Stuck in the Matrix: Where is Yahoo’s Neo?

When Carol Bartz was hired, I was quoted in the New York Times saying that Yahoo (s YHOO) should be taken private. A year later, I’m even more convinced that it’s the company’s only option. Here’s why.

There are some great strategy discussions about what Yahoo can do — notably from Jason Calacanis and Reid Hoffman.  However, as insightful as these assessments are, very few pundits see the real structural issue at play, which is Yahoo’s fossilized organizational structure. When turning Yahoo around the first time, Terry Semel implemented a classic matrix structure to manage the company. Products like Front Page, Messenger, Mail and Flickr are on the verticals, while organizational functions like PR, legal, privacy, branding, etc. are on the horizontals. This structure is used by most large organizations in the world, and it’s great for managing growth as well as for checks and balances.

But it is terrible for accountability or speed. Whenever you launch or change a product, you have to get clearance from legal, PR, branding, privacy etc, which inevitably takes time. The matrix structure also prevents any real risk taking. The legal department, for example, wants the same ToS across all the products. Brickhouse was created to circumvent this issue. Set up outside and away from the mother ship, we hoped to be the tugboat that pulled the big tanker around. It worked for a while, but the Microsoft bid pretty much derailed that effort. The company had to focus all its energies to fend off the bid, which was necessary but incredibly disruptive to morale and productivity.  In addition, the Matrix had woken up and was attacking our unit (the best analogy I’ve found for this is that whenever you do corporate incubation, the immune system of the company will come and attack you — but that’s a whole other post).

The matrix structure works great in older, slower industries, but on the Internet, the two attributes you must have are speed and risk. Very simply, Yahoo’s organizational structure is antithetical to the industry they’re in. Over time, that structure has calcified and today, Yahoo is a 14 year old dinosaur in the industry it helped form.

Inevitably, the people get blamed.  However, the fastest NASCAR racing team cannot win if you take the car off-road against ATVs on sand dunes. What needs to happen at Yahoo is a deep restructuring to strip out the org structure and push accountability, control and risk back out to the edges.  Let a product manager have full control and put themselves on the line in exchange for flexibility.  For example, at Brickhouse, we could choose whether or not to launch on Yahoo’s servers or avail ourselves of other internal or external services (in theory, at least. But this restructuring is a massive task and essentially requires major surgery on the company.  That is simply not possible while Yahoo is public and its constant focus is the hamster wheel of the quarterly numbers. The only option for Yahoo is to take the train off the tracks.

Importantly, this issue is not unique to Yahoo; it’s a structural mismatch between control systems needed at any large, public company and the high metabolism of the consumer internet. Google (s GOOG) was also falling into that structural trap, and Larry Page’s first steps were to reorganize to try and avoid that fate.

Ashkan Karbasfrooshan has a good analysis of the numbers, which shows that Yahoo, despite having as many users as Facebook, is worth just 1/20 of Facebook, despite being profitable and having higher revenues.

There is clearly a tremendous upside to play for, and like many ex-Yahoos, I bleed purple on the inside.  I hope someone steps up and does the right thing — Yahoo is an important foundational piece of the Internet; it deserves to be saved from the Matrix.

Salim Ismail is the founding Executive Director and current Global Ambassador at Singularity University, based at NASA Ames. He’s a former Vice-President at Yahoo and ran Brickhouse, their internal incubator.

Image courtesy of Flickr user Sudhee.