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How To Face Off Against Microsoft


Think of it as the tech industry version of a preseason football scrimmage. On May 10, Intuit Inc.'s (INTU) top 40 managers decamped from their Mountain View (Calif.) campus for a hotel in nearby Palo Alto. They were divided into two groups: one representing Intuit, the other archrival Microsoft Corp. (MSFT). The Microsoft team came up with a plan of attack against Intuit's small-biz accounting software, QuickBooks. Team Intuit responded. Throughout the day, the mastermind behind the event, QuickBooks General Manager Brad D. Smith, sent out mock press releases with titles such as "Microsoft slashes prices," forcing both teams to scramble.

Smith's goal: to train Intuit managers to handle the equivalent of football's no-huddle offense. "You've got to be able to go out, read the situation in real time, and have a set of scenarios in your back pocket," says the 41-year-old, who attended West Point and worked at PepsiCo Inc. (PEP) and check processor ADP. "The decision-making power is out in the front lines because that's where the action happens."

On Sept. 7 the role-playing becomes reality. Microsoft is expected to release a new software product, Microsoft Small Business Accounting, in a direct attack on QuickBooks. The giant is angling for a chunk of the $600 million small-business accounting market dominated by Intuit. Two months later, Intuit will respond with a new, improved QuickBooks, code-named Denali. The outcome is crucial for Intuit since the QuickBooks franchise accounts for more than 40% of its revenues. Indeed, this is the biggest threat from Microsoft since it took aim at Intuit's Quicken checkbook software in the 1990s -- a brutal battle that Intuit eventually won.

It's also a critical moment for Intuit Chief Executive Stephen M. Bennett. After arriving five years ago from General Electric Co. (GE), Bennett took a company with a stellar reputation for customer relations and focused intensely on execution, increasing revenues from $801 million in 1999 to $1.8 billion last year. Operating margins jumped from 15.6% to 25.7%. Yet this is the first serious new threat from Microsoft with Bennett at the helm, and he's eager to prove himself. "I knew they were coming when I took this job," he says. "And I can see the whites of their eyes now."

His strategy: keep doing the things that have made Intuit successful, with a surprise or two to knock Microsoft off balance. Intuit is known for its easy-to-use products. Now it's simplifying the user interface even more and adding sophisticated features in higher-end versions, such as improved auditing capabilities. One surprise came on Aug. 24 when Intuit, at Smith's urging, broke with its long-standing tradition and preannounced the new QuickBooks package. Smith wanted customers to know Intuit had something right around the corner when Microsoft launched Small Business Accounting.

Microsoft brings potent weapons to the fight. Many small businesses already use its Excel spreadsheet for accounting and Outlook for client management. While Microsoft has been selling accounting software to small businesses for several years, this is the first time it has designed a product specifically for them -- it even hired cultural anthropologists to learn their ways. The results struck a cord with bookkeeper Mae Farrow of Ironwood Self Storage in Idaho Falls, Idaho. She switched to the test version of Small Business Accounting because it's more sophisticated, offering double-entry accounting rather than the simple checkbook-style process in QuickBooks. "I do not enjoy using QuickBooks because it was not made for someone who knows what they are doing with books," she says. Microsoft officials declined to comment prior to their announcement.

There's enough doubt to make it a lively contest, but analysts are betting on Intuit. Most believe Intuit will beat back the challenge thanks to its intense focus on the market -- while Microsoft is spread out. Intuit has been catering to small businesses for a decade and responding quickly to their shifting needs, plus it has a network of 200,000 accountants who recommend QuickBooks. As a result, Intuit has an overwhelming 74% market share at retail and 3 million customers.

One of QuickBooks' key advantages is its SimpleStart version. At a cost of just $99, it's aimed at first-timers such as Leslie Anderson, owner of classic car dealership Blue Oval Ranch in Salem, Ore. Thanks to its simplicity, the software saves her 10 hours a week on bookkeeping. "I needed something I could just let do the work for me," she says. Intuit's lock on the smallest businesses, like Anderson's, seems likely to hold up, since Microsoft's product is expected to run $200 and is crafted for larger and more sophisticated outfits. Landing customers when they start out gives Intuit a better chance of keeping them as they grow.

Small-business accounting software has been Bennett's pet project since he became CEO in 2000. Sales were solid, but he knew they could be better. "We were fat, dumb, and happy," he says. So he used QuickBooks as a model for how Intuit could improve. He even put in two stints leading the business unit.

When Bennett was hired, there were only two QuickBooks products, Basic and Pro. But Basic was too complex for companies with just a few employees, and Pro was too constrictive for companies with more than 20 staffers. He has since added 21 versions, including one for companies with as many as 250 employees, packages for particular industries, and SimpleStart. Analysts say this strategy has put Intuit in a much stronger position for a fight with Microsoft. "If I'm a small business, I know I can grow with Intuit. They have a road map," says analyst Mika Krammer of market researcher Gartner Inc.

"A PASSIONATE LEADER"

But Bennett knew he needed to do more to beat back a frontal assault from Microsoft. When he learned last November that Microsoft had a QuickBooks-killer in the works, he launched a series of strategy sessions aimed at beefing up the features in Denali and coming up with an aggressive marketing push.

Bennett's smartest move may have been picking Smith to run the campaign. Smith had proved himself by boosting Intuit's tax-software business, TurboTax, in just one year at the helm. After customer research showed that only about a quarter of tax filers were comfortable using software to do their taxes, he went after first-timers through marketing outreach partnerships with hip-hop impresario Russell Simmons, retailer Best Buy, (BBY) and travel site Expedia.com (EXPE). The result: Unit sales rose 27%, and Intuit boosted its market share from 70% to 78%.

Smith, a fast-talking, self-described "hillbilly" from Kenova, West Virginia (pop. 3,500), contrasts sharply with Bennett's controlled GE style. Bennett knew he had a good strategy but needed a passionate leader to rally the troops. "Brad is one of the best I've ever seen at winning the hearts and minds of employees," he says. When Bennett asked Smith to run QuickBooks in May, Smith didn't hesitate. "Anytime there's a scrap out there, I'll sign up for it," he says.

After he took the job, Smith dove right in. At a July 20 staff meeting he gave every QuickBooks worker a copy of a children's book, The 300, recounting the tale of how 300 Spartans fought off a Persian army of thousands. Reading the synopsis of the battle on the back cover, he paused, shivered, and said: "I feel ready for a group hug!" to applause and laughter. Smith displays the book and a small Greek action figure in his sparse office. "Yes, it's Microsoft, and their assets look vast. But this is Intuit. We know what we stand for, and we've seen them before," he says. "So they can bring it on."

ROUND SEVEN

Indeed, Intuit has seen Microsoft many times before. They've had six previous head-to-head contests -- all of which Intuit has won. The last time the two tangled, it was over tax-preparation software. After much anticipation, Microsoft released TaxSaver in late 1999 but withdrew from the market in March, 2000, before the tax filing deadline. Despite its brand name and marketing power, it had won only 4% market share.

It's hard to believe Microsoft will do as poorly this time, but early signs are that QuickBooks will prove hard to dislodge. Farrow, the self-storage proprietor who's switching to Small Business Accounting, acknowledges that four companies who use her to do their bookkeeping are sticking with QuickBooks. Steven Menasche, owner of martial arts studio Hapkido Institute in San Francisco, thought about switching from QuickBooks because he liked the idea of integrating Microsoft accounting software with Microsoft's Outlook e-mail and other products. But he balked in the end. Some technical glitches in the beta version factored into his decision. Even more important, his wife, who has done consulting work for dozens of small businesses, is "fluent" in QuickBooks. "If I went with Microsoft, she couldn't help me," he says.

That kind of grassroots popularity might be Intuit's biggest edge. According to Intuit founder Scott Cook, now chairman of its executive committee, when Bill Gates proposed a merger with Microsoft in 1995, he told Cook: "I can copy your products, but I can't copy your word of mouth." Ten years later, it's still true. And that bodes well for the home team.

By Sarah Lacy in San Mateo, Calif., with Jay Greene in Seattle


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