Microsoft Corporation Lets the Other Shoe Drop In Nadella's Turnaround Plan

For a few hours this morning, Microsoft (NASDAQ: MSFT  ) shares surged nearly 4% higher. At that point, Redmond added 11 points to the Dow Jones Industrial Average (DJINDICES: ^DJI  ) all by itself. The catalyst for Microsoft's huge jump? Well, the other shoe dropped in CEO Satya Nadella's turnaround plan.

It's only been a week since Nadella spelled out Microsoft's new direction. He said it was time to think beyond the not-very-old "devices and services" strategy, which predecessor Steve Ballmer wanted to leave as his legacy. Nadella wants to go all-in on mobile and cloud products, and he needs to flatten Microsoft's ponderous command structure to make it all happen.

Flattening the chain of command always comes with collateral damage. "At some point, the flatter organization he's investing in should also result in heads rolling among middle management," I noted last week.

As it turns out, Nadella is doing more than just chopping a few heads in the bloated middle-management layer. Indeed, he's taking a machete to the entire company. Some 18,000 Microsoft jobs are going away over the next year, and it involves a lot more than just erasing superfluous mid-level titles.

Source materials from Nokia and Microsoft.

The cuts start with 12,500 jobs in the devices and services division, which was created out of the $7 billion acquisition of Nokia's (NYSE: NOK  ) handset operations. In a letter to Microsoft employees, Nadella explained that this bit is all about activating the "synergies and strategic alignment" between Nokia and Microsoft. "The first step to building the right organization for our ambitions is to realign our workforce," he said.

That's a no-brainer move -- standard practice in big acquisitions, really -- though the scale of it is larger than expected. The Nokia deal brought 32,000 new names onto Microsoft's payroll, and about 40% of them will get their walking papers.

Beyond the carnage in Microsoft's new handset operations, Nadella is indeed taking some fluff out of the overstuffed command structure.

"We plan to have fewer layers of management, both top down and sideways, to accelerate the flow of information and decision making," he said. Nadella didn't spell out the headcount impact of this particular initiative, but he also didn't present any other direct job reductions.

Microsoft CEO Satya Nadella. Source: Microsoft.

I think it's safe to assume that the unaccounted 5,500 or so payroll reductions will apply to the "flattening" project. That also lines up with pre-announcement rumors of roughly 5,000 Microsoft jobs going away.

In an SEC filing, Microsoft said these cuts will result in pre-tax charges between $1.1 billion and $1.6 billion. The plan will be "substantially completed" by the end of 2014 and finalized by June 2015. About $900 million of these charges will be cash payment, counting toward the just-started fiscal year 2015.

Curiously, neither Nadella nor the SEC filing spell out the expected long-term cost savings of these drastic cuts. I get that Nadella wants to focus on the business-model transformation, rather than the trite cost savings that will follow. Still, investors would love to hear more about the real dollar impact of it all.

Perhaps Nadella will share more cost-savings detail when Microsoft reports fourth-quarter results next Tuesday. Until then, I'm applauding the clear direction and the gutsy scale of Nadella's revamped business model. But it's hard to call this job reduction an investable event until Microsoft starts talking about the financial effects.

Microsoft owners appear to agree, as the morning's 4% share price gains faded to less than 2% in the afternoon. This was a good start, but investors are still hungry for more information on Nadella' plans.

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