This is my promised follow-up to How Not to Run Yahoo, so I suppose this should have been titled How to Run Yahoo, but I’m too much of a smart-ass for that.  I spoke to a bunch of smart people (past and present Yahoos) some of whom even allowed me to print their names, and here’s our consensus view on what the next Yahoo CEO really has to do to turn the company around. I’m sorry it all sounds so negative, but it is toward a positive end, remember.

Yahoo has a bureaucracy problem that I attribute to former CEO Terry Semel, who hired legions of vice presidents to insulate the former Hollywood studio boss from the rude fact that he wasn’t, anymore, a Hollywood studio boss.  Since Semel didn’t seem to get what Yahoo was about, he hired lots of people to keep him from having to personally deal with it.

Here’s how my friend Randy put it: “My beef with Yahoo is that they have way too many layers (I might have the exact titles wrong, but the number of layers is right) — associates, senior associates, managers, senior managers, directors, senior directors, general managers, VPs, SVPs, EVPs, regional presidents. This is absolutely crazy. They have more VP-level employees than you could ever imagine. Their product and engineering talent sits under all of these layers. It’s no wonder they’re not a technology company anymore. That’s what they need to fix first — flatten the company. Firing a bunch of senior execs who can’t get it done and not replacing them would go a long way. No more senior directors, no more GMs, and way fewer VPs and SVPs.”

Step one, then — fire the executive fat.

Step two is all me: reorganize business development and place it lower in the organization.  Biz-dev at Yahoo seems mainly intent on not doing deals, which may be a safe bet for a high tech company that wants to die, but not for one that needs to reinvent itself like Yahoo does. We’re starting to see similar behavior, too, at Google.  Place the decision making authority where the knowledge is, as they used to say at Intel but apparently never said at Yahoo. It’s time to let divisions manage their own deal flow.

At this point I was blessed by an e-mail from Larry Tesler, former head of customer experience at Yahoo as well as chief scientist at Apple and some similarly impressive title at Larry, one of the smartest and nicest guys you’ll ever meet put it right on the line. His advice for Yahoo is below and it feels right-on to me. If the Yahoo board self-decimates as seems to be expected, I think Larry deserves one of those open board seats. He’d be a big help.

“If I were running Yahoo! with the goal of turning the business around, what might I do? asked Larry, repeating my question. “You can quote any or all of what’s below in that context.

“First, I’d be sure that retention incentives for top innovators and operators were in place. Then I’d embark on a three-year disciplined turnaround. I’d identify a few existing businesses that are profitable and competitively strong, boost them by updating features, user experience and operational efficiency, and sell or shut down everything else.

“I’d liquidate the Alibaba stake, probably a little at a time, to generate cash.

“I’d pick a dozen exciting ideas for breakthrough services. They could come from the patent portfolio, Yahoo! Research and other internal sources. Or from acquisitions of unique, patent-protected technologies. I’d focus the innovators on those and keep the operators away (my emphasis here –Bob). I’d introduce one or two such services a year and invest heavily in their marketing, customer service and product quality.

“At first, I’d focus one third of executive staff meetings on the progress of business exits, one third on the needs of the remaining businesses, and one third on the maturest innovations. Over time, these proportions would change. I’d make long term strengthening of the brand a factor in every major decision.”

If you wonder why Carol Bartz is gone it’s because she didn’t seem to do any of this. Maybe she wasn’t allowed to or maybe she just didn’t get it. Hopefully the next Yahoo CEO will get it.