Microsoft's Restructuring: In Depth

  After weeks of rumors, Microsoft yesterday unveiled a long-awaited and dramatic restructuring. CEO Steve Ballmer, in a lengthy memo to employees, announced the company’s strategy to create “One Microsoft” by moving away from its longtime divisional structure to a more holistic one that emphasizes collaboration around a common set of goals. This is the technology titan’s latest attempt to become more nimble in an environment of intensifying competition and changing consumer preferences. Microsoft investors and industry critics have lamented for years that the company’s product line is too disconnected, impeding its ability to innovate quickly.

In his memo, Ballmer elaborated on the impetus behind the shakeup: “With the more recent growth of broadband and the mobile Internet as well as the development of newer devices such as tablets and smartphones, consumers’ experiences and use of technology have fundamentally changed again… Going forward, our strategy will focus on creating a family of devices and services for individuals and businesses that empower people around the globe at home, at work and on the go, for the activities they value most." Although no immediate job cuts are expected to result from the re-org, it will involve a profound shift in management. The company will eliminate divisional presidents and organize the business by its core functions—such as finance, HR and legal—with each group led by an executive vice president. A key part of the new setup are specialized cross-functional groups helmed by current top executives:

  • Satya Nadella, former president of Microsoft’s Server & Tools group, will lead the Cloud and Enterprise Engineering group, which  will be in charge of back-end technologies such as technologies for data centers and databases.
  • Terry Myerson will head up the Operating Systems Engineering group, which will be responsible for cross-platform OS work related to gaming consoles, mobile devices, PCs, and back-end server systems. Myerson is currently the Windows Phone chief.
  • Qi Lu, now in charge of Microsoft’s online services, will lead the Applications and Services Engineering group, which  will oversee a variety of productivity, communication, and search applications and services.
  • Julie Larson-Green will take over the Devices and Studios Engineering group, which will be responsible for all hardware development as well as all games, music, video and other entertainment. Larson is the former head of Windows engineering.
  • Tony Bates, former CEO and current head of Microsoft’s Skype division, will take over as head of Business Development and Evangelism group, which will oversee acquisitions and company partnerships, including OEMS, silicon vendors, and developers.

Undoubtedly, word of the impending re-org caused some frayed nerves in Microsoft’s upper echelon. So what’s to become of the existing executive bench? This morning’s announcement was accompanied by the news that Kurt DelBene, president of Microsoft’s Office division, will retire. Microsoft Research head Rick Rashid will migrate to a new role in the company. Current COO Kevin Turner is expected to stay, as is CFO Amy Hood. Ballmer himself is not expected to surrender his post anytime soon.

However, it is not clear who will replace Ballmer when he does step down, as no single executive has been appointed directly below him as part of the reorganization. This has led to speculation that an outside candidate will eventually take hold of Microsoft’s reins. Microsoft last attempted a major realignment of the company in 2008, when Ballmer split its Platforms & Services division into three distinct units. Yet this restructuring might have one decided advantage: Alan Mulally, who is known for his remarkable turnaround of Ford since taking over as CEO in 2006. Ballmer is said to have consulted Mulally on how to position Microsoft for revitalization.

The Microsoft restructuring process is expected to last through the end of 2013. Yet some things are already fairly certain. For one, the units’ executive vice presidents, in their new higher-profile roles, will be under more intense scrutiny by Microsoft’s employees, management, board and investors as well as the media. And the restructuring is likely to give way to a new financial reporting format. This could ultimately conceal Microsoft’s money-losing units and make the company's finances less transparent overall. As with any corporate reorganization, the effects of these changes will not be clear for some time. Until then, it remains to be seen whether Ballmer’s vision of “One Microsoft” will put this struggling software giant on the comeback trail.