What Do Microsoft's Layoff Plans Tell Us About Satya Nadella's Vision?

The company looks to be making its largest cuts ever, partially due to redundancies created when it bought Nokia's mobile phone business.

Jul 16, 2014 at 7:28AM

When Microsoft (NASDAQ:MSFT) bought Nokia's mobile phone business it seemed inevitable that significant job cuts would follow.

Those cuts are set to happen, according to a Bloomberg report. But rather than just reducing redundancies from the deal, they appear to be part of a broader effort by Microsoft CEO Satya Nadella to reposition and reinvigorate the company. Nadella laid out his plans in an open letter to the company's over 127,000 employees last week. In the missive the CEO prepared the company for change. 

The day I took on my new role I said that our industry does not respect tradition -- it only respects innovation. I also said that in order to accelerate our innovation, we must rediscover our soul – our unique core. We must all understand and embrace what only Microsoft can contribute to the world and how we can once again change the world. I consider the job before us to be bolder and more ambitious than anything we have ever done.

Nadella also distanced himself from predecessor Steve Ballmer's vision of the company as a "devices and services" business. Instead, he repeatedly used the terms "productivity and platform." He also stressed adaptability and at a basic level building a company that's about helping people get things done. 

Productivity for us goes well beyond documents, spreadsheets and slides. We will reinvent productivity for people who are swimming in a growing sea of devices, apps, data and social networks. We will build the solutions that address the productivity needs of groups and entire organizations as well as individuals by putting them at the center of their computing experiences. We will shift the meaning of productivity beyond solely producing something to include empowering people with new insights. We will build tools to be more predictive, personal and helpful. We will enable organizations to move from automated business processes to intelligent business processes. Every experience Microsoft builds will understand the rich context of an individual at work and in life to help them organize and accomplish things with ease.

Bold change is certainly needed. Ballmer's Microsoft squandered opportunities -- it fell behind in mobile devices, lost market share for Windows, and entirely ceded the low-cost device battle to Google's (NASDAQ:GOOG) Chrome and Android operating systems. But change doesn't come at a company as large and as lumbering as Microsoft without pain.

What's going to happen?

Microsoft plans to shed workers from areas of overlap created by the Nokia deal and from other parts of the company. The cuts, which could come as early as this week, may top the 5,800 positions eliminated in 2009, the biggest in the company's history, Bloomberg reported.

The 2009 layoffs were in response to the recession. They took about a year and resulted in Microsoft letting go about 5% of its workforce.

The new round of cuts seems less about the economy and more about being efficient and having the right team moving forward. Some of the moves will also fulfill a pledge Microsoft made when it acquired Nokia in September to implement $600 million in annual cost savings within 18 months of the deal closing. 

In September 2013, when Ballmer was still CEO, the company stopped creating original content at its MSN and Bing brands resulting in the elimination of around 100 vendor and contractor positions. These workers -- known as contingent staff -- weren't direct employees, so legally those don't count as layoffs, but they likely felt that way to the workers, many who had been in their positions for years. Some were writers working on a traditional freelance basis (where you always know you can be cut with no notice) while others were full-time editors, producers, and copy editors who worked traditional full-time schedules.

At the time of those cuts, a number of top content executives left, including former MSN News content boss Stephen Cvengross who decamped for Syracuse Media Group not long after it was announced that Microsoft was dropping all content creation. During the same period Microsoft also shuttered its MSNnow product, which employed nearly 30 full-time vendors and contractors at its height.

Microsoft has always made liberal use of vendors and contractors so it can grow and shrink its workforce without technically having layoffs. 

Cuts among regular Microsoft employees have been more rare. Aside from 2009, the company has lopped off a few hundred workers here and there -- in most cases the affected employees were given ample chances to move internally.    

Making a significant cut to the full-time staff puts all of Microsoft on notice. It shows that Nadella values the company's traditions but knows that the past is not what will drive it forward. To innovate, Microsoft's workforce needs to be hungry and maybe just a little afraid.

Nadella's letter and the cuts show a leader who knows his company needs to change with the resolve to actually make it happen. 

Can Microsoft change?

It's hard to find fault with anything Nadella has done since taking over. He took swift steps to modernize the Office platform, bringing it to Apple's (NASDAQ:AAPL) iPad and iPhone. He also has put Windows back on a path where it can both compete and where it moves toward being an operating system people actually like. The biggest challenge the CEO faces is keeping and growing a positive culture while making tough decisions.

Cutting workers when things are going reasonably well can be a tough sell to employees. To keep his vision on track Nadella must convince his remaining staff that he is doing what is needed. Most importantly he needs to have them believe that by working hard, being adaptable, and embracing the new Microsoft they won't be the next to be unemployed. Layoffs can create negative momentum at a company and an environment where many workers spend more time waiting for the ax to fall than moving their work forward.

If Nadella can make these cuts while showing a positive vision for the remaining staff then he will have walked an impressive tightrope. He will also have created a more nimble, hungrier company better prepared for the quick innovation required.

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Daniel Kline is long Microsoft and Apple. He spent a year as Microsoft vendor and thoroughly enjoyed his time there. The Motley Fool recommends Apple and Google (C shares). The Motley Fool owns shares of Apple, Google (C shares), and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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