27 December 2013

Redesigning Microsoft's Managerial Operating System in the post-Ballmer Era

Steve Ballmer steps down as CEO of Microsoft in 2014. It's a perfect opportunity for the company to change their managerial operating system and begin to again create equity for employees and stockholders.

First let's get something straight. Steve Ballmer is worth $18 billion, which is not only more than 7.1 billion other people on this planet but roughly $18 billion more than me. That alone may cause you discount my two cents about what he might have done in his 14 years leading Microsoft. He's rich. I'm not. But in my defense, I'd like to point out that I've created more wealth for my stockholders than he has. 

(I've created none. Ballmer has destroyed between $50 to nearly $200 billion in stockholder value, depending on whether you use the absurdly inflated, dot com bubble price that prevailed when he took over or some more reasonable amount from about a year earlier.)

Secondly, as a company becomes larger, it is more difficult to grow fast. You might grow 30% a year for decades and then - at some point - your size relative to your industry or even region will be capped by the growth in that industry or region. If Ballmer had grown Microsoft's value as much in the 14 years he worked as CEO as it had grown in the decade before, its net worth now would be more than global GDP. At a certain point - like it or not - growth gives way to predictable dividends. It may well be that Ballmer did as much with Microsoft as anyone could have and Bill Gates timing for ending his tenure as CEO may have been as wisely serendipitous as his timing for the start. But it's also true that while Microsoft was dead center in technology in 2000 - in possession of the defining operating system and most popular office software - all the significant innovations since (from smart phones to web-based everything) have come from outside of Microsoft. 

Simply put, Ballmer could have done more for stockholders.

The reason he didn’t is that he clung to an antiquated operating system in the form of a management approach that depended on competition and control rather than cooperation and freedom, a philosophy more interested in ranking people within existing businesses than in creating new businesses. Put differently, Microsoft was among the first to arrive at the new economy but then maintained the management approach from the old economy. 

Ballmer used a system of stack ranking for employees that forced outcomes. Regardless of whether a team was all great or all atrocious, there would be a few top ranked and a few bottom ranked employees, in every group, every six months. The result was that employees focused on competing with each other and focused on short-term results. It is hard to conceive of a system that does more to squash innovation. Teams create new products and those teams need to focus on competing with other teams, not each other. Knowing only this about Ballmer one might well predict that Microsoft would be profitable (competition can be good for creating efficiencies) but hardly innovative. 

Of course this emphasis on ranking mattered because rank in the organization matters. If you were CEO of Microsoft, your net worth could put you among the top 10 or 20 in the world. In this way, Microsoft was like the France of Louis XIV or Iraq under Saddam Hussein; it’s good to be king. Contrast that with more evolved forms of government; in the US last year, roughly 6 million Americans made more than Barack Obama earned as president. Corporations are still largely unevolved institutions where the reward for being at the top is closer to what Mubarak might get than what Canada’s Harper would be paid. (Estimates of Mubarak’sprofit from running Egypt range from $1 billion to a staggering $700 billion; Harper makes roughly $300,000 a year.) Ranking matters when position – rather than innovation – is the best predictor of wealth.

Ranking suggests something static. If you want to win the gymnastics competition, you have to be flawless; ranking suggests clear criteria.

Creativity doesn't measure against old criteria: it creates new criteria. Rather than rank people, Ballmer might have done well to encourage entrepreneurship by giving employees the chance to create wealth, just as he and Gates did. Microsoft is large enough that it could have created internal markets that allowed employees to create new businesses, using its $80 billion in cash to finance startups from within the company. Microsoft has attracted phenomenal talent that has the advantage of having seen generations of technology rise and fall. The potential for entrepreneurial activity within Microsoft could rival that of most states. But the incentives are not designed to encourage the creation of new businesses but instead are designed to rank performance within the old business.

The process for creating wealth within Microsoft could take many forms. Imagine employees being able to bet on different proposals because of their faith in a particular technology or team, essentially R&D and new business development being conducted more along the lines of entrepreneurs vying for venture capital. This would spur the right kind of competition, a competition between alternate businesses and teams rather than competition within them. The company might match - dollar for dollar - investments made by employees in various startups within the firm, internally publicizing various technology breakthroughs and ideas. The wisdom of crowds could guide management allocation of resources and the emphasis would be on actually creating equity, not just products. People would then cooperate to create this value they'd invested in, working to create equity rather than competing with one another for a fixed pool of equity.

In his foreword to Robert Beyster's book about SAIC, William Taylor makes a really important distinction, one that might be useful for Microsoft as they enter a post-Ballmer stage.

“Much of our business culture is infatuated with power - amassing it, holding on to it, using it to vanquish competitors and dominate markets. In contrast, much of Dr. Beyster’s leadership philosophy is about spreading freedom. And freedom, it turns out, packs a bigger wallop than power. Power is about what you can control; freedom is about what you can unleash.”
—William C. Taylor

If Microsoft can let go of a ranking system that they feel gives them control over teams and instead adopt a system – any system – that gives employees more entrepreneurial freedom, they might begin again to create equity for their stockholders and their employees who feel less controlled and more like entrepreneurs free to create their own future. Microsoft is such an inescapably big and important part of tech that one can only hope they decide to evolve the company and not just their products. No company has done more to prove the importance of operating systems; its time they looked at the operating system they use to manage their employees.

No comments: