Nadella's Bid To Fix Microsoft: What Ballmer Didn't Dare

May 7 2014, 5:20am CDT | by

W hen Satya Nadella settled into the U.S. at age 20, he had a problem. The Indian emigre wanted a master’s in computer science as fast as possible, so he could dash into America’s booming tech sector. But cash was tight and his undergraduate preparation, back in Mangalore, was patchy. In 1988 professors at the University of Wisconsin-Milwaukee, pegged him for the slow lane. Gaps in his software studies seemed so severe he might need an extra year to graduate.

No way.

Within months Nadella yanked himself up-to-speed on UWM’s requirements–and wheedled a coder’s job on the side to earn spending money. By the spring of 1990 Nadella was racing to complete his thesis on computer algorithms, aiming to graduate in the standard two years. Could he find enough hours in the day? UWM professor K. Vairavan remembers coming into the computer lab one morning and beholding a sleeping bag in the corner. It was Nadella’s time-saving trick: a way to conduct lab research until 3 a.m., catch a catnap and then keep going.

Nadella has been surprising his bosses ever since. He joined Microsoft in 1992 and by 2011 rose to be one of five executive vice presidents reporting to CEO Steve Ballmer. When Microsoft’s hunt for a new leader began last August, directors pegged Nadella as a great candidate down the road, once he got a bit more seasoning. Then they took a closer look. They liked what they saw. On Feb. 4 Microsoft announced that Nadella, the skinny 46-year-old with the funky glasses, would be Microsoft’s next leader.

Well-run companies like to promote from within. Dysfunctional companies hire outsiders to head off calamity. Microsoft’s six-month hunt for a new CEO–which included a public flirtation with 68-year-old Alan Mulally from Ford as a possible turnaround artist–suggests the question: Is Microsoft well-run or dysfunctional? The answer, of course, is both.

By most financial measures Microsoft is a well-oiled machine. It posted $21.9 billion in net income last year, reflecting a freakishly high 28% of revenue. Microsoft’s brand is as ubiquitous as Coca-Cola and Christianity; the Windows and Office franchises each boast more than 1 billion users worldwide. Yet Microsoft’s growth rate has slowed from 15% a year in the mid-aughts to barely 6% today. Ambitious new product pushes of the past decade, such as the Bing search engine, Windows Phone or Surface tablets, have won skimpy market shares at great expense. There’s a perception in Silicon Valley that Microsoft can’t innovate anymore. Microsoft’s own directors have worried that the culture under Ballmer became too arrogant and insular, making it hard for the Redmond, Wash. company to match fleeter rivals such as Google, Apple and Amazon.

It’s rare for an internal candidate to fix such messes. How could anyone who tolerated Microsoft’s flaws for the past decade suddenly see the company with fresh eyes and declare: “Enough already!”

Well, 100 days in Nadella has established himself as the anti-Ballmer, even though his press people insist that such repudiation cannot be happening. Table-pounding bravado is out; good-natured curiosity is in. The floorboards of old business models are being pried apart. There’s less talk about seizing billion-dollar opportunities or hitting financial targets — and more emphasis on investing profits to win hordes of new users. Nadella will have a big date in July if, as expected, he explains everything to Wall Street analysts in an all-day briefing. The likely headline: Give me leeway on short-term earnings so I can get this growth engine revved again.

Part of Nadella’s transformational agenda involves righting matters internally before sharing his views publicly. Ballmer was a deliciously quotable CEO who often let rhetoric get ahead of results. Nadella right now is dodging major interviews so he can focus on customers, partners, employees and his shareholders. But after conversations with more than two dozen Satya-ologists–ranging from fellow CEOs at tech giants (such as Hewlett-Packard’s Meg Whitman) to long-ago work buddies from the 1990s–it’s possible to assemble a clear picture of what the new boss is like and where he is heading.

Start with Nadella’s instincts for getting the right products to market. “He’s very sharp technically,” says Workday Inc. Chairman Aneel Bhusri. “He’s an innovator. He knows that even the best ideas don’t start out looking like they could be huge.” In face-to-face meetings Nadella is guided by an engineer’s interest in what the world will look like in three to five years, rather than a salesman’s hunger to close deals before the 30th of the month. His mind isn’t trapped by Microsoft propaganda, which was Ballmer’s undoing. Ask Sequoia Capital’s Jim Goetz, the top venture investor on this year’s FORBES Midas List, what he thinks of Nadella, and the conversation gets earthy in a hurry. “Satya doesn’t bull—- himself,” says Goetz. “He comes alone. No entourage. He wants to know where we see the world going. He’s the most self-questioning executive from Microsoft that I’ve ever met. He’s also a brilliant software strategist.”

To maintain Microsoft’s relevance and restore double-digit growth, Nadella must make the company an indispensable partner in cloud computing, the megatrend in which corporate customers shed physical data centers and prepackaged software in favor of nonstop Internet access to faraway services hosted by someone else. Microsoft’s capital spending nearly doubled last year to $4.3 billion, amid cloud-focused data-center construction everywhere from Iowa to Brazil. Amazon remains the cloud-platform leader, with Google, Salesforce and IBM staking out key positions. But Microsoft has emerged as the clear number two, with the fastest growth rate of all. That’s the surge Microsoft only dreamed of in the Bing/Google wars.

“Satya totally gets the cloud,” says Workday’s Bhusri, who moonlights as a venture capitalist at Greylock Partners. “I think he’s going to push Microsoft aggressively in that direction.” Adds Sequoia’s Goetz: “Microsoft has such a wonderful channel into companies’ chief information officers–and a great opportunity to leverage that.”

Traditionally Microsoft pitched itself to CIOs as “your one-stop software shop.” The cloud turns Microsoft into another node in a high-tech ecosystem that includes plenty of spending on Google, Amazon, Oracle and others. When Nadella talks about a “mobile first, cloud first” strategy, which he does incessantly, he is signaling a greater desire to meet users halfway, making sure Microsoft plays nice in the new world.

Nadella knows the power of nice. He smiles a lot. He makes gently self-effacing comments about people’s tendency to assume he’s a vegetarian. (He isn’t.) In public remarks he salutes other people on Team Microsoft, ranging from frontline engineers to long-ago cofounder Paul Allen. When Nadella holds one-on-one meetings, people such as Whitman extol him afterward as a “fabulous listener.” They like him. They tell him more about their hopes and fears than they intended. The Nadella intelligence-gathering network is in play all the time, and the antennae work better if the dials are set to “nice.” Returning to Redmond after road trips, Nadella knows things his competitors don’t.

To spread his ethos he’s been pointing employees to Nonviolent Communication, a book that urges respectful listening instead of the classic Microsoft rejoinder: “That’s the stupidest idea I’ve ever heard!” For now, Nadella enjoys a strong 86% approval rating on employee-feedback site Glassdoor, versus Ballmer’s 47% last year, though Nadella’s number will surely slip once he makes spending cuts promised to Wall Street.

WHEN SATYA NADELLA OPTED for a corporate career in 1990, one of his UW-Milwaukee classmates asked why he wasn’t pursuing a Ph.D. instead. “I don’t need a doctorate,” Nadella replied. “I’m going to be hiring Ph.D.s.”/>/>

Initially the young engineer thrashed around. He joined Sun Microsystems, where he helped build e-mail software but quit in 1992 with plans to attend the University of Chicago’s Booth business school and become an investment banker. Then Microsoft offered him a job in its Windows NT division. Abruptly, Nadella shunted his M.B.A. ambitions to a weekend program. He was headed to Redmond.

Joining Microsoft in the early 1990s was like showing up in Hollywood in the 1920s to make movies. Desktop software was sweeping the world, Microsoft’s stock was soaring as much as 122% a year, and opportunities were endless. Swarms of its salespeople were calling on Wall Street firms, urging them to rip out Sun workstations in favor of cheaper servers running Windows NT. Nadella joined one of those squads as a low-key, attentive technical expert who befriended data guys at the likes of Goldman Sachs, ensuring that Microsoft could deliver what they needed.

“We were always trying to figure out the thin edge of the wedge that we could use to split this open,” recalls Frank Artale, a Microsoft sales alum who covered Wall Street at the time. “Our job was all about big-time listening. And Satya was very good at that.”

Nadella’s official biography glides past the dot-com boom and bust of 1998-2002, but his tangles with that era may influence how he deals with Microsoft’s challenging operations today. Instead of working in the safety of Microsoft’s big Office or Windows division when the 1990s Internet frenzy collapsed, Nadella became an executive at bCentral, a short-lived attempt at supporting small business websites.

“It was awful,” recalls Nadella’s boss for much of that period, Doug Burgum. “Satya and I were closing businesses left and right. When we liquidated one company, I asked if there were any salvageable assets. They said, ‘Yes, a couch.’ I asked if that was a technical term for some kind of software I didn’t know about. They said, ‘No, it’s a piece of furniture.’ That was all we could recover.” Burgum figures Microsoft lost $70 million on that folly.

A builder by nature, Nadella learned to cut costs in tough times, even if it meant sizable layoffs and admissions of failure. He and Burgum rebuilt their division as Microsoft Business Solutions, drawing on the strengths of Great Plains Software, a business-services company that Burgum had sold to Microsoft in 2001. “I don’t think any assets of bCentral survived,” Burgum says. “The one good thing that we got out of that was Satya.”

In 2007 Nadella finally got his chance to hire as many Ph.D.s as he dared. Microsoft CEO Ballmer summoned Nadella to run engineering for the company’s online ser?vices division, where Microsoft barely competed against category king Google. Microsoft spent billions trying to turn its rebranded search engine, Bing, into a serious global rival, a struggle that continues to this day. A Nadella-era talent infusion sharpened Bing’s algorithms a lot, but users barely reacted. When Nadella arrived in 2007, comScore data showed Google with a 49.7% market share and Microsoft with 10.3%. When Nadella left in 2011, the scoreboard read Google 65.4% and Microsoft 13.6%. (Since then Bing has risen to 18.6%.)

Bing’s predicament highlighted a breakdown in Microsoft’s once invincible strategy of being a “fast follower.” In the 1990s it didn’t matter if little rivals pioneered spreadsheets, browsers or word processors. Microsoft could storm those markets with smoothly built alternatives that fit into a suite of easy-to-use tools from Redmond.

A decade later the world had changed. In search, Google’s huge market share generated the best user data and thus the greatest ability to fine-tune algorithms for ever improving service. What’s more, advertisers insisted on favoring the site with the most users. Google made billions from search advertising; Bing couldn’t even cover costs. In Ballmer’s final years as CEO Microsoft’s fast-follower attempts floundered in category after category: Windows phones, Zune music players, Surface tablets.

After four years of pushing boulders uphill at Bing, Nadella won a tastier job in 2011, running Microsoft’s server and tools business. It’s a hard-core techie’s realm: short on glitter but profitable, growing and well-regarded by users. Driven managers thrive in such places, rewriting the rules without constant second-guessing. Among the properties Nadella took over was Microsoft’s small but promising cloud initiative: Azure. How Nadella sized up Azure’s potential, and how he expanded that business 150% a year, speaks volumes about how he operates.

Azure was at a crossroads when Nadella took over. It was built to challenge Amazon’s market-leading AWS cloud service, which had been launched several years earlier. Azure was also supposed to entice customers into meeting the bulk of their computing needs with other Microsoft products, too. If you wanted Azure to run a Windows operating system, Microsoft was proud to take your business. If you preferred the rival Linux approach (which Ballmer once dubbed a “cancer”), you were out of luck.

To determine Microsoft’s next move it was time to leave the Redmond cocoon. Todd McKinnon, CEO and cofounder of a then-tiny San Francisco startup called Okta Inc., remembers Nadella showing up in jeans a few years ago to see how Okta used the cloud. “We’re not using Azure,” McKinnon said. “We use AWS.”

Nadella shrugged. This wasn’t a sales call. It was somewhere between fact-finding and espionage. At the end of the hourlong visit Nadella had drawn out a detailed map of what startups like Okta wanted from the cloud. Over the next few months he met with at least seven other startups in similar settings. Those talks inspired Nadella to offer Linux at a special, lower price on Azure–forgoing Windows licensing fees to keep customers happy. The decision was so at odds with Microsoft’s usual lockstep methods that it later became the subject of a Harvard Business Review case study. Azure now is the fastest-growing of the five major cloud infrastructure services, according to Synergy Research Group, with an estimated 154% revenue leap in the past year.

Such flexibility guided Nadella in an early move as CEO, when Microsoft–at last–said in March that it would make Office available on Apple’s iPads. Nadella said read-only versions of Word, Excel and PowerPoint would be free. To create documents users could license the Web version of Office 365 for $99 a year. Microsoft had been preparing some sort of Office/iPad rollout for a long time. In the pre-Nadella era, however, the project mightn’t have launched so aggressively–with both the free-to-try feature and a bigger strategic message. “Our commitment is to make sure that we drive Office 365 everywhere,” Nadella said. “That means across the Web, across all phones, across all tablets.”

Take a moment to parse those sentences. The new boss had just declared that Microsoft’s best software application was too important to stay tethered to Windows.

Within Microsoft, if Nadella wants to brainstorm about strategy–or even if he doesn’t–Bill Gates is always in the picture. The company’s 58-year-old founder stepped down as CEO in 2000, but he’s never totally left. During the Ballmer era Gates was Microsoft’s nonexecutive chairman; today he is a “technology adviser” to Nadella. As far back as 2005 Nadella figured out how to hold his own with Gates. Instead of being fawning or defensive, eyewitnesses say, Nadella mastered the art of posing strategic puzzles for Gates. The world’s richest man is highly argumentative and loves nothing more than to engage in problem solving./>/>

Once a topic was in play, Nadella offered up new information that both men could digest together. “Satya was very good at coming up with way for Bill to participate in the back-and-forth of getting things right,” recalls Kurt DelBene, a former head of the Microsoft Office business.

Nadella is well-positioned to figure out the enterprise side of the house, where the company gets 58% of revenue and 75% of earnings, according to Evercore Partners. The tougher job is figuring out, quickly, what to do with Microsoft’s wobbly consumer side: phones, Xbox, Bing and Skype.

When Ballmer last year decided to buy Nokia’s handset division, Nadella reportedly voiced doubts at first about the $7.6 billion purchase. No longer the world’s top mobile player, Nokia misread the move to smartphones and ended up tied to the Windows phone operating system, which has just a 3% market share. With Google/Android at 78% and Apple/ iOS at 16%, it’s hard to see how Microsoft might win.

So far, Nadella has been in listening mode. Microsoft’s Xbox consoles are believed to be modestly profitable, though not enough to justify the tens of billions that Microsoft has injected into that business. Loyalists contend that each consumer business has strategic value, with Bing search results supporting Windows phones and the like. “The board will probably give him at least a year or two to sort out the consumer side,” says John Connors, a former Microsoft chief financial officer who is now a venture capitalist at Bellevue’s Ignition Partners. “But they won’t give him ten years.”

Directors needn’t worry about Nadella letting the years slip by. You don’t get to be CEO of Microsoft at age 46 by moving slowly. Expect the Microsoft of 2019 to look a lot more like business-minded IBM than consumer-happy Google. And watch out if the new boss brings his sleeping bag to work.

 
 

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