FY01 Microsoft received aDepartment of Defense facility clearance from the DefenseSecurity Service. At this time over 70 percent of the federalpractice consulting team has some level of government sponsoredsecurity clearance or background check.

By helping government customers to design, develop and extendsolutions on Microsoft platforms, MCS takes the customerrelationship to the highest level.

“When customers buy Microsoft products and install them on theirservers or on their desktops, that’s only the beginning of therelationship,” says Horowitz. “It’s not until they becomecommitted to applications and solutions that solve real, line-of-business problems that our relationship is cemented for the future.”

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Microsoft’s state and local government (SLG) business unit waslaunched officially in FY01 to execute a systematic, nationwidestrategy to address the growing SLG opportunity. It broughtunder one organizational umbrella sales and support services thathad previously been operated by the regional districts.

Demand for IT products and services in the state and localmarket is booming despite the economic slowdown. Medicaidcosts and unexpected homeland security spending, will causeinformation technology spending for states to remain stable thisyear and grow over the next fiscal year, according to analysts atresearch and consulting firm Federal Sources Inc., (FSI).

State and local government IT spending for fiscal 2002 isestimated at $39.9 billion — a $1 billion increase from the lastfiscal year. For fiscal 2003, FSI estimates $40.4 billion inspending, and $41.5 billion in 2004. The company forecaststhat in fiscal 2003, 30 percent of the total state and local ITspending will be on services ($12.3 billion), followed closely bypersonnel ($11.7 billion), then hardware ($8.2 billion),telecommunications ($5.3 billion) and software ($2.9 billion).

Services will account for 30 percent of the total IT spending inFY03. The fastest-growing areas of IT expenditure are externalservices and software. Microsoft receives approximately 13percent of the total current SLG software spending.

“Ten states account for 55 percent of the IT spending.Among them are California, New York, Texas, Michiganand Pennsylvania. They have also been the most consistentIT spenders over the past several years. Health and

human services is the top sector that state and localgovernments will continue to focus on, followed by justiceand public safety, and finance and administrationservices,” says Jim Kane, President of FSI.

While the state and local government (SLG) IT market is one ofthe largest, it is also one of the most decentralized in the UnitedStates. It consists of all 50 states, approximately 19,000municipalities and 3,200 counties. Moreover, the SLG market isfurther segmented into hundreds of distinct agencies spread outacross the nation, each tasked with different, specializedresponsibilities.

“State and local governments currently employ anestimated 8 million workers, all of whom need computingtools, from simple desktop functionality to majorInternet-enabled server applications,” notes FrankGiebutowski, General Manager of MicrosoftGovernment’s SLG business. “The SLG opportunity forgrowth in the server category especially, is huge and stilllargely untapped.”

The SLG customer base includes all public sector organizationsat the state, city, county and local government level. The officialMicrosoft designation for an SLG account is based on thedefinition used in Microsoft SLG’s procurement contracts. Assuch, SLG customers include:

“Any government agency, department, instrumentality,division, unit or other office that is supervised by or ispart of the state and any county, borough,

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Part 3. Microsoft State and Local Government

State & Local

State and Local Government Total IT Forecasts,2000-2005

State and Local Government Total IT Spending

2000 2001 2002 2003 2004 2005

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commonwealth, city, municipality, town, township, specialpurpose district, or other similar type of governmentalinstrumentality located within the state’s jurisdiction andgeographic boundaries, provided they are not consideredto be affiliates of the federal government and its affiliate.”

Customers managed by the Microsoft SLG team can also bedistinguished by their funding source; all are publicly fundedorganizations with the exception of educational institutionseligible for academic licensing.

Within the category, SLG customers are further classifiedaccording to Microsoft’s standard taxonomy of strategic, major,corporate, medium enterprise, and small government, based onthe number of PCs in the customers’ enterprise.

• Strategic: more than 10,000 PCs

• Major accounts: between 5,000 and 9,999 PCs

• Corporate accounts: 1,000 — 4,999 PCs

• Medium Enterprise Accounts: 50—999 PCs

• Small Government: less than 50 PCs

For the purpose of account management and sales execution,each of the 50 states and the District of Columbia is consideredan account. A state account consists of multiple SLG customersin one or more segments. The states are classified based onhistoric IT spending:

• Tier 1 states: States delivering >80 percent of Microsoft SLGrevenue over the last three years; and

• Tier 2 states: states delivering <80 percent of Microsoft SLGrevenue over the last three year

...State and Local Sales Execution

The most significant challenge in expanding Microsoft SLG’smarket share is coverage. Not only are SLG organizationsgeographically disparate, they are also divided in terms ofmanagement and purchasing authority. Rarely, if ever, forexample, could a governor’s office make an IT purchasingdecision for the state as a whole. Instead, each discreet governingbody within the state—from state legislatures and city councils,to mayors’ and sheriffs’ offices—owns the IT purchasingauthority for their particular enterprise.

The state of Texas, for example, contains 137 different agenciesspread across 254 county and 350 city governments, each with itsown purchasing authority and processes. For this reason, the

large-scale, consolidated purchasing trend now transforming theFederal environment can’t be applied to the SLG marketplace.

“Every SLG customer engagement is radically differentfrom the next, so our regional account managers have tobe resource brokers and relationship managers, tapping theright subject-matter experts for each situation from therest of the company and our solutions partners,”Giebutowski explains.

While all SLG customers have different purchasing processes,there are a number of well-known factors, trends and behaviorsthat characterize selling to SLG organizations.

• Centralized MIS vs. Independent Departments — Centraldepartments are the guiding force for the jurisdiction’s ITplans and strategies. These agencies will set baselinerequirements to ensure standardization of IT products andservices. These agencies will also tend to procure the hardwareand telecommunications services utilized for horizontalapplications across the governmental enterprise, whereasindependent agencies procure more customized solutions tofulfill the requirements of their particular interest.

• Sources of Information Technology Funds —Althoughfunding for IT projects are almost always perceived to bescarce, state and local government agencies have three majorsources: general funds, federal grants and IT bonds. Generalfunds are allocated by the state legislatures or city councils tocover independent agencies’ operating and MIS budgets.These will typically include spending on personnel,equipment maintenance, and procurement of basic hardwareand software.

• Risk Aversion — Taxes fund the operations of state and localgovernment, so public sector organizations are extremelyaverse to risk. Consequently, they focus on proven ITsolutions rather than “bleeding-edge” technology.

• Extended Sales Cycle — In contrast to other vertical markets,the sales cycle for IT solutions in the SLG marketplace canoften last for 18-24 months. In many ways, the acquisitionprocess of state and local government agencies reflects thestereotypical perceptions that government processes arehighly administrative and bureaucratic. Moreover, IT projectsmust also meet the appropriate budgetary and fundingguidelines. Factors such as these combine to slow the pace ofall government sales engagements, but most notably in theSLG field.

• Non-technical Decision Makers — In many cases, particularlyat the local level, individuals who have final approval on ITprojects that go out for bid often do not have the technical

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expertise to understand and evaluate the specific benefits ofmany IT solutions without guidance. Additionally,governments have established a number of “mixed”procurement committees, which are comprised of bothtechnical and non-technical members. Moreover, theincreasing involvement of political and business line officialsin the rollout of e-government initiatives creates anothergroup of non-technical decision makers.

• IT Governance and Strategic Planning — As state and localgovernments recognize the growing importance of IT in theirdaily business: they are increasingly engaging in strategic ITplanning initiatives to better direct their investments andresources enterprise-wide. There are three primary ITgovernance innovations currently being pursued bygovernments:

• Appointment of CIOs (see below)

• Establishment of IT task forces

• Formation of public/private sector IT governancecommittees

• CIOs — The majority of states and the larger municipalitieshave installed CIOs to provide enterprise-wide leadership anddirection on IT initiatives. Currently, 46 states have CIOsthat usually report directly to the office of the governor orlieutenant governor. A CIO’s technology acquisition decisionoften hinges on a consensus from individual agencies and/oron non-technical cross-agency committees that controlbudgets. The members of such decision-making groups oftenhave technology agendas based on individual needs, whichmakes agreement on enterprise decisions difficult.

In addition, the CIO position is increasinglytransitory. Over the past year, at least 13 publicsector CIOs have left their long tenures ingovernment to join the private sector. This year, 22of the top 30 states, representing 90 percent of totalstate government spending, are holding elections.This will result in procurement delays during thetransition to new Governors and their CIOs.

Taking all of the factors mentioned above intoaccount, there are four elements to Microsoft’sSLG sales strategy for FY03.

1. Realigning Resources to Focus on the BigThings. Approximately 80 percent of SLGrevenue comes from 21 states. Microsoft hasorganized its regional resources to focus on largeopportunities—both in terms of these top

markets, and also in terms of the largest agencies within thosemarkets, which include Health and Human Services (HHS),Justice and Public Safety (J&PS), Transportation, andTax/Revenue.

Line of Business Focus: In FY02, a solution sales team wascreated with a solution sales specialist focusing on HHS,J&PS and E-Government to help state executives betterunderstand Microsoft solutions for these lines of business(LOB). This vertical approach to LOB represents asignificant departure from the horizontal approach commonlypracticed in private-sector sales. As in the federal market, thisvertical LOB approach reflects the way that customers budget,procure, plan and deploy SLG solutions. In the SLGenvironment, the majority of horizontal solutions arecontained within vertical solutions. Consequently, MicrosoftSLG’s partner team and technical specialists (TS) are alignedto deliver solutions in the following LOB areas.

• Health and Human Services — The primary focus inHHS is bio-terrorism and Integrated Case Management(ICM) solutions. There is also great interest in anddemand for solutions that help agencies comply with theHealth Insurance Portability and Accountability Act(HIPAA).

• Justice and Public Safety — The primary focus in J&PS ison Integrated Justice, CAD/RMS and Dispatch and CourtCase Management solutions.

• E-Government — The primary focus of E-Government isto build the infrastructure and portal architecture neededto deliver government-to-government, government-to-business and government-to-employee solutions.

PAGE 18

State Priorities By Line Item State Priorities by Spending

Other 4%ENV 3%

EDU 12%

HHS 15%

PS 15% ECD 17%

FIN/AD34%

PS and HHS verticals will account for approximately50% of all IT spending by states in FY2003

Source: FSI Analysis of 27 State Budgets: selected statesrepresented approximately 80% of totall state pending

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In FY03, Microsoft will extend its reach into these areas byrecruiting experienced subject matter experts who can refine the“go to market” approach and secure higher-level access.Investigations are also taking place to assess whether additionalresources are needed to gain broader penetration in the existingverticals and to pursue Tax/Revenue and Transportation. Ingeneral terms, the objective of Microsoft SLG’s vertical approachis to secure the market for development platforms andLOB/application server technologies.

IBM is the key competitor in this arena because of its coveragemodel and Java 2 Enterprise Edition (J2EE) message. Inresponse, Microsoft SLG focuses on three strategies:

• To deliver a baseline Microsoft application architecturemessage that is reinforced everywhere, while also emphasizingthe custom vertical/LOB expertise that Microsoft brings tothe table.

• To identify key application integration and E-Governmentapplication opportunities. Once identified, to leveragepartners and Microsoft offerings to conduct as many pilots aspossible, and from there, convert them to design wins.

• To find and reinvigorate Microsoft developers for the largestgovernment accounts.

Account Team Focus: Microsoft SLG will continue to refine thesegmentation model to ensure the right sales and TS coverage isin place for the depth and breadth accounts. Maximizingcoverage is the priority for these accounts in the top 21 states.

In FY02 Microsoft focused depth state account teams (salesexecutives and technical specialists) on the largest cities, countiesand agencies in the top 21 states. The headquarters-basedbreadth (tele-sales) representatives cover the Tier 2 states andsmall-to-medium cities, counties and agencies in the top 21States. Technology specialists focus on driving enterprise-widedeveloper and infrastructure standardizations and technologydecisions within central IS, as well as at the top agencies anddepartments.

Integrating the SLG government affairs organization and lobbyingconsultants into the account planning and strategy process hasenhanced sales efforts. This coverage model helps to optimize therelationships and attention provided to the most importantcustomers. As a result Microsoft SLG led the United States ingrowth with 56 percent total revenue growth and 117 percent inserver revenue growth (YTD thru March 2002). Moreover,anecdotal evidence suggests that customers in both the depth andbreadth segments believe that Microsoft SLG better understandstheir business and takes better care of their needs as a result of itscoverage model. Feedback from the State of Georgia CIO, along

with remarks from state executives attending executive briefings inRedmond, validate the positive impact of this coverage model.

2. Improve SLG Annuity Revenues. In 2002 (YTD thru March),EA revenue has grown by 128 percent and Office revenue by 44percent. In FY’01, Microsoft SLG allocated incrementalresources to the Licensing Specialist and Desktop Specialist roles.Strengthening these roles, along with the company’s Anti-piracymessage, are responsible for driving a large portion of SLGbusiness and enhancing long-term customer commitment toMicrosoft desktop technology. Desktop revenue remains thelargest component of Microsoft SLG revenues, so ensuring thateach customer understands the value of annuity based licensingprograms, whether enterprise accounts (EAs) or softwareassurance, is essential.

3. Unseating Novell. With a significant installed base in SLG,Novell is a key competitor for enterprise agreements. MicrosoftSLG has dedicated sales specialists to engage in promotionalefforts, targeting the largest accounts for direct assault andleveraging partner/reseller channels for smaller accounts.Through this effort, Microsoft SLG has captured more than100,000 Novell seats. More than 30,000 seats, for example, wereconverted as part of a Government Open License Program(GOLP) promotion. Other high-profile wins include LosAngeles County and the City of New York.

With continued focus on this campaign, Microsoft will developstrategies with LOB partners and solution specialists to bring theadvantages of Microsoft infrastructure to their solutions offerings.An estimated further 20 percent of Novell market share will becaptured from a new GOLP promotion running March throughJuly 2002. The key message to customers is that Windows 2000-versus Novell or Linux-represents the most secure investmentgoing forward.

4. Leveraging programs for Small- and Medium-SizedGovernments. Microsoft will serve the medium-sizedgovernment space by refining integration with the MEEN(Medium Enterprise Engine) Machine initiated in FY01.Closed-loop marketing activities will be used to close thedeals and manage results. Partners are key to this strategy andtheir support will be needed to service expected demand.Small government markets will be reached through directmarketing efforts that drive them to purchase off the statecontract or GOLP.

“In a word, the key to sales in the State and Local marketis ‘Trust.’ Reliability, credibility, playing it safe—thesefactors count more than anything else, including price,with government customers. Their political futures are onthe line, and they have very long memories,” saysGiebutowski.

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In 4Q 2002, 36 governors will come up for re-election, whichwill dramatically slow SLG sales in those states through 1Q2003, particularly where new administrations are elected. From alonger-term perspective, however, analysts expect IT spending atthe SLG level to grow steadily over the next few years.

Between FY02 and FY04, SLG spending on IT will have aprojected 4 percent compound annual growth rate. IT buyingwill continue to support fundamental business objectives,especially greater operational efficiency and cost-effectiveness.More than ever before, SLG customers are focusing on achievingbest value at lowest cost.

...State and Local Government Marketing

In order to optimize marketing resources, Microsoft SLGconcentrates on the top 25 states with its heaviest, one-to-oneefforts, while communicating with medium- and small-sizedprospects via broader campaigns. More specifically, SLG’smarketing strategy approaches each segment as follows:

• Top 21 State Government — are consistently touched throughlocal events, such as seminars and road shows, as well throughprogrammed broad-reach marketing activities. Smaller stategovernments are covered primarily through direct marketing,as well as through partners and resellers.

• Medium and Small Local Government — are covered throughdirect marketing and telesales.

There are specific state and local government solutions marketinginitiatives for:• Justice and Public Safety• Health and Human Services• E-Government

...State and Local Partnering

Currently there are over 2,000 Government applications on themarket. By working with partners to increase this portfoliothrough FY05, it will be possible to meet server sales goals.

“Working with partners and resellers to develop andpromote repeatable LOB solutions that address the high-demand, high-growth areas is a major marketingopportunity. By showcasing success stories from one SLGenterprise, we’re bound to catch the eye of counterparts inother states,” notes Giebutowski.

In order to maximize geographic coverage of the SLG market,leveraging Microsoft’s nation-wide network of partners/resellers isessential. It’s important, however, to avoid the trap of

categorizing technology partners by their region. Instead, it’smore useful to categorize integrators, developers and othervendors serving the SLG market according to their area ofvertical/LOB solution offerings and expertise.

“From the point of view of an SLG customer, thegeographic location of an IT vendor’s headquarters is notterribly relevant,” explains Microsoft Government’sPartner Manager, Jack Hersey. “Much more important iswhether or not they and their products have anestablished, successful track record in a particular categoryof the SLG environment.”

Cultivating relationships with vertical/LOB partners is a vitalcomponent of Microsoft’s transition toward the world ofintegrated solution selling, which is practically mandatory in theSLG market. Collaborating effectively with partners to sell bothpartner solution offerings (PSOs) and Microsoft SolutionOfferings (MSOs) is essential to achieving the company’s .NETEnterprise Server revenue quotas.

As the percentage of .NET Enterprise server revenue derivedfrom PSOs rises, it is essential that the government partner teamcontinue to develop hardened offerings with support fromMicrosoft Consulting Services (MCS) and the company’ssolutions team to keep up with the customer demand andrequirements. To date, the partner team can take to marketapproximately 190 partner offerings across government segments.

The short-term priority is to build an extensive inventory ofenterprise-ready solutions that both Microsoft and partners arecommitted to promoting while staying focused on what can besold today. The longer-term priority is to build an inventory ofMicrosoft and partner-led solution offerings that meet the morerigorous requirements of customers demanding sophisticated,enterprise-quality solutions.

The three key functions of Partner Account Managers (PAM) arelisted below. They encompass the activities required to bringPSOs and market players together to drive Microsoft serverbusiness. The amount of time spent in each area is directlyrelated to the maturity of each vertical segment, as well as thenumber and percentage of Microsoft-based solutions alreadyavailable in that market. When entering a new vertical segment,for example, the majority of time needs to be spent identifyingand engaging existing Microsoft-based PSOs. The good news isthat, in most cases, a core set of Microsoft-based offerings isalready available and rolled-out to customers.

Engagement: Identifying and bringing to market Microsoft-basedPSOs that can drive immediate solution sales and revenue.Engagement activities include:

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• Partner profiling and solution assessments• Integration with vertical marketing campaigns• Engagement with solutions sales and account sales teams

Development: Moving market leaders onto Microsoft platforms,and aligning best of breed solutions with solution-sales initiativesand marketing. Activities include:• Identification of market leaders• MCS engagement and potential investment• Application & Solutions migration and or Development• Skills development and knowledge transfer• Opportunity mapping and engagement• Relationship management and executive support

Sales: Winning over trusted business advisors and strategicintegrators with PSOs that support their industry niches.Activities include:• Bid and RFP development• Customer account and solutions mapping• Joint customer selling• Executive marketing • Relationship management and Executive support

The bottom line is that maximizing the number of enlistedpartners and PSOs going to market helps to enhance theexposure of Microsoft products to potential customers.

“It’s absolutely essential to continuously nurture andengage partners in the sale and support of MSOs andPSOs geared for state and local government,” says Hersey.“Their development, sales and service teams are allresources that help put Microsoft products into customersystems. The focus should be on helping them maximizethe value of solutions, not just the technology platforms.And we must provide opportunities for them to leveragethe Microsoft brand in their go-to-market strategies.”

...State and Local Services and Consulting

The Microsoft Consulting (MCS) SLG practice was establishedin July of 2001. Today the practice has 62 people, including 1practice manager (PM), 9 managing consultants (MCs) and 52consultants. The practice covers all state and local governmentbusiness in the United States, with a special concentration onthose 21 states that by far outspend the rest in IT development.

MCS SLG is organized geographically to get consultants as closeas possible to clients and minimize travel and cost. The practicehas concentrations of technical resources in:• New York• Pennsylvania• Florida• Texas• Ohio• California• Washington

There are a few items that make SLG consulting unique:

• Large geographic area

• Contracts are unique from state to state and city to city,requiring a great deal of contracting and legal expertise

• Practice makes use of Public Sector Contracting assets

• Many SLG opportunities are RFP/RFI driven, something thatMCS SLG and MCS as a whole are not in a position toaddress

• MCS is often unable to contract in many states, counties andcities, requiring MCS to act as a subcontractor to partnersthat hold purchasing vehicle.

The SLG practice also serves the central and west regions of thecountry for the education sales district, which includes all K-12and higher education clients. MCS anticipates that in FY03,Education will become its own vertical practice area.

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