Microsoft reorganizes and this time it’s for all the marbles

The monster news of last week is clearly Marissa Mayer giving Jawbone UP fitness monitor wristbands to over 11,000 employees, which sends a strong signal to the markets and lets Yahoo staff know that she wants them to be healthy and work hard. And tracking their every movement. No, no, just kidding.

Maybe Steve Ballmer should have bought Jawbone UPs for the staff at Microsoft, who are going to have to run faster to just keep up with the sweeping organizational changes announced last week. I’ve written a number of posts prior to the reorg about what it means (see Microsoft announces reorganizationMicrosoft will rise from the ashes of Windows and Surface failures, and Microsoft passes on Nokia, and Ballmer is set to reorganize).

Throwing away all the packaging, Ballmer’s memo boils down to this organization:

There will be four engineering areas: OS, Apps, Cloud, and Devices. We will keep Dynamics separate as it continues to need special focus and represents significant opportunity.

[...]

Specifically, our teams and their leaders will be these:

  • Operating Systems Engineering Group. Terry Myerson will lead this group, and it will span all our OS work for console, to mobile device, to PC, to back-end systems. The core cloud services for the operating system will be in this group.
  • Devices and Studios Engineering Group. Julie Larson-Green will lead this group and will have all hardware development and supply chain from the smallest to the largest devices we build. Julie will also take responsibility for our studios experiences including all games, music, video and other entertainment.
  • Applications and Services Engineering Group. Qi Lu will lead broad applications and services core technologies in productivity, communication, search and other information categories.
  • Cloud and Enterprise Engineering Group. Satya Nadella will lead development of our back-end technologies like datacenter, database and our specific technologies for enterprise IT scenarios and development tools. He will lead datacenter development, construction and operation.
  • Dynamics. Kirill Tatarinov will continue to run Dynamics as is, but his product leaders will dotted line report to Qi Lu, his marketing leader will dotted line report to Tami Reller and his sales leader will dotted line report to the COO group.
  • Advanced Strategy and Research Group. Eric Rudder will lead Research, Trustworthy Computing, teams focused on the intersection of technology and policy, and will drive our cross-company looks at key new technology trends.
  • Marketing Group. Tami Reller will lead all marketing with the field relationship as is today. Mark Penn will take a broad view of marketing strategy and will lead with Tami the newly centralized advertising and media functions.
  • COO. Kevin Turner will continue leading our worldwide sales, field marketing, services, support, and stores as well as IT, licensing and commercial operations.
  • Business Development and Evangelism Group. Tony Bates will focus on key partnerships especially our innovation partners (OEMs, silicon vendors, key developers, Yahoo, Nokia, etc.) and our broad work on evangelism and developer outreach. DPE, Corporate Strategy and the business development efforts formerly in the BGs will become part of this new group. OEM will remain in SMSG with Kevin Turner with a dotted line to Tony who will work closely with Nick Parker on key OEM relationships.
  • Finance Group. Amy Hood will centralize all product group finance organizations. SMSG finance, which is geographically diffuse, will report to Kevin Turner with a dotted line to Amy.
  • Legal and Corporate Affairs Group. Brad Smith will continue as General Counsel with responsibility for the company’s legal and corporate affairs and will map his team to the new organization.
  • HR Group. Lisa Brummel will lead Human Resources and map her team to the new organization.

Let me recapitulate what the new organizational structure could mean for the enterprise software side of things. First of all, Google has reorganized but is still structured around technology. As Danny Sullivan has pointed out, there is no head of Social or Ads like you’d find at Google, Microsoft’s leading competitor.

Qi Lu is head of Applications and Systems Engineering, which now incorporates many of the company’s major profitable products, Office apps and enterprise software, like Exchange, Outlook, Office 365, Yammer, Sharepoint, and a dotted line management of the engineering team of Dynamics. Also included is Bing, which is a money-losing endeavor that doesn’t fit anywhere, as far as I am concerned.

For all intents and purposes, Qi Lu is now heading up Social at Microsoft, because the products he’s managing are where all the social is. (I’ll add one asterisk to that statement: when Microsoft gets around to building social streams into Windows as a native operating system capability, we will revise that. If they ever do.)

Some have noted that Microsoft has a history of reorganizing, and it hasn’t led to any enormous spike in profitability or focus in the past. Bill Gates wrote in 1996,

We changed the structure of the company. I’m sure we’ll change it again many times. Reorganizations are expected around Microsoft.

With the benefit of hindsight, and with my perspective being the social business, let me make the case that this time the reorg is different, because for the first time one person is in control of the user experience for users of Microsoft’s enterprise applications. Again, an asterisk for Windows, but I maintain that the collapse of the desktop PC market is happening so quickly that someone in Qi Lu’s position has to chase the hot zone of growth, nowhere near the Windows PC operating context. He will likely focus overwhelmingly on cloud services, like Office 365 and Yammer, and transitioning on-premise server-based solutions like Sharepoint and Exchange to their cloud counterparts.

We’ve already see the push in Office 365 to make Yammer the default user experience in Sharepoint (see Yammer is becoming the social UX for Microsoft). They are going to enlarge what Yammer is, and make it the social stream for the passage of all sorts of newly socialized information.

Qi Lu’s cloud solutions run on Windows Azure, and so he will continue to be the most important customer for Satya Nadella’s cloud and enterprise engineering group for some time. It’s not stated in Ballmer memo, but the value of Office 365 and the other enterprise apps (and Bing) is so great that in essence Qi Lu has a dotted line influence on Nadella’s engineering group, as well.

The missing piece of the puzzle for me — along the lines of Sullivan’s comments about ads and social having no owner — is this question: Who owns the mobile experience at Microsoft, now? The new Microsoft has no place for a Jony Ive controlling user experience.

The simple and wrong answer is Julie Larson-Green, who is building devices like tablets and smartphones. Another wrong answer is Terry Myerson, who is building the Windows software that runs on those devices. These are both wrong — and especially wrong in the enterprise area — because many Microsoft customers are having their primary interaction with Microsoft software through the browser, or on non-Microsoft devices. And if the trend lines are to be believed, in the near future those proportions will continue to rise. So, already today the most important user experience to consider is in the browser, and soon it is likely to also include mobile apps running on hardware not produced by Microsoft. And I don’t mean Internet Explorer, either.

Yes, I know that Ballmer, Qi LU, and anyone else in authority at Microsoft will have to publicly stick to the party line — “Windows will continue to be a dominant operating platform for decades to come, we are turning the corner with Microsoft smartphones and tablets, yada yada yada” — but the numbers say different. Ballmer’s memo only mentioned PC four times, and mostly in retrospect, phone only three, and Internet Explorer zero. (I noticed that Surface’s price was dropped today by around $100. Too little, too late?)

However, behind the scenes, Qi Lu and his colleagues must be planning for a transformation to a very different operating model: a leading enterprise software company, integrating a collection of tools necessary for the functioning of business in the past decade, right up to the business of today. But the battle now is to contrive the software platform for the emergent company of next year, and the decade that follows. Qi Lu, with the people at Yammer, Office 365, Sharepoint, Exchange, and Skype, will have to connect the dots in a way that transitions to a very different tomorrow while delivering value at every today along the way.

Microsoft’s battle for the future is not other established mainline enterprise software players, like IBM, Oracle, and SAP, who are increasingly being sidelined into narrow functional areas — like manufacturing, and finance — or deriving more of their revenues from consulting services. The battle for the future is with Google, to a lesser extent Apple, and perhaps the rapid rise of upstart start-ups, like Dropbox. And in the weeks, months, and years to come, we will see that multidimensional, multiplayer game play on. This reorganization is a prelude, and not a finale.

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Stowe Boyd

Stowe Boyd

researcher-at-large Stowe Boyd

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