Stephen Elop is the new president of Microsoft's $16.4 billion-a-year business division, and he understands as well as anyone that Microsoft may have its work cut out for it to keep Office's crown in the online era while continuing to grow the rest of the division (CRM, ERP, SharePoint, etc.). But that doesn't mean there's a sharp right turn for the powerful division's strategy any time soon.

Elop, who's recently from outgoing Microsoft vet Jeff Raikes, appears at first blush the ultimate outsider replacement to Raikes' ultimate insider. Before joining the company, Elop was unconvinced of Microsoft's approach to services -- he thought it was "cheesy" and backwards-looking -- and accepted as fact that Microsoft wasn't an innovative company. His recent background at Macromedia and Juniper focused on the Internet and networks, not business software.

However, beneath that is a former CIO and engineer by trade who in a few short months has gone from skeptic to believer. "When you actually talk to customers, just about all are saying there are some things I need on premises, some things I need hosted entirely within the cloud, and by the way I want all of those things to work together," he said in an interview this week. That philosophy is the core of Microsoft's "software plus services" strategy: services are here to stay, but isn't by any means dead.

It's clear, though, that while Elop buys the idea that customers want both choice and combination of software and services, the wind is blowing in the direction of services, and Elop wants Microsoft to accelerate its pace toward embracing them. Microsoft CEO Steve Ballmer recently asked Elop what he thought he should stand for at Microsoft, and Elop knew he had to stand for generational change, a transition into the software plus services era."There's very much a pressure that I'm applying that's like, 'Let's go'," he said. "All great companies, any great company you can name, has necessarily had to make those generational leaps."

Elop seems particularly excited about technologies like Live Mesh and other Web-based application platforms that Microsoft chief software architect Ray Ozzie and his secretive group of engineers have been working on for the last two years, and which will likely begin to finally see the light of day in October at Microsoft's Professional Developers Conference. He thinks they could transform Microsoft's business and productivity applications. "As the single largest application vendor in the world building on those platforms, that's something that we fully intend to embrace," he said.

The next versions of Office and SharePoint will have major services components, according to Elop. In an early nod to those plans, Ballmer on Wednesday said that both would have social components when they are released. Both Elop and Ballmer said the public should expect more news on the future of Office and SharePoint in coming months. Though it's not services related, Elop hinted that future versions of Office could also employ multi-touch, a feature shown off in recent early demonstrations of the next version of Windows, 7.

So why haven't we seen a Web-based version of Office yet, while and others have already planted their own flags in the ground? "Microsoft does a pretty good job of trying to deliver the right things at the right times in ways that are capable of representing the brand appropriately," Elop said, making it clear that he wasn't about to announce anything. "I could go quickly out and do something cheesy or acquire something or whatever and say, hey, there you go, you've got a word on the Web or whatever, but we're taking care of a really, really important franchise and a really important brand. And so, if one were to see a product from us in the Web environment, if that were to happen, their expectations would be at a certain level that is higher than other companies would have."

There's also that little fact that Google and the rest of the online productivity vendors haven't really made any headway as far as big customers go. "For all of the press that these companies are given, saying Google's got that, go find me a company who's adopted Google Apps," he said. "It doesn't exist."

That might be a of hyperbole, but he has a point. Microsoft makes 90% of more than $15 billion annually off of Office, while InformationWeek has struggled in the past to find any examples of major companies or organizations embracing Google Apps whole hog at the expense of Office. Still, Elop said, Google will eventually get those first big reference customers, and it's for that reason that Microsoft can't let its guard down.

It's not that Elop sounds particularly afraid that moving to services will automatically cannibalize the software business. He said that while Microsoft may have struggled with an innovator's dilemma a few years ago, it doesn't now. "What the company's essentially doing is testing and trying and figuring out what makes sense to our customers," he said. "As that comes into focus, we're in a position where we can make the decision that you know what, we're going to break the innovator's dilemma, we have to move forward." The implied conclusion is that by balancing software and services, cannibalization only occurs on the periphery, and Microsoft can somewhat dictate its pace.

While Microsoft bides its time and decides its direction, Elop said, he's watching the Web-based productivity market and would-be competitors like a hawk, experimenting with their products and asking Microsoft's own customers what they're looking for. "It's a new market, so you have to have a high degree of humility and say just because we've done something well before or just because they've done something well, doesn't mean either one of us is going to figure it all out," he said.

One thing Microsoft could learn from its online competitors and apply to its own services is the model of constantly adding new features to keep consumers wanting more. While software like Word and PowerPoint will stay on a multi-year release schedule for now, other services like Office Live Workspaces will add new features periodically.

With Microsoft's love of integration among its products, however, that strategy could pose challenges. "You might have the Office productivity apps on a two to three year wavelength and other things on a ninety day wavelength, and yet, for us, we still need to bring those things together," he said.

The big growth opportunities for Microsoft's business division at this point aren't just services, and are likely the technologies outside of the traditional core of Office as well as new markets: unified communications, SharePoint, and products aimed at underserved consumers and employees. "It's not just about the spreadsheet or the word processor or PowerPoint, it's also about how you can you share, how can you build an environment where all these things come together, or how that experience is extended in different directions," he said, echoing Microsoft's long commitment to integrated products.

Elop called Office a "healthy, growing franchise." However, it's unclear how much of that is due to products like SharePoint in business versus the traditional Office suite with both consumers and businesses. The business division lost $136 million in consumer revenue last quarter, excepting $500 million in deferred revenue that was recognized last year, and that's with increased revenue due to exchange rates. Considering more than 90% of Microsoft's revenue in the business division comes from the Office suite, and most of the other products products beyond the core productivity suite are business-focused, most of that drop in consumer revenue likely came from the likes of PowerPoint, Excel, and Word.

However, according to Elop, Microsoft will keep focusing on ways to against leading productivity scenarios, rather than slashing prices to near nothing, which is far beyond what the company did when it the $70-a-year Equipt suite of Office, security and some free services. Apps costs $50 annually for a supported version, but is free for the ad-supported consumer version. "The things that are cheap and free are appropriately cheap and free," he said. "Good news, headlines, press release, we now have bolding and underlining. Great, cheap and free." The software plus services strategy, if executed well, could be one way to regain that luster.