The opening spread of the upcoming Vanity Fair piece on Microsoft and Steve Ballmer.

Stephen Toulouse worked at Microsoft for 18 years before leaving earlier this year, so he read Kurt Eichenwald’s Vanity Fair piece on the company’s “Lost Decade” with a former insider’s eye. And he agrees with its assessment about Microsoft’s stack-ranking system, which evaluates and compensates employees in a way that artificially pits them against each other.

In short, he says, it needs to go. He writes in an email …

“It’s an incredibly demoralizing message to hear someone say, ‘During your review period you worked 80 hour weeks, exceeded your documented tasks, and to top it off you fed a multitude with only a fish and a loaf of bread! Unfortunately someone else in your peer group did all of those things plus walked on water and therefore you will be getting a lower compensation ranking,’ Never mind having to come home to a spouse and explain that your work/life sacrifice the past year isn’t going to yield what you thought it would thanks to an arbitrary model. Now imagine you’re a manager and you have to deliver that message!”

Toulouse is one of several former Microsofties with whom I’ve shared my copy of the article, a full version of which isn’t yet available online. The general consensus is in line with my initial impression — that the piece accurately takes aim at many of the company’s problems, but doesn’t provide a full picture of Microsoft’s last decade.

Stephen Toulouse
Stephen Toulouse

“I believe that the author actually undermines the overall article somewhat by completely glossing over successes. In short, it’s unfair,” says Toulouse, who worked in areas including online security and Xbox Live during his time at the company. “I can’t see legitimately calling the past 10 years a lost decade when Windows 7, Xbox, Kinect, and Halo are household names.”

Michael Cherry, a former Microsoft engineer who now works as an analyst covering the company for an independent research firm, agrees with that assessment, but notes that the piece also didn’t delve into all of the company’s problems. As he sums it up,  the article cites four key reasons for Microsoft’s “lost decade.”

  1. Out of touch with how people use software
  2. Killing products (or burdening other products like smartphones) over allegiance to Windows/Office
  3. Bureaucratization — designing software by committee. (And Ballmer’s overall span of control being way too large.)
  4. Stack ranking pitting employees against each other

Noting that he’s speaking purely on his own behalf, Cherry says he would point to several more challenges that he sees as equally critical:

  • Battling the DOJ and EU (both the decision to fight, and then the wagging of a long, and in retrospect poor, and ultimately futile battle that was too costly on many fronts.)
  • Obsession with finding another “Windows” business—Search, Entertainment, etc. and thinking they could spend money better than shareholders (that is versus paying dividends), which lead to poor record of acquisitions.
  • Failure to turn money spent on R&D into actual products (note they talk about R&D often as money or % spent and rarely as actual results).

Speaking on KUOW-FM’s Conversation today on a different topic, long-ago former Microsoftie Naveen Jain (better known for founding his own companies) was also asked by host Ross Reynolds about the Vanity Fair piece.

“They need to break up the company into smaller companies for especially the entrepreneurial things, where they can go out and do things without ever having to be tied to the mother ship,” Jain said. “They can spin off these small baby Microsofts out there, and say, go out and out-innovate us, go out and disrupt Microsoft, but they’ll all actually be funded by Microsoft.”

By the way, Eichenwald spoke via phone on the same show, and one of Reynolds’ questions was about my post on GeekWire contending that his piece unfairly overlooks successes such as the Xbox business. Here’s what Eichenwald said about my post.

Where I disagree with him is that I don’t think business is there solely to develop tech products. If they’re going to develop a media division and Xbox is within there it ought to be playing some sort of role in driving the profits of the company. Xbox is a great product, but in terms of its financial contribution to the company, it’s nothing. That’s why, when I talk about the need to break (Microsoft) up, Goldman Sachs has put out a report already saying that Microsoft should spin off the division that makes Xbox because then its profitability will not be weighed down by everything else going on with the company. And it won’t be a unit that has no significant financial impact on the company. It will be something that drives a company.

Fair enough, but it is worth noting that the Entertainment & Devices Division, driven by the Xbox, posted a $1.3 billion operating profit in the 2011 fiscal year — not yet making up for the company’s huge historical investment in the business, by any stretch, but also nothing to sneeze at. And with more than 60 million consoles in living rooms, the platform has a bigger financial potential.

So what should the company do? Toulouse keeps coming back to the same thing as Eichenwald does. Here’s how the former Microsoftie summarizes his thoughts …

Despite my bullish view of the company and its place in the technology industry, my time away has let me see the review model in a more objective light.I believe the performance review model made more sense when Microsoft was organizationally much different. Think of it like this: Let’s say you want to ship a widget at Microsoft. You’re going to probably be beholden to a lot of things critical to your success that you do not control. Do you want Product Support? You’re probably going to have to use Microsoft Product Support Services, a business group with different business goals from yours under a different Vice President. Do you wish to bill customers via subscription or a digital marketplace? You’re probably going to have to use the Microsoft billing platform, again housed in a different business group with different business goals from you under a different Vice President. Want your customers to have accounts to use on your widget? Well then you probably will have to use Windows Live ID, different business group/goals/Vice President.

So any given group’s business is spread across so many different internal partners that execution has to be 100% right the first time, or getting everyone back on the same page can be extremely difficult. It’s not impossible, and the organizations have become very good at it.  But it is difficult. Here’s where that influencing without having authority piece tends to get used the most. Keep in mind the above is both a simplification and an exaggeration at the same time, but the point is that getting things done naturally requires more and more cooperation as the capabilities are developed by the company.

The real challenge right now from my perspective is when you combine that ever increasing cross-group reliance with a Darwinian performance review model that actually subconsciously incents people to undermine teamwork, you might end up with a next decade that’s going to be worse than the last. I continue to believe Microsoft makes good technology and has great days ahead of it, but not because of the performance review model.

So is Steve Ballmer the right person to lead the company?

“Steve Ballmer is a very smart man, and no one can rally the troops like he can,” Toulouse says. “I often wonder though if he wouldn’t make a better President for Microsoft and have a different CEO, which I believe was a successful model when Bill was still with Microsoft. But I can’t claim the expertise to say he’s the right or wrong CEO.”

All this commentary and the actual Vanity Fair piece still isn’t online, unfortunately. The summary is here, and when the full version is posted I’ll link to it.

Comments

  • daxwax.com

    Steve Ballmer should have been terminated about 8 years ago. He is a joke. I’m a former MSFT employee and nobody respects Ballmer.

  • JohnnyDoe

    One thing I’ll say is, as a former FTE at Microsoft, despite many parts of MS not working well together as described above, compare its record with Sony, a similar behemoth. In that comparison, MS has actually done very well. At Sony different depts don’t even talk to each other, let alone try and not get it right the first time which is what happens at MS. Sony has flailed as a result.

    One thing done poorly at MS, as stated above, is commercialize its MASSIVE R&D spend (read: not “investment”). 70% of the money spent on R&D needs to go towards an entrepreneural fund which can be accessed by anyone at the company for an intiative similar to Google’s 20% time program whereby employees are expected to spend 20% of their time on projects other than their core responsibilities to their immediate team.

  • http://disqus.com/samirsshah समीर शाह

    STACK RANKING SYSTEM HAS TO GO!!!

  • http://twitter.com/tlamb3 T. Lamb

    It’s easy to criticize a “stack ranking” system and come up with an example that proves how it fails such as taking a 10 person team where everyone is a rock star, yet a certain percentage of them have to be rated lower than the others.

    However, in reality, this isn’t the case. It’s a rarity at Microsoft to have that small of a team as well as have teams where everyone is a rock star. If teams are 50-100 people large, the law of averages if going to play out and you’re going to have some people that are doing awesome, others that are doing OK and others not so good.

    It’s also easy to criticize the system that’s in place without providing an alternative. What are people suggesting? No review system at all? If there is a review system, what would it be? (And please don’t just say “reward the entire team”, because what do you do about people that underperform?).

    Regarding Ballmer, I agree he shoudl have been let go several years ago (or voluntarily stepped down). One of the primary responsibilities of a CEO of a public company is to derive value for shareholders. The stock price has been in the crapper for 10 years so clearly Ballmer has failed. The obvious argument is that “smart CEOs shouldn’t pander to wallstreet”. I agree that CEO’s shouldn’t think short term about only optimizing stock price, but over the course of say 5 years, there have go to be results for the so-called strategy that’s in place. 10 years of ridiculously poor stock price means the CEO has failed.

    • http://www.stepto.com/ Stepto

      Tlamb have you been ranked under the system? It can seem worse the higher up you go. Instead of one person getting a bad message it can be 10. Or 100. The alternate system is to define goals and establish rewards for exceeding them. Instead the system basically defines goals and says well you can exceed them, but if anyone else exceeds * your* goals beyond where you exceeded them you lose.

      • Comparison

        How have other companies with similar systems to Microsoft like Apple been successful then? It is easy to pick on the review system, especially when the stock isn’t moving and you didn’t get a 1 or a 2 (or a 4.0)

        • http://www.stepto.com/ Stepto

          It’s possible to succeed despite the ranking system. I’m unaware of Apple’s but I’m to understand its not Darwinian. And I got plenty of outstanding reviews and one or two bad ones in my 18 years. I’m saying the review system is like a weight on a runner. The runner can still win the race but the weight hampers them.

          • Kevin

            As many have said, it is about beating a drum and visibility.
            You wonder why things are shoved out the door before they are readY?? Look at the current review model. There is no reward for putting the brakes on a bad release (Vista, Windows ME). Ship it awards, patting yourself on the back, blowing your own horn is more important.
            Xbox has been successful because it somewhat sheltered itself.
            Also with the current system, you are sheltered within a big group. A re-org or two and your life can be hell. Loyalty to a manager or group is career suicide.

      • guest

        Human performance follows a curve. Money available for rewards is finite. Put those together and most companies follow some variant of pay for performance. MS’s problems go far beyond the stank rank system.

      • http://twitter.com/tlamb3 T. Lamb

        Yes I have been reviewed under this system. I have been with the company 15 yrs, and the las 7 as a manager.

        With a fixed pool
        Of money, the proposal
        You have won’t work. Period. Money isn’t endless.

    • kdb98033

      There are other performance management methods that other companies use that reward teamwork. They tie performance incentives to overall company goals, team goals, and individual goals. If Microsoft isn’t tying any of its performance incentives to the team and overall company performance and is just tying it to the individual, you have a culture of individuals instead of teams which doesn’t promote making the organization better as a whole. I believe that Microsoft actually does tie their performance management incentives to company and team goals, however there is so much focus on the individual goals and not enough transparency in to which part of the company and team goals make up the performance review/incentive. I agree with you that you can’t just “reward the entire team” the same; however if your goals are broken up in to a percentage and each percentage is tied to organization, team and individual goals and you’re transparent about this, you can still recognize the great performers, manage the underperformers and promote a better culture of teamwork/feeling ownership in how the entire company is performing. Not saying this is the best way, I’m sure there are many others; but I’ve seen this method really promote great teamwork while still being able to manage out underperformers – and not just managing them out by giving them a number that’s the bottom of the stack rank.

    • miller canning

      there are a number of valid review reward systems to choose from. this forum isn’t where i would spend my time explaining because it doesn’t add value for a company that uses the infighting and horse trading at time to test lower level managers stomach for blood. my first year as an FTE i was given a team with 1 consistent poor performer that my manager never removed or grew, on my first day she said “good luck with that”. i let her go due to bad performance after multiple opportunities. but it was a mistake from a ranking perspective. had i kept her on i could have given her the lowest score i was forced to take on.

      i had no opportunity to fight for my team, present the successes, or value of our deliverables. because i was forced to give a 2.5 to a good performer who then left the company.

      i stayed at MSFT 6 years until i took a 3 month health sabbatical due to chronic migraines. surprise, at week 4 i stopped having migraines. when i returned my job had been eliminated. i used the time to escape by finding work elsewhere.

      while this part sucked, caused harm to my health and took it’s toll on my self-perception…i made some of the best friends there from the early 90’s. they remain in my fondest memories of unbridled creativity.

  • DejaVu

    Quoting Naveen Jain seems like a joke in itself.

    • http://geekwire.com Todd Bishop

      I was hoping people would appreciate that! Hey, Naveen is revered on public radio, apparently.

    • HiLarious

      Really, after leaving the company almost 15 years ago and driving several businesses into the ground or the FBI, that is someone who adds credibility to the article.

  • dpgj

    Windows 7 is an household name. Maybe. But I think it is like AT&T which not many people really want it.

  • Irving L

    Having been ranked once under the old system must people describe and once under the new system I can say that the new system is even worse.
    Also the system works better for engineering where teams believe and understand metrics. In marketing most people on the receiving and creating end dont really understand the systems and measurements against which they are messured. Which are often asinine. Plus in marketing the decisions are often made at altitude and handed diwn by fist. I managed a team of 9 and had no input into the stack eanking. My gm took it all over and i foubd out later she just acquiesced to our vp anyway. So the whole exercise was a waste of time and massively frustrating. People only stay because the economy is bad and wait for opportunities at other safe companies like Facebook, google and amazon.
    The stack rank system rewards the people who can shout ‘look what I got done’ the earliest and loudest and disregards the real value of the work. If they can make the perception be that it was worthwhile and undermine the perception of the work of others they can get top ranking. And people who are better at their real work and worse at self promotion get shafted. That is very much the reality in many teams at MSFT.
    But I also know people in engineering teams where the process works properly.
    The point about tying performance only to individual goals is also valid. If they added team and company goals and specifically looked at performance not measured in advance theyd have a better system.
    More pertinent. There is lots of research to show that this kind of performance incentive is completely ineffective and that long term rewards tied to company overall success plus non financial public recognition work much better.
    Finally, the perf review cycle sucks a month per year oit of productive work. In and of itself it is am 8% drain on real productivity

    • Joe

      Amazon is not a safe company. Amazon uses stack ranking as well and the percentage that get a performance improvement plan (PIP) is larger than Microsoft. The PIP is just for legality so the company doesn’t get sued, the real intent is to fire them and most are fired within 60 days.

  • http://twitter.com/trixie360 Mrs. Gunny Charter

    You know who could rally the troops better than Balmer? J Allard and Robbie Bach. And Bill of course.

    • guest

      Um, everything Bach touched was a financial failure. Most were market failures as well. Rallying troops is easy when you don’t actually hold them or yourself accountable for accomplishing anything. And what did Allard do over the last decade of his career there? Allard and Bach represent everything wrong with that generation of MS management and Balmer’s judgment in leaving them in place as long as he did.

  • http://twitter.com/trixie360 Mrs. Gunny Charter

    You know who could rally the troops better than Balmer? J Allard and Robbie Bach. And Bill of course.

  • yinowino

    That Ballmer dude sure seems to be way full of himself!
    Total-Privacy dot US

  • http://rendion.myopenid.com/ render

    I never saw a review system write a line of code. I think MS problem is that it focused so long on selling to dysfunctional enterprise IT shops that it eventually became one itself. I mean if you look at everything MS tries to do, it would drive a sane person crazy.

    Set aside Office and Windows: MS Business model is as follows:

    Go off and innovate in a thousand different directions for the sake of doing it.
    Blow your entire stash on money losing products that have no marketing traction (for years and years)
    Dont develop your best technology, let it rot or stall so that if you do market it it will be too late anyway
    Piss off your developer community by constantly thrashing them about with a constantly self destructing stack (silverlight et all)
    Make windows so ugly a mother couldnt even love it
    ALMOST do big things like buy Yahoo and then punt
    Make upgrades so expensive that no one upgrades

    MS is obviously a business in decline. But hey it did its job. It replaced the IBM selectric. And thats all MS could ever get its head around.

  • Chris

    “I can’t see legitimately calling the past 10 years a lost decade when Windows 7, Xbox, Kinect, and Halo are household names.”

    Enron is a household name too. That doesn’t mean it was a model of success.

  • Alex Kochis

    As a former MS FTE and manager I was ranked and ranked the
    people under me plenty of times (though not in the new model) and I agree with
    plenty of what’s being said, at the same time we should be careful to not lay
    too much blame on how stack ranking was/is carried out. Remember that while the
    stack ranking results in some changes to compensation (but not your base
    salary) and how you fared will become part of your ‘career trajectory’ but
    beyond that the effect is mostly about how you feel about the results. For the
    most part I didn’t see the stack ranking as something that got in the way of
    getting our work done.

    I agree it can be demoralizing to not come out on the top
    (particularly if you were trying to come out on top) – at the same time by
    shooting for the top you’re taking on additional risk and you’re competing with
    people (often very smart ones) who are trying to do the same. I think there’s
    something to be said for being OK about being ranked in the middle. With the
    healthy salaries that people generally receive the extra compensation or bonus
    awarded for being ranked near the top is just that, a bonus.

    Overall I think it would be good to increase flexibility and
    open up the compensation model to offer more discretion to managers. While
    people costs might be the largest expense of the company and it’s important to
    keep costs contained I can also recall times when I felt that a bit more
    flexibility would have offered better return on the dollars than other uses of
    the money might have.

  • rgrimm

    I did two stints there, working 16 years over a 26-year stretch. I won’t add to the review/stack rank commentary, but I will add a few more: Merge Product Management back into the R&D teams like it used to be to improve visibility between product teams and customers, and significantly reduce the number of marketers; start all new efforts outside the current corporate umbrella; outsource HR to kill it’s stranglehold; outsource Finance because the beancounters have significantly cut operating budgets thereby killing Microsoft’s nimbleness to generate short-term profits; and flatten the org.

  • Emre Aydinceren

    At year 2000 Microsoft was already in a successful position with it Office and Windows cash cows. When we look at current situation we clearly see revenues created from those products were not leveraged. Ballmer’s job was not to maintain the status but find ways grow shareholder wealth using incredible power of two tremendously profitable business units which did not happen.

    • guest

      Arguably it was both; Maintain and grow existing revenue sources while creating new ones. He did a decent job on the former until failing to keep Windows ahead of the curve and more recently hopelessly underestimating iPad (after doing the same for iPhone) and taking three years to respond. The fate of Windows and Office future growth, and therefore MS’s, is likely now sealed. But he sucked completely at creating new businesses, despite spending more than $100 billion trying and another $100 billion on R&D. And that’s the real killer because even if he’d done an awesome job keeping Windows competitive, which he didn’t, cash cows don’t last forever.

  • R Malhotra

    I recently left MSFT after 12 years there as a senior engineering manager and wanted to offer my perspective on stack ranking.

    1) Any time you have a fixed budget for compensation, you have to make trade offs – it’s by definition a zero sum game. You don’t have to call it stack ranking and can give it a more politically correct term I suppose. How else do you divide up a fixed bonus pool? Do we do what they do in pre-school and give everyone a ribbon and money? Team goals are great and as a manager, I had only team goals on my reviews but it doesn’t work for ICs who have much less control and scope.

    2) The scenarios described by many of the anecdotes call out superstar employees who are treated unfairly because of the system. These are edge cases and there are mechanisms to deal with them. Ultimately all review decisions get rolled up to a VP and any competent manager who feels an employee is legitimately being treated unfairly due to the “system” is encouraged to call this out and adjustments get made. In my ten years as a manager, I refused to ever give an employee a “message” that I wasn’t willing to personally stand behind and defend if I thought it was unfair. If you did so as a manager, that’s really on you.

    3) Yes, there are politics that reward visibility at big companies. Is this shocking or unique?

    • panacheart

      Are you still being paid by Microsoft? Are you on crack? Because I spent 5 years under that system and left with ulcers. Worst working environment I’ve ever been in. In one case I exceeded my goals by 200%, turned accounts from being angry with MS to being happy, and pretty much walked on water and still got a low score. No, that system is terrible. I could go on for pages about what happens when groups merge or there are reorgs, and you get stack ranked in the new group. I could go on for days about how many people I’ve seen driven off by that system. And for no amount of money in the world would I ever subject myself to that kind of abuse.

      • R Malhotra

        I’m possibly drugged and being paid for my post and your self-assessment is “I walked on water”. I can’t possibly comment on your specific experience and can only go by what you wrote here. Invariably the people who do the worst in this system are those that demonstrate this obvious lack of self-awareness resort to extreme hyperbole to make their point.

        • srshopper

          You seem to support the stack ranking system at Microsoft. Why the hell did you leave? You hypocrite

  • Doug

    Holy cow, Alex – I don’t think you were paying attention if you didn’t think the stack ranking was getting in the way. The outright sabotage, the backstabbing, the 10pm scurryfest on mail when someone slams someone else to a gaggle of VPs, angling for advantage….seriously, that’s what the culture looks like, and it’s the stack ranking and the corporate culture that create it.

    If you’re really only working for your base salary it’s a serious pay cut over anywhere else. I’m suspecting the folks you ranked were pretty junior – at higher ranks, that money is a big deal.
    This is high stakes by design.If you get a 4 or 5, your career at MS is instantly over. Period. You can’t move to another group, you can’t improve next time (the momentum towards giving another 4 or 5 is really strong). You’re done. That adjustment to your salary is permanent. You can either wait for the layoff to hit (which it will, eventually) or try to leave.
    This is high enough stakes that people think twice about helping someone else out, since everybody knows that in many cases, one person’s gain is another person’s loss. There’s a true art to seeming helpful, but providing no assistance whatsoever. Lots of people at MS have perfected that.
    After a few years, I suppose they’ll have done the reductions in force they want. The question will be are the people that are left, the people that you’d want?

    • someone

      I’ve been here for two years and I can see how demoralizing the system can be. I can’t agree with you more! if you look at the last MS Poll and the number of people who are thinking of quitting you’d think management would wake up.

  • guest

    Until Ballmer is gone, this discussion is moot.

  • guest

    “I can’t see legitimately calling the past 10 years a lost decade when Windows 7, Xbox, Kinect, and Halo are household names.”
    Windows was already a household name 10 years ago. Windows 7 sold well and partially repaired the damage done by Vista, but even that wasn’t enough to stem gains by Apple, which has grown share every quarter since Vista. Xbox/Kinect/ Halo are all related and part of Xbox overall. It has been a market success but also a financial failure. I guess any company prepared to lose as much as $8 billion at one point (now down to perhaps “just” $4-5), can buy their way to household name status. That doesn’t make it a good business.

    When I reflect on Ballmer “lost decade” plus, I see a decidedly mixed record on new versions of existing products, a bunch of acquisitions that mostly failed, and a number of new businesses, almost all of which have either fallen short of initial expectations, are still not cash flow positive, or have been wound down. About the only new unqualified financial success I can come up with is Sharepoint. It was innovative in its way and has created a legitimate billion dollar plus business, albeit that it’s been allowed to lose some of its competitiveness recently, which may in part explain the recent billion plus Yammer purchase. That’s a pretty embarrassing result for a company that each and every year of that decade led it next ten competitors combined in R&D spending.

  • anon

    bozo article

  • panacheart

    I spent 20 years in high tech. I worked in Japan, in Korea, the Silicon Valley, and Micorosoft. I’ve seen a few working environments, and of all the places I’ve worked, MSFT was the most unpleasant. Backstabbing, lying, brown nosing, politics. The entire place is vile and full of negative energy. And yet I can say that it was there that I worked with some of the smartest people I’ve ever worked with – unfortunately they all left, as did I. Really smart people don’t stick around for that kind of abuse.

    The company has achieved some things in the last 10 years, and is still showing good profits, but those are separate issues. The fact is that MS does lose a lot of people because of the very negative working environment they’ve created. It’s just poison. And I’ve seen cases where absolute idiots were ranked the highest in groups, only later to be fired for theft, fraud, sexual harassment and other abusive behavior. Stack ranking simply doesn’t work to reward the best performers – it rewards those who play the game. It’s like being in a pack of hyenas.

    I had a successful career before MS, and I’ve gone on to create a successful career and business since, so I’m confident in my opinions and decisions. Most of all I’m confident that rejecting that working environment was a great career and life move. But there will always be people willing to do anything for a job, especially in this economy, so I’m sure there will be no shortage of minions to abuse in the future.

  • remyngtin

    Management by Character Assassination

  • http://www.sparkjunction.com/ Spark Junction

    I’d like to see a more advanced and more popular Bing search engine. I’d also like to see an AdSense-like service… I’m still surprised how come Microsoft and Yahoo are lagging so much behind Google in these issues…

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