Getting to Know You
Microsoft dispatches ANTHROPOLOGISTS into the field to study small businesses like yours. Here's why.
By Richard McGill Murphy/Redmond, Wash.

(FORTUNE Small Business) – Stan is a hands-on sort of guy. The entrepreneur's day starts at 7:30 A.M., when he gets into work and checks his e-mail. At 8:30, Stan starts preparing for the daily 9 o'clock sales meeting. The rest of the day is a blur of calls and meetings: Stan's banker, his accountant, his suppliers. The chubby, graying 41-year-old usually leaves work at 5:30 with a briefcase full of reports to read that night. Sometimes Stan goes straight home to his wife and two children. But often he goes out to dinner with a client and doesn't get home until late.

Stan may sound like you, or many hardworking small-business owners you know. But there's one important difference: Stan doesn't really exist. He's a fictional character dreamed up by researchers at Microsoft to help them develop Office Small Business Accounting 2006, a new financial-management application that will hit stores in September.

Like other tech vendors, Microsoft has been making a major play for the small-business market in recent years. The reasons aren't hard to find. Fortune 500 companies are still hung over from the great technology spending spree of the late 1990s. At the same time, all the big tech manufacturers have woken up to the news that small firms now create more than half of U.S. private nonfarm GDP and employ 39% of all high-tech workers, according to the U.S. Small Business Administration. Today's small-business owners are increasingly willing to invest in IT. "Retiring baby-boomers are handing their businesses over to a younger generation of owners, who are more comfortable with technology," says Kevin Gilroy, Hewlett-Packard's senior vice president for global small- and medium-sized-business sales. In 2004, U.S. entrepreneurs spent $125 billion on information technology and telecommunications, up from $120 billion in 2003, according to a confidential AMI-Partners study that Microsoft agreed to share with FSB. And a recent HP survey found that most small-business owners (81%) plan to increase technology spending by 20% over the next two to three years.

The small-business tech market isn't just big. It's also extremely profitable. "There's less discounting, quite frankly," says Gilroy. Yet the sector is still underserved from a technology perspective. Although 93% of all small businesses use PCs, only 42% of those companies are equipped with a local area network, according to AMI-Partners. Only a third of them (33%) use laptop PCs, although that percentage is expected to rise as laptop prices fall.

Intuit currently dominates the $400 million market for small-business accounting software, with an 87% share for its QuickBooks application. Office SBA is a direct challenge to that hegemony. Although Intuit certainly has a headstart, two factors weigh in Microsoft's favor. First, most small businesses still don't use any specialized accounting software. Second, nearly all of them use Microsoft products such as Excel, Outlook, and Word, which integrate seamlessly with Office SBA. It's the browser wars all over again: Microsoft hopes to use its dominance in operating systems and productivity software to take over the small-business accounting space. But Intuit chairman Scott Cook doesn't seem worried. "Our culture is customer in, not technology out," Cook told FSB.

To better understand the software needs of entrepreneurs, Microsoft has been undertaking detailed field studies of small firms all over the U.S. Its executives refer to this sort of qualitative research as "anthropology," a term that has become a popular buzzword at the company in recent years. In addition to the code jockeys and marketing mavens who dominate the upper reaches of the corporate hierarchy, Microsoft employs numerous social scientists, including two credentialed anthropologists, to work on projects such as the development of Office SBA. Their fieldwork is far removed from the popular perception of the anthropologist as lantern-jawed adventurer in baggy shorts and pith helmet, canoeing up the Amazon in search of the proverbial lost tribe. But there is a certain correspondence between Microsoft's research agenda and the work of those old-time anthropologists, many of whom were funded by colonial governments that needed to understand their native subjects in order to rule them more effectively. The modern version of this knowledge-power dynamic is Microsoft, a multinational technology colossus that hires anthropologists who study the natives in order to sell them more software.

Naturally Microsoft doesn't quite see it that way. "It started as a pure research study," says Rajat Taneja, 40, an Indian-born engineer who led the Office SBA development effort. Taneja is a tech evangelist whose passion for accounting software seems undimmed after two grueling years of research and product development. He likes to quote Luca Pacioli, a Renaissance monk who laid out the principles of double-entry accounting in a 1494 treatise that remains relevant to this day (although Taneja also hired 35 CPAs and bookkeepers to make sure that the software conformed with contemporary accounting practices).

Before they wrote the first line of code for Office SBA, Taneja and his researchers observed work processes at dozens of small companies. "We wanted to find out how small businesses use technology and how technology can make them more productive," Taneja says. They watched CEOs, accountants, salespeople, marketing executives, and others as they navigated the working day, always looking for points of "friction," which Taneja defines as "time wasted getting information that already exists elsewhere." (Friction is another popular concept at Microsoft, made famous by Bill Gates' 1995 book, The Road Ahead, a paean to an IT-enabled state of business grace that Gates called "friction-free capitalism.")

At Microsoft "friction" is also roughly synonymous with "Post-it notes." Whenever a Microsoft executive mentions Post-its, you can be sure that he is referring to some inefficient, predigital business practice that a Microsoft application was built to rationalize. Office SBA, for example, will ship with a new version of Business Contact Manager, an Outlook add-on that allows salespeople to access every client's sales and credit history at a glance, rather than laboriously gather information from old invoices and contracts in the back office. "We found that sales and marketing people didn't tend to document their leads properly," Taneja says sorrowfully. "A lot was happening on Post-its and whiteboards."

Taneja recruited a number of real entrepreneurs to test Office SBA in the lab, where "Stan" soon became a generic term for any small business owner. During these so-called usability studies, the Stan of the day would sit in an isolation room, taking the software through its paces under the watchful gaze of researchers, who recorded Stan's every word and keystroke from behind a one-way mirror. Expressions such as "Stan would never use that!" became common in Microsoft debates about proposed features of Office SBA.

"Stan could also be a lady," Taneja says agreeably. Whatever his/her gender, Stan is not alone: He's part of a veritable menagerie of so-called personas (all actors, hired by Microsoft to help flesh out the characters) whose photographs and bios adorn the walls of research labs and offices throughout the company's peaceful campus in suburban Redmond, Wash.

Microsoft divides entrepreneurs into four broad groups, based on their degree of comfort with information technology. Each segment is represented by its own individual persona. At the Luddite end of the spectrum we find "Jerry," a construction contractor for the past 20 years. Jerry is a lean, fortysomething white guy with close-cropped hair and a tight smile that may reflect his discomfort with computers (or with his new briefs.) Jerry uses e-mail because his customers demand it, but he'd rather just call them on the phone or meet up in person. He owns two elderly PCs, one for himself and another for his secretary. Jerry's business is suffering from his lack of basic digital literacy. His secretary complains that her computer is slow, and Jerry is falling behind on billing and scheduling tasks.

At the opposite end of the tech spectrum, "William" maintains six brand-new PCs at his fast-growing financial services practice, all networked on a server. William is an owlish, amiable-looking accountant who bears a passing resemblance to the actor Bill Cosby. William organizes all his sales and marketing contacts in Business Contact Manager, and he employs a part-time IT whiz who prepares reports for him using Access, a Microsoft database application. But William still wants to boost his Internet presence and marketing capabilities in order to compete with local financial services chains.

In the real world most entrepreneurs fall somewhere between Jerry and William when it comes to technology. But tech-savvy entrepreneurs like William make particularly appealing customers because they are growing their revenues at a torrid 12% per year, according to Microsoft research, as opposed to 4.8% growth on average for all the other groups.

Microsoft has often been accused of arrogance and isolation from its customers. Countless critics have stereotyped its engineers as brilliant nerds with limited social skills and inadequate personal hygiene who grew up pounding out code in their bedrooms, dreaming of orcs and hobbits and relating to actual human beings only through the role-playing sublimations of Dungeons & Dragons. In this skeptical view, Stan and his imaginary friends are a logical product of what even Microsofties call the "Redmond reality-distortion field," a parallel universe of insular techies who tend to assume they understand their customers' needs better than the customers do.

On the other hand, Taneja didn't just invent Stan over a couple of beers. And there are sound reasons that a giant technology company would resort to abstractions in order to understand the small business world. It's been some years since Bill Gates last ran a small business, after all. Microsoft today is a sprawling global behemoth with more than 57,000 employees, who collectively generated nearly $37 billion in revenues last year. Unlike Dell and other companies that sell products directly to end users, Microsoft has always sold most of its software via resellers and hardware manufacturers. "We talk to our smaller customers through our marketing materials and website," says Steven Guggenheimer, vice president for small business. Although this indirect-sales model allows the company to concentrate on "innovating great software," as Gates would say, it also creates a wide gulf between Microsoft and its customers. The Microsoft research effort that created Stan was one effort to bridge that gap.

To understand how Microsoft approaches the small-business market, I went into the field with Nelle Steele, one of the company's two staff anthropologists. Steele, 33, holds a master's degree in anthropology from the University of Wisconsin and hopes to complete her doctoral studies there in the next few years. Early in her career she and her anthropologist boyfriend (now her husband) lived in the South Pacific for nine months, studying obesity, cardiovascular disease, and cultural change among Samoan islanders. Today Steele travels the world for Microsoft, studying the way technology fits into people's lives. Her research has taken her into middle-class families in Brazil, Finland, and India (where she discovered that young Indian women love to play computer games). For the past 2½ years Steele has also been pursuing an extended field study of four small companies in the Seattle area.

The firms received between $75,000 and $100,000 total in free Dell computers loaded with Office, Outlook, and business applications such as Great Plains and Business Contact Manager, along with consultants to maintain the systems. In exchange the companies agreed to let Steele observe them whenever she wanted to. She titled her study "Small Business Better Together," because it involved pulling many products together for testing and because "everything you do at Microsoft has to have a catchy name."

Steele is a bubbly woman with long, straight hair, a slightly hippie demeanor, and an infectious love of field observation. She took me to visit a sportswear company called KAVU, which stands for Klear Above Visibility Unlimited. KAVU operates out of a decrepit industrial building overlooking a canal where employees can go kayaking during lunch breaks. Founder Barry Barr, 34, is an outdoor enthusiast who started the company in the early 1990s to market a strap cap of his own design. Today KAVU boasts 16 employees and around $4 million in annual revenues.

Down on the shipping floor, two laid-back staffers complained that their online order-fulfillment software didn't communicate with Great Plains, which KAVU uses for accounting and inventory management, forcing them to enter the same data in two places. Steele took copious notes. And when a delivery truck pulled up outside, she grabbed her digital camera and started feverishly documenting the scene. "The wheels of commerce are turning!" I said brightly. "Totally!" Steele yelled back.

On our way to SSA Acoustics, a small acoustic engineering partnership on Puget Sound, Steele briefed me on some of the friction points that she had discovered while studying the company. Sure enough, they involved Post-its. "Client relations are crucial to this firm," Steele said. "They never want a client e-mail or phone call to go unanswered." But SSA's partners used to write one another's phone messages down on Post-its, which they stuck to the recipient's computer monitor. The notes often blew off whenever the office door opened. Many vital messages wound up on the floor, where Zoe, the office wheaten terrier, would eat them. "Outlook is a really important piece of software for them now," Steele concluded.

SSA's eight employees work together in a smallish office with a bike hanging on the wall and Zoe asleep under the desk of her owner, firm partner Anita Perkins. Soon after we arrived, Steele handed me a notebook and asked me to observe Anita at work. So I stood behind Anita's chair while she fielded a technical query from one of SSA's clients, an architectural firm that was building a hotel in downtown Seattle. The query came in to Anita's colleague Bill Stewart, who forwarded the e-mail to Anita, who spent 15 minutes rummaging through books and blueprints on her desk in search of the answer. It turned out that the answer lay in the pages of a crucial document that had been scrambled by the co-worker who picked them off the shared office printer. "The pages are backward!" Anita told me excitedly. "That's the key to the whole thing!" I faithfully conveyed this friction point to Steele, who took it back to the developers in Redmond. Someday Microsoft may come up with a piece of software that solves this essentially human problem. Meanwhile, the anthropology marches on.