Microsoft CFO Chris Liddell (left) talking to the Hon. Don McKinnon ahead of his speech to a Trans-Tasman Business Circle lunch in Auckland yesterday sponsored by CPA Australia, Westpac and the University of Auckland Business School (of which Mr Liddell is a benefactor). The Seattle-based CFO - a Rugby Union director - joked that our national team's resent results were promisigly "counter-cyclical". (Photo: Chris Keall).

Microsoft's Kiwi ex-pat Chris Liddell says just three months ago, things “still looked like they could get really scary”. Now, the clouds are parting. But the post-recession world won’t be the same as before.

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“Just two or three months ago, the Dow and the major indexes were tracking as they had during the Great Depression,” Microsoft’s Kiwi ex-pat CFO, Chris Liddell, told an Auckland audience at yesterday’s Trans Tasman Business Circle lunch in Auckland.

Now, a global meltdown is much less likely said Mr Liddell, who credits the disaster aversion to the “massive, co-ordinated global action” from various governments.

“The worst is probably behind us, but were probably going to scrape again the bottom until time in the next calendar year,” said Mr Liddell.

New Zealand and Australia have been remarkably resilient in the face of the worldwide downturn, Mr Liddell said.

“I know there is pain out there and the asset bases have gone down, and companies have gone out of business,” he said. “But compared to most countries I follow in the world, this country and Australia have come through the last 12 months remarkably well.”

The Microsoft CFO is better placed than most to comment on the global mess.

While his company has taken its share of knocks during the economic crisis, it remains one of the most profitable enterprises on the planet. The most recent Fortune 500 list places Microsoft at number 35 in annual revenue, with turnover of $US60.4 billion last year; in profitability the company was third, making $US17.7 billion last year.

Global reset
And as its chief financial officer, Mr Liddell is constantly monitoring the economies of dozens of countries.

The good times are not coming back, he said, at least not any time soon.

“We’ve been living through an economic paradise in the past decade that we’re unable to replicate in the next decade,” he told the Auckland audience. The “boom” was caused by overheated consumer borrowing.

“Now we’re going through a ‘global reset’. It won’t be as bad as we thought six months ago,” said Mr Liddell.

But once we get out the other side, things won’t be as good as before.

Mr Liddell said there were three possibilities for a post-recession world. The first is that the globally economy will return to the go-go growth of the past decade. This is “unlikely” in Microsoft’s view.

The second is that the economy will return to the trajectory it would have been on without the worldwide credit-binge. Mr Liddell said this was the best-case scenario we could hope for, but not something his company could back on.

Meet the new normal - worse than the old normal
The third possibility is what Mr Liddell called “the new normal”, a phrase coined by Mohamed El-Erian, chief executive of Pimco - the company that advises Microsoft on where to place its $US30 billion in cash and short-term investments.

In short, the “new norm” means society, politicians and business having to adjust to a lower-growth global economy, at least for the next two or three years, and maybe a lot longer.

Microsoft is realigning itself for a possible five to ten years of lower growth. People and companies have been scarred by the crisis, and will be wary of spending even once fundamentals improve.

That means all companies need to batten down the hatches - though not in all area.

In Microsoft’s case, the company had enjoyed 10% to 15% growth for the past five years or so, Mr Liddell said, with expenses growing at the same rate.

But with the meltdown, Microsoft suffered the first ever decline in sales in its 35 year history.

The company reacted by laying off 5000 or its roughly 100,000 staff worldwide, and implanting tough cost controls. Many analysts credited Mr Liddell for moving quickly. All up the CFO has cut op-ex by $US3 billion a year.

But while his own division, and others, were trimmed, Mr Liddell said he left Microsoft’s $US9.5 billion annual R&D effort untouched (although some business units around the margins, such as the games software division, have been shuttered or hollowed out, and some products dropped altogether.)

Part of the “new norm” is that companies who innovate will be able to steal market share from competitors - prospering by taking a bigger share of the smaller, post-recession pie, and positioning them for larger share still as things start to expand.

The one-time Carter Holt Harvey boss said he he'd also endeavoured to bring the concept of "operational excellence" - which he'd initially thought more applicable to his roles in the manufacturing sector - to software and services.

That meant delivering projects on time.

As evidence of this push, Mr Liddell said Microsoft has launched 110 products over the past 18 months, including headliners such as its new search engine, Bing.com, and Windows 7.

Studying the Great Depression
The CFO said Microsoft has spent a lot of time studying companies that survived the Great Depression and other economic crisis. One constant was a focus on innovation, said Mr Liddell. A second was a focus on cash.

Mr Liddell elaborated on his study of earlier recessions during a July 30 briefing in the US, telling analysts: "... one thing I thought was interesting was how market share affected companies during the Great Depression.

"If you go back to 1929, the top 207,000 companies in the US - essentially all the companies that were measured at that stage - had revenue of $68 billion.

"During the course of the next four years, as the economy contracted something like 30% to 40%, revenue shrank to $US31 billion, and 139,000 companies survived - I don't think obviously it's going to be as drastic as that here, but it's interesting how that shrank.

"Over the next four years, as the economy started to recover, albeit at a slower rate, and that even by '37 it wasn't back to '29 rates, companies started to obviously come out and mature, and revenue got to $US61 billion.

"If you look at the revenue per firm, what you see is it shrank from $330,000 per firm, to $220,000 - clearly the economy contracted faster than the number of companies that survived it - then, as you came back out, even for a lower level of economic activity, the revenue per firm went up."