Media Moves

Coverage: Microsoft cutting workers

July 18, 2014

Posted by Liz Hester

Software giant Microsoft is making its largest numbers of layoffs ever. While the move will likely help with profits, the company is really looking to clean up past mistakes and shed extra weight.

Shira Ovide had this story in The Wall Street Journal:

Microsoft Corp. Chief Executive Satya Nadella recently pledged to be “bold and ambitious” to remake the company and its culture. The first task, he signaled in a memo on Thursday, would be cleaning up some of his predecessors’ messes.

The recently named Microsoft chief is cutting up to 18,000 jobs in the next year, or about 14% of the company’s workforce, the largest layoffs in its history. About two-thirds of the cuts would come from its phone and tablet staff, which bulged after former CEO Steve Ballmer agreed to buy Nokia Corp.’s handset business last fall.

The shape of the job cuts reflect a tough reality for Mr. Nadella: He must repair parts of the company he inherited from former CEOs Bill Gates and Mr. Ballmer before he can reshape Microsoft as he wants. Outside of staff overlap with Nokia, the cuts amount to about 5,500 people, or about 5% of the company’s staff before the Nokia deal pushed it to 127,000 people.

The New York Times story by Nick Wingfield pointed out that Microsoft’s problems aren’t profit related, but innovation related:

While Microsoft still makes profits that executives at other companies would be ecstatic to have, it has been beaten on the biggest new trends in tech, including mobile, Internet search and cloud computing. As a result, it is regularly left out of conversations about companies defining the next generation of technology, outflanked and overshadowed by companies like Apple, Google, Facebook and Amazon.

Cutting jobs does not mean the company will suddenly begin creating products that people love. And the cuts did not suggest a sharp shift in strategy. But it is a start of something new, in the view of many Microsoft critics, and one that could help the company concentrate on the businesses where it is likely to have the most impact.

“I think this is a jolt to the culture, which is really needed,” said George F. Colony, the chief executive of Forrester Research, a technology research firm. “It was frozen in place, and lacked new creativity and innovation.”

Microsoft has announced several bold plans meant to inject new dynamism into the company in recent years, including reorganizations, new products and acquisitions. Most of those changes did not produce the edge it wanted. The question yet to be answered with the latest move is whether Mr. Nadella’s leadership, and the scope of the change, will break that pattern.

Dina Bass pointed out in her story for Bloomberg that investors are likely to be supportive of the move:

Last week, in his first mission statement, Nadella said the Redmond, Washington-based software maker needs to become more focused and efficient and requires changes to its engineering teams. He pledged updates on the new plans later this month, and said he would provide more details when the company reports earnings on July 22.

Microsoft investors are likely to view the cuts as a positive sign, illustrating that Nadella is trying to get costs and headcount under control and that he understands the challenges facing Microsoft, Ives said.

“We view this as another step in the right direction from the Street’s perspective,” he said in an interview. “Nadella is not wearing rose-colored glasses.”

The reductions may add 30 cents a share to Microsoft’s profit in fiscal 2016, estimated Kirk Materne, an analyst at Evercore Partners Inc., who rates Microsoft the equivalent of a buy.

The Washington Post reported in a story by Hayley Tsukayama that former Nokia CEO Stephen Elop put out his own memo about the cuts:

Stephen Elop, the former Nokia CEO who is Microsoft’s executive vice president of devices, told his staff where the bulk of cuts will take place in a memo of his own on Thursday. He said that the firm will decrease its presence in San Diego, Beijing, Dongguan, China and Oulu, Finland. Microsoft will also phase out all operations in Komaron, Hungary. It will also stop making phones for Google’s Android operating system.

Elop said the moves will “right-size” Microsoft’s manufacturing operations.

“Whereas the hardware business of phones within Nokia was an end unto itself, within Microsoft all our devices are intended to embody the finest of Microsoft’s digital work and digital life experiences,” he wrote in a memo to his staff. “Our device strategy must reflect Microsoft’s strategy and must be accomplished within an appropriate financial envelope.”

Jon Swartz of USA Today reported that Microsoft is struggling to compete in the device market:

Nadella has said he doesn’t want to compete with big hardware companies that make PCs based on Windows, Microsoft’s recently announced Surface Pro 3 tablet aside, Feibus says.

“Seriously, the only Microsoft-owned hardware he’s openly supported is Xbox.”

Though Nadella has offered encouraging words about Surface Pro 3 and smartphones, Thursday’s actions staggered Nokia.

The software giant, which is undergoing a wrenching shift to mobile and cloud computing, plans to scotch Nokia’s brief foray into Android-based phones, announced in February. The acquisition of Nokia’s handset business added 25,000 people to Microsoft’s payroll.

The company has a long way to go before it’s considered innovative and can compete in the mobile device market. As people do more on their mobile devices, it will be increasingly important for companies to be in pockets and purses across the globe in order to compete. Nadella is making a hard move to put Microsoft in a better position. Here’s hoping it isn’t too late.

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