Analysis: Microsoft reorganization needed to end internal 'turf wars'

'Microsoft has rebuilt the company in a way that makes sense,' says one analyst

Microsoft Corp.'s reorganization makes sense for the company, which was getting too big and unwieldy under its former structure to continue to be managed efficiently, industry analysts said today.

Microsoft this afternoon consolidated six divisions into three, each with its own president. Those groups are the Microsoft Platform Products & Services Division, led by Kevin Johnson and Jim Allchin as co-presidents until Allchin retires at the end of 2006; the Microsoft Business Division, with Jeff Raikes as president; and the Microsoft Entertainment & Devices Division, with Robbie Bach as president.

The new Platform Products & Services group will comprise the current Windows Client, Server and Tools division and the MSN online services division. The business group will consist of the current Microsoft Information Worker group, including Microsoft Office, and the Business Solutions group, which includes CRM and ERP applications. And the new entertainment division will oversee the development of entertainment and digital devices, such as IP television, Xbox and other consumer-oriented digital lifestyle products.

The changes reflect an effort by CEO Steve Ballmer to install more professional managers in top positions as Microsoft evolves into a large, mature company with nearly 60,000 employees, Matt Rosoff, an analyst at independent research firm Directions on Microsoft, told Reuters. Directions on Microsoft is based in Kirkland, Wash.

"There's room for improvement in areas such as clear product road maps and delivering timely updates," especially in the Windows division, Rosoff said.

As software becomes more complex to deliver and deploy, Microsoft is shifting toward delivering product updates and software-based services over the Web. "I think they thought of putting in a more sales-oriented person [Johnson] who talks to customers all the time and really knows what they're asking for," he said.

He predicted that additional personnel changes in the company's lower ranks are likely as the impact of the restructuring trickles through the company.

Rob Enderle, principal analyst at research firm Enderle Group in San Jose, said the restructuring will enable Microsoft to more efficiently deliver products combining technologies from divisions that previously had difficulty working together because they were in separate organizations.

"The company had become almost unmanageable," he said. "In the past two and a half years, it felt like you just couldn't get anything done. The turf wars became more pronounced."

Enderle used the example of handheld gaming machines, which are currently hot in the consumer gaming market, where Microsoft's Xbox product plays. "Microsoft couldn't build one because you have to bring together a bunch of different groups that don't work together," he said.

Issues like this should be resolved under the reorganization, not only because it aligns different groups that previously were separate divisions, but it also gives people an approachable throat to choke -- in the form of a division president -- if there are problems with collaboration between teams, Enderle said.

"If between those big organizations there has to be cooperation, you have one person to go to make sure that happens," Enderle said. "Before, you kind of had to go up to Ballmer, and you don't want to go up to him and say people aren't working together, because Steve will start picking up bodies and hurling them around. ...Microsoft has rebuilt the company in a way that makes sense."

The new structure also is logical because, except for the former MSN division, the company has reorganized businesses according to the customer base for the products and services in each group, said Ted Schadler, a vice president at Forrester Research Inc.

"This organization is a simple one because the alignment here of all the product groups, save one, is around markets -- around people who write checks, the buyers," Schadler said.

The restructuring will allow Ballmer more time to identify long-term goals for the markets each unit serves, while leaving the coordination of various divisions and specific goal-setting up to the presidents responsible for each unit, Schadler said.

"Steve doesn't have to be involved in setting those goals -- he doesn't have to broker the conversations between the different product group leaders," Schadler said. "He can leave that to the presidents. It's a much more autonomous business unit structure."

Though Schadler did not think the inclusion of MSN into the new Platform Products & Services Division was as logical as the rest of the new structure, a Microsoft spokesman said it fits in with the company's plan to depend less on selling packaged software and provide more services for customers.

MSN is increasingly becoming the division where Microsoft creates innovative service offerings, so it makes sense for that business to be alongside Windows and other pieces of server software that will become more of a services infrastructure than separate products, said Tom Pilla, a corporate communications representative at Microsoft.

"Customers want a seamless experience," Pilla said. "The line is going to be blurring between static bits and always-on services. This is how we're positioning the company to take on that challenge going forward."

Dan Kusnetzky, vice president of system software research at research firm IDC, said Microsoft has been moving in the direction of providing a more services-oriented revenue model for some time. "Microsoft has been working for a number of years to move from a packaged product thinking to thinking about software as a service [customers] pay for in perpetuity," he said.

However, Kusnetzky cautioned that Microsoft could alienate some customers because they have traditionally forced people to buy into the services model rather than clearly outlined the benefits of it to them, and "most people get upset when they are forced in a direction they don't understand."

That was evident just last week when Microsoft said it would require enterprise customers of Windows Vista to purchase its Software Assurance contract, a move that drew fire from customers who felt like they were being made to pay for something they may not use.

Reed Stevenson of Reuters contributed to this report.

Copyright © 2005 IDG Communications, Inc.

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