One Microsoft CEO scenario is looking likely

In recent months, I have been outlining the idea that Microsoft’s board of directors might be too tied to the company’s current business strategy to accept a new CEO who might advocate any serious changes, such as selling off the company’s consumer products. For example, in Microsoft buys Nokia Devices and Services, Elop is EVP of Devices, I wrote

The Microsoft argument is that the company will be much strengthened working together with Nokia. If so, then why not a year ago when he walked away from a rumored deal? Because at that time Ballmer thought he could build his own devices and sell a lot of them. Instead, he wrote off $900 million in Surface tablets at the end of the last quarter (see Microsoft sees worst stock drop since 2000: Welcome to the post-PC era), and the board (and especially Bill Gates) decided it was time for someone new at the helm of Microsoft. But it seems like the board still believes in the services and devices plan, which is to invest hard and win big in the devices marketplace.

I think this is a huge pipe dream. Nokia has leaked new Microsoft RT-based tablet plans based on Nokia Lumia phone designs, and my hunch is that they believe this is a better table that Surface, just like Lumia is a better phone that anything Microsoft has built. The rumors are that this tablet would be launched in late September.

All along, as the Microsoft disaster has been careening down the hill, I have stated that the future will be in enterprise software: that Microsoft has to find a Sam Palmisano type to turn the company around and drop all the money-losing lines of business, like Bing, phones and tablets. But I also have continued to bet that the company wouldn’t do so until a/ Ballmer was gone, and b/ billions more were squandered. Well, they are an additional $7.17 billion down, and counting.

The big question is whether Ballmer is now going to hand the reins to Elop, and if so, will Elop ride the Microsoft trail as Ballmer has laid it out, right over a cliff? It might be that Ballmer and the board (including Bill Gates) are prepared to spend more time and money in capturing a significant share in the handset and tablet world, even though iOS and Android seem to have closed that opportunity. It might be time to start handicapping who will be CEO at Microsoft once Elop takes his shot, and fails with the Ballmer plan, just like Ballmer did.

In that piece, and others, I have been making a two CEO argument: someone is going to be appointed the new CEO, and more-or-less required to continue the current business plan, which is based on the Ballmer theory of fighting everywhere: the ‘devices and services’ plan he hatched last year and reorganized around. However, that CEO will have to be followed by another CEO, the one that will start making the real changes Microsoft needs to make to become a competitor in its growth area: enterprise software. The board is just not willing to accept the change that the ‘second coming’ implies.

In a piece at AllThingsD yesterday, Kara Swisher suggested that a two CEO scenario is becoming the plan at Microsoft, with Ford CEO Mulally being envisioned as a ‘caretaker’ CEO who’d continue the current plan for the short term, and then transitioning to one of the several internal candidates once they’ve one of them has proven himself. Thos internal candidates would include COO Kevin Turner, Stephen Elop (the former CEO of Nokia and soon to be head of devices at Microsoft), Tony Bates (former Skype CEO), and the new frontrunner in waiting, Satya Nadella. Nadella, notably is the head of enterprise software at Microsoft. And enterprise is the ultimate destination for Microsoft.

So, it appears that Mulally might be the person selected to lose those billions over the next few years and to be compensated enormously for doing so. And then one of the insiders will be the one allowed — at long last — to spin off all the non-viable and non-essential bits of Microsoft — Bing, XBox, Windows, phones and tablets — and turn into a leader in enterprise software.

It may be a long — and costly — few years. ahead.

Microsoft drops stack ranking system: Did the incoming CEO make that happen?

We’ve heard that Microsoft’s board is eager to bring on a new CEO before the end of the year to replace outgoing Steve Ballmer (see Who’s calling the shots?), and there is a short list of people being discussed: Stephen Elop (former Microsoft exec, former CEO of Nokia), Alan Mulally (now CEO Ford), Paul Maritz (former Microsoft exec, now CEO of Pivotal), and Tony Bates (former CEO Skype, now Microsoft’s head of evangelism and business development).

I believe that those that have deep experience at Microsoft may have a correspondingly deep aversion to the company’s stack ranking approach to employee evaluation and compensation. The approach — where managers are required to fit their direct reports against distribution targets, so that a certain proportion must be considered as not meeting expectations for their job, independently of whether or not the manager agrees — has led to wide-spread dissatisfaction among managers and employees. In fact, many attribute the company’s ‘lost decade’ to the internal stresses, outright competition and sabotage that the approach creates, such as Vanity Fair contributing editor Kurt Eichenwald.

Yesterday, Microsoft changed its long-standing policy, as was revealed in a memo from Microsoft Human Resource lead, Lisa Brummel, in which she stressed moving away from ranking on a curve, the need for more feedback to employees on their performance, and a transition to greater levels of teamwork and collaboration.

Ballmer has been CEO for quite a while, and he’s supported stack ranking all along. He could have changed that at any point, but did not. It’s reasonable to support that others in the organization, like Brummel, have been advocating for a change for a long while. Ballmer is a lame duck, so it’s conceivable that Chairman Gates gave Brummel the go ahead on the change.

There are a number of aspects of the reorganization that was started in June 2013 that have not been completely solidified, and the status of Stephen Elop is one aspect of that. As the Nokia deal is finalized, Elop would be taking control of the Microsoft devices group, which will include Nokia devices. But if he comes in as CEO, that would have to be rejiggered.

Leaving aside Elop’s status, is it possible that a CEO has been picked? One that wants stack ranking dropped immediately? My feeling — and it’s just that, a feeling — is this: one of the candidates has been picked, and he’s made it clear that stack ranking is a terrible system, one that is linked to a great deal of the dysfunction going on inside Microsoft. That would argue for someone with deep experience at Microsoft, like Maritz or Elop. And of the two, Maritz has had exposure to more modern software companies’ talent management models, like VMware and Pivotal.

Taken from another angle: it would be bad to make this change prior to a new CEO coming on board who wants to take some other approach to talent management. The board would be tying the hands of a new CEO. So you have to figure that at least all the candidates being considered are opposed to stack ranking, even if they haven’t made a final choice.

This transition will the start of a positive change at the software giant. The next step is to announce the new CEO, and begin the long process of finding a new vision and focus for Microsoft.

An aside: the news of Microsoft’s abandonment of stack ranking comes right on the heels of Marissa Mayer’s newest black eye: a brouhaha arising from the company’s stack ranking system (see Apple Q4, Gates disses Zuckerberg, Mayer’s Cultural Revolution, and Chautauqua) and the griping that it is causing there, for all the same reasons.

 

Who’s calling the shots?

Who Will Be Calling The Shots At Microsoft?

I wrote this week about Stephen Elop’s willingness to ax some of Microsoft’s products if he were to get the CEO role at Microsoft (see Stephan Elop supposedly thinking about making big changes at Microsoft). In particular, people with access to Elop told Bloomberg reporters that Bing would likely be shuttered, Xbox spun out, and other consumer-oriented products reconsidered.

Most cogent to the business orientation of the firm, Elop would move to make Office actually workable on other mobile devices, like iOS and Android. Some commentators made the case that Office Mobile is already available, but they seem to forget that it requires an Office 365 subscription, at the least. Here’s an interchange I had with Henry Blodgett and Mary Jo Foley on that:

Screenshot 2013-11-10 10.46.59

So, Elop may only be advocating a speed up, but it’s been a long time coming.

However, others have started to wade in, notably, Paul Allen, the billionaire co-founder of Microsoft. The chief investment officer of Allen’s family investment office Vulcan Capital is Paul Ghaffari, and he spoke at The Financial Times Investment Summit recently, and according to Stephen Foley of the Financial Times he said this:

Mr Ghaffari said the overwhelming majority of Microsoft’s earnings were generated by selling software and services to business customers.

“The search business and even Xbox, which has been a very successful product, are detracting from that. We would want them to focus on their best competencies,” he said.

“My view is there are some parts of that operation they should probably spin out, get rid of, to focus on the enterprise and focus on the cloud.”

The Microsoft board has shown a new “receptivity to getting outside views,” Mr Ghaffari said, adding that the search for a successor to Mr Ballmer was being handled well.

If the board opts for rumoured candidate Alan Mulally, currently chief executive of Ford, Mr Ghaffari suggested he be paired with another executive with technology product experience. Other shareholders have questioned the recruitment process, including the issue of whether Mr Gates may circumscribe future strategy.

Note that this presentation preceded the Bloomberg reports about Elop.

Other reports suggest that the Microsoft board wants to replace Ballmer before the end of the year, partly to deal with the issues surrounding its Nokia acquisition, the release of the Xbox One console, and to complete the company’s reorganization (which is still a work in progress). The same names keep popping up —  Elop, Ford’s Mullaly, former Microsofty Paul Maritz, and current evangelism and business development head, Tony Bates, the former CEO of Skype — with no dark horse appearing on the horizon.

So far, Elop is the only one that has presented a new vision for the company to the outside world, and it lines up with what investors like Allen seem to think is a wise course. But the others may be quietly presenting plans for Microsoft to the board, but not leaking it to the world. Personally, Paul Maritz might have a better claim for successfully leading large and successful business software companies, like VMware and Pivotal.

‘Because Marissa Said So’

There is a growing furor at Yahoo about Marissa Mayer’s Quarterly Performance Review system, instituted last year around the time of the ‘No Remote Work’ mandate. In essence, Mayer’s created a review approach that attempts to systematize reviews of employees: reducing the role of the manager in evaluating an employee’s performance, and placing employees along a curve.

This is the most recent example of the human resources issue: should all employees be evaluated using a companywide, ‘objective’ approach, or should employees be measured for the effectiveness in the work setting they are part of? On one side, the company is seen as a large monolithic collective, and all are ranked based on company-wide metrics and considerations, such as the degree to which they align with corporate culture. On the other side, an employee would be measured based on how their efforts supported localized goals, like getting their product designed and out the door on time. In place of corporate goals, localized goals would dominate.

Mayer is in favor of the former, which comes along with the need — apparently — for managers to find a certain percentage of their teams ‘missing’ goals: to match the curve, and to serve up candidates for firing. Mayer has denied this in a 7 November Yahoo Q&A, as Kara Swisher reported,

Mayer highlighted that a part of the quarterly process called the “bucket” ranking allows for a divergence of plus or minus one to three percentage points. According to sources, this still apparently requires mandatory calibration, using the rankings: Greatly Exceeds (10 percent) Exceeds (25 percent), Achieves (the largest pool at 50 percent), Occasionally Misses (10 percent) and Misses (five percent).

There are rumors that these ratios may be relaxed, but there is no suggestion that the QPR regime will continue, as part of that glorious ‘entrepreneurial’ culture that Mayer is trying so hard to impose at Yahoo.

Are Millennials Calling The Shots?

I interviewed Avinoam Nowogrodski this week, the first in an ongoing series called The New Visionaries, where I plan to talk for entrepreneurs building social tools (see The New Visionaries: Avinoam Nowogrodski). He had piqued my interest by suggesting the businesses could learn a lot from Millennials, which he defended in the interview

According to a recent Forbes article, by 2025 more than 80 million Millennials are projected to be in the workplace. On the one hand, some feel this brings a wave of ambitious individuals with high expectations. On the other hand, I believe Millennials, more than any other generation, stand to democratize collaboration, which in turn can empower individual workers of all ages.

Because Millennial workers were raised in the digital age of transparency, they are accustomed to posting their activities online and having their progress followed. For them, success at work is about proving their worth to the team and the project. They must have an online voice and be constantly augmenting that voice and adding clarity to the team. Millennials thrive on transparency and a sense of team cohesion, which is something that social media provides. Because they are used to interacting online regardless of their physical locations and the time of day, they will provide the impetus companies need to embrace workforce mobility.

I read a story by Tom Agan in the New York Times today that provided additional support for Avinoam’s argument, and some specific examples:

I worked with one executive who was starting a big I.T. project — and she was shocked and a little embarrassed to learn that her mostly-millennial team had identified a lack of support for the effort among higher-ups. How? During her introductory presentation, they sent instant messages among themselves and to others in the company and figured it out.

[…]

When I worked at Nielsen, I led a quantitative study of major consumer companies like Kraft and Procter & Gamble — research that demonstrates the link between learning and innovation. The study found that employees were likely to generate more revenue if they held mandatory meetings to identify the strengths and weaknesses of new products after their introduction, used a consistent set of questions to do so, and recorded what they learned.

 At some companies and universities, smart leaders are already tapping into millennials’ abilities. For instance, when leading conference calls, one senior executive I know asks younger staff members to introduce the instant messages they send during the meeting directly into the discussion. Rather than keeping the two streams of information separate, he is intentionally encouraging and inviting the parallel conversation into the mix.

At Northwestern University, teams of undergraduate and graduate students — guided by older, experienced faculty members and alumni, and often paired with senior-level researchers — create plans for start-ups in an interdisciplinary series of classes called NUvention. Over the last two years, three of these teams have won first- or second-place awards in the Rice Business Plan Competition, to the tune of more than $1.5 million in prize money. And the winning teams have gone on to raise over $1 million each.

Mike Marasco, the leader of the NUvention program, puts it this way: “Millennials work more closely together, leverage right- and left-brain skills, ask the right questions, learn faster and take risks previous generations resisted. They truly want to change the world and will use technology to do so.”

In another example of Millennials’ preferences, Goldman Sachs recently announced that they want their junior bankers to work less, so they don’t burn out and quit. They also dropped their efforts to prohibit first year bankers talking with headhunters, and dropped the initial two year contract arrangement, making new hires full-time, regular employees from day one.

Millennials are starting to change the world of business, one text message at a time.

Stephan Elop supposedly thinking about making big changes at Microsoft

800px-Stephen_elop

Stephen Elop

Peter Burrows and and Dina Blass are reporting on discussions they have had with people privy to Stephen Elop’s thinking about the future of Microsoft. Elop is the former head of the Microsoft Office division that left to become CEO of Nokia, and then led the sale of Nokia’s handset business to Microsoft, and where he has been reported to be a CEO candidate to replace Ballmer.

The Bloomberg writers misspeak a bit when they say that Microsoft’s has refused ‘to adapt Office for Apple and devices based on Google’s Android operating system’. They have made Office Mobile available on iOS, although it requires an Office 365 subscription, and the user experience is ghastly. I have less experience with the Android offering, but the basics are the same: requires Office 365 subscription, and likely to be touch-unfriendly.

But it is clear that Microsoft has been positioning Surface and Windows phones as the only place that really works with Office. And no, apparently, Elop is taking a quite radical line, seemingly advocating the backing down from that position, and accepting the need to fully support those other hardware platforms.

Elop is supposedly considering other notions that break with the Microsoft orthodoxies:

Peter Burrows and and Dina Blass, Microsoft CEO Candidate Elop Said to Mull Windows Shift

Besides emphasizing Office, Elop would be prepared to sell or shut down major businesses to sharpen the company’s focus, the people said. He would consider ending Microsoft’s costly effort to take on Google with its Bing search engine, and would also consider selling healthy businesses such as the Xbox game console if he determined they weren’t critical to the company’s strategy, the people said.

The elephant in the room, however, is Surface and Windows phones, which are a huge question mark. Elop is behind the development of arguably the best Windows phones and tablets, so he can’t come out and say that he’d even consider shutting down that line of business if needed, but maybe it’s too soon for that.

Elop hasn’t confirmed (or denied) any of this. And Frank Shaw, a Microsoft spokesperson, said, “We appreciate Bloomberg’s foray into fiction and look forward to future episodes.”

My bet is that Elop has talked to various board members about these ideas, and they are the ones sharing their views with Bloomberg. Perhaps there is a factional battle going on for the future direction of the company.

In recent posts, I have made the case for a future Microsoft firmly focused on being a leader in enterprise software (see Microsoft is caught in a reality-distortion field and Microsoft will rise from the ashes of Windows and Surface failures). While the company seems committed to the current Ballmer strategy, this is really the first hint that senior Microsoftoids — and CEO candidates — are finally acknowledging that it may not just be execution or timing that’s at issue, but the fundamental strategy may be flawed.

Elop’s contract incented him to a firesale of Nokia

Tero Kuittinen, a Finn who covers the telephony markets at Forbes, has reported the latest twist in the Nokia acquisition by Microsoft. Apparently, Stephen Elop, the Nokia CEO and former Microsoft exec who engineered the deal, was allowed a very different contract than his predecessor’s, one that gives him a huge bonus if the scenario that we saw at Nokia happened. This is all according to research done by Helsingin Sanomat, the largest daily Finnish newspaper. He writes

According to changes implemented in 2010, Elop was entitled to immediate share price performance bonus in case of a “change of control” situation… such as selling of Nokia’s handset division. Curiously, his predecessor Kallasvuo had no such clause in his contract. This adjustment meant that unlike previous CEOs, Elop was facing an instant, massive windfall should the following sequence happen to take place:

  • Nokia’s share price drops steeply as the company drifts close to cash flow crisis under Elop.
  • Elop sells the company’s handset unit to Microsoft under pressure to raise cash
  • The share price rebounds sharply, though remains far below where it was when Elop joined the company.

Should this unlikely chain of events ever occur, Elop would be entitled to an accelerated, $25M payoff.

The $25 million is a 30% acceleration of the full golden parachute built into the contract.

Also note that Nokia’s chairman, Risto Siilasmaa, was questioned about the contract last week he made the statement that there were “no essential changes” in the contract relative to the previous CEO’s. Now he has backpedaled, and says the company’s legal department slipped up.

Urp.

The Finns are pissed, with Prime Minister Jyrki Katainen saying the situation was “outrageous”, and then “apparently the practices of rewards by large corporations all over the world are so exceptional that they cannot be understood with common sense.”

Elop has responded to a request by Nokia to decrease the payout by saying he needs the money for his divorce, 50% of which has to pass to his wife under Finnish law.

At any rate, Microsoft is paying 70% of the payout, so Nokia is only stuck paying him $7.5 million.

 

Stephen Elop’s Nokia contract rewarded him for the way things played out

http://www.forbes.com/sites/terokuittinen/2013/09/24/nokia-admits-giving-misleading-information-about-elops-compensation/

Many people in Finland are feeling understandably sore at the sale of Nokia(s nok)’s venerable handset division to Microsoft(s msft), and this won’t help quell the conspiracy theories. Nokia previously said outgoing CEO Stephen Elop had a similar bonus structure to that of his predecessor, but on Tuesday it emerged that Elop’s contract included a “change of control” clause that helped him net $25 million on the way out. There was effectively a built-in incentive for Elop to see the share price fall and then have to sell off the handset business.