Layoffs raise questions about Nadella's commitment to Nokia deal

Maybe the new CEO doesn't fully share his predecessor's vision of Microsoft as a maker of smartphones

Satya Nadella speaks to Microsoft employees July 10, 2014

Satya Nadella speaks to Microsoft employees July 10, 2014

Microsoft's 14 per cent staff reduction, the largest in its history and focused heavily on employees acquired from Nokia's devices and services business, has some observers thinking Satya Nadella got a bad case of Lumia-induced indigestion.

Where his predecessor, Steve Ballmer, saw in the $US7.2 billion deal a cure for Microsoft's mobile ills, it's possible Nadella has come to view the acquisition as bad medicine.

When Ballmer and then-Nokia CEO, Stephen Elop, brokered the deal last year, the vision was that, to improve Microsoft's pitiful mobile market participation, it had to emulate Apple by being in tight control of both the OS and hardware of devices.

Ballmer spent the last years of his tenure saying Microsoft was transforming into a "devices and services" provider. But in his "manifesto" to employees last week, Nadella retired the term, saying the company should focus on being a "productivity and platform" company instead.

After de-emphasizing "devices" last week, Nadella said that of the 18,000 positions to be cut, "our work toward synergies and strategic alignment on Nokia Devices and Services is expected to account for about 12,500 jobs, comprising both professional and factory workers."

Many have interpreted that to mean that about half of the Nokia employees that came over in the deal will get pink slips, although some of the victims could also be Microsoft staffers in the Devices & Services unit.

Be that as it may, the size of the job cuts has some wondering whether Nadella is second-guessing the wisdom of the acquisition.

Analyst Jack Gold, principal analyst of J.Gold Associates, likened the Nokia deal to Google's purchase of Motorola. Both companies wanted to get a stake in the hardware business but subsequently found that the market is a difficult, low-margin game, he said.

"Perhaps it's not good for [Microsoft] to be in the direct hardware business competing with OEMs," Gold said. He expects Microsoft to either spin out or sell off the phone business within 18 months.

Gold sees the staff cut as a sign that Nadella is steering Microsoft's corporate cart away from the road Ballmer had it on. "Nadella is redirecting Microsoft more towards what it is good at, which is the OS and [to] offer solutions and support OEMs rather than being the next Apple," Gold said.

But IDC analyst Al Gillen isn't certain that the layoffs mean Nadella has soured on the Nokia acquisition. For starters, Microsoft won't say how many of the job cuts will be from the manufacturing staff. It may be that most are, in fact, people whose desk jobs overlap with those of Microsoft staffers. In that case, the layoffs couldn't be interpreted to mean Nadella is repelled by the idea of Microsoft as a smartphone manufacturer.

Or it might be that Microsoft still hasn't completely decided who is leaving yet, Gillen said, noting that the first 13,000 cuts will happen over the course of six months and the full round will take 12 months to complete. Another thing to keep in mind is that Nokia would have had to downsize even if its Devices & Services division hadn't been acquired by Microsoft, according to Gillen.

Frank Gillett, from Forrester Research, highlighted the decision to shift future designs of the low-end Nokia X phones from Android to Windows Phone, branded as Lumia products, saying it shows that the job cuts aren't only to eliminate redundancies but also to adjust Nokia "on a narrower scope."

"They're reconfiguring the focus, purpose and scope of what they're doing with handsets," Gillett said.

It's hard to say how much less interested in devices Nadella might be. The layoffs may simply mean an outsourcing of the manufacturing from inside of Microsoft to third-party partners. It's also worth noting that this round of layoffs will have little or no impact on the teams working on other Microsoft hardware, like the Xbox console, the Surface tablet and the Perceptive Pixel large displays.

Gartner's Merv Adrian said devices remain a critically important part of Microsoft's strategy. "I don't think Satya is abandoning devices and services at all. What he was stating [in last week's letter] was a higher-order point of view about Microsoft's vision, asking: 'Why do we have devices and services? What are we after?'" he said.

According to Adrian, Nadella wants to make clear that devices aren't an end in themselves, but rather vehicles for Microsoft to deliver its new productivity experiences for people's personal and work lives, driven by the company's cloud computing products, like the Office 365 software-as-a-service email and collaboration suite, and the Azure platform- and infrastructure-as-a-service wares.

The other job cuts will come primarily from the Microsoft side, apparently an attempt to eliminate a layer of management fat across several departments. "There's centralization going on at Microsoft," said analyst Ray Wang, founder and chairman of Constellation Research. "There's a lot of operational overlap. They're trying to figure out how to reorganize all of this."

It's important to note that Nadella said Thursday that Microsoft isn't freezing its overall hiring, but rather will add employees in other areas. This means that, after the smoke clears, Microsoft may end up with a net staff reduction that is smaller than 18,000, although how much smaller isn't clear.

"If you look at the job boards, they're ramping up," Wang said of Microsoft's hiring, adding that Nadella is looking to improve Microsoft's mix of skill sets.

Gartner's Adrian noted that "there is substantial investment going on at the same time" that these layoffs are being carried out. "This is reshaping, not cutting," he said.

Although Nadella tried to put a positive spin on the staff reduction, saying it's necessary to make Microsoft leaner, faster, more efficient and agile, the fact remains that he just authorized the largest round of layoffs in its history. It will be tricky to minimize the inevitable aftershocks affecting employee morale and triggering concerns about the company among some outsiders, such as partners, customers and investors.

"You want to make sure when you make cuts in this magnitude, that they are done in a way that really delivers extra benefits to the business rather than just lowering overall headcount," said Charles King, chief analyst at Pund-IT.

"You want to cut the fat but not cut into the muscle or bone. In an organization with 100,000 employees, there is bound to be fat, but depending on how aggressive a strategy like this is, sometimes you can get rid of the good people along with those who aren't so good," King added.

Nadella will have to explain the layoffs not only to shareholders but to employees as well and, King added, it's counterproductive if staffers "remain on edge, fearing that the ax may fall on them any minute."

(Joab Jackson in New York, Chris Kanaracus in Boston and Peter Sayer in Paris contributed to this report.)

Juan Carlos Perez covers enterprise communication/collaboration suites, operating systems, browsers and general technology breaking news for The IDG News Service. Follow Juan on Twitter at @JuanCPerezIDG.

Tags business issueslayoffsMicrosoftsoftwareinternet

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