The Microsoft Reorg – Good or Bad Idea?

By now most of you have at least heard that Microsoft has announced a long rumored major reorganization of the company. It was announced in a company-wide email from CEO Steve Ballmer.

Let me say first of all that I think Mr. Ballmer takes an inordinate amount of grief. I also think that he has a very difficult, although interesting and enviable job. He is running a very large, complex company which has stalled with respect to it’s historical traditional growth.

I also want to say that I think Microsoft has enormous resources build upon, not the least is which is their people. I’ve never met a current or former Microsoftie that I didn’t like or think was really smart. But dealing with the actual company as an outsider has never been easy and the picture one gets of the company’s operations include significant dysfunction–not that that is unusual for a big company.

Mr. Ballmer’s email is fairly long and written in “big-company speak” with a lot of bureaucratic-style prose, which I’m not a big fan of. Frankly it’s a bit hard to understand what his bottom line was in writing it, but I’m going to take a crack at it:

He wants to turn Microsoft into Apple.

Can Microsoft be the next Apple?

Many other outsiders who’ve read the email have come to more or less the same conclusion. Apple has had a great run (like Microsoft before it), but I don’t believe that it’s the right model for Microsoft to try to emulate. Apple has grown into a very, very large company with a very focused strategy and flat organizational model. Their success has been based upon a small number of huge hit products shrewdly tied together with a common user experience and ecosystem.

Now, who doesn’t want Apple’s recent success. And Microsoft has thrived in the past as a “fast-follower” from its very early days.  But that doesn’t mean it’s the best model for Microsoft to emulate from an organizational and strategy perspective.

First of all, for all it’s success I believe Apple is a bit of an anomaly in the annuls of large tech company success stories. It was built very much on the cult of Steve Jobs who held the organization and strategy tight to his personal, exacting vision and no doubt hit it big in the process. He placed really big bets on his own visions and hit not just a home run but a grand slam. However, it could easily have gone another way and in most cases this approach has burnt down the house far sooner. And I’m also of the opinion that Apple without him has likely lost it’s way and will not be able to continue this approach.  I don’t consider this a highly replicable model on how to build a great $100B+ tech company. And Microsoft has a more complex business than Apple, with their fingers in nearly every aspect of the software and technology business.

Now let’s look a little more closely at the specifics of the announced reorg. Mr. Ballmer wrote in the first sentence of his email:

“Today, we are announcing a far-reaching realignment of the company that will enable us to innovate with greater speed, efficiency and capability in a fast changing world.”

Sorry, but I don’t believe it. Mr. Ballmer announces the dissolution of it’s current approach organized around a set of business units each with there own P&L. In it’s place with be one large organization based upon a classical functional approach. It appears that true P&L responsibility will reside only with Mr. Ballmer.

Not too big to fail

If Microsoft was even a $1B company (which would be already a very large software company) this approach might work. But even the current divisions (which are essentially being folded back in together!) are already huge by software industry standards:

Approximate Annual Revenue of Microsoft Divisions

Business Division: $24B

Servers & Tools: $18B

Windows/Windows Live: $18B

Entertainment & Devices: $9B

Online Services: $3B

The problem isn’t solved as I see it by realigning your company to look on paper like the competitor who’s level of success you’d love to emulate. The important thing to compete at the level Microsoft would like to going forward is to beat the competition with cutting edge new products and services. This will require increased innovation. Apple notwithstanding, the classic way to increase innovation is to make organizational units smaller, more nimble and accountable–not the other way around.

That’s a big reason why small startups (with fewer resources) are more innovative than larger companies. I’d argue that Microsoft was already too centralized to be innovative since it’s divisions were already very large tech companies by size in their own right. This new structure is the ultimate in centralization–appropriate for a hundred employee startup. But I believe from an innovation and nimbleness perspective it’s a potential disaster for an $80B company with nearly 100,000 employees. The Apple anomaly notwithstanding, I believe that a company of this size and complexity is fundamentally unmanageable with a centralized structure. As I’ve written before I believe that all companies that grow very big–even the great ones–eventually reach a size where they implode under their own weight. Unfortunately,  I believe this Reorg will accelerate that process and make the company even slower and less nimble.

I understand why Mr. Ballmer took this course. He is trying to knock down the walls of divisional fiefdoms and getting everyone one the same page to execute a focused strategy. But I think that he’s essentially “thrown the baby out with the bath water” and will slow down things even further.

Alternative strategies

So what would I have done? While I rarely agree with Wall Street’s prescription on how best to manage companies (which usually revolves around extracting the highest short-term value), I think that many on the Street have  it right this time. I would break up the company into smaller more focused companies with the aim at unleashing the innovation potential of all those smart employees.

There are good arguments against a breakup. There are no doubt strong synergies between various elements of the business, as well as big brand power. But in my opinion a company at this size becomes essentially unmanageable in the traditional sense. Plus, the brand has been damaged to the extent that the company is viewed largely as an old fuddy-duddy which represents the past in the tech business. Although still wildly profitable, the company has been floundering for a while with respect to what the future of computing will bring. The long term outlook at Microsoft overall appears quite negative and has for a while. At this point,  I believe that the potential benefits of smaller, focused independent companies exceeds what would be given up and significant value could be created.

Short of breaking the company up, I would have at least broken the company into even smaller business units, pushing decision-making and P&L responsibility down much further than it is now and giving innovation a chance to rise out of the bureaucratic weeds.

What do you think about this highly interesting and controversial move by this tech bellwether?  Post a comment below with your own opinions on Microsoft’s latest strategy.

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