Microsoft announced this week its first-ever layoffs, which brought out the naysayers and predictors of doom, but not me. I see cutting these 5000 jobs as good, with my only caution being that it really should be 20,000 at least. Fifty thousand would be better.
I am not, nor have I ever been, a big fan of Microsoft. Lots of smart people at Microsoft do great work and lots of other people at Microsoft do not do great work. It would be nice if most of the 5000 being let go were the latter variety, but who really knows?
This is a complex subject so I am going to take it one piece at a time. First there is the issue of Microsoft having never before had a layoff. In one sense why would they? The company makes so darned much money – or at least they have historically – that layoffs in the traditional sense of cutting fixed costs have hardly been necessary. But there is a problem with not having layoffs and that’s the sad fact that it makes it difficult to get rid of people who simply don’t belong. There are a lot of folks at Microsoft who should have departed long ago, but why? It’s comfortable in a way, the benefits are good, and once you’ve been around for a few years, heck, there’s not much they could ever do to get rid of you. There are people – possibly thousands of people – coasting at Microsoft because of the company’s policy of simply allowing it.
Next let’s consider how big a layoff this really is – 1400 people right away and up to 5000 by sometime in 2010. Microsoft has, depending on how you count it, about 100,000 employees. If the average time in service is 10 years that implies that 10 percent of the Microsoft workforce leaves every year, which feels about right. That’s 10,000 folks leaving of their own accord EVERY YEAR. So what does this layoff mean, anyway? “Over the next two years we’ll be eliminating 5000 positions.” It means nothing.
The company’s intent MIGHT BE to permanently eliminate 5000 jobs over two years, but all that would mean under this scenario is that their hiring during that period would be limited to 15,000 replacements.
The real problem at Microsoft is one that every other public company would love to have – they make too much profit. So unlike every other public company, Microsoft traditionally manages its earnings not by cutting expenses but by increasing spending. It’s a legacy technique invented years ago by legendary CFO Frank Gaudette and embraced by Bill Gates and Jon Shirley because it accomplished the task of meeting Wall Street expectations, allowed the company to hide spectacular true profit margins, while still generally keeping anti-trust officials off Microsoft’s back.
The problem at Microsoft typically hasn’t been, “Oops, we’re not going to make enough money this quarter; how do we boost earnings?” It has been, “Oops, we’re going to beat Wall Street estimates by too much; what can we spend money on to bring our numbers into proper alignment?”
It’s a great problem for a CFO to have.
But what happens, then, when you finally do have a bad quarter? For Microsoft it triggers a number of interconnected decisions and events. If it were run like a normal company Microsoft could simply cut a bunch of expenses, move some money around and – like IBM does right now – look terrific to Wall Street. But Microsoft doesn’t want to do that for a number of reasons, most of them familiar to erstwhile Y2K vigilantes who hid in the mountains in late 1999 waiting for the end of the world. Simply put, Microsoft’s current system has built into it about $100 BILLION in hidden financial resources in the form of accounting rules that could be changed and whole businesses that could be jettisoned or even sold. But having spent all these years building up that fat in case it might eventually be needed, Microsoft is loathe to make the changes required to start burning that fat in fears that the whole technique will be compromised and the fat burned before it is truly needed.
So they leave things pretty much as-is, announce a first-ever layoff that’s as close to meaningless as possible, and cut a few expenses to generate a projected $1.5 billion savings. Why not? We’re in the worst economy of our lives. Making ONLY $4 billion in profit last quarter will be quickly forgiven.
I’m not saying here that Microsoft has fudged any numbers. Just the opposite, I’m saying that for maybe the first or second time ever they AREN’T fudging numbers.
Microsoft is in trouble. While they don’t this year need any of the doomsday techniques they’ve carefully built into the system, eventually they will. Its simply inevitable as the world goes more and more mobile and Microsoft can’t control a majority of that mobile business. It’s not that the PC is dying but that it is being supplanted – supplnated by platforms and business models that Microsoft does not control.
Anything less than majority market share in every segment means Microsoft is losing and losing big.
Steve Ballmer doesn’t appear to have any sense what to do about this and should leave the company. Certainly the “beat Google” war is already over and Microsoft lost, whether Ballmer knows it or not. Google, too, will fail in time, but not to Microsoft.
Redmond can continue to own the desktop but what happens when desktops disappear? The company will eventually start whittling itself down, earnings will continue to look good, Wall Street will continue to be impressed (sort of) but it won’t make any difference at all to the endgame, which is oblivion or — worse still — irrelevance.
Instead of 5000 positions, the company should drop 50,000. It should decide what businesses it is in and close or sell the rest. It should be a lot better than it is at running its true core – the muscle that’s been hiding beneath all that fat.
The big question is whether Microsoft will do it, or even CAN do it?
I have my doubts, one of which is that it even matters.