Microsoft's next act -- service provider?

The maker of Energizer batteries and Schick razors has dumped an unspecified number of employees so that Microsoft can run its IT operations. The move is a tantalizing signal that Redmond may join the IT services business.

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Faced with limited growth opportunity in a mature software market, Microsoft may be weighing a future as a service provider.

The company has quietly launched a pilot project from within its IT department to provide full-scale

[Energizer] came to us and asked us to help solve a problem.


Mike Adams, general manager of Microsoft's IT business

,
outsourced IT services to battery maker Energizer Holdings Inc. The agreement is a milestone for Microsoft, which has never taken over the management of an enterprise customer's global installation. St. Louis-based Energizer, which is known for its iconic pink bunny with a drum, and also makes Schick razors, has roughly 6,000 end users worldwide.

During the next 12 to 15 months, Energizer and Microsoft executives will watch closely as Microsoft gradually assumes management of Energizer's Windows desktops, including software distribution and related upgrades, operating system management and management of security measures such as antivirus, antispyware and firewall technologies, according to internal documents obtained by SearchWin2000.com.

Energizer will keep some functions in-house

Microsoft will also take over help desk and end-user support activities, adding 24/7 support, managing all e-mail services and server management and electronic document storage. The corporate plans also revealed that Energizer will continue to manage its non-Microsoft systems, including its SAP implementation and other specialty applications. It will also still handle its own user accounts, corporate

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network and the management of its PCs and PDAs.

There were a number of IT staffers laid off as a result of Energizer's transfer of its IT responsibilities to Microsoft, although it was unclear how many jobs were involved.

Energizer is looking "to tap into the skill and scale of a larger organization," and by doing so, be able to more quickly roll out new technologies and focus more of its efforts "on new opportunities to apply technology to the business instead of the day-to-day status quo tasks," according to an internal memo from Randy Benz, vice president and CIO at Energizer. Energizer executives did not respond to requests for comment.

Historically, Microsoft has been absent from the cut-throat service provider business, although it has offered some services through its consulting division. It's a challenging business, with high labor costs and constant price pressures, compared with the product business, where Microsoft is naturally more familiar, experts said.

Energizer deal is called a 'project'

Mike Adams, general manager of Microsoft's IT business, would not characterize the deal as an IT services offering, but rather as "a project undertaken on the behest of the customer."

"They came to us and asked us to help solve a problem," Adams said. Neither he nor the Energizer memo said how much the outsourcing deal was worth.

There are no other customers currently lined up for similar services. The outsourcing arrangement, which has no specified end point, operates out of Microsoft's IT department, and uses the same staff members who run Microsoft's internal operations. The company often touts its own global enterprise, which supports 75,000 employees, as a giant test bed.

Adams said he was uncertain if there would be any Microsoft employees based at Energizer, but the documents state that in the company's largest locations, Microsoft employees will work on site during normal business hours. In small locations, employees from local Microsoft offices will step in to assist Energizer employees when necessary.

Move conflicts with earlier Microsoft statement

Last year, Rick Devenuti, a Microsoft corporate vice president, publicly stated that Redmond was not trying to be an IT services company, but rather, it wants to improve the adoption, deployment and use of Microsoft products. Devenuti is the company's former CIO and now heads its Microsoft Services unit, which is responsible for technology consulting and product support.

Adams, in an interview this week, did not deviate from Devenuti's earlier message, saying that the Energizer project was a long-term learning commitment for both companies. "We have a great deal of knowledge within IT," he said. "There is a great opportunity for our IT group to take the experiences gained working closely with the customer."

But the internal Energizer documents expressly state that the deal is significant to Microsoft as a "future source of revenue" in addition to it being "a platform for reshaping its products to drive down the cost of supporting and upgrading those products across their customer base."

If Microsoft is trying to test its ability to provide enterprise services, it would represent a significant shift in the role and responsibility it is playing with its customers and its strategic partners, who are also aggressively pursuing these opportunities, said Jeff Kaplan, principal at ThinkStrategies, a Wellesley, Mass., consulting firm.

Could alienate systems integrators, partners

And the move would signal a maturity on Microsoft's part, as well as its realization that opportunities for growth are growing thin, added Jonathan Eunice, president and principal analyst at Illuminata Inc., in Nashua, N.H. A Microsoft services business would also put pressure on Sun Microsystems Inc. and Dell Inc., and would be a revelation -- and not a welcome one -- in the systems integrator community, Eunice said.

Others agreed that Microsoft's move into the service provider business will certainly irk industry heavyweights and Microsoft partners, such as IBM Global Services, Hewlett-Packard Co. and EDS Corp., which will likely reassess their relationship with Microsoft should it become a competitor.

Energizer is taking a number of steps to ensure that the arrangement with Microsoft is successful, and to assure end users that Microsoft is committed to the project. For example, the company is phasing in the implementation over time so IT executives can assess the quality of service at each site before progressing to the next step. There are also service-level agreements in place should performance against pre-set metrics fail to measure up.

Massive investment by Microsoft would be needed

Paul DeGroot, an analyst at Directions on Microsoft, a Kirkland, Wash., consulting firm, said he doubts Microsoft would want to develop into a large global services player because the company would have to hire more people to run a services arm than currently run the software business. "I think customers would rather see them focus on getting products out on time," DeGroot said.

One possible reason for entering the services business at this point is that Microsoft will have other opportunities for selling more software in addition to services. With Microsoft inside a customer's facilities, it's less likely they would opt for Linux or products from IBM or Oracle Corp.

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