Four things CIOs need to know about Microsoft's reorg

Last week’s big Microsoft reorganization should have caught exactly zero people by surprise. A couple of high-ranking executives departed, and departments were shifted so the senior leadership team can purportedly focus on engineering excellence and becoming more relevant across a spectrum of devices.

Read PCWorld’s analysis of what Microsoft’s new product groups mean for you

But what does this mean for the CIO? What do Microsoft’s internal machinations imply for its corporate customers? From my perspective, it means four different things for you. Let’s take a look at each of them.
When CEO Steve Ballmer wrote in his memo to the troops that this was a reorganization “that will enable us to innovate with greater speed, efficiency and capability in a fast changing world,” he wasn’t kidding about the greater speed part.

Windows 8 is getting a quick facelift with the August arrival of the 8.1 update.
You’ve probably noticed by now that the ill-received Windows 8 is receiving a quick facelift in Windows 8.1. This will be released to original equipment manufacturers for inclusion in their devices by the end of August, according to the company’s Tami Reller at the recent Worldwide Partner Conference in Houston.The head of Windows Azure, the company’s cloud computing platform, said at the TechEd conference that his team targets updates to cloud services inthree-week intervals.The Microsoft Exchange team has switched to a servicing model that releases quarterly updates. These are deployed like an entirely new version of Exchange, as opposed to just a service pack. This is a reflection of the company as a whole, which seems to be eschewing the concept of service packs and instead focusing on delivering changes via more frequent updates.
This is a huge change for IT departments everywhere, but especially in larger enterprises, who typically wait months, if not even a year or more, before deploying new releases of critical software en masse to users.
It’s entirely unclear whether this faster release cadence is solving a problem that anyone outside of Microsoft has, but for the time being, the message is clear: Get used to being only 12 months away from a shiny new version of whatever you’re using, regardless of whether this accelerated timetable actually aligns with your organization’s strategic plans.
The fire hose is turning on. Hope you’re thirsty.
Microsoft’s current line is that it gives you the best of both worlds-best-in-class operating systems for your own server rooms and data centers, and the same operating system that works the same way in private cloud services and up on Windows Azure.
This is absolutely correct. No competitor even comes close to creating the so-called “virtuous cycle,” where improvements in on-premises software make their way up to the company’s cloud services, while the best practices, feature improvements and bug fixes found by running hundreds of thousands of servers in the cloud make their way into the engineering for the next release of the on-premises operating system. This is a real win.

Microsoft’s Steve Ballmer
However, this virtuous cycle can still be virtuous for Microsoft without being so valuable to non-cloud customers. In fact, the days of on-premises Microsoft line of business software for your own datacenters may well be numbered, even if the company currently promises otherwise.
It’s not difficult to see an era where, as Microsoft steers its ship into the harbor of devices in services, it decides to develop more in the cloud and, perhaps, save some of the effort and expense of engineering new operating system releases. (That doesn’t appear to be in the immediate future, given the quick follow-up Windows Server 2012 R2 release only about a year after the original Windows Server 2012 release to manufacturing.)
If Redmond is creating devices that exist to consume its services, those services will naturally be a key area of investment for the company. They’ll also drive recurring revenue, whereas perpetual software licenses generally do not, and are less “sticky” to boot.
The slow but steady decline of the personal computer has not been kind to the outlook for the software giant, while the emergence of Microsoft Surface as a sort of tablet window into the era of personal devices has not gone as well as the software giant had hoped, surely.
The Windows franchise lives and breathes at this point with PC shipments, and with Barron’s reporting that PC shipments fell by 11 percent this quarter as compared with the same period last year, the problem is clear: Microsoft needed to shift, even on the server and enterprise side, one of the billion-dollar, consistently profitable segments of the company.
Ballmer was nervous and needed to light a fire. The reorganization, according to Ballmer, is intended to help transform the company into an era where PCs are just one piece of a much larger pie.
“The form of delivery shifts to a broader set of devices and services versus packaged software,” Ballmer writes in his memo, indicating that he wants Microsoft relevant in more than just PC and Xbox.
Microsoft is playing for more than enterprises and knows that PCs aren’t where the money is anymore. For the CIO, this means a Microsoft that’s not as laser-focused on business tools as it has been throughout its existence, with some exceptions, but is attempting to reach consumers, gamers, executives, artists and so on.

News flash: Microsoft desperately wants you to subscribe to the cloud. It really wants your mail and collaboration in Office 365, it wants your Web services hosted on Windows Azure, it wants your sales force using hosted Microsoft Dynamics, and it wants your spam filtering done by Exchange Online Protection. It wants to hook you in, send you an invoice every month, and seal you into the Microsoft ecosystem-and for the trouble, you’ll receive upgrades, support and (hopefully) always-on service.
You know what? For some businesses, this is exactly where to be. This message is compelling for resource-challenged small to medium-sized businesses to play at a scale that Microsoft can offer for pennies per hour. The majority of small businesses have no reason to run an in-house email server. The majority of medium-sized businesses can’t roll out a Web application on a scale and in the timeframe by themselves that they could by spinning up some Windows Azure instances.

This Microsoft, for these businesses, is a good thing. More power and capability has never been available at a lower price than now. This focus of Microsoft means good things in these capacities for these audiences. 

Microsoft reorg could fix some problems, create others

Steve Ballmer’s grand plan to reinvent Microsoft has garnered mixed reviews from industry analysts, ranging from enthusiastic endorsements to frowning skepticism.

Some predict the reorganization will accomplish its goal of making Microsoft more efficient and innovative, and thus better able to compete against rivals like Apple, Oracle, IBM and Google. Others are concerned that internal accountability will drop and the company will become less responsive to customer needs and market inflections.

Microsoft CEO Steve Ballmer

At the heart of the restructuring, announced Thursday, is the dissolution of the company’s five business units—the Business Division, which housed Office; Server & Tools, which included SQL Server and System Center; the Windows Division; Online Services, which included Bing; and Entertainment and Devices, whose main product was the Xbox console.

They’re being replaced by four engineering groups organized by function, around operating systems, applications, cloud computing and devices, and by centralized groups for marketing, business development, strategy and research, finance, human resources, legal and operations.

Ballmer wants the company to operate more cohesively, so it can build blockbuster products that cater to the needs of people both at home and at work in a variety of ways.

“The form of delivery of our value will shift to really thinking about devices and services versus packaged software,” Ballmer said during a press conference Thursday.

“We need to move forward as one Microsoft, with one strategy and one set of goals,” he added.

Teams will work in an interdisciplinary fashion on all major projects to make sure efforts are in sync with the overall goals of the company, according to Ballmer.

Tom Austin, a Gartner analyst, is skeptical of this shift from business units to functional groups.

“The business of business is business. Companies should be organized by major business units, not by functional units,” he said.

With this new setup, it may become harder for outsiders such as customers, partners, investors and analysts to decipher Microsoft’s strategy and evaluate its performance, he said. In short, he fears there will be less transparency and visibility into the company.

“I would have preferred that there was a clear message they were going to continue to manage and report by business. Whether they structure [the company] that way or not is less material,” Austin said.

“The value of transparency is that it lets customers and investors make more informed decisions as to the level of accuracy or spin that are in Microsoft’s executive statements,” he added.

IDC analyst Al Gillen views the plan with more optimism, saying Microsoft is making necessary, bold changes.

“Microsoft’s core business is being undermined by changes in the market and the company needs to be more responsive and think about things differently than it has in the past,” he said.

Among the main challenges Microsoft faces are the weak position of Windows in smartphones and tablets, where it lags far behind Android and iOS, and the increased competition against Office from rivals like Google that offer less expensive, cloud-hosted alternatives.

Microsoft has responded to those threats with Windows 8 and Windows Phone 8, and with Office 365, a suite that includes cloud-delivered versions of its productivity apps like Word, Excel and PowerPoint, and Web-hosted versions of its server products like SharePoint, Lync and Exchange.

However, Windows 8 and its version for ARM devices, Windows RT, launched in October, weren’t well-received, prompting Microsoft to prep an update called Windows 8.1 that will be released this year. Meanwhile, Office 365 continues to battle Google Apps and other competing communication and collaboration suites. For example, Microsoft spent US$1.2 billion a year ago to buy Yammer and boost SharePoint’s enterprise social networking capabilities.

The four new engineering teams are the Operating Systems Engineering Group, led by Terry Myerson; the Devices and Studios Engineering Group, led by Julie Larson-Green; the Applications and Services Engineering Group, led by Qi Lu; and the Cloud and Enterprise Engineering Group, led by Satya Nadella.

“We’ll pull together into fewer core engineering groups, and we’ll pull together all the other functions and disciplines under leaders that work for me directly,” Ballmer said.

The Operating Systems Engineering Group will focus on Windows development for gaming consoles, mobile devices, PCs and back-end server systems, including OS cloud services. With this realignment, Microsoft is seeking a unified, common Windows presence and experience across those devices and systems, which it doesn’t have today and which enterprise customers especially could find compelling.

“It’s important and a positive move to integrate all operating system development into a single team,” Gillen said.

At the Devices and Studios Engineering Group, Larson-Green, until now one of the two Windows OS chiefs, will focus on all hardware development and their supply chain strategy. This group will also be in charge of “studios experiences” including games, music, video and other entertainment. Microsoft seems interested in boosting its efforts to build its own hardware, building on its experience developing the Xbox console and the Surface tablets, thus mimicking to an extent Apple’s successful model.

The Applications and Services Engineering Group will be in charge of applications and services technologies in productivity, communication, search and other information categories. It will be interesting to see how the realignment works in this group, since the Office stack and the consumer online services had traditionally belonged to separate groups.

However, with Office 365, those lines are blurring, in particular with the recent decision to mesh Skype, which is primarily a consumer IM and VoIP service, with its enterprise equivalent, Lync. In the press conference, Qi Lu said that whether it’s Bing, Office or Skype, Microsoft applications are all about helping people complete tasks and get work done.

Meanwhile, the Cloud and Enterprise Engineering Group will be in charge of back-end technologies, including technologies for data centers, databases and enterprise IT systems and development tools. Its leader, Nadella, had been in charge of the Servers and Tools group, which had been performing well financially. A focus for this group will continue to be the company’s Azure cloud platform.

The Dynamics enterprise software products will continue to operate separately under Kirill Tatarinov, but report to Lu, Chief Operating Officer Kevin Turner and Tami Reller, the other former Windows chief who will now head the Marketing Group. As part of the plan, Craig Mundie will work on a “special project” until the end of this calendar year, and assume a consultant role starting in 2014. Office chief Kurt Del Bene resigned from the company Wednesday, though his official last day will be Dec. 31.

Michael Osterman, from Osterman Research, views as positive the shift away from product-centric, siloed teams to a more unified approach that is focused on what customers need from devices and services.

“This is a good thing,” he said. “They need to realign the company to be more responsive to customers.”

The reorganization may yield a sharper marketing focus and strategy, an area where Microsoft has at times been weak, Osterman said.

Frank Gillett, a Forrester Research analyst, concurs. “This demonstrates a commitment to build an integrated, coherent Microsoft experience. It wasn’t incoherent before, but it also wasn’t well-coordinated,” Gillett said.

What’s not clear to Gillett is how exactly this will be carried out, and he foresees it being a major endeavor. “I’m not seeing an overall head of products. That concerns me,” he said.

Others view the “One Microsoft” effort with skepticism, especially if it results in a doubling-down on what critics call the “Microsoft first” strategy, which they blame for Microsoft’s reluctance, for example, to fully port Office to other operating systems like iOS and Android despite massive demand, in order to give Windows a competitive advantage.

“[One Microsoft] should do wonders for CIOs who are all in for Microsoft, but it should strike fear in the heart of CIOs who were hoping that Microsoft would decouple Office from Windows,” Austin said.

Over the years, Microsoft critics have suggested the company’s product lines are too diverse, and that certain businesses should be spun off as autonomous subsidiaries or even independent companies. Clearly, Ballmer has taken the opposite tack.

The implementation of the plan should take at least three months, maybe more, said Gillen, who considers this the company’s biggest reorganization ever. Microsoft will need to continue tweaking the plan in the coming years based on market changes.

“Is this the only and last thing they’ll have to do? No. They’ll have to continue responding to changes in the industry, and they’ll have to continue adjusting the organizational structure,” he said.

Or as Gillett put it: “They needed to do something and they’re making big changes that make sense. Now we’ll have to wait and see how it plays out.”

Drumbeat about Microsoft reorg grows louder

Reports of an imminent and broad Microsoft business reorganization keep mounting, including an anonymously sourced article from The Wall Street Journal’s AllThingsD blog that says CEO Steve Ballmer will unveil the plan on Thursday.

Microsoft critics have pointed out for years that the company has a product lineup that is too big and too varied, and that it could make sense to split up the house that Bill Gates built into more independent subsidiaries or even spin off some units entirely.

Melissa J. PerensonSteve Ballmer
This, observers have said, could bring more agility and innovation to the different teams by streamlining the decision-making process both at the product development and business strategy levels.

Currently, Microsoft has products as disparate as the Xbox gaming console, the Bing search engine, and the SQL Server enterprise database.

Far from consolidating and paring down its product roster, Microsoft has ventured into new areas, like its surprising decision last year to build its own tablet device—the Surface—while risking alienating its hardware partners.

There has been dissatisfaction among investors about stagnant growth in the stock price, and the company has been criticized for adapting too slowly to key trends, including cloud computing and consumerization of IT.

Glaring examples of missed opportunities by Microsoft are the minor presence of its Windows OS in tablets and smartphones. While Microsoft is trying to remedy that with Windows 8 and Windows Phone 8, the OS is very far behind iOS and Android, and Microsoft has missed three years of blazing hot sales for these devices, which many people now use both at home and at work.

On the enterprise software side of things, Microsoft has also scrambled to respond to fast-moving trends. For example, it spent $1.2 billion a year ago to buy Yammer in order to boost the weak enterprise social networking capabilities of its SharePoint collaboration server and of other business software like Office, Exchange, Lync and Dynamics.

In addition, rivals have been sniping at the Office franchise for several years, offering up less expensive, cloud-only options like Google’s Apps suite that have found success in a market Office has historically dominated.

According to AllThingsD’s report on Monday, the reorganization will be drastic and has many company leaders on pins and needles because Ballmer has apparently kept the details confidential, sharing them with only a select few. According to a Fast Company article, the restructuring intrigue and uncertainty played a part in Don Mattrick’s decision to leave his job as president of the company’s Interactive Entertainment unit and join Zynga as CEO.

MicrosoftDon Mattrick
But the overall goal, according to AllThingsD, is to bring “functional coherence” to the company and group some products under different leaders, including the creation of a new unit for cloud computing and business products led by Satya Nadella, who is now in charge of the Servers and Tools division.

Qi Lu, now head of Online Services, which includes Bing, would also oversee Office and other apps. A Bloomberg article last week also included details on a number of such moves that are reportedly part of the plan.

Of course, major restructurings and reorganizations are common among large IT vendors, and often the plans end up being so convoluted and hard to implement that they do more damage than good. Sometimes the plans slow down the company or simply prove outright unwise, leading down a path of failure.

An unwanted byproduct can always be that enterprise customers and employees interpret these shakeups as signs that the vendor is in crisis and rudderless, leading them to lose confidence in the companies. Customers then begin to second-guess their decisions to invest in the vendor’s products, while employee morale dips and staff turnover increases.

David Johnson, a Forrester Research analyst, said that Microsoft's internal divisions are getting in the way of its progress. The division leaders are judged on the financial performance of their business unit, but also on potentially conflicting goals including product integration, quality and shared financial results.

"It can be extremely complex to track progress and success and failure across a confusing organizational structure and set of priorities, and divisional revenue will always trump other goals, so when the pressure is on for revenue or profits in one division, it can be difficult or impossible to get collaborative, cross-silo work done," Johnson said via email.

The potential upside is that, given the company's enormous capabilities and resources, Microsoft could speed by competitors and blaze a trail of innovation if its inner workings were properly coordinated, he said.

 (Andy Beal)Satya Nadella, head of the Servers and Tools division
The best purpose of a large company is the ability to coordinate resources and talents across a large number of things, to get a few very important things done," Johnson said.

"But the way they're structured now, they can innovate but only in silos or pockets, and so they're not bringing the full potential of a well-coordinated, large organization to get that handful of really important, high-value things done," he added.

Johnson expects a more prominent role will be given to Nadella and to the software-development-tools line of products.

"Microsoft's best work is when they give people development tools that are so easy to use for incredibly powerful things, that they will commit themselves and careers to mastery of them," he said.

That was the case with Visual Studio early on, and with Visual Basic for Applications with Excel, according to Johnson.

"Microsoft democratizes software development by lowering the barriers to entry like no other company. This is a part of their DNA and culture I'd like to see come back. The shift to cloud gives them the change to do it again, and I was blown away by the improvements I saw with Visual Studio 2013 at Build 2013 in San Francisco," he said, referring to the recently concluded Microsoft conference for developers.

Johnson is also betting on the consolidation in a single Windows division for PCs, tablets, smartphones, and even wearable devices.

"Microsoft needs to unify the experience across all devices, and stop treating them as separate businesses with separate priorities and revenue goals," he said.

This reorganization would also give Ballmer a good chance to tear down the notorious stack ranking system that Vanity Fair magazine detailed in a devastating article a year ago.

That story, titled "Microsoft's Downfall: Inside the Executive E-mails and Cannibalistic Culture That Felled a Tech Giant," described this annual review system, which forces team leaders to give glowing, fair, and bad reviews to a pre-determined percentage of their employees, even if it just so happens that on a given team everybody delivered good and excellent performances.

"Such a system has benefits, but the negative consequences can be severe. When employees know that someone on their team is going to take a bullet every year, competition and not cooperation between people is the natural result, along with all of the negative behaviors that go with it," Johnson said.

Instead of promoting collaboration, communication and sharing of information and resources, which are the things Microsoft needs to survive and thrive, this system leads employees to engage in information hoarding, noxious corporate politics and blame games, he said.

Michael Silver, a Gartner analyst, said there have always been reports of lack of cooperation and in-fighting among Microsoft units, a situation that has likely prevented the company from maximizing the potential synergies among products, which would yield a competitive advantage.

"At this point, Windows and Windows Phone should offer a much better combined experience, but the two are very separate," Silver said via email.

Microsoft also needs a better effort in marketing, which Silver said has been "subpar to say the least."

In addition, the company needs a more coherent design and user experience across its products. "They need someone to deal with this across the whole product line to ensure consistency and improve the user experience on every product individually and together," Silver said.

Rumors about the restructuring plan began floating around weeks ago. Microsoft will report its fourth-quarter earnings on Thursday of next week.