31 July 2012

What Deming Could Have Told Ballmer - How Rankings Destroyed Billions at Microsoft

Fascinating article in Vanity Fair on Microsoft's lost decade. In the midst of stories and stats to illustrate Microsoft's fall is this simply fact: "The iPhone brings in more revenue than the entirety of Microsoft." 

Management genius W. Edwards Deming used to excoriate executives and school officials who relied on grades, or rating, and ranking. He would have had fun with Microsoft CEO Steve Ballmer.

One of Deming's deadly diseases was annual performances and ranking employees. Deming thought that ranking showed a lack of understanding of systems and variation. Employees will invariably vary in their performance (whether the entire employee group is comprised of  Nobel Prize winners or recovering brain trauma patients freshly awoken from comas, there will be top ranked and bottom ranked people). And a business like Microsoft in 1995 will produce far more impressive results than a business like General Electric in 1905, regardless of rankings. Rankings simply distract people and undermine teamwork and innovation. Deming could have told CEO Ballmer this but he knew better. It is sad what his ranking of employees did to the potential of what was once one of the most amazing companies in the world.

From the article:

At the center of the cultural problems was a management system called “stack ranking.” Every current and former Microsoft employee I interviewed—every one—cited stack ranking as the most destructive process inside of Microsoft, something that drove out untold numbers of employees. The system—also referred to as “the performance model,” “the bell curve,” or just “the employee review”—has, with certain variations over the years, worked like this: every unit was forced to declare a certain percentage of employees as top performers, then good performers, then average, then below average, then poor.“If you were on a team of 10 people, you walked in the first day knowing that, no matter how good everyone was, two people were going to get a great review, seven were going to get mediocre reviews, and one was going to get a terrible review,” said a former software developer. “It leads to employees focusing on competing with each other rather than competing with other companies.”Supposing Microsoft had managed to hire technology’s top players into a single unit before they made their names elsewhere—Steve Jobs of Apple, Mark Zuckerberg of Facebook, Larry Page of Google, Larry Ellison of Oracle, and Jeff Bezos of Amazon—regardless of performance, under one of the iterations of stack ranking, two of them would have to be rated as below average, with one deemed disastrous.For that reason, executives said, a lot of Microsoft superstars did everything they could to avoid working alongside other top-notch developers, out of fear that they would be hurt in the rankings. And the reviews had real-world consequences: those at the top received bonuses and promotions; those at the bottom usually received no cash or were shown the door.“The behavior this engenders, people do everything they can to stay out of the bottom bucket,” one Microsoft engineer said. “People responsible for features will openly sabotage other people’s efforts. One of the most valuable things I learned was to give the appearance of being courteous while withholding just enough information from colleagues to ensure they didn’t get ahead of me on the rankings.”Worse, because the reviews came every six months, employees and their supervisors—who were also ranked—focused on their short-term performance, rather than on longer efforts to innovate.“The six-month reviews forced a lot of bad decision-making,” one software designer said. “People planned their days and their years around the review, rather than around products. You really had to focus on the six-month performance, rather than on doing what was right for the company.”……..
In the end, the stack-ranking system crippled the ability to innovate at Microsoft, executives said. “I wanted to build a team of people who would work together and whose only focus would be on making great software,” said Bill Hill, the former manager. “But you can’t do that at Microsoft.”
Sad that a company that created so much wealth through an understanding of, and ability to create, computer operating systems showed such a lack of understanding of the dynamics of social systems.

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