Satya Nadella, Chairman and CEO of Microsoft, says a multinational company’s license to do business is earned by creating “local surplus” wherever it operates. In this episode, Brad and Satya unpack what this means, how it connects to the company’s mission, the responsibility that companies have to create inclusive growth, and how software is one of the biggest deflationary forces during inflationary times.
Satya Nadella, Chairman and CEO of Microsoft, says a multinational company’s license to do business is earned by creating “local surplus” wherever it operates. In this episode, Brad and Satya unpack what this means, how it connects to the company’s mission, the responsibility that companies have to create inclusive growth, and how software is one of the biggest deflationary forces during inflationary times.
Satya Nadella is Chairman and Chief Executive Officer of Microsoft. Before being named CEO in February 2014, Nadella held leadership roles in both enterprise and consumer businesses across the company. Joining Microsoft in 1992, he quickly became known as a leader who could span a breadth of technologies and businesses to transform some of Microsoft’s biggest product offerings. Most recently, Nadella was executive vice president of Microsoft’s Cloud and Enterprise group. In this role he led the transformation to the cloud infrastructure and services business, which outperformed the market and took share from competition. Previously, Nadella led R&D for the Online Services Division and was vice president of the Microsoft Business Division. Before joining Microsoft, Nadella was a member of the technology staff at Sun Microsystems. Originally from Hyderabad, India, Nadella lives in Bellevue, Washington, with his family. He earned a bachelor’s degree in electrical engineering from Mangalore University, a master’s degree in computer science from the University of Wisconsin – Milwaukee and a master’s degree in business administration from the University of Chicago. Nadella serves on the board of trustees to his alma mater the University of Chicago, as well as the Starbucks board of directors.
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Brad Smith: I'm Brad Smith, and this is Tools and Weapons. On this podcast, I'm sharing conversations with leaders who are at the intersection of the promise and the peril of the digital age. We'll explore technology's role in the world as we look for new solutions for society's biggest challenges. After taking a quick break, we're back with Season Two, and you might say that we're picking up right where we left off. Some of you may recall my turning the tables and interviewing Kara Swisher on our last episode of Season One. Well, today I'm doing it again, this time with my boss by turning the tables on someone who's been a colleague of mine for nearly 30 years.
Satya Nadella: So the question is, what is this next phase of the Industrial Revolution that now equates for the entirety of the world? It can't just be about the global North, but it's the everyone. If that is the goal, then how do you go about it?
Brad Smith: That's Satya Nadella, the Chairman and CEO of Microsoft. If you follow the tech sector, then Satya really needs no introduction. But in this conversation, Satya and I sit down and we talk about Microsoft's mission, its role in the world, the four pillars that we've developed to define what it means, we think, to empower people to use technology to achieve more.
Brad Smith: Satya shares how growing up as the son of a senior civil servant in India shaped his views about the responsibility multinational companies have in the countries in which they operate. And he shares why software can be one of the biggest deflationary forces during inflationary times, a lever if you will, for doing more with less. My conversation with Satya Nadella up next on Tools and Weapons. Satya Nadella, thank you for joining me today.
Satya Nadella: Thank you so much, Brad. It's fantastic to be on the podcast with you.
Brad Smith: Well, I wanted to start, Satya, with something that you wrote recently, and you did something that I love to do. You started with a story. You started with a story from history. We love to say that history doesn't necessarily repeat itself, but it often rhymes. You started by talking about two magazine covers that you remembered from 1975. Tell us what they are and why they spoke to you.
Satya Nadella: No, yeah. In fact, you're absolutely right. History doesn't repeat, but it rhymes. Interestingly enough, going back all the way to the founding of Microsoft in 1975, I found that we were essentially founded and started around a time which sort of mirrors our current times. The two magazine covers were both, there was a Popular Electronics magazine cover, which is the one that very famously our founders picked up in Harvard Square and essentially used that as inspiration to create Microsoft.
Brad Smith: What was the cover of the other?
Satya Nadella: It was Popular Electronics with the Altair. Basically, it just essentially announced the creation of the microcomputer era. So if you look in tech history, that was the time, and it became clear that the PC was going to be inevitable. It took maybe a good 10 years after that for it to really come about as a mass market product. But anybody in tech circles in 1975, you read that magazine and you say, "Yeah, the world has changed." The interesting thing is, the same week the other cover was the Newsweek cover, which had basically this thing about the energy crisis, inflation, and all of the political challenges of that time.
Satya Nadella: So basically it sort of mirrors what's happening today which is, there is technology that's being born, whether it is the mixed reality in metaverse, or AI, or quantum, these are all technologies that are absolutely there are breakthroughs every day, and are going to reshape our industry. But at the same time, we are faced with perhaps one of the biggest challenges that we are going to have, whether it's the energy transition, whether it's the core macroeconomic issues around productivity in the world, the world GDP as we speak is coming down not going up, and then of course the social issues around the world, the geopolitical issues.
Satya Nadella: So the thing that I sort of thought about is, it's no longer possible or no longer advisable to just pick up one of the magazines. You have to in fact, if anything, pick both the magazines, read them from cover to cover and relate the two. In other words, you have to use all these technology advances that we are excited about to actually do something meaningful in the world to solve, whether it's the energy transition, whether it's the economic productivity challenge, or the societal and geopolitical tensions, how do you reduce them? So that to me was the inspiration for the Microsoft of 2022.
Brad Smith: So it is 50 years later, the 1970s really were a hard decade economically as you point out. It's easy to forget, and those of us who perhaps are in leadership positions today were very young then but we have some memory of it. As you say, the world is more complicated. It sure feels more complicated than it was in the 1970s. What do you think technology most has to offer for getting through, say the macroeconomic challenge that we face right now?
Satya Nadella: Yeah. I mean one of the other things, Brad, I've been thinking a lot about is, if you sort of take even modern life, it's all a product of 150, 200 years of scientific, and I'll say engineering progress. That has just been a real explosion of technology that then had real impact in economic output of the world, and then the quality of life people lived. That's sort of really what the Industrial Revolution brought about. And then you say, "Okay, how are we going to get out of this challenge?" We need a new Industrial Revolution.
Satya Nadella: I mean that's sort of how I think about it, because the last time humanity was able to overcome many constraints and improve the quality of life for large swaths of the world was the Industrial Revolution. So the question is, what is this next phase of the Industrial Revolution that now equates for the entirety of the world? It can't just be about the global North, but it's the everyone. If that is the goal, then how do you go about it? To me, I go back and say software. And the reason I say that is because we now know one of the big challenges is, we have to get past the current energy system in order to sort of produce productivity.
Satya Nadella: So in other words, you need a more malleable resource that doesn't consume more energy but if anything it in fact makes the world more efficient and then helps us with the energy transition. So in that context, software to me is the real answer. So whether it is making a factory, let's say by creating a digital twin, reduce waste, reduce water usage, and reduce power usage so that it's more efficient, that's something that software tools can do. Oh, the other thing for example. I had not realized this, but when I think about the call to energy transition is going to be essentially trying to compress what happened in chemistry over 200 years to maybe 25 years. And if that is what needs to happen, then basically computational chemistry needs to be super accelerated. So those are the kinds of things that I feel we now need to bring to the world so that we can help ourselves tame some of the real constraints that both our society and our economy, and the globe, and the planet face.
Brad Smith: The other thing that's interesting about this current time is, say in the United States and Europe in a way that no one has experienced since the 1970s, people are talking about and worrying about inflation. You've tended to say that in the time of inflation technology is the one thing that can help redress it. It's a deflationary force in an inflationary economy. What do you mean by that?
Satya Nadella: Again, take something like what's really happening today, take the public cloud. Cloud infrastructure for a unit of compute produces more output than any previous era of computation. That's sort of one. So it is deflationary in the context of just computation and its usage. Then the question is, where is computation used? Computation is used to do automation, to drive productivity of people and labor. So if that is the case, then what you have is two things. One is a more efficient use of digital technology and delivery of digital technology, and its use will increase capital efficiency on one side. And then the second side it'll improve labor efficiency or labor productivity.
Satya Nadella: So to me, that's why I think fundamentally technology is the deflationary power we have, again, to fight the inflation that is raging today. Even take the energy point, which is if energy prices are going up, and your consumption of say compute is going up, then the thing to do is to really get on the efficient frontier of compute. And that's one of the reasons why I think public cloud and its use across economy across the world, in fact particularly in Europe right now, it's going to be very critical.
Brad Smith: The other thing that I think is interesting is, at one level we're dealing with what feels like a sudden and temporary phenomenon, this inflation, but at another level as we've been looking at data inside Microsoft, we really see that the world has reached an inflection point in the global North for demographics. Working-age populations are no longer increasing. In fact, in four of the G7 countries it's going to decrease, and this is really going to be the rest of this century. So if we're going to have fewer people on which to rely, we're going to need more technology and figure out how to harness it more effectively.
Satya Nadella: No, a hundred percent. And in fact, that's one of the reasons why even skilling becomes even very important. Which is, what does it mean to teach maybe even an aging demographic new skills? Because the reality is people are going to participate in the labor force a lot longer than they previously did, but the skills required to participate are rapidly changing. In fact, one interesting example I came across was, I was recently in the UK and meeting with a group of people who manage essentially the airport operations and they were telling me ... In fact, I met a fireman who is now a Power Platform certified app creator. And he went on to describe how someone else who was also trained on Power Platform went back home and showed their grandchildren a Power App they created. He went back, and his grandchildren couldn't believe that the grandfather was building apps. But that's the type of new skilling, which is not just about everybody needs to graduate with a computer science degree. I think that's one of the fundamental things that we would have to all understand is, "Hey, there is a way for us to teach digital skills where the entire population, the entire labor force, can participate." And that's another thing that I think in not only in the global North, but all over the world it's going to be very required.
Brad Smith: One of the things that I found fascinating, Satya, when you and I first really started working together closely eight years ago, was this almost intuitive sense you had for how people in government think about the world, about the private sector, from having grown up not just in India in another part of the world, but having grown up as the son of one of the senior civil servants in India. Can you say a little bit about the impact of your father on the way you look at the world?
Satya Nadella: Yeah, no, for sure, Brad. I mean growing up in India, and as you said as a son of a civil servant, one of the things that you grow up with, quite frankly, is a bit of skepticism around multinationals. If you think about it, India was colonized after all by a multinational company, the East India Company, and that weighs very heavily in the psyche of the entire country. As a civil servant, you are fundamentally trained to be skeptical about companies, and private enterprises, and what they may or may not be doing for you and your country. And so I've always felt that in today's world, the only way to have a license to operate around the world is for a company to be able to see these skeptics in the eye and prove to them that you are creating local surplus. I just don't see how in 2022 let's say Microsoft can have a license to operate in any part of the world if we can't fundamentally prove to the local politicians, and officials, and the community at large, that we are helping improve the productivity of their small businesses. Make the local multinationals from that region globally competitive because of some input we have given them, the public sector more efficient, the health outcomes are getting better because we are helping there, or the education outcomes and the skilling outcomes.
Satya Nadella: That to me, is what I look for wherever I go to, whether it's any region in the United States, if I'm in Atlanta and I need to go meet the mayor of Atlanta, I need to look at all that data and make sure we can actually quantitatively prove that's the case. Or if I'm in Istanbul, or I'm in Rome, that's going to be the same formula because I think Microsoft's fundamental ability to operate, I would even call it a responsibility as a multinational, is to create local surplus in every country and community we operate in.
Brad Smith: You've basically created I think a rallying cry inside the company. In effect saying, we need to create more profit for other people than ourselves.
Satya Nadella: That's right. I mean in fact, that's the only way to create long-term profit for yourself. The way I interpret the role of a private company in a capitalist society is to be able to ensure that you're one, competitive, and two, that you are creating surplus all around you that ultimately leads to your own profit. Because otherwise, if all you are doing is you are very profitable and everything you touch around you is not really, then that's not a stable situation. You may get away for it for a couple years, but long term why would you have license to operate anywhere?
Brad Smith: One of the interesting things about the tech sector is, it's not only an industry that is characterized by lots of innovations, lots of diversity and products and services, but in fact diversity in business models. How do you think about the business model dimension of the tech sector?
Satya Nadella: Yeah, it's a great one. I think a little bit what happens today is people just say, "Oh, that's big tech." I think that one has to really get much deeper and in fact the sophistication with which especially policy makers around the world study the nature of digital technology, and how they even think about their policy and their use of it, I think will determine how countries do and communities do. In fact, there's an economist out of Dartmouth whom I studied, did this longitudinal study of the Industrial Revolution and the spread of the diffusion of technology. Basically the conclusion there was, those countries that were able to import new technology and then intensely use it to create more technology got ahead. And those who did not import new technology and figure out how to intensely use it to create more technology were left behind. So if I sort of take that metaphor, in today's world I think digital technology has two uses. One is as a factor of production, so that means you use this technology to produce more technology. Public cloud is a great example of it. Cloud infrastructure is no good if you don't use it to create something, productivity, efficiency, new software products, whatever the case may be. But it's mostly like, it's kind of like, energy source. It's an input for the world's output is how I think about it.
Satya Nadella: So a lot of what Microsoft does in the core, whether it's start-up productivity software, communication software, or cloud infrastructure, is all databases. These are all inputs so that the next energy company is more efficient, or a retail company is doing more, or what have you, or even the public sector is more efficient, so that's a factor of production. There's also another role digital technology is increasingly playing mostly as a factor of distribution. In other words, its marketplaces. So if you think about what app stores do, what search engines do, what social media sites do, that's all about being able to bring demand and supply together, or e-commerce.
Satya Nadella: That's also got a role to play in an economy, because after all it's about efficiency in connecting supply and demand. But my thing is, you have to have a real balance. If the entire economy fundamentally is driven by digital companies that are making high profits, or all these middlemen, that's not a healthy one. So you have to have balance of, "Hey, where is the factor of production companies? How are they being used to drive the overall economic output, and the folks who are just marketplaces?" So I think understanding those distinctions and then thinking about how each country's policies help in some sense create more output, digital output, in that country, I think is going to be very important going forward.
Brad Smith: About a month ago you sent out your annual letter to shareholders, and you very much focused on not just the sense of responsibility but the four pillars that we've worked hard to develop under our mission statement, inclusive growth, trust, fundamental rights, and sustainability. Can you share a little bit about how you see these pillars connecting to our overall mission statement of empowering people, empowering every organization and person on the planet to achieve more?
Satya Nadella: Yeah, no, absolutely. In fact, one of the definitions I like of what's the purpose of a firm is from Colin Mayer, who's an economist at Oxford, where he talks about the social purpose of any company is to create solutions to the challenges of people and planet. Ultimately, there are complimentary faces in that. Right? Which is, you have to be a profitable enterprise, otherwise you should sort of shut shop and give the money back to the shareholders. At the end of the day though, your core business model, your core operation, has to be something that's creating a solution to one of the challenges of people and planet.
Satya Nadella: So in that context, our mission of empowering every person and every organization on the planet to achieve more fundamentally is about driving economic growth by using digital technology as an input all over the world. I mean as I said at the very beginning of our conversation, in a world which is not even growing at 2% what is most needed is true economic growth. And my hope is that as a percentage of GDP, digital technology will only go up, but that going up needs to translate into the overall pie growing. So that's I think the core responsibility Microsoft has, which is in any country, in any industry we participate in, how is that industry getting better, and more efficient, and more productive?
Satya Nadella: Then having said that though, it's also our responsibility to make sure that this economic growth is aligned, for example, with the planet. You can't have the next phase of economic growth fundamentally really not help with the energy transition. If anything, it needs to accelerate the energy side, so it needs to be aligned with the planet, it needs to also create more equitable growth. My dream in fact is, whether it's in any labor force, it's not just wages of knowledge workers that is going up, it's also the wages of first-line workers that's going up because of productivity. The global North and the South both are really able to sort of grow so every country is able to participate in it.
Satya Nadella: So more equitable economic growth, even across industries. It can't be about the West Coast of the United States or the East Coast of China. It has to be about every part of the world. And then it also has to be about trust in technology. You can't have technology be pervasive and really have it break. So these are the core pillars for us as we think about ... Don't think of these as exogenous or things that somehow we're going to come at this when we think about ESG. It has to be more about the foundational business model needs to solve for not only the economic growth in the world, but it also needs to be aligned with the planet, create more trust, more equitable growth. And those are the things that at least we think about.
Brad Smith: I'd like to conclude with one last aspect. Every company likes to go tell people about itself. Maybe every person does. Maybe it's part of our human nature, it's how we look at the world. And yet not everything in life is good news. Not everything actually is praiseworthy. When we think about trust, I think often of Ronald Reagan's phrase, "Trust but verify." People have to have the data to be able to look at themselves.
Brad Smith: One thing you've pushed, one thing we've worked on together in a variety of settings over the years, is pushing more transparency. We did it again recently with our diversity and inclusion report. I think we became just the first or second company to provide pay gap data by gender, for example. And we talked about it. We said, "This is something that's going to show that we're not where we want to be, but let's show it anyway." And you have a philosophy about this. Share that if you could.
Satya Nadella: Yeah, I mean couple of things. One is, it goes back even to the conversation we had which is, how do we ensure that long term we as companies can have the license to operate? You have to be able to show the impact you are having on all aspects of it. So whether it is our operations and their carbon footprint, so what we did with our commitments to our own energy transition, and to be able to then track that every year and publish a report that are audited and others can read, that's going to be important.
Satya Nadella: Because without the data, and the metrics, and accountability, I don't think you can make progress. Same is true on diversity. So I think to me, if you believe that trust is about consistency over time, somebody described that that's the definition of trust, then one way to sort of create that consistency is by just having data be transparent about of the core operations of a business. So what you claim you are about then needs to be something that can be inspected. So to me, taking that and then bringing it to all aspects of our operation, I think is super important.
Brad Smith: So to tie this all together, you've been CEO for eight and a half years. I and many others hope that there's quite a number of years ahead. But you're far enough into your tenure that you talk with us on the senior leadership team about what we're building for the future. Each of us has the opportunity to lead a company like Microsoft for, call it a generation. A generation is less than the 30 years that is often used. But you have an opportunity to take what was there before and build something for someone who comes next. How do you think about that? What do you think we are building today? What do we hope it will give to say the leaders of this company in the 2030s?
Satya Nadella: Yeah, that's a great one. I think a lot about what is longevity in business mean? When someone says, "We are a 100-year-old company, 200-year-old company," what does that mean? Where does that sort of come from? And first of all, is it well-deserved even? And I think it comes from that social contract you have with the broader world which is, are you actually relevant in solving the challenges of people and planet? So when I think about what is it that Microsoft needs to sort of be 20 years, 30 years, 50 years from now, it's that, which is we need to be socially relevant.
Satya Nadella: Technologies will come and go, but you need to have that sense of purpose and a core business model which is aligned with the world doing well. So we should do well when the world around us do well. And in order for that to happen, you need to have a culture that allows you to reinvent yourself. Because all the stuff that we talked about, the technologies I love, may be irrelevant even five years from now because the world changes. But the ability for the next management team to sit in this place and say, "Oh yeah. You know what? We know how to reinvent ourselves. We are not going to be stuck in our dogmas of today."
Satya Nadella: But we will. In fact, whether it's the technology dogma, or even the way the world looks at us and the responsibility with which we need to approach our core operations. So as long as we are a learning organization with a real sense of purpose that is aligned with the world around us doing well, I think we'll be great. In fact, I would even claim that Microsoft should only exist as long as it's doing those two things. And the day it ceases to do those two things, there is no reason for any company, including Microsoft, to sort of continue.
Brad Smith: And the nature of market economics is that if a company fails to deserve to exist, it probably won't exist.
Satya Nadella: That is correct.
Brad Smith: I mean that's capitalism. Well, Satya, thank you. You've let me turn the tables on you. We'll turn off the microphone, get back to work, and you can turn the tables back on me.
Satya Nadella: No, thank you so much Brad. It was a real pleasure.
Brad Smith: You've been listening to Tools and Weapons with me, Brad Smith. If you enjoyed today's show, please follow us wherever you like to listen. Our Executive Producers are Carol Anne Browne and Aaron Thiese. This episode of Tools and Weapons was produced by Corina Hernandez and Jordan Rothlein. This podcast is edited and mixed by Jennie Cataldo with production support by Sam Kirkpatrick at RUN Studios. Original music by Angular Wave Research. Tools and Weapons is a production of Microsoft made in partnership with Listen.