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Three-Part Harmony for Microsoft?

By Jay Greene On Sept. 14, Microsoft (MSFT) CEO Steven A. Ballmer sat in an empty conference room at Las Vegas' Venetian Hotel and vigorously told BusinessWeek that the company wasn't getting bogged down by bureaucracy. "We have the healthiest company in the world," Ballmer said at the time. Sure, Microsoft has a series of hoops that managers have to jump through as they coordinate efforts across divisions. But, Ballmer insisted, that wasn't getting in the way of producing great software (see BW, 9/26/05, "Steve Ballmer Shrugs Off The Critics").

Just six days later, Ballmer announced Microsoft's biggest reorganization since 2002, in part to help the company move faster. Microsoft's seven divisions will be merged into three groups -- Platform Products & Services, which includes Windows, MSN, and the Server & Tools division; the Business group, which includes Office and Microsoft Business Solutions; and the Entertainment & Devices division, which includes Xbox and the mobile devices group.

"Our goal in making these changes is to enable Microsoft to achieve greater agility in managing the incredible growth ahead and executing our software-based services strategy," Ballmer wrote in an e-mail to employees announcing the change.

SPEEDIER SHIPMENTS. In addition, Microsoft announced the pending retirement of one tech industry legend and the ascension of another. Jim Allchin, a 15-year Microsoft vet who has run development for every version of Microsoft's monopoly operating system since Windows 98, plans to retire after his last creation, Windows Vista, ships at the end of next year (see Allchin's memo to employees).

Microsoft also announced that chief technical officer Ray Ozzie, the creator of Lotus Notes, will expand his role to guide Microsoft's efforts to expand its Web services business.

The moves seem to be aimed at overcoming challenges plaguing Microsoft of late, including a thickening bureaucracy, impediments to innovation, and sagging morale (see BW 9/26/05, Troubling Exits At Microsoft"). Rivals such as Google (GOOG) and (CRM) have in some cases been able to move more quickly, putting Microsoft at a disadvantage.

STREAMLINED STRUCTURE. "It would be incorrect to say that these changes alone address those issues," says Microsoft spokesman Larry Cohen. In addition, the software kingpin plans to keep refining the decision-making process in a bid to reduce the time it takes to ship products.

The new structure puts more responsibility in the hands of fewer leaders. Ballmer created the seven-group structure in 2002, and it's become one of the hallmarks of his nearly six-year tenure as CEO. The idea was to give division heads more autonomy to pursue product strategy. But the groups would sometimes stumble over one another as leaders carried out plans aimed at furthering their own products, though not necessarily others sold by the company. "This organizational structure makes it easier to hold executives accountable," says Ted Schadler, vice-president and principle analyst at Forrester Research. "The old organizational structure did not."

The leaders of the new groups are all old Microsoft hands. The Platform business will be run by Kevin Johnson, who formerly ran Microsoft's global sales, and Allchin until his retirement. The Business group will be led by Jeff Raikes, who joined the company in 1981 and now runs the $11 billion Information Worker business. And Robbie Bach, a 16-year Microsoft vet who heads the Xbox group, will led the Entertainment & Devices group.

"HARD LESSONS." While each of the new groups will still need to coordinate strategies with the other two, the idea is to streamline the process. "We wanted to bring groups together on common areas," Cohen says. In the past, Microsoft's Web and PC search engineers were housed in different divisions. Now, the company hopes the new structure will enable them to work more closely and compete more effectively against Google and others.

In an e-mail to employees discussing his decision to retire, Allchin touched on some of the challenges he faced, and how the reorganization would begin to address them. "We've learned some hard lessons over the last few years and my hope is that we will use those lessons wisely," Allchin wrote. He says he dreams of a day when there are "fewer roadblocks" in the engineering organization, and "fewer bad dependencies," a reference to the strategy of trying to integrate Microsoft products, which can sometimes slow development.

Current and former employees have said those challenges are why Vista will ship five years after Windows XP, the longest stretch between Windows releases ever. Allchin believes the company has made progress in the past 18 months or so but that work remains to be done. "The result will be better code and more innovation, sooner for customers," he says.

"DON'T TALK -- IMPROVE IT." Those challenges have sparked internal critics to openly complain. Bloggers, such as the anonymous Mini-Microsoft (see BW, 9/26/05, "A Rendezvous With Microsoft's Deep Throat"), have harped on the company's woes. Without mentioning those critics by name, Allchin suggested that employees stop carping and start trying to fix problems. "If you want to make a difference and you see something that can be improved, then don't talk -- improve it," Allchin admonishes.

For all the talk of making Microsoft more agile, the reorganization's impact not be as dramatic as the company hopes. "They have really just moved a few things around. There will likely be further reorganizations down the line," says Matt Rosoff, an analyst with Directions on Microsoft, a research firm that tracks the company. It seems that for a company as mammoth as Microsoft, agility comes one step at a time.

Greene is BusinessWeek's Seattle bureau chief

with Arik Hesseldahl in New York

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