SteveB’s Retirement Announcement

Posted on August 25, 2013 by halberenson

I’ve been trying to decide how to approach this topic, because in truth I want to write about the future of Microsoft and not focus so much on Steve.  But I might as well put the past to bed first and then write a blog entry on the future.

I hope when historians look back on Steve Ballmer’s tenure at Microsoft they focus on all his positive contributions to the company rather than just his mistakes.  Steve was a key contributor to the success of the company, certainly prior to being CEO and one can make the case that he did a lot of good during his CEO tenure as well.  Ultimately he didn’t return Microsoft to its pre-DoJ glory, and that will always dominate the discussion.

For employees and ex-employees, our biggest beef with Steve will probably turn out to be that he made a great, if sometimes brutal, place to work a lot less great.  And that, particularly in the second half of his CEO tenure, it became a lot more brutal yet cruelly random in how it measured and rewarded employee contributions.  It wasn’t always this way.  In his first few years as CEO Steve went overboard in trying to keep employees happy.  At some point he sensed they’d become complacent, many of us noticed how the parking lots were surprisingly empty at times employees would previously have been working, and sought ways to re-motivate people.  His efforts here seemed to be like grasping at straws, eventually degrading into fear as the primary  way of motivating people.  I don’t think Steve really intended this, but that’s how it worked out.  I’m not sure who this bothered more, those who lived through Microsoft’s glory days or new hires who only experienced Microsoft at its fearful worst.

By the time I left in 2010 I couldn’t find any employee, executive staff included, who wasn’t down on Steve.  One thing that is surprising about his retirement announcement is that employees (particularly senior leadership) seemed to be getting more positive.  The recent reorganization, and the new leadership made up of a new generation and how they were working together, was a positive.  There are also some indications that the era of fear as motivator was coming to an end.  Now we’ll never know if Steve would have regained favor with the employee base.

Steve made plenty of mistakes on the product front, many of them clearly of his own design but not necessarily the worst of them.  Longhorn.  Steve didn’t craft the Longhorn plan, Bill did.  Steve has to take responsibility for it since he was CEO, and he obviously bears responsibility for not making sure the company executed.  Longhorn was a bold plan and Steve took a huge risk in agreeing to it.  Had it succeeded he probably would have gotten the kind of credit regularly attributed to that other company head named Steve.  Instead it doomed his tenure as CEO.  The management distraction in recovering from that debacle, along with the efforts to make up for lost time, led Microsoft to miss the critical transitions of the last decade such as the emergence of consumer smartphones and tablets.

The other big overhang in Steve’s tenure as CEO were the U.S. and European antitrust actions.  Steve’s move from running sales and service to President and then CEO was largely the result of these actions.  Steve was one of the few senior executives who was not a central figure in the legal proceedings and thus had the cycles and energy to run the company.  And after the DoJ settlement, he had to spend a good chunk of his tenure finding a way to settle with the E.U.  And then run the company under the terrible burden of complying with both settlements.  Between the actual restrictions from these settlements and the general caution about antitrust that then pervaded the Microsoft culture, Steve was essentially running Microsoft with one hand tied behind his back.

The truth is, I don’t think Steve gets enough credit for saving the company.  Without him Microsoft probably would now be a footnote in tech history.  Like Digital Equipment Corporation in the 90s, an industry titan that became irrelevant and then quickly faded away.  It would have been easy for Microsoft to turn itself into a cash cow.  Or break up the company.  Or become a niche player.  Or be absorbed into another tech industry giant.  Can you imagine the irony of IBM having purchased Microsoft?

Steve took over Microsoft at its low point and kept it going and growing.  He made a lot of mistakes and then fought the company back from both his own and the mistakes of others.  And from the horrors of living under government imposed restrictions that none of Microsoft’s competitors faced.  When you look at it this way Steve is a hero.  Period.

Steve’s biggest crime is that he’s never gotten Microsoft out of purgatory.  He kept it from sliding in to the depths of hell, but failed to return it to the heaven of industry leadership.  He’s never gotten vision, strategy, tactics, execution, employee engagement, collaboration, communication, etc. to all line up at the same time.  This dwarfs any individual mistakes he’s made, big or small, in terms of how to look at his tenure.  No matter how brilliant the vision or strategy, if you can’t communicate and execute against it then you’ll fail.  And no matter how good the execution, if it isn’t taking you to the right place then you’ll fail as well.  Microsoft under Steve was guilty of a lot of both of these.

I was somewhat surprised by the announcement of Steve’s retirement, largely because I hadn’t heard any recent rumblings about his future.  Two or three years ago I heard something from a very well-connected source that lead me to expect something like this, but as time went by I assumed it was a false positive.  Was Steve forced out?  Probably not.  Was he encouraged to consider leaving earlier than his original timeline?  Perhaps so.

Let me offer a somewhat different perspective on this.  Steve just rebuilt Microsoft’s senior executive team with the next generation.  All functions are now led by individuals that were either middle management or outside the company when he became CEO.  The dinosaurs have all died out, with one exception.  Perhaps Steve looked at this and realized he was the only one left and it was time for him to join the other First Ones beyond the rim.  The future belongs to the next generation, now let’s see what they do with it.

 

Posted in Computer and Internet, Microsoft | Tagged , , | 25 Comments

The value of strategic vision

Posted on August 20, 2013 by halberenson

Yesterday the rumor hit that HTC was working on a Windows Phone variant of the HTC One.  If I could YAWN any louder I would.  This is the history of manufacturer support for Windows Phone.  Take your flagship Android device and six months later, when it is beginning its way down the inevitable curve of decline into mid-range devicehood, put out a variant of it running Windows Phone.  My original Windows Phone, a Samsung Focus, was a warmed over Galaxy S.  It was on the market only a couple of months before Samsung relegated it to mediocrity by announcing the Galaxy S II.  When I excitedly showed the Focus to people they inevitably pulled the Galaxy S from their pocket and showed me they’d had the same hardware for months.  Microsoft was never going to gain traction with this kind of support from device manufacturers, and the manufacturers themselves were about to be blindsided when one of their own took a different approach.

Nokia, in committing their entire smartphone energy to Windows Phone changed the game.  While the first generation of Nokia Lumia phones showed promise, the second generation positioned Nokia (and Windows Phone) on the front lines of the smartphone battle.  Nokia isn’t just producing the best camera phones in the Windows Phone market, they are producing the best camera phones in the phone market period.  And they aren’t running Android on them.  Nokia isn’t just producing a very inexpensive low-end smartphone, they are producing one with better specs than high-end hero phones just over three years ago. And they aren’t running Android on them.

The vendors who gave lip service to Windows Phone such as HTC and Samsung have been pushed almost entirely out of the WP market, and they don’t look inclined to alter their strategies to change that situation.  For HTC and Samsung, as well as others, “the plan” around Windows Phone appears to be to throw a model or two out on the market and move as many units as they can with as little effort as they can get away with.  There is no strategic vision around their participation in the Windows Phone market.  And as far as I can tell, the only reason for them to remain in it is so they won’t have to start over from scratch should WP really take off and becomes a competitive threat to their Android efforts.

It’s time for a little side story.  Back in the 90s I’d do at least two customer tours a year visiting CIOs and other senior IT executives to talk about SQL Server.  At the time a lot of those customers were existing Sybase customers and I was always being asked to justify their committing to SQL Server 7.0 versus Sybase System 11.  Now Sybase had indeed done us a great favor by totally screwing up System 10, but they were promising great things for System 11.  Meanwhile, of course, Microsoft was unproven in its ability to produce a database product independent of Sybase (as even SQL Server 6.0/6.5 were based on the technology licensed from Sybase).  So I would proceed to explain our strategic vision, not just for SQL Server, but around Visual Studio, Data Access, Transaction Processing, Integration of Microsoft Office particularly Excel and Access, Windows Server, and various other technologies.  And I’d end up pointing out that with Sybase you were buying a nice database product but with Microsoft you were buying an overall strategic vision for enterprise computing.  I never lost one of those discussions.

Now let’s imagine a conversation between Nokia CEO Stephen Elop and AT&T Mobility CEO Ralph de la Vega.  Elop presents Nokia’s strategy.  How they are going to build a range of smartphones, each designed to be a leader in its class.  He describes how Nokia intends to be the clear leader in photography on smartphones.  He describes how Nokia is making major investments in higher-level software to differentiate their devices from Samsung and Apple.  He talks about Nokia’s design language and how their devices will be as far from “me too” as any major manufacturer has dared go.  He talks about how Nokia will have the perfect device for AT&T’s GoPhone pre-paid service as well as hero and mid-range devices for the post-paid service.  He explains how Nokia will provide exclusivity, and differentiation, amongst devices (particularly higher end devices) for each carrier.  At the end of all this de la Vega says something like “That’s a great story and we’d love to work with you to make the Nokia Lumia family a strategic part of our offering.  Let’s have our staffs get together and put together a plan for the Lumia to be one of AT&T’s two or three top efforts in the coming years”.

Ok, now HTC CEO Peter Chou comes in for his annual discussion with de la Vega.  Somewhere in the middle he devotes a couple of slides to their next generation Windows Phone device.  He mentions that it is a variant of the HTC One that AT&T is already selling.  de la Vega tells him AT&T is interested in carrying it and that AT&T’s buyer will contact their HTC Account Rep to make the arrangements.  Then the conversation moves on to Facebook and the HTC First, or Last, or whatever other flavor of the month HTC is attempting to differentiate their Android offerings.

Is it any wonder that Nokia is blowing HTC and Samsung out of the water when it comes to Windows Phone?

Let’s now explore another aspect of strategic vision.  One of Microsoft’s observations about the success of the iPhone, and about problems with its own Windows Mobile ecosystem, was that fragmentation of the user experience was a bad thing.  Obviously the success of Android, despite this fragmentation, is a counter-example.  But back in 2008 trying to minimize user experience fragmentation became an important goal for Microsoft, and so Windows Phone was designed to prevent skinning by device manufacturers.  Microsoft would enable extensibility through hubs and other mechanisms, but all Windows Phone devices would retain a common look and feel.  The device manufacturers balked and saw Windows Phone as preventing them from offering sufficient differentiation from their competitors.  Meanwhile Nokia accepted these limits, knowing they could push Microsoft for more mechanisms for differentiation than existed in Windows Phone 7.  And in my opinion, Nokia has validated Microsoft’s vision.

I’m not sure I’ll ever be able to switch from a Nokia Lumia to another Windows Phone because I’m locked in to what Nokia has added in the way of software.  On the other hand, I can pick up a non-Lumia Windows Phone and have no problem at all operating it.    That to me is the best of the world Microsoft wanted and the world that the device manufacturers wanted.  The Lumia family is a highly differentiated set of devices.

The problem for device manufacturers like HTC and Samsung is that their idea of differentiation is so centered around changing the top-level user experience via skinning, an idea that they originated with Windows Mobile and then put at the center of their Android efforts, that they refused to see or invest in an alternative.  And since Windows Phone was never a strategic priority for them, they didn’t have to.

Having a clear and compelling strategic vision counts for a lot in this world.  Nokia has proven that having one, and executing against it, can turn you into the dominant player in a niche.  Next up is for them to prove that the one they have can return them to glory in the larger phone market.  The fact that they have the vision and appear to be executing well against it is a very positive sign in their ability to survive and thrive.

BTW, Don’t let low U.S. market share confuse the issue.  Nokia was never a leading supplier of phones in the U.S., and had absolutely no presence with Symbian-based smartphones.  That they are shipping devices on all four major U.S. carriers, with strong efforts at the two largest, and have any measurable market share at all, is a huge advance for them.  But in any case, pay more attention to the progress they make in faster growing markets.  That’s where their channel and other business strengths should best leverage the product-level work we are all so focused on.

Posted in Computer and Internet, Microsoft, Mobile, Windows Phone | Tagged , , , , , , | 11 Comments

Hope for Windows 8

Posted on August 9, 2013 by halberenson

Sorry for the overly dramatic title.  This is about a surprising recent experience that demonstrates how Microsoft’s vision might just be the right one.

Last weekend my wife and I went into Best Buy to look at cordless phones (you remember those, don’t you?).  She stopped to look for a new case for her iPhone so I wandered over to see what the latest was in the PC section of the store.  A few minutes later I spotted my wife checking out notebooks.  Seriously checking them out.

My wife’s current computing technology portfolio consists of an iPhone 5, an iPad 2, and an HP TouchSmart 520 All-In-One running Windows 7.  The iPhone and iPad are always with her, making IOS her most used operating system.  So imagine my surprise when I walked over and she said “I miss my notebook”!  And yes, she was seriously thinking about getting a new one.

We talked over her usage scenarios.  The iPad would remain her primary mobile data device.  Obviously she wanted Office, including Outlook.  She wanted to really be able to type.  It was going to be used mostly on her lap rather than on a table.  Mostly at home actually, but it would be nice to be able to take it on a trip.  Her iPad can’t hold our entire ripped music collection, it would be nice if this could.  Her iPad (32GB) also can’t hold much in the way of TV shows and movies.  It would be nice if this could, again for the travel scenario.  The form factor should work well on an airplane seat.  And it had to have touch.

The touch point came about rather interestingly.  Because this was a secondary or even tertiary device for her she didn’t want to spend a lot.  She took me over to a line of sub-$500 notebooks and I pointed out they didn’t have touch.  To which she responded “That’s stupid”.  So it was back to the pricier devices.

She asked about the Surface.  I explained that since she was going for more of a notebook, and was keeping the iPad, that the Surface RT probably didn’t make sense.  The Surface Pro made good sense except for two things.  With her key requirement of being able to use it (as a notebook) on her lap, it wasn’t really a good design.  You can do it in a pinch, but I wouldn’t buy one knowing that was a frequent usage scenario.  The other was that even with the recent price cut she’d be pushing $1000 with the Type Cover.

But a little more playing around and things did narrow down to a convertible of some form.  That offered the best option for covering all of her usage scenarios.  We kept coming back to the Lenovo Yoga 11s.  It offers the most positions for matching up with the various scenarios.  She liked the keyboard.  She liked the weight.  She liked the price of $799 (really $750 since you get a $50 Best Buy gift card).  It was more than she wanted, but hundreds less than she had feared she’d need, to spend.  It comes with 128GB, and of course can take an SD card.  So plenty of space for music, movies, etc.  It came with a Core i5 and 4GB, so plenty of horsepower for her needs.

We talked about waiting a few months for the next crop of devices but decided to act now for one reason.  What if Lenovo abandoned the Yoga design?  Again the point that this wasn’t her primary device meant some of the benefits of waiting didn’t really hold that much weight.

We ran over to the Microsoft Store to see if they had any other options, but there was nothing more compelling.  They did carry the Yoga 13, but that was bigger than my wife wanted.  So it was back to Best Buy to purchase the Yoga 11s.

I know of another tablet (this time Android) user who gave their Samsung 10.1″ to the kids and is now carrying around a Surface Pro (and loving it).  He wanted a tablet but missed having the full capabilities of a PC.  Now he has both.

Obviously two data points does not make a trend.  And neither data point suggests that Windows RT has a role to play.  But as people need to replace their existing notebooks, or decide iPad or Android tablets can’t meet all their needs, has Microsoft’s focus on moving the PC platform to a variety of touch-based form factors positioned them for success?

Posted in Computer and Internet, Microsoft, Mobile, Windows | Tagged , , | 16 Comments

Kill your Windows XP systems, before they kill you!

Posted on August 6, 2013 by halberenson

Paul Thurrott just published The Coming Windows XP Apocalypse reminding us that support, including security patches, for Windows XP is coming to an end.  For a more in-depth examination on why you need to run from Windows XP as fast as you can see my blog entry from two years ago.

Last month I experienced just how difficult it was going to be to fully put the nail in the coffin of Windows XP.  I went to the open house for a new hospital and when touring around noticed that their PCs were running Windows XP.  That’s right, a new deployment of XP in a mission critical environment just months before all support for XP ends.  Oh, and a new deployment in an environment with extreme privacy requirements.  In an environment in which malware could quite literally cause loss of life.  I tweeted about this and someone from Microsoft already went off to work on making sure the hospital had a migration plan in place.

No doubt a new deployment of Windows XP is not done because the IT department desired it.  All controversy about Windows 8 aside, Windows 7 is something IT can and does have a love fest with.  The problem is likely ISV software, and support for specialized hardware, that hasn’t yet made the migration to Windows 7.  Or perhaps in this case, the hospital’s parent organization has a migration plan but this hospital was opening before the rest of the organization was ready to migrate.  Let’s just hope they complete the migration in time.

There are a few points about Windows XP usage and what happens when support ends in April 2014 that I wanted to make.

First, the Netapplication numbers Paul used are worldwide numbers.  Netapplication wants $300 to let you filter by country, which I think is fair except that I can’t justify paying them just so I can write a blog article.  Using StatCounter data we see that July 2013 worldwide XP usage is 20.45% while US usage is 11.67%.    Note how StatCounter and Netapplication (37% worldwide XP share) differ dramatically because of methodology.  And the truth is that actual market share may be quite different than either of them report, because lots of systems in business are not used for web browsing (which is how both gather their data).  All that matters is that Windows XP usage is still quite substantial no matter what the actual number or its source.

The worldwide numbers may greatly overstate the situation in individual countries or regions.  For example according the StatCounter Windows XP remains the most used operating system in China at 54.69%.  By contrast Australia is at about 9%.   This also explains why the drop in Windows XP usage appears to be slowing.  In some countries the move away from Windows XP is almost over while in others it has barely begun.  And for the latter, often dominated by pirated copies, it isn’t clear that the loss of support holds much meaning.  Thus they just aren’t moving!

I expect that in places like the U.S. there will be one more major downward move in XP usage before April 2014.  The reason is simple, public company corporate governance requirements will force IT’s hand on the migration.  Risk Management Departments are going to be making this a CEO-level issue as they understand, if they haven’t already, just how much exposure the organization is taking on by using Windows XP after April.  And while not everyone will complete migration by April 2014, they will be well into migration by then.  What we’ll be left with is the millions of personal or small business PCs where the owner just doesn’t care.  And just as there is still usage of Windows 9x out there, there will likely still be some XP usage a decade from now.

One last thing I wanted to talk about was the comparison of the end of Windows XP support to Y2K.  Sorry folks, there is no comparison.  Y2K was about driving off a cliff while this situation is more like stopping maintenance on a bridge.  Cracks will develop.  Bolts will fall out.  Rust will set in.  But it will take years before the bridge actually collapses.  And in the case of Windows XP, as long as security vendors continue to produce anti-malware software for it most cracks will be patched.  Although with bubble gum rather than a weld.  To switch analogies, after April 2014 leaks in dikes will be plugged with fingers rather than properly repairing the dike.  Eventually fingers just won’t be enough, the dike will be breached, and the city washed away in a flood.

I think people are nuts to keep using Windows XP.  I thought so the moment Windows 7 hit the market.  With support ending in April 2014 there are no more excuses.  And I still have hope that, at least in western countries, that corporate migration off of Windows XP will largely be complete by April 2014 or shortly thereafter.  If your organization is not on track, you need to push it to get there.

As for moving individuals off of Windows XP?  Well, maybe the upcoming holiday season should be all about giving your family and friends the gift of modern computing.

 

Posted in Computer and Internet, Microsoft, Privacy, Security, Windows | Tagged , , , | 31 Comments

Fixation on Margins: The Surface RT Debacle Edition

Posted on August 1, 2013 by halberenson

I know you’ve been waiting for a comment on the Microsoft Surface impairment charge ever since Microsoft’s earnings report.  Well, I’m going to give my view of the problem and how Microsoft turned what should have been a shining moment in its transition to a Devices and Services company into a debacle.  There will be no dwelling on the Surface RT hardware (and particularly ARM) debates nor on Windows 8 shortfalls, except for limited reference.  Those things play a role, but I believe a fairly minor role in how Microsoft messed this up.  The problem, at its surface (pun intended for a change), is that Microsoft let a desire for Apple-like margins on hardware cloud its judgment on how to enter the PC hardware business.

The other day a friend of mine made two astute comments.  The first was that the only real problem with the Surface RT was that it lacked applications.  The second was that if Microsoft had given away the millions of unsold Surface RT systems implied by the $900 million write-down then the application problem would have been solved.  So why didn’t Microsoft do exactly that?  That is, sell several million Surface RT systems at bargain basement prices to seed the market?  I’ll get into that as I walk through this story.

Before getting into Surface specifics I want to discuss a general point about Microsoft over the last decade and moreover the last few years as it started the transition to a Devices and Services company.  As a (near) pure-play software company Microsoft has had absolutely enviable margins.  The kind of margins that make for business school case studies.  Put simply the Microsoft software business model is very high fixed costs and near-zero variable costs.  So as you drive volumes higher you reach a point where every sale is nearly pure profit.

Software profits have been so high over the years that they allowed Microsoft to invest in many unprofitable products (or even outright failures) while still maintaining profit margins that were the envy of the entire business world.  In the 90s no one even noticed.  In the 00s they noticed, but were more critical of the lack of new successes than of the margin impact of trying to find one.  In the 10s you are seeing more calls to split or drop all the new endeavors and remake Microsoft as an Enterprise-focused software company, thus returning it to historical margins at the risk of the likeliness that the “Consumerization of IT” will eventually render it irrelevant.

The problem for Microsoft today is that if you transition the company away from its primary revenue stream being sales of perpetual software licenses to a Devices and Services revenue stream you stop being able to hide behind the tradition software license sales margins.  So Microsoft, and I’ll put this very much (and very appropriately) at Steve Ballmer’s feet, is extremely focused on maintaining margins as much as possible during the transition.

Take Office 365 as an example.  Without getting into all kinds of details of the dynamics of the Office business and how a services offering changes them, I’ll just point out that Microsoft is adding a lot of variable cost (running the service) to what used to be a purely fixed cost business.  And the fixed costs (e.g., Engineering) don’t go down at all.  So when you look at the complex set of offerings under the Office 365 umbrella what you see is Microsoft trying to address cost-sensitive parts of the market, value for $ parts of the market, and high-end information worker parts of the market and trying to get the mix of subscriptions to end up margin neutral.  Or at least close enough that when the transition is done shareholders will be happy with the resulting margins.  So far they seem to be on a path to success with this one.

Bing is another case of a focus on margins.  While there are very strategic (survival even) reasons for being in the Search space, the business case is that once you achieve a particular market-share the advertising revenue hits the knee of the curve and you quickly get to very high margins.  So, if you have the money, you can pour immense amounts into scratching your way to that magical market-share (whatever it may be) knowing the eventual positive bottom line impact will be enormous.  If, and it remains a big if, Microsoft hits the knee of the curve on advertising revenue then the many billions spent to get there will quickly be forgotten.  For now they are getting close to a break-even run rate while making good use of Bing as a platform technology.

But Surface and future mainstream device offerings are a far more risky venture for Microsoft.  Before Microsoft announced that it was becoming a Devices and Services company you could look at the Surface and declare it a “North Star” product.  That is, it wasn’t really intended to make money but rather to excite customers and show OEMs the way.  But if you are a Devices company then you need to make money selling devices!  And because devices are very high revenue per unit, they can quickly overwhelm your software revenues and have significant margin impact.  You can look at Apple, and to some extent Samsung, and see that it is possible to get high margins from devices.  And that led Microsoft, which has always had a bit of Apple-envy in its DNA, to fall into a trap.

Microsoft, in entering the devices market, could either go for market share or margin.  They went for margin.  According to IHS iSuppli, the gross margins for the Surface RT were (based on original pricing) higher than the Apple iPad.  And they did that at exactly the same time that overall tablet prices were being driven down by the introduction of 7-8″ devices, often with a subsidized price.    If Microsoft had actually been able to sell several million Surface RT’s at its original pricing then this would have looked like a brilliant move and Steve Ballmer would have been a candidate for CEO of the year.  But it turns out the “go for margin” strategy completely failed.

I’d originally expected a competitive, but not aggressive, list price for the Surface RT that, when combined with a service subscription, made the device seem inexpensive.  Microsoft didn’t do that.  I’d also expected a price in the ball park that the Surface RT came out at with a price reduction once supply became plentiful.  Microsoft never lowered the price.  Actually my main expectation was that after the holiday season Microsoft would effectively lower the Surface RT price by package the Touch Cover with it at the same price as the Surface RT-alone had been for the holiday season.  They didn’t do that.  Instead they maintained the effective price at about $100 more than the iPad through FY13, and then took a write-down as a result of a re-pricing for FY14 that did nothing more than take the Surface RT to the price it should have been at introduction!

The write-down, aka impairment charge, is an abomination in my opinion.  Why did Microsoft take it?  Well, we are back to the margin point.  By re-pricing the Surface RT to where it should have been in the first place Microsoft eliminated the possibility that it would ever be a high margin product.  They could have taken the hit in reduced overall margins for the first two quarters of FY14, which would have been a fair representation of the impact becoming a Devices company is likely to have on the business in the short to medium, if not long, terms.  Instead they pulled the entire margin impact into Q4FY13 and took the PR and investor hit all at once.  This will make FY14 look artificially good.  Most likely from Microsoft’s perspective they hope to attain good margins on Devices in the second-half of the fiscal year and just wanted to avoid more margin discussion until then.  But personally I’d rather see a continual true representation of the impact of Devices on the business quarter-to-quarter instead of using accounting tricks to hide it.

Back to the Surface RT debacle itself let’s focus on the weakness of introduction strategy.  The uniqueness of the Surface RT tablet is that it is (a) tablet for running Metro apps, (b) runs Microsoft Office, and (c) has a keyboard and track pad built into a thin cover.  So basically, along with other Windows RT tablets, you have a tablet that will let you run Office and be more productive on content creation tasks than the iPad or Android tablets.  But at introduction it had almost no Metro apps, and nine months later the library is growing fast but is still not compelling.  So effectively you would pay $100 more (than an iPad) for a tablet that can run Microsoft Office, but can’t run any other applications.

Microsoft Office is indeed a compelling capability on a tablet.  So is a keyboard and track pad.  But, Microsoft missed on the tablet version of Maslow’s Hierarchy of Needs.  Near the base of pyramid that represents the hierarchy is “Run the applications I want”.  A few levels up is “Does real work” (which for many people means runs Microsoft Office).  And the way Maslow’s hierarchy works is that you have to satisfy the needs nearer the base before people care about things more towards the top.  A tablet that doesn’t “Run the applications I want” is a non-starter despite the ability to run Microsoft Office.  And one that requires I pay a premium for the privilege of not meeting my base needs is truly DOA.

Microsoft apparently expected that the Metro application library would grow so quickly that Maslow’s tablet hierarchy would be a non-issue.  But they shot themselves in the foot with their strategy to achieve this.  No, I don’t mean that Windows 8 sucks so app vendors are ignoring it.  On the contrary, app vendors offer near universal support for Windows 8.  The mistake Microsoft made was to assume that support for Windows 8 meant the creation of Metro applications while Microsoft made it perfectly acceptable for Windows 8 support to mean desktop Win32 applications and IE10-tuned websites.  Microsoft gave App vendors (and I use the modern term broadly to also include traditional ISVs and website operators) almost no real incentive to create Metro apps rather than continue down the same path they were on for Windows 7.

Think about Microsoft’s initial spiel to developers:  There are already hundreds of millions of PCs installed that will be capable of running Metro applications (because they are upgradeable to Windows 8).  That takes away the disincentive of the market for Metro apps being too small, but does nothing to incent developers to create Metro apps.  So today there are about 100 Million PCs actually running Windows 8, and perhaps 98 Million of them also run Win32 Desktop apps.  So the real market, the one you can’t reach in other ways, for Metro apps is only 2 million systems.

The reason we have 110,000 Metro apps in the Windows Store is because of the business advantages the Store model brings for small developers.  Such as not dealing with installation, uninstallation, payment/billing, automatic updates, etc.  But for medium and larger developers, the incremental market reach of doing a Metro app pales in comparison to the costs associated with maintaining a desktop application (for Win 7 for example, or for power users) in addition to the Metro app.  So the Windows Store is largely populated by apps from small developers, with only a modest subset of apps from larger developers and website front-ends.  This is a speed bump for Windows 8, because users will continue to use the desktop applications.  But it is devastating for the Surface RT and other Windows RT systems as they cannot run Win32 apps.

Think about other examples of confusing messages from Microsoft.  The IE team is on a big push to get websites to support IE10 and be touch friendly.  But a good touch friendly IE10-compatible website reduces the incentive for a front-end Metro application.  Microsoft itself, in tweaking Office for touch and then including it in Windows RT, showed developers how they could avoid creating Metro apps in favor of tweaking their desktop Win32 apps.  So you have developers claiming Windows 8 support and pointing customers to either their website or their Win32 apps.

Now we get to where Microsoft’s desire for high margins and its need to incent developers to create Metro apps crippled each other.  The main incentive for developers would have been a large number of systems that they could only effectively reach with Metro applications.  The best way Microsoft could have made sure this happened would have been to price the Surface RT very aggressively so developers saw a rapidly growing population of Metro-only devices and moved rapidly to jump on the bandwagon.  Banks, newspapers, airlines, social networking companies, Information Worker ISVs, etc. would pay a lot more attention to 10 million devices and growing fast then they are to 2 million devices apparently going nowhere.   Of course, since Microsoft equated Windows 8 unit growth with Metro app library growth they thought they could have their cake and eat it to.  Windows 8 would drive Metro app library growth and they could go for high margins on the Surface RT.  It didn’t work.

Microsoft now finds itself with the worst of all worlds.  They’ve had to write down the Surface inventory.  They will have to be more price competitive (and accept lower margins) on the next generation of devices.  And they still don’t have enough Metro apps to make Windows RT devices successful.  Moreover, the reputation of Windows RT may have been harmed to an irreparable degree.  This is important because, as I’ve pointed out before, Windows RT was supposed to be the future of Windows.

Posted in Computer and Internet, Microsoft, Windows | Tagged , , | 51 Comments

Some things never change

Posted on July 17, 2013 by halberenson

As dramatic as the recently announced Microsoft reorganization is I think it likely that many core aspects of the company’s culture remain.  In particular, while the centralization of product marketing should give it more coherence and top-level strategy influence the center of product power in the company remains the heads of its engineering units.

The Engineering EVPs will retain the primary ownership of Strategy for their segment.  They also retain the Program Management function, which amongst other things, owns Product Requirements, driving release definition, and coordinating amongst the various teams and groups within and across organizations.  Ownership of Product Requirements by Program Management, as opposed to by Product Management, is one of the distinguishing characteristics of Microsoft that sets it apart from many other companies.

From an operating standpoint I doubt the engineering groups at Microsoft will feel much difference with the new structure.  Keep in mind that historically, with short periods of exception, product marketing has not reported to the leader of individual products.  It has primarily been centralized at the level of divisional Senior Vice President or higher who owned several products.  Go back to the 90s and structurally it would have looked much as it did a few weeks ago where marketing for an entire business unit reported to the President.  There was perhaps 1 year in the last 20 where SQL Server Marketing reported to the head of SQL Server, as an example.  The rest of the time it reported to the head of Developer Division (when that was a top-level division that SQL Server was part of), or Server Application Division, or Server and Tools Business, or whatever other “bigger” structure my brain has forgotten the name of.  So the majority of Microsoft executives, including the GMs and CVPs, are used to not having direct control of their own marketing teams.

What is different now is that Product Marketing has its own seat at the table in Senior Leadership Team (if they still call it that) discussions.  And Tami has the opportunity to eliminate many of the business-oriented seams between products that drive customers absolutely nuts.  She can also focus efforts on cross-product business strategies, such as the BI example I described in an earlier post, to help force the different engineering groups to bring a coherent solution to market.  Marketing’s influence, both politically and operationally, goes up.  But this is not a fundamental shift away from an engineering-driven culture to a marketing-driven culture.

To give you a concrete example of a place where this reorg could help let me focus on one of my efforts at Microsoft.  I was tasked, at the behest of two SLT members, with shepherding a technology that both were huge fans of.  Besides my personal involvement I eventually had an engineering team with about 100 people working in the technology space.  Unfortunately the revenue, and thus the primary marketing responsibility, accrued to a third SLT member who did not consider the technology a priority.  So while marketing from all sides participated in virtual team efforts to create a plan, when it came time to execute that plan no resources were made available.  The marketing team supporting my organization couldn’t devote the resources for something that yielded them no revenue.  The marketing team for the organization that did accrue the revenue had been handed marching orders that precluded them allocating resources to it.  Attempts to force the issue eventually ran into the limits of the organizational structure then in place.  100+ engineers, 0 marketing.  We ended up with engineers handling some of the non-optional marketing duties, but otherwise the effort just did not receive the attention called for.

In the new structure Tami becomes the eventual arbitrator of the situation I lived through.  She doesn’t get to say “that’s the other marketing group’s problem”.  Instead she can decide which group, independent of revenue allocation, should assign resources.  And if she decides that the effort should not have marketing support, then she can also be the voice at the SLT saying “why are you wasting 100 people on something that is not important to the business”?

Does this mean that all will be perfect?  No.  It is still entirely possible that engineering will want to invest 100 people in something that is strategically important even if it has little short-term business impact and thus little marketing support.  What it means is that the odds of rational decision making and clarity of decisions goes way up.  And there is someone, beyond Steve of course, who gets to take the view “what is best for Microsoft’s customers/business” rather than “what is best for my product’s customers/business”.

There are many other dynamics that keep Microsoft an engineering-driven culture, most of which I won’t dive into here.  But just for one example, engineering teams hire for long-term subject area expertise.  For college hires the SQL Server team, for example, targets graduates of the schools with top database programs like UW Madison.  And it seeks out people with decades of database experience working for competitors.  And then it retains them in the database, or at least broader storage, discipline often for their entire career.  Senior engineers and engineering management from every significant database player have been part of the SQL Server organization.  The recently hired head of SQL Server development arrived with decades of database experience at DEC, Sybase, and SAP.  Meanwhile over the last two decades Microsoft has never hired a career database marketing person to head SQL Server marketing.  That’s not to say they haven’t hired good marketing people, just that they don’t generally have the subject matter expertise (or longevity in role) to have long-term strategic product impact.

If you wanted my biggest concern about the new marketing structure I think I just revealed it.  If marketing people were considered fungible and not tied to specific products in any long-term way before, then being in an organization without ties to a specific product area will only enhance that situation.   Marketing at Microsoft just took a giant step towards better coherence of business and marketing strategy, but perhaps also a significant further step away from being able to influence individual product strategy or details.  All models are flawed, some models are useful….

 

 

Posted in Microsoft | Tagged , | 16 Comments

Doing the successor speculation shuffle

Posted on July 12, 2013 by halberenson

The press, financial, and “watcher” community is obsessed with the question of who is being lined up as Steve Ballmer’s successor at Microsoft.  They have been since the moment he became CEO, and with the latest reorg that question seems to have become more important than what benefit the reorg might bring to customers, products and services, employees or the bottom line.  Right now I don’t see an obvious successor to Steve if, for example, he decided to chuck it all tomorrow and go focus on owning an NBA team.  But that doesn’t mean there isn’t an eventual successor amongst the current crowd of Microsoft senior leadership.

Microsoft has had only two CEOs in its history, an iconic co-founder and a near-founder, with very different strengths and styles.  Besides a typical Microsoft thread, that both are unbelievably smart, they have another similar thread.  Both lived through the key history of Microsoft from almost irrelevant startup to tech industry leader to convicted monopolist to evolving giant.  And they’ve had responsibility for all aspects of the company.  Steve is best known for running the Microsoft Field (sales and service) before taking over as President and then CEO, but recall that earlier he had run product groups.

So when you think of Steve becoming CEO, here was a guy who knew every nook and cranny of the company as well as Bill Gates.  Who was almost as much a part of the culture as Bill.  And, importantly, was surrounded by both Bill and many of the other leaders who had built the company.  There is a lot of good and bad about that, but the key point is that it seemed like and was (for a while) a pretty seamless and obvious transition in leadership.

Microsoft’s next CEO, whoever they are, is unlikely to be someone who ever experienced the company other than as a tech giant.  They, and those around them, will recall the dark days of the DoJ battle from the perspective of middle management or external observer.  They will have experienced the glory days of the mid-90s as individual contributors and first or second level managers, if they experienced them at all.  They may not understand the lost five years or have any personal context on why it was necessary to institute the Trustworthy Computing program.  They will have little personal experience on how Microsoft’s business model evolved.   On “the playbook” as Bob Muglia used to call it.  By definition this means the next CEO will be very different from either Bill or Steve.  And depending on Microsoft’s state at the time of transition, this will be either a very good or very bad thing.

If you go back to the 2005 reorganization and the creation of quasi-independent business units with Presidents it looked like a perfect setup for developing the next CEO.  After all, they were essentially supposed to be mini-CEOs.  So you could look at the Presidents, see who was being most successful, see who was demonstrating the best leadership skills, see who was closest to meeting the needs of the company at the moment, and declare them the new CEO.  And they were initially staffed by people who had similar history at the company to Steve.  Also recall they had broader responsibility sets than those who were Presidents just prior to this weeks reorganization.  Jeff Raikes had both Office and Dynamics.  Kevin Johnson had Windows, Online Services, and STB.

Take Jeff Raikes as the perfect example.  No one would have been shocked to see Jeff declared CEO if something had happened to Steve.  In fact, even today if something happened to Steve and Microsoft needed an acting CEO during a search I would expect Jeff to be at the top of the list.

Jeff went on to be the chief executive of Bill’s foundation.  His successor, Stephen Elop, left to become CEO of Nokia.  Kevin Johnson left to be CEO of Juniper Networks.  So this was obviously a workable model for developing a successor.  Except of course if you really aspire to be a CEO, rather than specifically CEO of Microsoft, then you don’t have to wait for Steve to leave.

For the most part though the current Senior Leadership Team doesn’t have the seniority of that original set of Presidents, doesn’t have the breadth of experiences either inside or outside the company, and in the new structure doesn’t have the opportunity to be mini-CEOs before being given the top floor office in Building 34.  That makes reading the tea leaves on a potential successor much more difficult.

So I’m going to give you my opinion on a number of members of Microsoft’s senior leadership and their potential to eventually be Microsoft CEO.

Let’s start with Qi Lu.  I never really got a chance to interact with Qi but have always heard good things about him from my peers.  I think he’s underrated by outsiders because of Online Services being a money-losing business.  But that is an unfair way to look at things.  If you’d told Steve Jobs his mission was to beat Microsoft in the PC business, and didn’t let him create the iPod, iPhone, and iPad then the world would have a very different view of him today.  Qi’s job has been to go up against a similarly dominant, and perhaps monopolistic, competitor in Google.  And he’s been making progress both on a market share and improving financials basis.  He has survived a suicide mission.  To the point where he’s just been entrusted with Microsoft’s largest and most profitable product family, Office.  But what I most like about Qi is that he’s been innovative in changing the nature of search.  Of pushing for Search as a platform on which great applications are built.  And not just exposing and evangelizing the platform that way, but actually building a great set of apps for Windows 8.  So here is the thing about Qi: he is one of the two SLT members who are the most Bill Gates-like (not that anyone could really come close to being Bill).  If he continues to make progress in Search, and keeps Office healthy and growing, one has to imagine he is a viable CEO candidate.  Looking out a few years the question at the time might be, does a $100B/year Microsoft need someone with more technological vision or more operational excellence.

Steve wanted someone to put STB’s move to the cloud into overdrive and that’s exactly what Satya Nadella has done.  Under his watch Azure has gone from something where you could almost hear the crickets in the data centers to being unable to keep up with demand.  And STB’s business, a bright spot for Microsoft ever since the late 90s, has continued its healthy pace of growth under Satya.  Previously it was Satya who, when Microsoft got really serious about competing in the Search space, was tapped to build the Search and Advertising engineering organization.  So while I gave all that credit to Qi, Satya had quite a bit of the strategy elements in place and the engineering organization built and executing even before Qi was hired.  Then the two of them worked very well together to turn Bing into the only real alternative to Google.  A funny story.  When Satya was named to run Search engineering a friend at Yahoo told me that their executive staff felt that meant Microsoft wasn’t serious about competing in search.  Who got the last laugh on that one?  Satya is classic Microsoft.  Smart, deeply analytical, etc.  He’s proven he can lead a number of different Microsoft businesses (Dynamics being another one) and has two years as a mini-CEO under his belt.  If one assumes over the next few years Microsoft takes the cloud computing lead from Amazon it will be hard to deny Satya is a potential CEO successor.

Tony Bates is the one SLT member I don’t know at all because the Skype acquisition happened after I left Microsoft.  But again, I hear good things.  Of all the potential internal candidates Tony is the most obvious successor on paper.  He’s been a CEO.  He ran a huge chunk of Cisco.  Skype has been one of the smoothest and most quickly additive (at the strategic level) acquisitions Microsoft has ever had.  So no wonder he’s been tapped to, amongst other things, drive future acquisition activity.  In the old days I would have considered his new role a demotion; an indicator he was no longer considered good enough to run the all important product groups.  But, Tony doesn’t need to prove he can run a very large engineering organization as he did that at Cisco.  Tony’s been tapped to drive a number of areas that Microsoft have either never been Microsoft strong-suits or are struggling.  Success leaves him a leading candidate for CEO.

So that covers the three leaders who have proven mini-CEO/CEO experience.  Next up, the three newbies to the ranks of the SLT.  Besides sharing that they have only recently reached the very top-tier of Microsoft leadership, these three share that they have a narrower functional experience base than Tony, Satya, and Qi.

Terry Myerson did an amazing job on Windows Phone.  It is really difficult to communicate to an outsider the magnitude of the task Terry faced when he was tapped to create what has become Windows Phone.  He didn’t pick the delivery date, that was cast in concrete before he started.  He was given two years to ship an iPhone competitor, including building an engineering organization up to the task.  Nearly every Microsoft executive or other senior leader I talked to didn’t believe he could pull it off.  That wasn’t a reflection on Terry, it was a belief that two years was just an impossible timeline.  Yet Terry did it.  And then he had to do it again by switching from the Windows CE kernel used in Windows Phone 7 to the NT kernel use in Windows Phone 8.  He’s proven he can run an engineering organization.  Of course Windows Phone has been less successful on the business front than on the technical front.  And Terry does share in the responsibility for that.  On the other hand in the 18 months that Terry was mini-CEO (although he was never named a President) of Windows Phone, and thus has primary business responsibility, we’ve started to see it gain some real traction as a result of the Nokia partnership.  Now Terry has been handed what is probably the most critical pure engineering leadership role in the company.  While I think he’ll do an excellent job, and prove he deserves to be in the ranks of the most senior leadership of the company, it doesn’t seem like a job that sets him up to be CEO.  Most likely he’d need to take on another, more business-oriented, role between this one and being a serious CEO candidate.

With the departure of Steven Sinofsky last November Julie Larson-Green  emerged from his shadow to become one of Microsoft’s most discussed executives.   Julie has been one of the most influential leaders at Microsoft for quite some time, having lead the program management disciplines for both Office and Windows.  In 2008 the 1000 or so of Microsoft’s most senior technical leaders voted her the technical recognition award for the Office Ribbon.  Julie’s biggest weakness when thinking about her as a CEO candidate is that her entire management career has been in a single discipline.  The last 7 months as a broader engineering leader isn’t enough to judge her ability in larger leadership roles.  Julie’s new role leading Microsoft’s efforts to become a Devices company should change all that.  If Microsoft finds itself up there with the big boys as a devices company then Julie becomes a serious candidate for a CEO role.  If not at Microsoft, at another major hardware company.

I met Tami Reller during the course of Microsoft’s acquisition of Great Plains Software and thought she was going to make a great addition to Microsoft.   I would even have voted her “most likely to succeed”, certainly of anyone other than the hard corps engineering folks with no broader ambitions.  But I couldn’t imagine at the time that she’d rise to Microsoft’s most senior executive ranks.  It would be hard for me to see Microsoft with a finance person as its CEO, but of course over the last few years Tami has also had a marketing role at Microsoft.  Again, not enough of one to think of her as a CEO candidate.  Particularly since the launch of Windows 8 was not exactly a blockbuster.  But in Microsoft’s new structure Marketing takes on a dramatically more prominent role than in the past.  The opportunity to create the kind of marketing organization, and success, that would launch someone to CEO at other companies in other industries is there.  It could make Tami a candidate at Microsoft, though without some experience running a large engineering organization Tami would be disadvantaged compared to other candidates.

There are three other SLT members that need to be talked about.

Eric Rudder might be the longest-serving SLT member besides Steve.  Honestly, I’m amongst a crowd of technical leaders who have always wondered why Eric wasn’t named Chief Software Architect.  Either instead of Ray Ozzie or after Ray left.  Eric is in that category with Bill and Steve of being unbelievably smart, always the right characteristic for a Microsoft leader.  But there are questions around his ability to run large organizations and unless those are put to rest I don’t see him as a CEO candidate.  But CSA?  Yes.  Please.

As a general rule the COO job at Microsoft has not historically been seen as a stepping stone to CEO, so it’s no wonder most observers don’t talk about Kevin Turner as Steve’s obvious successor.  When Bill was CEO the purpose of a COO was to shield him from a lot of the day-to-day operational details so he could focus on product, technology, and larger strategic issues.  And Steve was taking care of Sales.  While KT has probably been the most powerful Microsoft COO, he’s been no more involved in product strategy than his predecessors (unless that’s changed the last few years).  If Steve and the board saw KT as a serious contender for Microsoft CEO they’d alter his responsibilities to have more direct control over product development and marketing.  But absent that it seems like he’s destined to be CEO someday, just of a company other than Microsoft.

The last man standing as a mini-CEO at Microsoft is Kirill Tatarinov as the head of Microsoft Business Solutions.  This is an odd case in which Steve agreed the dynamics of the business warrant that it retain a standalone joint business and engineering leader.  But its a small business by Microsoft standards, and it hasn’t lived up to its promise.  When Great Plains Software was acquired in 2001 the expectation was that Microsoft would turn ERP/CRM into a $10B business by the end of the decade.  Despite numerous other acquisitions, particularly that of similarly sized Navision shortly after the Great Plains acquisition closed,  MBS still isn’t even close to its original business goal.  Microsoft doesn’t disclose MBS revenue separately, but if I had to guess it is still in the low single $B.  Perhaps when Microsoft announces changes to its reporting structure we’ll have more insight into MBS.  But basically, unless that business reaches the point where it is talked about in the same breath with SAP and Oracle (or he is given an alternate opportunity to demonstrate running something much larger that he has to date) I don’t see Kirill being considered as a candidate for Microsoft CEO.

If Microsoft needed a new CEO right now I’m pretty sure they would name an interim CEO and conduct a search.  Some of the current SLT members might be considered, but I think the odds are that they’d hire an outsider (or perhaps a former Microsoft executive who is currently a CEO) to lead the company.  However if Steve stays as CEO until at least 2017, which is the earliest he’d leave based on his own timeline, one or more of the current SLT members could emerge as a very strong candidate to replace him.

Posted in Microsoft | Tagged , , | 7 Comments

First reaction on Microsoft’s reorganization

Posted on July 11, 2013 by halberenson

I’m not going to have a lot to say on the reorg for a few days as I want to let it sink in.  Besides, my analysis in the previous two (pre-announce) blog entries hit pretty close to home.  But I have to say my first reaction is “Wow!”

For the twenty years that I’ve been paying attention to Microsoft’s structure and management philosophy, often from the inside, it has been focused on product groups.  The product groups had both engineering and marketing responsibilities.  They were organized around clusters of products that were targeted at particular customer segments.  Before that they were organized around two broad groupings, Apps and Systems; A notion whose tentacles continued to influence the product groups through the last decade.  Microsoft moved products between groupings, moved the groupings around, shifted responsibilities between the product marketing and field subsidiary marketing groups, and made other modest (sometimes significant) changes.  The 2005 reorg was the most dramatic I’d witnessed but retained the essentials other than creating President’s with greater authority over far more independent business units (nee, product groups).

From where Microsoft has been the last twenty years there are three directions one could have taken.  The first would be to break up the company, a direction I don’t believe the leadership has ever given serious consideration except under duress (i.e., when it looked like the courts might force it).  The second would be to shuffle things around once again to refocus the company, but maintain the basic philosophical underpinnings of product groups.  The third would be to swing completely away from the idea of independent customer-segment focused product groups to a single integrated company.  One could look at the 2005 reorg and see it on a path to the next step being breaking up the company.  Well, for this reorg they went in the opposite direction.  In fact, pretty much as far in the opposite direction as is possible.

This reorg is a risky proposition.  Microsoft’s leadership knows how to navigate a product group-focused world.  Much more modest changes, such as when marketing programs responsibility were moved from the product groups to the field subsidiaries (e.g., Germany) took over a year to figure out how to actually make them work smoothly.  So conceptually the reorg is brilliant.  In practice it could lead to some very painful ball-dropping mistakes in its first year.

Besides the structure itself I want to point out how much of a refresh of the senior leadership has taken place the last few years.  Terry and Julie are long-time Microsoft veterans who have only recently broken into the top-tier of the management structure.  Qi and Tony were external hires who came in at the top-tier, Tony very recently as part of the Skype acquisition.  Tami is at this point a veteran of the company, but again is new blood at the Senior Leadership Team (SLT) level.  Satya is another long-time veteran who is still relatively new at the SLT level.  I left Microsoft at the end of 2010, and almost the entire SLT has turned over since my departure.

I’m pretty excited about the new SLT.  It’s new blood, new dynamics, lots of experience both internally and externally.  Some of the leaders are proven in roles of the scope they have, while others are stepping up to the next level in their career development and have a lot to prove.  All will be challenged by the radically new (for Microsoft) structure.  It’s going to be fun to watch.

As far as the engineering leaders go let me give one personal vote of confidence.  If I were still at Microsoft I’d happily work for any of them.

Posted in Microsoft | Tagged , , | 16 Comments

On org structures, goals, and metrics

Posted on July 9, 2013 by halberenson

@marypcbuk brought up an interesting point on Twitter:

 

I want to explore this a bit.

Organization structures are a good example of the adage all models are flawed, some models are useful.  The structure you pick for an organization will tend to emphasize some behaviors and deemphasize others.  As discussed in my earlier entry on the upcoming Microsoft reorganization, the structure that has been in place since the fall of 2005 was intended to put clear responsibility and authority for each Microsoft customer-centric business in the hands of a business unit President.  In doing so it emphasized the autonomy of the business units and encouraged them to avoid too much cooperation.

Avoid cooperation?  Was that intentional?  Was that an unintended consequence?  Was it wise?  Yes. Yes. Somewhat. Somewhat.

In the fall of 2005 Microsoft was getting ready to exit the Longhorn era, and a lost five years, by shipping Vista.  Part of what made Longhorn so damaging was that it had involved every business in Microsoft in whole or in part.  Longhorn started out with the notion that all of Microsoft would do a coordinated wave of products around a new ground-breaking OS.  It was going to be über cooperation that hadn’t been seen since the days of Windows 95.  Exiting Longhorn few Microsoft executives had any taste for über cooperation.  And every corner of Microsoft found itself having fallen behind the curve as a result of the lost five years.    So an organizational structure that let each business focus on its own rebuild, without the distractions of major cross-organizational cooperative efforts, made sense.

This “lack of cooperation” lead to Windows 7.  This “lack of cooperation” lead to Windows Azure.   This “lack of cooperation” lead to great releases of Windows Server and SQL Server, amongst many other products.  This “lack of cooperation” lead to Office’s rebound from a product that was, in the early 90s,  considered mature and unlikely to grow at greater than the pace of PC sales to the product line that (along with STB) carried the company through otherwise very dark times.  That’s the positive side.  Of course there are many negatives as well.  And not all cooperation was abandoned.  BPOS/Office 365 was a cooperative effort between Microsoft Business Division and STB.  And despite a rough start the SQL Server and Office team have cooperated magnificently in bringing the self-service BI vision to fruition.

The problem is that after the initial rebuilding took place the organizational model that encouraged independence started to become part of the problem rather than part of the solution.  Take Windows Azure as an example.  It initially had few customers, met few requirements for other teams to use it, seemed to have introduced arbitrary incompatibilities with Windows Server, etc.  That one was an easy one to fix and Windows Azure was moved into STB alongside Windows Server.  Look at Azure now and the story is very different.  Some of that is organizational structure.  Some is a change in leadership.  And some is a change in the goals and metrics by which organizations and individuals are measured.

Organizational fixes alone are often not enough of course.  Take Windows Media Center (WMC) as an example.  In an attempt to fix the problem that two organizations had responsibility for the “Living Room”, WMC was pulled out of the Windows organization and put into Entertainment and Devices, the team that owned Xbox.  But despite heroic efforts on the part of a number of people, Joe Belfiore for example, WMC was playing second fiddle to the Xbox as the main strategy for addressing the “third screen”.  Meanwhile it no longer had more than lip service support from its shipping vehicle, Windows.  Well, all models are flawed.

After the shipment of Windows 7 and similarly timed products, and the basic repair of Microsoft’s ability to write and ship software, it became increasingly obvious that cooperation needed to take a stronger role in how Microsoft worked.  The efforts around Windows 8 were forced.  The efforts of the last year reflect general recognition of the need for cooperation by the senior executives.  The coming reorganization is one way that Steve will try to make cooperation the norm rather than the exception.  I’ll make three (and a half) points to support this.

The first is that the organization structure (as rumored) will leave none of the engineering leaders with businesses that can run independent of one another.  A perfect example is that if the Office clients (Word, Excel, Powerpoint, etc.) move to Qi and the Office Servers and Services (SharePoint, Exchange, Office 365, etc.) move to Satya then neither owns the entire business (if they have any business responsibilities at all).  They must cooperate to meet the needs of the Information Worker.  Devices will need the OS, consumer services from Qi, and business services from Satya.  And so on.  Contrast this with how MBD was constructed back in 2005, when all clients, servers, and services deemed necessary to address the Information Worker were placed in the same organization.  Or take Windows, where Hotmail and other consumer services were moved out of Online Services and into Windows (nee, Windows and Windows Live) allowing the Windows business to function independently.

Second, if my speculation about business responsibilities moving away from the engineering units to a central business organization are true then the business guys will drive cooperation.  Let me speculate on an example.  Today both SQL Server marketing and Office marketing have BI business responsibilities.  Not only are there two organizations, their degrees of freedom are constrained within the business requirements and engineering priorities of their larger products.  While coordination between the teams, in parallel with coordination on the engineering side, has led to some great advances that is a one-off case.  In the new organization it is possible that you’d have a single BI business focus that gave requirements to multiple engineering organizations, own prioritization of requirements across the engineering organizations, own (via one or two levels up the management chain) making business-focused priority tradeoffs between BI and other areas, etc.

By the way, one of the reasons that Microsoft could consider going to a structure now that would have been rejected a few years ago is the move to annual or shorter release cycles.  In the past an area of friction, for example, would be that SQL Server had a ship cycle to meet the needs of database customers and Office had a ship cycle of its own.  If SQL Server had something to ship and missed the Office cycle it had to wait for the next one for them to sync up.  (For those who wonder why Access always struggled with support for newer versions of SQL Server, you now have a significant part of the answer.)  With cycles of 2-3 years that means in a worst case scenario you could wait nearly six  years to ship a cooperative effort.  With no longer than annual release cycles, the worst case scenario is two years to ship a cooperative effort.  Six years to ship something requiring cooperative effort discourages trying to cooperate.  Two years are tolerable, and moreover it is far easier to coordinate annual shipments making even two years a true worst-case scenario.  So the shorter shipment cycles make it far more productive to try to cooperate than the longer cycles of old.

The third point is that many of the reported leaders of the new organizations have a good track record of working with each other.  Satya used to work for Qi and the two appear to maintain an excellent working relationship.  Julie showed a willingness to cooperate that would often be stymied by her then boss.  Terry Myerson is more of a question mark, with many people historically having had a hard time working with him on cooperative efforts.  Though I suspect Terry’s experience being the junior partner in the Windows Phone 8/Windows 8 effort may have given him a new perspective.

Organizational structures are but one way to encourage a cooperative atmosphere.  Organizations also use goals and metrics, at both the organizational unit and individual levels to drive behaviors.  Let me give a hypothetical example.  If you tell your business unit Presidents 70% of their review would be based on meeting business metrics such as revenue targets and contribution margin, 10% on people and organization health  goals, and 20% on shipping specific products on time where is the incentive for them to cooperate?  If you want organizations and people to cooperate you have to measure and reward cooperation.

Microsoft has (at least) two ways to do that.  One is via individual review criteria that Steve establishes with his directs and they then filter down into their subordinate’s reviews (and so on down the chain).  The other is via a set of shared metrics that determine a portion of the compensation for all of Microsoft’s senior leadership.  Outsiders get to see, or fairly easily discover, the organization structure but we don’t get to see anything about  review criteria or shared compensation metrics.  I have heard that over the last few years these have been tweaked to favor cooperation, but I have no knowledge of how far this effort has gone.  Indeed, these interact with the current organization structure in ways that to date may have made them less effective than one would hope.

Let’s be clear, if a Business Unit misses revenue and contribution margin commitments than that is a material event that could cost the President their job, cost Steve his job, and even (in theory) sink the company.  If product A says that organization X failed to cooperate on something product A needed, the impact on the leadership of organization X might range from a slap on the wrist to a severe tongue lashing and, perhaps, a small ding to their compensation.  Lose your job or get a slightly smaller bonus?  I know which I’d pick.

A new organization structure in which the engineering leaders are not responsible for short-term business metrics would allow them to carry review commitments with sufficient weight to truly encourage cooperation.  Let me try a concrete hypothetical example.  It would be easier to seriously hold the engineering leader of Office and the engineering leader of Windows responsible for doing whatever it takes to ship a great set of Metro Office apps ASAP if you aren’t also telling them job #1 is to meet this year’s revenue and contribution margin goals.

The truth is that the metrics you choose to measure are what really drives behavior, not organization structure.  Sales management really understands this as the metrics have long been directly tied to the sales compensation structure.  But it applies in other disciplines as well.  If you want a product to perform well you need to drive it to a set of performance metrics.  If you want a product to be reliable you need to drive it to a set of reliability metrics.  If you want programmers to be productive, you need some set of metrics for that as well (as controversial as these usually are).  If you want people to cooperate you need metrics for assists and saves, not just points and wins.

Until we see the actual structure of Microsoft we won’t know how much of what I’ve described really applies.  All information so far does point to a reorganization that favors cooperation far more than Microsoft’s current business unit structure.  Now we wait for the actual reorganization to be announced and the details to settle down, and then it will be more obvious to what extent I’m right and to what extent I’m full of excrement.

 

Posted in Microsoft | Tagged , , | 7 Comments

A key principle of Microsoft’s upcoming reorganization

Posted on July 9, 2013 by halberenson

A Microsoft reorganization does seem to be imminent.  I don’t know how much weight to put on the rumors, but if there is any truth to them I think I’m picking up on a secondary theme to the “Devices and Services” pivot of the organizational structure.  That’s a rethink of organizing the company around businesses with independent Presidents.

I provided some history of the current organizational model and thinking in a blog entry back on June 3.  The key here is that Microsoft’s last major reorganization was intended to create separate business units with leaders who would be given great independence in running those businesses.  Basically the President of a business would negotiate a set of goals with Steve and then be largely free to operate the business without central interference.  Essentially, Revenue and Contribution Margin commitments.  Overall strategy agreement.  And then a bunch of other operational metrics (e.g., customer satisfaction) the company was trying to address.  But after that, in theory, the President runs the business.

Microsoft’s current organizational model was inspired by organizations such as General Electric.  GE’s Housewares and Jet Engine businesses have nothing to do with one another and are different in every way imaginable.  Thus pushing as much leadership to the business unit heads as possible makes perfect sense.  Berkshire Hathaway functions in even a more pure conglomerate model, with a tiny corporate office that focuses on capital allocation.  Warren Buffet doesn’t try to be an operational manager at all.  He buys businesses he likes and makes sure they have leaders he trusts.  Then lets the leaders run the businesses.  The model has obviously worked well for both companies over a long period of time.

The problem for Microsoft is that it is neither a single business nor a conglomerate like GE or Berkshire Hathaway.  Microsoft is a collection of mutually reinforcing businesses.  Thus creating business units with leaders who were notionally given independence never worked right.  On one hand they never had the level of independence that the organizing principle called for.  On the other hand, the independence they had severely damaged the reality that they are mutually reinforcing.

Why, up until recently, was the problem of Microsoft products reflecting their organizational structure becoming worse?  Well, if you run them as independent businesses then their leaders are tasked with maximizing the success of their business, not the company as a whole.

In terms of independence Microsoft Presidents had a lot, but it never worked out to the level of something like GE.  For example, business units don’t have their own sales forces at Microsoft.  Each business unit President has to negotiate with Kevin Turner for sales support.  At one point STB wanted to get more aggressive in going after high-end Enterprise sales but that particular proposal was derailed by KT.   When Bill Gates was CSA he attempted to apply strategic technical coordination across the independent business units.  Bill succeeded, to varying degrees, via his moral authority.  But shortly after he left the role the institutions he’d created to carry on were eliminated under pressure from the Presidents.

With the advent of Windows 8 Steve started to apply more pressure on the business units to cooperate and they all did work in support of Windows 8.  At the same time you can still see the conflicting priorities in what they produced, with Office (for example) having mostly failed to jump on the Metro bandwagon.  Subsequently the Senior Leadership Team took on Ben Franklin’s “We must all hang together, or assuredly we shall all hang separately” attitude.  So Microsoft’s key organizing principles is now in conflict with the way its senior leadership is trying to operate.  And that is something that should be corrected in this reorganization.

There are many hints in the reorganization rumors that Microsoft will indeed eliminate the structure of having independent business units led by Presidents (and they may or may not use that title for the leaders of new units).  The rumors suggest that the leaders of the new units will not have their own CFOs.  The CFOs, if they even retain that title, will instead report up through the finance organization.  Something I speculated on in the June 3rd posting, that the financial reporting structure will change, is also now being rumored.  Yet it doesn’t seem to me that the organization structure being suggested matches up with a reporting structure that will make sense to investors.  And both the leaders being suggested, and the terms being used to describe those leaders’ roles, do not suggest they meet the description of a President.  Hints might also be found in what happened after Steven Sinofsky left Microsoft, with his responsibilities divided between a business executive and an engineering executive who both report to Steve.

What the tea leaves suggest is that Microsoft is going to broadly split engineering and business responsibilities.  Most of what we have heard about until now are the names of the engineering executives and their potential new roles.  For example, Terry Myerson would become head of Windows and Windows Phone Engineering.  With the departure of Don Mattrick, Julie Larson-Green now seems slated to become head of Devices Engineering.  There are two clues here.  One of course is that if Mattrick was picking up more engineering responsibilities but losing his business ownership that might have made staying at Microsoft less interesting.  The other is that while many would question if Terry and Julie are ready to be President of such large business ventures, their readiness to run the engineering portion of those areas is far more proven.  From a people perspective it’s the right next step for both of them.

Talk about current Online Services President Qi Liu also use the word Engineering in describing his new role.  Oddly, only the references to Satya Nadella continue to suggest ownership of a business unit.  But that may just be a reporting anomaly.

More recently the rumors have suggested new business roles for Tony Bates and Tami Reller.  So we could be looking at a return to Microsoft’s 1990s principles in which engineering units run by Group Vice Presidents reporting to the CEO (or, earlier, Senior Vice Presidents reporting to an Executive VP) had significant but not complete business ownership.  Or we could be looking at something even more dramatic, a complete separation of business ownership from engineering.  For example, it isn’t clear in the new structure if Product Marketing responsibilities remain with the engineering leaders (as in the 1990s) or if those move into an alternate (and somewhat) parallel structure.

If I had to guess, and it truly is a guess, Steve has decided that the way to put the “mutually reinforcing” notion back at the core of Microsoft is by centralizing the business responsibilities to an extent never before (or at least not in the last 20 years) tried.  I have mixed feeling about this, which I’ll write about should it come to pass.  But while it’s fun to watch my former colleagues’, and in some cases friends’, names being thrown around in new (apparently engineering) roles the real action is in the areas that have so far gone underreported.

Who are Microsoft’s new business leaders and what is the new business structure?

Posted in Computer and Internet, Microsoft | Tagged , , | 3 Comments