Microsoft unveils $2.5B ‘Frontier Company’ to embed AI developers inside customers

Microsoft launches new AI “company”. It won’t be a separate legal entity, and most of its 6,000 people already work at Microsoft. But the $2.5 billion behind it is real, and the stakes are high, given how many of its AI partners and competitors are racing to do the same thing.

The tech giant on Thursday announced a “Microsoft Frontier Company,” which will embed engineers inside customers to build and run AI systems. It will be led by Rodrigo Kede Lima, Microsoft’s longtime sales leader, most recently president of Microsoft Asia.

This practice is known in the industry as distributed engineering, where a company sends its technical staff to work within a customer’s operations to design, build, deploy and implement AI systems on site rather than selling a tool and leaving.

The model was developed two decades ago by Palantir, but in recent months this approach has become the hot new thing in the AI ​​business. Amazon made $1 billion in its engineering program that was rolled out two days ago. (Some inside Microsoft suspect that its rival may have held its breath about what it had planned and stepped up to announce it first.)

Anthropic and OpenAI launched rival businesses in May to include engineers inside enterprise customers. Unlike Microsoft’s program, the OpenAI Deployment Company, as the ChatGPT maker’s business is known, is a truly independent business — majority owned by OpenAI but funded by more than $4 billion in a partnership led by private equity firm TPG.

Similarly, Anthropic has partnered with Goldman Sachs, Blackstone and Hellman & Friedman in a $1.5 billion venture — as yet unnamed — to embed engineers within mid-sized companies, starting with investment firms’ portfolio businesses.

Microsoft is trying to bring them all together.

“This goes beyond what is labeled Forward Engineering (FDE) and will be the largest, most capable, results-driven engineering organization in the industry,” wrote Judson Althoff, CEO of Microsoft’s commercial business, in a post announcing the new plan Thursday morning.

In response to questions from GeekWire, a Microsoft spokesperson called the new initiative “a purpose-built company with its own leadership and financial accountability” but stopped short of calling it a separate legal entity or independent company.

A spokesperson said the organization “brings together more than 6,000 industrial, engineering and AI professionals, drawn primarily from Microsoft’s existing engineering teams and deployed forward,” noting that it “will grow through a combination of internal talent and external hires across engineering, AI, and industrial roles.”

Separately, some consulting roles are among those expected to be affected by a round of layoffs expected next week.

Microsoft won’t say whether the $2.5 billion is new spending or re-spending from existing budgets, or when it’s being spent. The company also hasn’t explained what the new organization means for the future of its existing consulting and services units.

Across the industry, this is happening now because the benefits from AI have proven harder to capture than many companies expected. Businesses across the economy have used tools like ChatGPT, Claude, Gemini and Copilot, but are finding that impressive demos don’t automatically translate into results. Technology is powerful, but implementing it can be difficult within a real company, with its data, rules and entrenched ways of working.

So AI providers have started sending their engineers to work inside those companies and do it themselves, figuring out where AI can help, and then building it into the day-to-day work.

“Having a model alone doesn’t change your workflow or the way you work,” said Marc Nachmann, global head of asset and wealth management at Goldman Sachs, in an interview with CNBC about the Anthropic partnership. “You need people who can integrate technology with what’s happening in the business and implement those changes.”

Major AI providers have many reasons for doing this. Each of them wants to get more businesses using its AI platform in higher volumes. All of them look to drive long-term demand for AI capacity that collectively spend hundreds of billions of dollars to build.

Another big reason: AI models are becoming commodity, cheaper and more similar by the month. Much of Microsoft’s popularity lies in selling the services needed to make AI pay within the company, which is a much bigger market than selling the models themselves.

Microsoft puts privacy and trust as a selling point. Its promise is that customer data and hard-earned information remain customer-only. Microsoft says it will not rely on training its AI models in ways that will provide similar benefits to customer competitors.

And it’s a promising choice: customers can use any AI model that fits the job, from OpenAI, Anthropic, Microsoft, or open source providers, who are locked into using one.

Microsoft CEO Satya Nadella has argued that the company should be able to exchange one AI model for another without losing all the institutional knowledge it has built.

That is his test, as he puts it, whether the business is still in control of its future.

“The last thing any of us wants is a world where every company in every sector assigns value to a few models that consume everything they see,” Nadella wrote in a June 14 story. “If all value is increased by only a few models, the political economy will not tolerate it. There is no public consent for an AI future that covers all industries.”

Whether that vision of adaptive AI models becomes a reality remains to be seen. In fact, there is a risk to customers that the opposite will happen to the way forward engineering is used. Even though they could theoretically replace their competitors’ AI models, working with Microsoft engineers means that their systems naturally end up running on Microsoft’s cloud platform and related technologies, making it very difficult to jump ship.

It is also not clear how new this is to the company. Microsoft already has a large in-house delivery arm – Industry Solutions Delivery, a group that embraces what was called Microsoft Consulting Services – with thousands of consultants and engineers who build and deploy technology within customer organizations.

Microsoft also has programs like FastTrack to help customers roll out its software, and last year it was rolling out teams of “forward-distributed engineers” with partners, including a dedicated practice with Accenture and a $1 billion, five-year alliance with EY.

Therefore, the Microsoft Frontier Company is ultimately less a new company than an innovation that was already being done by a real company, although it is bigger and has a better brand than before.