The new Microsoft: How the reorg will affect you

Steve Ballmer just made the single most important decision of his career: In a reorganization that far eclipses his 2005 shake-up, the Microsoft CEO made good on his promise to start turning Microsoft into a "devices and services" company.

There's one little problem: Right now, Microsoft is a software, cloud server, and game company with a toehold in the highly competitive cloud and hardware businesses. It's saddled with a whole lotta losers that are either dying organically or need to be euthanized. Although the change Ballmer announced today may not be as drastic as former CEO Bill Gates's sudden conversion to the Internet faithful, per the famous Internet tidal wave email of 1995, or the introduction of Microsoft software as a service pursuant to Gates's "services wave" email 10 years later, it's going to shake the foundation of every Microsoft product.

The new organization
To make the transition from the cash cow past to the cloudy future, Ballmer has set up two main divisions:

• Cloud and Enterprise Engineering, led by Satya Nadella, the current fair-haired boy deemed by many as most likely to succeed Ballmer, will include "back-end technologies like data center, database and our specific technologies for enterprise IT scenarios and development tools ... data center development, construction and operation."
• Devices and Studio Engineering, led by Julie Larson-Green, a well-respected software engineer who's long been known as ex-Windows chief Steve Sinofsky's able assistant, gets "all hardware development and supply chain from the smallest to the largest devices we build ... studios experiences including all games, music, video, and other entertainment."

Although Nadella has a long, illustrious history leading Microsoft's Server and Tools efforts, Larson-Green's only hardware experience involves the Surface tablet -- damning with faint praise, that. To longtime Microsoft watchers, she's best known as the driving force (with Jensen Harris) for the Office 2007 ribbon interface and Windows 8 Metro interface -- sorry, but to many, damned again.

CFO Amy Hood, HR head Lisa Brummel, and legal boss Brad Smith all keep their current positions.

That leaves a whole lot of "other" at Microsoft -- very profitable pieces of the mothership that are neither devices nor services, including everything from Windows to Office to Dynamics. Those chips fall thusly:

• Qi Lu keeps Bing and "broad applications and services core technologies in productivity, communication, search, and other information categories" in what is now the Applications and Services Engineering group. I can find no official confirmation, but it sounds like the entire Office division has moved under Lu. Office isn't even mentioned in Ballmer's announcement, except for historical references. It's worth remembering: Nadella used to work for Lu.
• In a "small fish swallows big fish" manuever, Terry Myerson gets Windows in the Operating Systems Engineering group. Myerson, you may recall, took over Windows Phone when Ballmer effectively moved Andy Lees out of Sinofsky's acquisition path in December 2011 -- Lees was in charge of Windows Phone, Sinofsky wanted Windows Phone, Lees was moved to the side on "special projects," and Myerson took over Windows Phone. Less than two years later, the guy who was brought in to take care of Windows Phone now finds himself in charge of all of Windows. Sinofsky must be steaming. (More likely, with $14 million in stock coming his way, he doesn't really care.) Responsibilities "span all our OS work for console, to mobile device, to PC, to back-end systems ... [and] core cloud services for the operating system."
• Those are the four engineering groups -- the core of the company. In addition:
  • Tony Bates, formerly known as Mr. Skype, gets corporate planning and a huge checkbook for acquisitions and hosannahs in the Business Development and Evangelism group.
  • Tami Reller, current CFO of the Windows division (and recently passed over for the position Hood now occupies), becomes the head of an oddly independent marketing group. Details are sketchy at this point, with much talk about dotted lines.
  • Many of you will be pleased to know that Eric Rudder has his own Advanced Strategy and Research group: "Research, trustworthy computing, teams focused on the intersection of technology and policy, and ... our cross-company looks at key new technology trends."
  The strange bedfellows
  The shuffling of deck chairs leads to some strange bedfellows:
  • Devices' Larson-Green gets Music and TV services, begging the question of when a service is, in fact, a device.
  • Larson-Green also gets the Xbox console, but "Mr. Windows" Myerson gets the Xbox software.
  What of Kurt del Bene, former king of Office, and Kirill Tatarinov, lord of Dynamics for many moons? They died at the end of Season 3 at the hand of the treacherous Lannisters. Er, del Bene has officially registered his retirement. Tatarinov remains in charge of an oddly free-floating Dynamics group, 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." Sounds like the prelude to a very abrupt career change.
  The most important change of all, in my view, comes in the financial reporting realm. Until yesterday, Microsoft CFOs by and large reported to their division chiefs. Ballmer is realigning things so CFOs report directly to Hood. That clears the way for all sorts of changes, including the ability to set goals in the divisions that aren't chained to a P&L.
  Former Microsoft GM Hal Berenson hit the nail on the head:

  A new organization structure in which the engineering leaders are not responsible for short-term business metrics would allow them to carry review commitments with sufficient weight to truly encourage cooperation. Let me try a concrete hypothetical example: It would be easier to seriously hold the engineering leader of Office and the engineering leader of Windows responsible for doing whatever it takes to ship a great set of Metro Office apps ASAP if you aren't also telling them Job No. 1 is to meet this year's revenue and contribution margin goals.

  Taking the CFOs out of line command also opens up the possibility that Microsoft will change how it reports performance and profits to the world at large. If you think Microsoft's reporting reeks of obfuscation now, just wait.
  The more things change, the more they don't
  For anyone who thinks of Ballmer's succession planning as an exercise in spaghetti pattern-matching, this new arrangement presents a recurring theme: Since Sinofsky left in November 2012, no obvious CEO candidate has emerged. Nadella may ultimately gain the stature necessary to take the reins, but with that sole exception I don't see any new CEOs being groomed. That doesn't bode well for Microsoft long term.
  The reorg is being billed as a giant lovefest, with greater cooperation among operating divisions. But people tend to forget that the 2005 shakeup had a similar goal. Back then,Bob Enderle of the Enderle Group said "the reorganization ... aligns different groups that previously were separate divisions ... [and] also gives people an approachable throat to choke -- in the form of a division president -- if there are problems with collaboration between teams."
  Many throats have been choked in the past eight years, but it isn't doesn't appear that the 2005 reorg led to greater cooperation between Microsoft fiefdoms, much less better products. Even Steve Sinofsky was a team player -- as long as you were on his team.
  Where we're headed
  With this massive change about to unfold, what can you -- as a user, a business, a developer -- expect? In the short term, not much. All the important product changes due to take place this year are already set in concrete. The reorg won't change any of them.
  But looking out to next year and beyond, I think we're going to see a lot of changes, many as a direct result of this new organizational structure and the stripping of P&L responsibility from the engineering divisions.
  With the alpha engineer in charge of Services, you can bet that Services will appear front and center in every Microsoft effort. Devices -- Xbox, Surface, Music, and maybe even TV -- will get a similar shot in the R&D arm.
  In the same breath, it must be said that Windows and Office are in for challenging times. The dominance of Metro in Windows is complete: The man in charge of Windows itself is a Metro kind of guy. Those of us who held out hope that there would be some progresswith the old Desktop can just kiss that dream good-bye.
  Office has been languishing without a real touch interface. That has to change -- and it will to some extent in the near future -- but with the 800-pound cash cow now buried in the corporate structure, it's hard to imagine how Office will get enough respect (or money or manpower) to gain a top-notch touch interface. Ballmer doesn't seem to think of Office as a major Microsoft asset -- he didn't even mention it in the responsibilities breakdown -- and divorcing it from the Windows organization makes Office's transition to a multiplatform application a foregone conclusion. Perhaps Office will end up as a free giveaway with every new Windows sale: legacy lagniappe.
  Oddly, Skype wasn't mentioned in the organizational breakout either.
  For companies wed to on-premises Windows networks, your days are numbered. The real innovation is going to come with Microsoft in the cloud. You already knew that, but this reorg should shout that fact at you in capital letters.
  Developers need to sit up and smell the smoke: Windows will be around for a long time, sure, but Desktop apps are going to look technologically more and more like Cobol. If you aren't headed to the cloud (or iOS or Android), you're missing one of those proverbial inflection points. Funny how we haven't heard a peep about Silverlight.
  I don't know what to make of the future of Xbox. In the past few weeks, the choice for head of Devices has gone from a gaming marketing genius -- Don Mattrick -- to somebody who may have actually played a game on Xbox, once. Maybe. At least, Larson-Green won't make the same rollout mistakes that dogged Mattrick's last months at Microsoft. Maybe.
  This much seems sure: Microsoft's been very successful at milking its old cash cows and coming up with profitable new products. I expect that Microsoft itself will continue to do very well, and the reorg may indeed help. The old guard is changing, old products are dying. This reorg demonstrates that, at least, Microsoft is smart enough to change course and face into the wind.
  Some say it's too little, too late. I disagree.