Sunday, July 14, 2013

Microsoft Reorganization Falls Flat

Microsoft at its worst is an arrogant, tone deaf company feasting off its OS monopoly and the ubiquity of Office in corporate settings.  In recent times, however, even I thought they were being maligned too much by analysts, who thought that they had no reason to be in the search business.  They've made some good progress coming out of nowhere.  I really do want to feel better about this company.

Instead, the recent announcement about another corporate reorganization made me feel that this company is its own worst enemy.  A company's lack of market place vitality almost never gets solved by a reorganization of an existing portfolio.  Here is my first clue that this announcement spells trouble:
                                                                                            credit: Getty Images
This is the CEO who wrote the 2,700 word memo communicating the reasons why Microsoft was going to re-energize itself and its customers with a reorganization that would unleash "One Microsoft."  One small problem: this man looks incredibly tired, bored, and devoid of any energy and enthusiasm for the message he is delivering.  This is not a man who is going to take names; he badly wants to take a nap. He doesn't believe in what he is preaching: a Chinese menu of platitudes and buzz words.

By contrast, my wife and I went to a movie at the independent Uptown theater in Minneapolis last weekend. With the trailers, there was a b&w, silent animated commercial that moved with incredible pacing.  It drew the viewer in, even though it might not have been evident to all what the trailer was about.  It was an Apple ad in the style of the "Designed in California" campaign.  I own no Apple products, but I loved the trailer.  Contrast this with the image to Mr. Ballmer's right: static, cliched, tired. This must have been a product of the pre-reorganization marketing department.

To demonstrate that most of the press couldn't make anything much out of this announcement, check this headline from the Wall Street Journal, "Steve Ballmer Solidifies His Grip on Microsoft."  He has no need to do this, having been CEO for thirteen years, being a "friend of Bill," and having done major reorganizations before.  Surely, this motive has to be a red herring.


This chart on Microsoft probably captures the real issue the best: it's a cultural issue, spawned by years of allowing a sprawling, mismanaged organization with misaligned incentives to corrode any incentive to take risks, innovate, think for the long term, and work together beyond one's SBU.

Sure enough, one Gartner analyst puts his finger on an example of this dysfunctional culture,
"It was just ludicrous to see the divisions between Windows Phone and Windows 8 last year," said David Cearley, an analyst at Gartner Inc. IT -0.08% That was a glaring miss." 
Some writers talked about CEO succession.  A better question for the board is this one: should Microsoft continue to exist in its current corporate form, given how badly it has consistently missed industry waves like the Web, tablets and mobile devices?  Can any executive lead such a bipolar organization effectively?  Now that there is one corporate CFO, you better believe that the investment bankers are asking themselves this same question and will be coming up with some ideas.

Microsoft will now have an executive in charge of partnerships and business development.  These are both functions which Microsoft performs very, very poorly.  Anyone can stick a logo on their website saying they are a Microsoft partner at some level: what it means in terms of value to the partner and commitment from Microsoft are a mystery.

Back to the issues of warring internal fiefdoms, Julie Roberts-Green has been given the entire hardware portfolio for Microsoft, an opportunity that could be a blind alley or chimney to the summit. She's got a lot of work to do.  Here's a comment she made to Wired Magazine,
"when ex-Wired editor Michael Copeland asked Larson-Green about replacing Ballmer at our business conference this past May, she was uncharacteristically blunt. “I wouldn't rule it out, but I’m not in a hurry,” Larson Green said. Give me a year and ask me again.”
Wow.  So this reorganization has really got executives who are speaking with "One Microsoft" voice.

I have listened to quite a few large scale reorganization announcements from companies I followed as an analyst.  In the short-term, the only guaranteed yield was executive turnover, followed by middle management malaise.  I can't think of one which, by itself, was a catalyst to the kinds of things Mr. Ballmer talks about in the papers.

It will be interesting to see if the executive compensation philosophy and structures reflect the goals of this reorganization by putting the executives' skin in the game to work together on one strategy (whatever that is) to deliver value.  Look at the next proxy and stay tuned.

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