Microsoft, the world's largest software firm, wants to give the public sector more attention, said Steve Ballmer, the firm's hard-charging CEO. It's not that Microsoft has ignored this market, but Ballmer would like to see the company focus more on underlying public policy issues and selling what government needs.

Ballmer said government stands to benefit greatly from the growing use of interoperability standards, such as XML, which Microsoft is pushing with its .NET platform. He also recognizes ongoing challenges the public sector faces with tight budgets and rising expectations from citizens.

To help governments around the world deal with their complex issues, Microsoft established a new U.S. Public Sector Group, hired new talent and announced partnerships to sell solutions. Ballmer, who has worked for Microsoft since 1980, is familiar with change. Right now, he leads the most comprehensive reinvention of Microsoft in the company's 25 years.

Together with founder Bill Gates and the company's other technical leaders, Ballmer will lead Microsoft's development of a revolutionary Microsoft .NET platform for desktop PCs, servers, non-PC devices and the Internet. Microsoft's goal is to provide a platform that enables a seamless experience across different computing devices, software services and data sources, putting a unified face on a wide variety of digital interactions.

Ballmer spoke with Dennis McKenna, CEO of e.Republic Inc., in May during the Microsoft Government Leaders Forum-Americas 2004 in Redmond, Wash. --Tod Newcombe

MCKENNA: Microsoft announced a significant reorganization of its government business segment. This is certainly an elevation and a greater focus on government. Can you talk about that and what it means for the customer?

BALLMER: Public sector is a big part of our business, and I think it was not getting as much attention from our general managers -- country general managers -- as we wanted. So we pulled it up as a direct report. We wanted to make sure we had focus on the policy issues as well as the sales issues -- the policy issues not just pertinent to Microsoft, but policy issues pertinent to our industry. So we enhanced our government affairs staffs in most countries to focus on that.

MCKENNA: Can you give an example of some of the policy issues?

BALLMER: Privacy, security -- how's that stuff going to look over time? I was in Germany a week and a half ago, two weeks now I guess, and made an announcement with the interior minister about a cooperation agreement we signed to help the German government protect its critical infrastructure. That's [an] issue that is technology based and policy based.

MCKENNA: As CEO, you run a very complex organization that uses and understands technology. What insights or advice could you offer government leaders who are looking at utilizing technology to transform what governments are doing today?

BALLMER: The focus on open standards is very important. I didn't say open source; I said open standards. That is really plumbing for interoperability based on XML, based on the Web services interoperability standards underneath that. Certainly we, as a company, are pushing [to] sell our own proprietary work. That's fine, everybody will. But government can play a major role in making sure there's good interoperability as companies like ours, and others, focus in on what I would call the interoperability standards of the future. We are in a unique point in time right now. XML will change the world in terms of interoperability, and that'll be a massive [change], particularly in government.

[But] who is going to set the XML standards for how we capture criminal justice information? It's got to come from the U.S. federal government, or it's not going to come. It can come on top of the XML Web services stacks that are open and interoperable. Boom, boom, big advance. Same thing in health care -- boom, big advance. But there's got to be guys like us and IBM and the others who battle it out. We'll get all the infrastructure standards right -- security, routing, the stuff we're good at -- through the standards bodies. Then who's going to say what a patient record is going to look like? Who's going to say what a criminal incident looks like? Who's going to say what an important piece of intelligence data looks like? It's not going to be us. That leadership has got to come from the government.

MCKENNA: Do you think industry has to play a bigger role in helping government define those issues -- define those standards?

BALLMER: If it comes to personal productivity, people look to us as kind of the, maybe, expert in setting some standards. If it comes to what a purchase order looks like, a lot of people would talk to SAP about that. So some of that comes out naturally. When it comes to health care, can you name the largest software vendor? Or take licensing systems. There are 50 states in the United States that all issue fishing licenses. Can you name the largest software company that does fishing license systems? I'm not trying to be silly, but because you don't have that strength of independent software companies, government's going to have to do something a little out of the box. Private industry can help, but I don't think private industry can just stick its hand up and say, "We're going to accept the burden," because I think we would fail.

MCKENNA: Governments are undergoing a tremendous cost pressure right now in terms of reduced revenues and increased costs. How would you advise governments to think about the ROI on technology?

BALLMER: The way we look at things at Microsoft, there's some infrastructure expenses I would just bear because they improve the productivity of every worker, every employee: a good Internet connection; a good device to process information; the ability for people to manage mail, calendars, express themselves. I think of that as basic infrastructure that I would just pay for, and thick and thin, I think pays back. After that, they want to say what's the return on the technology? I say what's the return on a project?

If we're going to change the way we process people through customs, we're going to make an IT investment. But the key is not the IT investment -- it's the IT investment in the context of the process change that needs to be made to get people through customs more efficiently, at lower cost, with better revenue recovery. I'm not the customs expert, but whatever the optimization point is for that process. If you're a tax collector for the IRS, you need information technology to support what you do. You have to have it. So it's not really, "Should I look at the return on technology?" What I really should do is say, "I want to get X more dollars collected." And I'll make a case on end-to-end what I need to invest in the tax collectors, then compare it to the amount of revenue I get and see if it makes sense. That's how we do our own investments. We don't say, "This is an IT investment. This isn't." Once you get past that basic infrastructure I described, what we do here is we look at it as a marketing investment, a sales investment, a support investment. It's not an IT investment. The basic infrastructure we do think of as an IT investment. And that gets you a Windows mobile device, gets you a PC, gets you Office, gets you file sharing, SharePoint, Exchange, gets you basic collaboration communications infrastructure. I think that's like asking, "How do you do the ROI on having a phone?" Most people won't do an ROI on having a cell phone. But to me, it's sort of as natural as that.

MCKENNA: As a successful manager and leader, what insights can you offer governments that are trying to transform their organizations to make them more adaptive and responsive?

BALLMER: You always start with the customer -- the citizen for government. You say, "OK, how am I going to change my ability to serve this person? What do I need to do to understand them better? What do I need to do to connect with them better? What do I need to do to make their lives simpler? And how do I do it, since the customer pays -- in this case, in the form of taxes -- how do I do it more efficiently with respect to the use of their money?" ... I think in an operational sense, government may underinvest in thinking through -- from a customer perspective -- what it needs to do, not from a policy perspective, but from an operational perspective.

You say, "How am I going to improve the experience of auto licensing?" Most things you do with it to improve the experience are going to cut the cost, because the biggest problem is that you wait in line. So if you are waiting in line, you're unhappy. You need to get greater throughput, and the brute force way of course -- you just add more people. The smart way is to say, "What else can we do, and what can we do with IT? How do we replumb the system? Maybe we can take people out -- cut down the lines." Win, win.

MCKENNA: How do you deal with the cultural issues of change?

BALLMER: It's a challenge. Everything I know about government tells me, it's a pure challenge. There are more people, and the culture is more consistent -- even more than in most businesses, because the external environment in a sense doesn't change that fast. Technology has always got something changing in our world. The fact of the matter is, fishing licenses are fishing licenses and probably have been for 50 years. Taxes are taxes. The law may change from time to time. You pay taxes fairly consistently for 50 years. So the processes -- the core basis of what you do -- change far less. And there are no competitors in government. Competitors help us in private industry change cultures. They remind you there are better ways. There's nobody to challenge government in terms of a better way to work.

MCKENNA: I was very interested to hear you talk yesterday about Microsoft's growing focus on its economic development role as an industry.

BALLMER: You have to take a look at what's been a great source of job creation in the United States: productivity in the IT industry. I mean I don't know what it was when I started in 1980 at Microsoft, but today, if you look at the three largest areas of employment in the United States: Electronics manufacturing is No. 1; auto production is No. 2; software and IT is No. 3. Two out of the top three come from this industry, and there is a role in economic development. When I meet with governors, particularly that have rural communities, they all want to talk about the call centers. "You don't need to go to India. Come to southwestern Virginia, or come to North Dakota, or come to eastern Washington." There is a way to think these things through and try to say, "OK, what kinds of jobs are going to be created in what kinds of communities?" They're not all going to be the same. There are jobs that are going to go one place or another, but our industry should continue to be a source of job creation in the United States, even though ... some jobs move, while other jobs get dialed up. As long as you believe the industry is a dynamic growing part of the value contributed to society, there's going to be net job creation. The U.S. ought to be able to own the key part of that.