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 user 2005-09-19 at 12:05:00 pm Views: 114
  • #12847

    Troubling Exits At Microsoft

    Once the dream workplace
    of tech’s highest achievers, it is suffering key defections to Google
    and elsewhere. What’s behind the losses?
    When Microsoft Corp.  hired computer scientist Kai-Fu Lee away
    from hardware maker Silicon Graphics Inc.  in 1998, the move
    underscored how thoroughly the software giant dominated the computer
    industry. Not only did it monopolize PC operating systems and hold an
    edge in Web browsers, but it was also vacuuming up the world’s
    brightest technologists. Lee’s expertise was in speech recognition,
    considered one of the next big leaps in computing. With people like him
    flocking to Microsoft’s labs, it seemed that the digital world’s
    reigning champion had a lock on the future.

    Things didn’t turn out that way. In July, Lee bolted from Microsoft for
    Web search king Google Inc. , and once again his personal journey is
    emblematic of a shift in computing’s balance of power. These days it’s
    Google, not Microsoft, that seems to have the most momentum. Microsoft
    sued to stop Lee from working for the upstart, citing his noncompete
    agreement. But on Sept. 13 a state judge in Seattle ruled that Lee
    could work for Google, with some restrictions, pending a January trial.
    Microsoft said it was happy the judge limited the type of work Lee
    could do. Yet when court adjourned, Lee smiled broadly and threw both
    arms in the air. “I feel great,” he said outside the courtroom. “I
    can’t wait to start work tomorrow morning.”

    Contrast that with how Lee felt about Microsoft. During the two-day
    hearing he painted a distinctly unflattering picture of the company’s
    inner workings. Lee, who opened Microsoft’s research lab in China in
    1998 and moved to headquarters in Redmond, Wash., two years later,
    fretted over what he saw as repeated missteps. In court he detailed how
    the more than 20 product-development centers in China tripped over one
    another, duplicating efforts and even fighting over the same job
    candidate. Lee called the company “incompetent.” After the ruling he
    praised Google, noting, “the culture is very supportive, collaborative,
    innovative, and Internet-like — and that’s bottoms-up innovation
    rather than top-down direction.”

    For most of its three decades, Microsoft has faced intense criticism.
    But in the past it came from the outside world. Rivals complained about
    its heavy-handed tactics. PC makers griped that it was hogging the
    industry’s profits.

    Now much of the sharpest criticism comes from within. Dozens of current
    and former employees are criticizing — in BusinessWeek interviews,
    court testimony, and personal blogs — the way the company operates
    internally. This spring two researchers sent Chairman William H. Gates
    III a memo in which they wrote: “Everyone sees a crisis is imminent”
    and suggested “Ten Crazy Ideas to Shake Up Microsoft.” Many workers,
    like Lee, are in effect saying: “I’m outta here.” More than 100 former
    Microsofties now work for Google, and dozens of others have scattered

    It’s not a mass exodus. Microsoft has 60,000 employees, and many of
    them are undoubtedly happy with their jobs and the company’s culture.
    While Microsoft’s annual attrition rate rose one percentage point from
    fiscal 2003 to 2004, it’s still just 9%, a bit lower than the industry
    average. Microsoft says it receives 45,000 to 60,000 job applications a
    month, and over 90% of the people offered jobs accept.

    Still, there’s no doubt that Microsoft is losing some of its most
    creative managers, marketers, and software developers. Lenn Pryor,
    director of platform evangelism, left for Internet phone startup Skype
    Technologies, now being acquired by eBay (EBAY ). Stephen Walli, who
    worked in the unit set up to parry the open-source threat, split for an
    open-source consulting firm. A long list of talent has moved to Google,
    a trip made easier by the company’s recent establishment of an office
    in nearby Kirkland, Wash. Joe Beda and Gary Burd, respected engineers,
    left and helped set up the instant messaging service Google Talk. Mark
    Lucovsky, who had been named one of Microsoft’s 16 Distinguished
    Engineers, defected to Google last November. He blogged that
    Microsoft’s size is getting in its way. “I am not sure I believe
    anymore that Microsoft knows how to ship software,” he wrote.

    Employees’ complaints are rooted in a number of factors. They resent
    cuts in compensation and benefits as profits soar. They’re disappointed
    with the stock price, which has barely budged for three years,
    rendering many of their stock options out of the money. They’re
    frustrated with what they see as swelling bureaucracy, including the
    many procedures and meetings Chief Executive Steven A. Ballmer has put
    in place to motivate them. And they’re feeling trapped in an
    organization whose past successes seem to stifle current creativity.
    “There’s a distinct lack of passion,” says one engineer, who would talk
    only on condition of anonymity. “We’re missing some spunk.”

    No question, most companies would kill to have Microsoft’s problems.
    It’s comfortably the most profitable player in the tech industry. And
    it’s making more money than ever, with net income of $12.3 billion on
    revenues of $39.8 billion for the past fiscal year. Its twin
    monopolies, the Windows PC operating system and the Office suite of
    desktop applications, give it important advantages when it thrusts into
    adjacent markets, such as server software for corporations and instant
    messaging for both businesses and consumers.

    Ballmer maintains that the company is in terrific shape. In an
    interview in a Las Vegas hotel, he says one of Microsoft’s strengths
    has always been its culture of self-criticism. What’s different now, he
    says, is that the internal debate is spilling out into public view
    because of blogs and e-mail. He says internal surveys show that 85% of
    the company’s employees are satisfied with their jobs, about the same
    level as in past years. “We have as excited and engaged a team of folks
    at Microsoft as I can possibly imagine,” says Ballmer. “[Employees]
    love their work. They’re passionate about the impact they’re having on
    customers and society. [The 85% number] is a real, real powerful
    statement about where our people are.”

    Indeed, there are areas of excitement within Microsoft. One is MSN, the
    Internet operation, where the search group is the underdog competing
    against Google. Another is the Xbox group, which is racing full speed
    against Sony Corp.’s (SNE ) leading PlayStation 2 to win over the next
    generation of video gamers. It’s launching Xbox 360 this Christmas,
    months ahead of PlayStation 3. “If you take a look at where we’re going
    with innovation, what we have in the pipeline, I’m very excited. The
    output of our innovation is great,” says Ballmer. “We won the desktop.
    We won the server. We will win the Web. We will move fast, we will get
    there. We will win the Web.”

    The company plans to release a series of major upgrades for most of its
    core products in the coming 18 months. That’ll culminate late next year
    in the long-awaited update of Windows, called Vista. Analysts such as
    Drew Brosseau of SG Cowen & Co. expect it to help financial results
    – he’s predicting that revenues will rise 12% during the next fiscal
    year, to $44.5 billion, as profits increase 12%, to $13.8 billion. He
    thinks the stock, now at $27, will follow. “It can be a mid-30s stock
    in 12 months,” says Brosseau.

    Still, Microsoft faces serious long-term challenges: the rising
    popularity of the Linux open-source operating system, a plague of
    viruses attacking itssoftware, and potent rivals such as Google in the
    consumer realm and IBM (IBM ) in corporate computing. It’s the
    company’s ability to respond to these challenges that current and
    former employees fear is being compromised by Microsoft’s internal
    troubles. They’re concerned that Ballmer and Gates aren’t taking
    seriously enough the issues of morale and culture. “Why in the world
    did I start [this blog]?” writes Mini-Microsoft, an anonymous employee
    who writes a blog that has become a gathering place for the company’s
    internal critics and reformers. “I love Microsoft, and I know we have
    the innate potential to be great again.”

    To many employees, Vista, the Windows update, exemplifies the company’s
    struggles. When the project was conceived half a decade ago, it was
    envisioned as a breakthrough: an operating system that would transform
    the way users store and retrieve information. But the more
    revolutionary features have been dropped, and Vista will arrive three
    years after researcher Gartner Inc. originally predicted that it would
    ship. Worse yet, they say, nobody has been held accountable. “People
    look around and say: ‘What are those clowns doing?”‘ says Adam Barr, a
    program manager in the Windows group.

    In the past, when Microsoft faced an emerging threat, Gates could be
    depended on to lead it in a new direction. Most famously, in 1995 he
    belatedly recognized the importance of the Internet and led a furious
    charge to catch up. But in 2000 Gates passed on the chief executive job
    to Ballmer. When Ballmer took over, he was determined to overcome the
    looming challenge of corporate middle age. He pored over how-to
    management books such as Jim Collins’ Good to Great. But since Ballmer
    took the helm, Microsoft has slipped the other way. The stock price has
    dropped over 40% during his tenure, and the company, whose revenue grew
    at an average annual clip of 36% through the 1990s, rose just 8% in the
    fiscal year that ended on June 30. That’s good for a company of
    Microsoft’s size, but it is the first time the software giant has had
    single-digit growth.

    The company’s performance even has some anonymous writers on the
    Mini-Microsoft Web site calling on Gates to ask Ballmer to step down.
    That’s very, very unlikely. Gates urged Ballmer to become chief
    executive nearly six years ago in the wake of the company’s antitrust
    battles with the Justice Dept., when the top job became too
    overwhelming for him. The two have been close friends since their days
    at Harvard University, and together they hold 12% of the company’s
    shares. And board members say they stand firmly behind Ballmer. “I am
    fully supportive of the transformation that Steve is leading the
    company through,” James I. Cash Sr., a director and former professor at
    Harvard Business School, wrote in an e-mail to BusinessWeek. “He is one
    of the best leaders I’ve observed over the last four years I’ve been on
    this Board, and the Board stands in full support of him and his

    Ballmer says he should be judged on his overall performance. “At the
    end of the day the proof is in the output. If you look at any of the
    critical dimensions, our company has performed well, and I’m bullish
    about how we will drive to continue.”

    While Microsoft’s internal reformers don’t directly criticize Gates,
    they’re frustrated with the sluggish pace of product development. As
    the company’s chief software architect, Gates bears that
    responsibility. He’s the author of a strategy called “integrated
    innovation.” The idea is to get Microsoft’s vast product groups to work
    closely together to take advantage of the Windows and Office monopolies
    and bolster them at the same time. But with so much more effort placed
    on cross-group collaboration, workers spend an immense amount of time
    in meetings making sure products are in sync. It “translates to more
    dependencies among shipping products, less control of one’s product
    destiny, and longer ship cycles,” writes Dare Obasanjo, a program
    manager in Microsoft’s MSN division, on his blog.

    To shake Microsoft out of its malaise, radical surgery may be in order.
    “I think they should break up the company,” says Raj Reddy, a professor
    of computer science and robotics at Carnegie Mellon University. Reddy
    is no passive industry observer: For the past 15 years he has served on
    Microsoft’s Technical Advisory Board, a group of academics who help
    guide the company’s research efforts. Reddy believes that a handful of
    Microsoft spin-offs, seeded with some of the company’s $37.8 billion in
    cash, could compete more nimbly in the marketplace. Some insiders
    agree. Microsoft’s Barr recently blogged that the company should be
    broken up after Gates and Ballmer retire.

    There are plenty of bold thoughts floating around Microsoft. The two
    reseachers who sent the “Ten Crazy Ideas” memo to Gates are Kentaro
    Toyama and Sean Blagsvedt. The 12-page document, reviewed by
    BusinessWeek, suggests giving product groups increased autonomy and
    calls for the creation of “bureaucracy police” with the authority to
    slash through red tape. “It’s said that large organizations won’t
    change their ways until a crisis really hits,” the authors write.
    “Everyone sees a crisis is imminent. Incremental changes aren’t enough.
    Are we the kind of company that can dodge the crisis before it happens?”

    It’s a question that echoes through the corridors in Redmond. To
    succeed, Microsoft needs motivated workers camping out in their offices
    at all hours to compete with tenacious rivals such as Google, Yahoo!
    (YHOO ), Salesforce.com (CRM ), and a reborn Apple (AAPL ) Computer.
    Yet current and former employees say there are many demoralized workers
    who are content to punch the clock and zoom out of the parking lot. “At
    this point there’s a traffic jam at 9 o’clock in the morning and 5
    o’clock at night,” says ex-employee Walli.

    Over its three decades of life, Microsoft has become an icon of
    American capitalism, a company that started with the intellectual
    firepower and relentless drive of Gates and his high school buddy, Paul
    Allen. It made billionaires out of its founders and multimillionaires
    out of thousands of its staff. And it created two of the most lucrative
    monopolies in American history — one of them, Windows, so powerful
    that it ultimately brought trustbusters down on the company.

    Now, strange as it seems, those monopolies are at the root of the
    company’s malaise. As Microsoft fought the federal government and
    litigious rivals, it developed an almost reflexive instinct to protect
    Windows and Office, sometimes at the expense of looking for
    groundbreaking innovations. “Every time Bill and Steve made a change to
    be more like other big companies, we lost a little bit of what made
    Microsoft special,” says a former Microsoft vice-president.

    One reason some employees say Microsoft isn’t innovating enough: It’s
    too busy upgrading Windows. With some of its key breakthrough features
    gone, Vista’s improvements include better handling of peripheral
    devices, such as printers and scanners, and cutting in half the time it
    takes to start up. Those are needed improvements, and there’s no doubt
    that hundreds of millions of copies will be sold as people upgrade to
    new PCs. But the changes are hardly the stuff of cutting-edge software
    engineering. “So much of what Microsoft is doing right now is
    maintenance,” says Mike Smith, a former software architect at Microsoft
    who left the company in 2003 to work for a Bay Area startup.

    And that leads to an even more worrisome problem: discontent among its
    software programmers. Instead of coming up with the next great
    technology, Microsoft programmers have to cater to its monopolies. But
    top-flight engineers want to tackle the next great challenge. “They
    want to create new worlds, not defend old ones,” says a former senior
    executive at Microsoft. “They want to storm the Bastille, not live in

    If Microsoft loses too many top developers, it will be hard-pressed to
    succeed in the new markets on which it has pinned so much hope. Google,
    for example, embarrassed Microsoft in October, 2004, by coming out with
    software that lets users quickly search the files on their Windows
    desktop before Microsoft released its own version.

    Adding to employee frustration is the company’s bureaucracy. After
    Ballmer became CEO, he put in place processes he hoped would help
    manage a bigger organization better. But instead of liberating
    employees to do great work, Ballmer’s moves have been stifling, some
    workers say. With so much effort placed on cross-group collaboration,
    employees spend more time in meetings making sure product strategies
    are in sync. The company schedules executive product reviews several
    times a year, and preparing for them is hugely time-consuming. That
    prep work cuts into the more interesting work creating new technologies
    and products.

    To Ballmer’s Chagrin, some of his up-and-coming programmers have left
    for Google. He was apoplectic about Lucovsky’s departure, according to
    documents made public during the Lee trial. Lucovsky said in a sworn
    statement that after he told Ballmer about his plans to move to Google,
    the beefy CEO threw a chair and cursed Google’s chief executive.
    “F__ing Eric Schmidt is a f__ing pussy. I’m going to f__ing bury that
    guy…. I’m going to f__ing kill Google,” Ballmer said, according to
    Lucovsky. In a statement, Ballmer calls Lucovsky’s account “a gross
    exaggeration of what actually took place.”

    Some workers express frustration that Microsoft is so busy protecting
    its PC-based businesses that it comes up short when competing on the
    Web. Take the customer relationship management (CRM) market — software
    that companies use to track sales and customer service activities.
    Microsoft targeted it 2 1/2 years ago with a traditional software
    package, Microsoft CRM. Today roughly 4,000 companies run the software
    for nearly 100,000 staff. Not bad, but Microsoft hasn’t been nearly as
    successful as Salesforce.com Inc., a trailblazer of Web-based CRM
    software, with 308,000 users at 17,000 companies.

    The secret to Salesforce.com’s success: the speed with which it can
    update its software. Microsoft last updated its original CRM software
    in January, 2004, with plans for a new version in first quarter, 2006.
    Meanwhile, Salesforce is constantly fixing bugs and adds features
    without interruption to the customer or added expense. All customers
    need to do is open a Web browser to run the program. Microsoft CRM boss
    Brad Wilson argues that business software is complex and best sold as a
    package that customers run on their own computers. “This is really
    about business process where you’ve got multiple steps,” Wilson says.
    “It is a much more extensive thing that often requires a lot of people,
    a lot of time, and a lot of resources.”

    While upstarts like Google and Salesforce have Microsoft on the
    defense, the biggest threat to the company may be its own moves. With
    revenue growth slowing, Ballmer has tried to squeeze more down to the
    bottom line to make the company more appealing to investors. In the
    past fiscal year he slashed $2.6 billion out of operating expenses. But
    that came at a price. Microsoft sliced health benefits, introducing,
    for example, a $40 copayment on some brand-name prescription drugs.
    Within a week of announcing the benefits proposal in May, 2004, human
    resources received 700 e-mails. Of those, 80% were negative, and fewer
    than 1% were positive, according to an internal e-mail obtained by
    BusinessWeek. One employee wrote in an e-mail: “Small things like this
    chip away at employee loyalty and morale and in the long run do more
    harm than benefit.”

    Even the cuts that seem trivial have dampened morale. Just whisper the
    word “towels” to any Microsoft employee, and eyes roll. Last year,
    Microsoft stopped providing a towel service for workers who used
    company locker rooms after bike rides or workouts. Employees who helped
    the company build its huge cash stockpile were furious.

    And don’t even mention stock options. Employees long counted on them to
    bolster their salaries. Microsoft minted thousands of employee
    millionaires as the stock climbed 61,000% from its 1986 public offering
    to its peak in 2001. Now shares are trading exactly were they were
    seven years ago. Microsoft has doubled its payroll in that time, adding
    more than 30,000 new employees, not including attrition. That means
    more than half of Microsoft’s employees have received virtually no
    benefit from their stock holdings. Instead, they’re working for a
    paycheck and not much else.

    And even if the stock does begin to climb, employees won’t hit the kind
    of jackpot their predecessors did. Two years ago Microsoft stopped
    issuing big dollops of stock options, retreating to more modest
    helpings of stock grants. The idea was to help retain workers by giving
    them a sure thing — stock with some value, since so many options were
    underwater. Meanwhile, 90% of the tech industry still rewards employees
    with stock options.

    Microsoft’s compensation moves have created a haves-vs.-have-nots
    culture. Newbies work for comfortable but not overly generous wages,
    while veterans have a lucrative treasure chest of stock options. Now a
    new pay scheme, scheduled to go into effect this fall, threatens to
    make the gulf even wider. If they meet incentive goals, the 120 or so
    vice-presidents will receive an eye-popping $1 million in salary a
    year, and general managers, the next level down, will get $350,000 to
    $550,000, according to a high-ranking source. But the rest of the staff
    is paid at market rates.

    The pay disparity is exacerbated by Microsoft’s rating system. The
    company uses a bell curve to rate employees in each group, so the
    number of top performers is balanced by the same number of
    underachievers. But Microsoft has a long history of hiring top-notch
    computer science grads and high-quality talent from the industry. Under
    the rating system, if a group works hard together to release a product,
    someone in the group has to get a low score for every high score a
    manager dishes out. “It creates competition in the ranks, when people
    really want community,” says a former Microsoft vice-president. A
    company spokesman says managers don’t have to apply the curve with
    smaller groups, where it’s not statistically relevant.

    Even on college campuses, long a fountain of talent for Microsoft, the
    tide seems to be turning. On Sept. 7, Massachusetts Institute of
    Technology’s Science & Engineering Business Club held its annual
    recruiting barbecue, with about a dozen companies setting up booths to
    recruit as many as 1,500 students. “There was a lot of buzz around the
    Google table and not a lot around the Microsoft table,” says Bob
    Richard, associate director of employer relations at MIT. How much?
    When Richard walked through, he says, students were lined up six deep
    to talk to Google recruiters, while only two students stood at the
    Microsoft table. Carnegie Mellon’s Reddy says his top students opt for
    Google and Yahoo ahead of Microsoft these days. Microsoft points out
    that in a survey conducted by market researcher Universum, the company
    ranks No. 1 among computer science students as employer of choice.

    Microsoft is hardly the first company to struggle as it moves from
    adolescence to maturity. And it could learn some lessons from others
    that have made the transition more gracefully. Take General Electric
    Co. (GE ) The conglomerate has long boasted an entrepreneurial culture,
    with hundreds of managers running fiercely independent businesses.
    Those leaders are given free rein yet are held accountable for their
    own results — meaning they can get the boot if they don’t perform.
    “The process is transparent and rigorous and constantly reinforced,”
    says Noel M. Tichy, a University of Michigan professor and leadership

    Ballmer says Microsoft is finding its way through the challenges of
    being a more mature company just fine and that the complaints of some
    employees simply reflect the kind of company Microsoft is. “We have for
    ourselves incredibly high expectations,” he says. “And that’s in some
    senses is the greatest blessing and opportunity anybody can ever have.
    Our people, our shareholders, me, Bill Gates, we expect to change the
    world in every way, to succeed wildly in everything we touch, to have
    the broadest impact of any company in the world. It’s great they’re
    saying: ‘Come on, we can still do better.’ Great.” Ballmer smacks his
    meaty hands together for emphasis. “We need those high expectations.”

    Microsoft certainly is chock-full of smart employees who want to do
    better. Still, many of them say that jumping through bureaucratic hoops
    and struggling to link products together is preventing them from being
    the best they can be. There’s a plea for action to Gates and Ballmer to
    do more — slash the bureaucracy, tend to morale, and make it easier to
    innovate. But is anyone listening?