Why former employees say Microsoft can't innovate

By many measures, Microsoft is simply too big. The bigness is in the gut, like a middle-aged man who drinks too much beer and eats too many classic potato chips. In computing years, Microsoft most certainly is a middle-aged company. So is Apple, which by comparison is leaner and healthier. What's up with Microsoft's gut?

Based on communications with current and former employees, Microsoft's midriff problem is one of middling middle management. The number of middle mangers swelled over the last decade, and they also are the employees making key management decisions, which includes who gets laid off or fired and where the remaining people work. What manager will fire himself or herself? (Before continuing, let me be clear that only former Microsoft employees will be quoted, and anonymously at that. Current employees would only communicate with me on background, for concern of risking their jobs).

One former employee, whom I'll call Boris, had this to say about how last year's layoffs affected him and his former team: "Out of a starting staff of nearly 20, four remained, all managers. I'm not sure what they manage." Who made the decisions about whom to layoff? Another former Microsoft employee whom I'll refer to as Fred said that a "dramatic increase in middle management, and the fat cutting the muscle, is right on target."

I don't have figures on how many middle managers Microsoft now employs. But various former, and even some current, employees say that their number of "reports" -- meaning people they report to -- has increased by five to seven managers above them during 2000. Typically that works out to double or more the layers of middle management over the decade.

"When I started at MSFT in 1996, there were six people between me and [Microsoft cofounder] Bill Gates," Boris said. "In 2009, there were 13 people between me and [Microsoft CEO] Steve Ballmer." Fred said, "the number of managers between me and the CEO went from six to 10," during the last decade. Another long-time Microsoftie, whom I'll call Barry, saw his reports go from six to 12.

Microsoft's swelling workforce gives some hint of the midriff, middle management problem. In June 2000, at the end of fiscal 2001, Microsoft employed 39,100. At the end of fiscal 2010, even after 5,000 layoffs, Microsoft employed 93,000.

'All Praise the Holy Reorg'

Microsoft manages middle management by way of seemingly perennial reorganizations. Every former or existing Microsoft employee I communicated with for this post and the accompanying "Microsoft Confession" series harshly criticized the reorganizations.

"How many reorgs have ever benefited anyone except the folks on top?" asked a former employee I'll call Jack. "The people that need to be cut at MS are the managers that don't support their teams and only support their own careers. I've watched countless super visionary managers get bogged in politics and leave."

Another former employee, whom I'll call Amanda quipped: "All praise the holy reorg, which is an approximately annual religious festival in certain sects, I mean divisions, of Microsoft." Recent reorganizations -- those publicly disclosed or uncovered over the last 12 months -- include desktop operating system, developer tool, entertainment, mobile device, search and server organizations, among others. This year's reorg affecting Microsoft's TV products came with the departure of Enrique Rodriguez, a corporate vice president.

Bill Veghte is one of Microsoft's highest-profile executive departures steaming from reorganization. Microsoft announced Veghte's departure on January 14, after he failed to find a new position following the summer 2009 reorg that put Steven Sinfosky in charge of the Windows & Windows Live group. Weeks later, Microsoft acknowledged the departure of Mike Nash, like Veghte a 19-plus year veteran. At the end of 2009, Microsoft also lost Chris Liddell, as chief financial officer. The point: Microsoft is shedding top-level managers all while middle-manager ranks add bulge to the organizational structure.

The reorganizations can be looked at another way -- as reflecting ineffective management processes that Microsoft tries to resolve by changing which groups report to which groups or to whom. In theory, Microsoft's five business groups -- Business, Entertainment & Devices, Online Services, Server & Tools and Windows & Windows Live -- should be small enough to be nimbler than a company employing more than 90,000. But there are mitigating factors, such as reporting hierarchies that cut across different groups and supporting organizations, like marketing and services, that have responsibilities affecting all five Microsoft divisions. In many ways, Microsoft's organizational structure is best described as a middle schooler's messy room (also a Windows Plus! Pack for Kids theme).

Incentives that Discourage Risk, Innovation

Related to gut-bulging middle management: some HR review and compensation processes discourage many employees from taking the kinds of risks necessary for Microsoft to regain its competitive edge and, quite frankly, to innovate in truly meaningful ways. Microsoft's definition of innovation, for most of its product groups, is anything that preserves the status quo -- meaning extending Office and Windows and increasingly server software like SharePoint and Windows Server. Risk is a dirty word for many employees looking to advance at Microsoft.

A former employee whom I'll call Rodriguez said of the HR review process: "Microsoft has become too 'scorecard' heavy and highly litigated to the point it kills an employee's spirit of free thinking and creativity, since everything a person does is closely judged by management." Among the former Microsofties I communicated with over the last couple of months, Rodriguez was the harshest critic of Microsoft's review process, which he observed is going on right now; fiscal year ends on June 30 and reviews occur midway.

Several former and existing employees tried to explain Microsoft's seemingly complicated review and compensation process. People are hired at a certain level and can advance up levels, which have corresponding salary ranges. During reviews process, employees are graded with such designations as 'exceed,' 'achieved' and 'underperformed' commitment ratings. These are based on numerous criteria, which include management assessment of performance and achieving goals set during the previous review process. Other criteria include "contribution rankings." Problem: These criteria sometimes work cross-purposes to performance. Fred explained:

Processes became more bureaucratic and individuals were less empowered to take action. In fact, oftentimes the incentive structure encouraged individual contributors not to do the right thing, but just to do what they committed to in their review the year prior. In other words, if you committed to include Feature A in Windows, and halfway through the year you realized that was a bad thing for Windows and Microsoft customers, the incentive structure actively discouraged you from trying to kill the feature, because then you wouldn't have achieved your commitments.

Barry also made similar complaints about the "decentives" to doing a good job. "The metrics are too complex," he said. "We were evaluated also on a client's satisfaction with our work." The client could range from a reporter for Microsofties working in PR to developers for employees doing product development or for anyone to other groups within Microsoft.

Several current and former employees wanting to do better or escape from stifling management situations would request transfers. However, many managers wanted to keep their staff in part "because it would reflect badly on them," Barry said.

"I was put in 'performance detention' due to wanting to expand to another part of the company and ended up in the 'crapper' list," said another former employee, whom I'll call Mickey.

What About those 5,800 Layoffs?

Last year's layoffs surprised many Microsoft employees. There are looming questions about whether or not Microsoft dismissed the right employees. From Friday through Monday, I posted four stories from former employees laid off in 2009. Each story reveals something about the layoff process and the middling middle management problems. Posted as Microsoft Confessions:

These four stories and others I received but didn't publish raise questions about whether Microsoft laid off the right people, whether certain groups were targeted and whether more middle managers should have been axed. Perhaps the most visible of the surprising layoffs: Don Dodge, who within two weeks of being let go was hired by Google.

Based on former and current Microsoft employee stories, five trends can be seen in Microsoft's layoff of 5,800 employees during 2009. Laid-off employees tended to be:

  • High salaried
  • With the company eight or more years
  • Older -- many in their late 30s or early 40s
  • At a status of what Microsoft calls "long at level"
  • In positions later refilled by younger, lower-salaried people
  • In positions the former Microsoftie resumed as a non-employee contractor

Several former employees proactively contacted me about these six similarities, but not all people used all six. Mickey said he was:

1. Over 40

2. Worked at MS for almost 11 years, industry almost 28

3.  Pretty high salary

4.   Senior guy but brought in underleveled

Barry, who had worked as a manager, clearly understood employee evaluations and he concurred about the six similarities. I should point out that in fairness to Microsoft, I've seen this pattern elsewhere, including journalism. Older and/or higher-salaried employees are laid off and either replaced by someone younger who is paid much less or the original employee returns on a freelance basis. For Microsoft, the returnee would a contractor. Barry is someone whom Microsoft laid off and took back as contractor doing essentially the same job as before.

Barry insinuated there was some age discrimination in the layoffs, but other former Microsoftie's disagreed. Former employee Randolph (not his real name, of course) noted that four of the people he was laid off with were ages 36 to 59, with two of them being 50 or over. "Suspicious, perhaps, but just as likely a consequence of the team demographics," he said. Two of the people remaining on the team were 48 and 51. The ages were provided with Randolph's severance package. However, "the fact that they gave me the paper in the first place suggests they are sensitive to the implication of age discrimination."

Then there is "long at level," which refers to employees who have stayed in the same position or designated organizational and pay level for a long time. Presumably a long-and-level employee lacks ambition to outperform. But for a smaller product or services group, where an employee shows expertise, there may be nowhere to go but out. Other employees stay in organizations where moving up or out is discouraged or even penalized by the manager. I know of current Microsoft employees who change positions every few years simply to avoid being perceived as long at level.

In conclusion, no company's organizational structure is perfect, because too many people put their personal ambitions before the company they work for. But companies can encourage mismanagement by the organizational structure, corporate culture and review and compensation processes. Based on my communications with dozens of former and current Microsoft employees over the last couple months, Microsoft needs to streamline its management processes, empower small groups to act like startups, reward risk-taking innovation and sharply reduce the number of middle managers.

Update: Mini-Microsoft's blog and especially the comments can offer broader perspective on this post's topic. While I purposely didn't read Mini's blog when researching and writing this post (I typically avoid outside influences when writing), several of my sources sent some of the comments they had posted to the blog. Mini has an active following of current Microsoft employees. I'll resume reading now that I've finished here.

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