Why Nadella's Second Year as Microsoft CEO Will Be a Lot Harder

After a successful start, he now has to a face the long-term issues

Satya Nadella, chief executive officer of Microsoft Corp.

Satya Nadella, chief executive officer of Microsoft Corp.

Photographer: Jason Alden/Bloomberg

Microsoft Corp. Chief Executive Officer Satya Nadella has an online dashboard that he looks at every day -- one for each of his executive staff with real-time graphs and data on financial performance to product usage.

Executives bring out the dashboards each Friday at senior leadership meetings to help coordinate efforts across business units, according to the executive who oversees the product. It’s a symbol of the changes Nadella is making in his drive to retool Microsoft for the mobile-computing era and to focus on software products that can be used by anyone, anywhere.

“Satya has been leading the charge for everyone in the company to be more data oriented,” said Chief Strategy Officer Mark Penn, who spends much of his time culling market data to decide which areas to focus on.

Now on the eve of Nadella’s one-year anniversary as CEO, the by-the-numbers approach has resulted in a Microsoft that is more cost conscious and open to experimenting with new business models -- and a stock that is up 14 percent since his appointment. The performance contrasts with the final years of predecessor Steve Ballmer's tenure as CEO.

The Redmond, Washington-based company is now succeeding in widening the market for Microsoft products by releasing versions of its software and services that work on other operating systems -- a break with the company’s longstanding strategy of favoring its flagship Windows operating system. Microsoft also undertook its largest-ever job cuts -- 18,000 -- in July.

Nadella must now use the data he’s been collecting to address a key question: How to generate more revenue in a world of cloud-based services and applications that largely run on other companies’ operating systems. Microsoft’s Windows, which once dominated computing, now underlies just 11 percent of gadgets, according to Sanford C. Bernstein & Co. Revenue is projected to increase 8.7 percent to $94.4 billion this fiscal year, down from last year’s double-digit growth, according to data compiled by Bloomberg.

“He’s hit all the low-hanging fruit -- that said, these things were not easy to do -- but now he has to address all the long-term issues,” said Brad Silverberg, a former Microsoft executive-turned-venture capitalist, who said he’s discussed the issue of changing business models with Nadella. “That’s what keeps him up at night. The risk is huge if you get it wrong.”

Microsoft declined to make Nadella available for an interview. In a conference call last month, Nadella, 47, said the software maker will address any issues around the company’s performance and weather macroeconomic challenges.

Microsoft’s quarterly earnings report in January highlights some of the hurdles Nadella faces a year into his turnaround effort. While cloud software sales to businesses more than doubled, sales to corporations of Office and Windows software to use on their own machines fell short of analysts’ estimates. Windows sales to personal-computer makers who put the program on their machines dropped 13 percent. In total, profit declined 11 percent from a year earlier to $5.86 billion, while sales rose 8 percent to $26.5 billion.

Global challenges are also hitting home. Fluctuating currencies are hurting sales, along with moves by the Chinese government to investigate the company and end purchases of its software. The Russian government also wants to reduce reliance on Microsoft and the Japanese have enacted a sales tax increase.

“The sophomore year is always harder,” said Matt McIlwain, a managing director at venture capital firm Madrona Venture Group in Seattle.

Inside Microsoft, Nadella and his executives are keeping up the pressure. At one board meeting last year, Windows chief Terry Myerson projected a slide with pictures of students using Apple Inc.’s Macs or iPads, Microsoft said. It’s a reminder that Microsoft may face a future where the new generation doesn’t use its technology.

To help Microsoft appeal to youthful users, Nadella last year agreed to a $2.5 billion purchase of Mojang AB, maker of the popular Minecraft videogame. Last month, the CEO and Myerson also unveiled the creation and use of holograms into the Windows software, as well as a headset called HoloLens for viewing them.

Microsoft's Joe Belfiore, left, Terry Myerson and Alex Kipman wear
Microsoft's Joe Belfiore, left, Terry Myerson and Alex Kipman wear "Hololens" devices at an event demonstrating new features of the operating system Windows at the company's headquarters in Redmond, Wash. on Jan. 21, 2015. Photographer: Elaine Thompson/AP Photo

“Microsoft hasn’t really shown any sort of vision like this in a long, long time,” said Mike Silver, an analyst at Gartner Inc. and longtime Microsoft watcher.

Internally, Nadella is cutting through Microsoft’s bureaucracy to get things done. He has changed the way engineering teams are structured, largely eliminating testers to speed software releases, and adding data scientists and designers to the engineering teams to ensure all features are informed by rigorous testing and good design principles. The CEO is also looking at cutting the layers of middle managers to flatten the organizational structure, Microsoft said.

He has been vocal about the need for efficiency. Last year, Nadella told an employee town hall that workers should skip meetings they’ve been invited to if they don’t really need to be there. He’s advised workers to take things to him directly if they feel the bureaucracy is stifling.

“The organization knows it’s go time,” said James Phillips, general manager of the Power BI dashboard product, which Nadella uses to measure performance. Phillips last month rolled out a free Power BI app that is available first for Apple’s iPad. “There are changes in the market we need to respond to.”

For advice, Nadella talks with Chairman John Thompson weekly, said a person familiar with the discussions. The CEO has also continued a previous practice of meeting with startups and bringing them in to brief his executives so they can get viewpoints from outside Redmond.

In July, at Nadella’s suggestion, Madrona Venture Group brought several of its startups, including Smartsheet.com Inc. and ExtraHop Networks Inc., to Microsoft headquarters to meet with cloud and enterprise chief Scott Guthrie and more than of 10 of his executives, McIlwain said.

Customers said they have noticed the difference. Eli Lilly & Co. Chief Technology Officer Mike Meadows said Microsoft is more open and listening to what customers need. He said he was glad to see the company demonstrate its products on iPads at Microsoft’s chief information officer conference last fall since Lilly’s almost 20,000 salespeople use the tablets.

“They’re starting to demonstrate more understanding of reality,” Meadows said. “They would say we were going in this direction already but Satya lit a fire.”

 --With assistance from Beth Jinks in San Francisco and Matthew Campbell in London.

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