Big changes and possible cuts prompt Microsoft to publicly air Nadella memo

Computerworld - Microsoft's CEO Satya Nadella distributed his Thursday memo beyond the halls of his company to signal to everyone -- employees, investors, customers and the press -- that big changes, likely including staffing cuts, are in the near-future cards, analysts said.

"He's preparing for some significant internal changes," said Merv Adrian of Gartner when asked why Microsoft published Nadella's 3,100-word email. "From the outset, Nadella has been very focused on the optics of what Microsoft does. This was all very carefully thought out, and he wants to make sure everyone knows Microsoft is working very hard at positioning for change."

On Thursday, Microsoft posted Nadella's email on its website, prompting a blizzard of coverage in the technology and mainstream media, and capturing much of that day's news cycle.

While corporations regularly deliver major news -- especially about strategy pivots and changes to the business -- to employees via email, most keep such messages inside the company, or try to. Microsoft, however, has a history of publishing some, although not nearly all, of its biggest memorandums for outsiders to read as well.

While co-founder and former CEO Bill Gates' famous "The Internet Tidal Wave" memo (download PDF) of 1995 was inside-only -- it surfaced during the U.S. Department of Justice's antitrust case against Microsoft -- others have been publicized, including Steve Ballmer's "One Microsoft" email of July 2013.

Ballmer, who was replaced by Nadella in February, used that memo to announce a major corporate reorganization designed to speed up development, foster collaboration and execute the "devices and services" strategy he had outlined the year before.

Nadella's email was in the same vein as Ballmer's of a year ago.

"I see this as a combination of a 'Burning Platform' and an advertisement," said Patrick Moorhead, principal analyst at Moor Insights & Strategy.

Moorhead's mention of "Burning Platform" was a reference to a 2011 memo by Stephen Elop, then the CEO of Nokia -- and now the head of Microsoft's devices division -- in which Elop argued that the Finnish phone maker faced very tough choices as competitors encroached on its business.

"Nadella is selling his employees on the changes he's going to make," Moorhead added. "He said he would streamline and decrease the number of people who have a say, decrease the number of general managers, those who have responsibility for a P&L [profit and loss statement], decrease the number of program managers who keep track of different steps along the development process."

But if the memo was written to warn employees of a sea change ahead, why take it public?

"Earnings are coming up, and the fiscal year just started," Rob Helm, an analyst with Directions on Microsoft, isaid n a Thursday interview, implying that the email was directed at investors as well as employees. "This seems like a desire to set priorities for the next fiscal year."

Microsoft will announce its June quarter revenue on July 22, when analysts will hear Nadella go into more detail. "I'll say more then on what we are doing in FY15 to focus on our core," Nadella said.

"This is Nadella's first time rolling out a major strategy presentation," said Moorhead. "He obviously thinks it's important to get it to all stakeholders -- employees, investors, partners, customers, the media -- to signal that there are changes coming and explain why they'll make those changes."

Clearly, there will be changes at Microsoft.

"Nothing is off the table in how we think about shifting our culture to deliver on this core strategy," Nadella wrote. "Organizations will change. Mergers and acquisitions will occur. Job responsibilities will evolve. New partnerships will be formed."

Many analysts put a spotlight on those lines, and others in the same paragraph, to conclude that headcount cuts are coming.

"The focused mission Nadella articulated does not need 130,000 people. Period. There are absolutely cuts coming, and they are likely to be brutal," said Ben Thompson, an independent analyst who covers technology on his Stratechery website (paid subscription required for Thompson's analysis).

Jan Dawson, chief analyst at Jackdaw Research, is less sure that Microsoft would reduce its workforce, but believes it's on the table. "There are also hints towards the end of [Nadella's] email about efficiency, streamlining and flattening in the organization, which could be read innocuously as having the same team operate more efficiently but could also be seen as an indication that some cuts may be coming," Dawson wrote on his Beyond Devices blog yesterday.

It's hard to believe other companies, like Apple and Amazon, would want to take an internal discussion public, much less take the time to promote such a move. So what's Microsoft's rationale?

Because it's not Apple or Amazon, said Adrian of Gartner. "Those companies are not undergoing the kind of transformations that Microsoft is," he said.

Nadella's email can be read on Microsoft's website.