Microsoft CEO Nadella Outlines Vision, More Overhauls

Jul 10, 2014 3:42 pm ET

(Updates with comments on hardware in 14th paragraph)

July 10 (Bloomberg) -- Microsoft Corp.’s Satya Nadella unveiled his first vision statement as chief executive officer, saying that more engineering and organizational changes are needed as he attempts to turn around the software maker.

“We’ve got to back it up with products people love and that’s what we’re galvanizing to do,” Nadella said in an interview.

The CEO didn’t address the prospect of job cuts, yet people familiar with the company’s plans said reductions will probably happen. Redmond, Washington-based Microsoft is shifting its focus from the devices and services strategy that former CEO Steve Ballmer reorganized the company around last July and is homing in more on productivity, mobile and cloud, Nadella wrote in the memo today that was distributed to employees and posted on the company’s website.

“Over the course of July, the senior leadership team and I will share more on the engineering and organization changes we believe are needed,” Nadella wrote. “Nothing is off the table in how we think about shifting our culture.”

The memo is Nadella’s most comprehensive statement about Microsoft’s direction since he was appointed CEO in February. Since then, he has made several appearances at company and technology events to discuss the priorities of mobile and cloud products, as he works to shift Microsoft away from its longtime core business of software for personal computers. Nadella has signaled a desire to produce software for rival operating systems like Apple Inc.’s iOS and Google Inc.’s Android and has shuffled management in areas like marketing, business development and the Xbox game console.

Laying Groundwork

“We believe management is effectively laying the groundwork for a healthy fiscal year 2015,” Daniel Ives, an analyst at FBR Capital Markets, wrote in a note today about Nadella’s memo.

When Microsoft agreed to acquire Nokia Corp.’s handset business in September, the software maker pledged $600 million in annual cost savings for 18 months after the deal closes. Meeting that commitment will probably involve job cuts in areas where the two companies overlap, said the people familiar with Nadella’s thinking, who asked not to be identified because the discussions are private.

Re-Engineering Teams

Other job cuts may result from changes Nadella is making to the engineering organization, said the people. Engineering teams have traditionally been split between program managers, developers and testers. Yet with new cloud methods of building software, it often makes sense to have the developers test and fix bugs instead of a separate team of testers, Nadella said in the interview. He is also elevating designers and data scientists to be on par with the engineering team on each product, he said.

Nadella declined to say in the interview whether the changes will result in job cuts and said he would provide more details on the implications of his memo when Microsoft reports fiscal fourth-quarter earnings on July 22. He said some of the changes have already been under way in several groups.

Nadella also defined productivity as corporate and consumer activities. He identified Cortana, Microsoft’s voice-controlled personal assistant, as “perhaps the biggest innovation in productivity we’ve done.”

The CEO said he sees the company’s operating systems as a cloud OS comprised of Azure, its software for hosting and running apps in the cloud; its Windows software for PCs; as well as Windows for devices and Microsoft’s own hardware. He pledged to modernize the company’s engineering processes to be faster and rely more on data, as well as making them better at predicting what customers want.

Xbox Matters

Nadella also stated his commitment to Xbox, even as he listed it as something outside the company’s core.

“It’s critical to define the core, but it’s important to make smart choices on other businesses in which we can have fundamental impact and success,” Nadella wrote in the memo. “The single biggest digital life category, measured in both time and money spent, in a mobile-first world is gaming.”

Microsoft isn’t interested in building hardware to become an equipment maker, Nadella said. Instead, the company will focus on areas where it can define new categories, he said.

In some ways the focus on productivity and platforms harkens back to where Microsoft was in the 1990s when it had two divisions: platforms and applications. The focus on mobile and cloud makes that mission bigger and gives Microsoft more potential to stake out a key role in customers’ lives, Nadella said in the interview.

“That core sensibility we have has to be redefined in sensible ways,” he said. “It’s a much more bold ambition on our core than we ever had.”