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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.

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