Human Risk 4: Steve Ballmer, The Decline Of Microsoft

This is the fourth in a series of articles on Human Risk. The first three can be found here, here and here.

Microsoft CEO Steve Ballmer, who took over from Bill Gates in 2000, recently announced that he will be resigning within 12 months. The fact that Microsoft’s shares jumped almost 8% on the news is testament to the widely held belief that Ballmer is primarily responsible for the decline of Microsoft relative to its much nimbler rivals such as Google and Apple.

By some estimates as much as $24 billion was added to the market value of Microsoft on Ballmer’s announcement. This is proof, if ever any was needed, that culture and risk are twin sides of the same coin. The only question is; what if any, were the specific cultural issues that caused one of the most important organisations in modern history to decline in value and competitiveness?

In the first instance and especially for those of us in banking and financial services, this is another all too familiar story of the overpowering boss. While Microsoft was never in a position to wreak the type of disaster on the American and global economies in the way Lehman Brothers did, the evidence suggests that Ballmer was somewhat like a Dick Fuld. If this was not the case the stock markets would not have responded in the way they did.

In our previous article we wondered where HR was during the financial crisis. We also wondered why having spent untold millions on management and employee development, that in so many cases a single boss was able to dominate the culture of a particular financial institution—ultimately to the detriment of everyone else.

At Microsoft, with a little help from HR, things were actually worse as not only did Ballmer dominate the culture, the management evaluation system, known as “stack ranking”, was totally destructive.

While Steve Ballmer had pioneered stack ranking within Microsoft, when Lisa Brummel took over as Executive Vice President of Human Resources she was supposed to tweak the system to improve it. By all accounts Brummel actually made the system worse and for her efforts she gained the most unwelcome title of “The Most Universally Hated Exec At Microsoft”.

The impact of stack ranking on the culture, teamwork and competitiveness at Microsoft was perhaps best described in an article entitled Microsoft’s Lost Decade by Kurt Eichenwald in an August 2012 issue of Vanity Fair. The relevant extract from the article reads as follows:

At the center of the cultural problems was a management system called “stack ranking.” Every current and former Microsoft employee I interviewed—every one—cited stack ranking as the most destructive process inside of Microsoft, something that drove out untold numbers of employees. The system—also referred to as “the performance model,” “the bell curve,” or just “the employee review”—has, with certain variations over the years, worked like this: every unit was forced to declare a certain percentage of employees as top performers, then good performers, then average, then below average, then poor.

“If you were on a team of 10 people, you walked in the first day knowing that, no matter how good everyone was, two people were going to get a great review, seven were going to get mediocre reviews, and one was going to get a terrible review,” said a former software developer. “It leads to employees focusing on competing with each other rather than competing with other companies.”

Stack ranking produced employee infighting, sabotage and massive amounts of internal politics. Those who believe that Windows and Office, the two products most associated with Microsoft, were the root cause of the company’s problems had better think again as no organisation can remain innovative and competitive once such a culture takes hold.

The irony is that Microsoft itself had triumphed over IBM because of the latter’s own evaluation system. When Microsoft started working with Big Blue they realised that one of the greatest barriers to innovation was IBM’s approach to evaluating projects. In the bad old days at IBM, projects were not evaluated based on their targeted objectives but by how many million lines of code were needed for the project’s completion.

Naturally, IBM programmers obliged by writing as many millions lines of code as they possibly could. Unfortunately for IBM, programmers who were focused on writing as many million lines of code as they possibly could were very unlikely to focus on project goals and even more importantly customer needs. IBM almost went bankrupt.

From the genius of Toyota and its development of Lean Production, to banking woes and the financial crisis and to the tales of Microsoft and IBM, we can see that organisational culture, value destruction, competitiveness, organisational risk and human risk are all inextricably linked.

CEOs, Boards, HR, senior executives and everyone else involved should take heed.

The feedback so far on these articles has been wonderful but please don’t forget to do the poll below.

Jonathan Ledwidge is the author of the book Clearing The Bull, The Financial Crisis And Why Banks Need A Human Transformation (iUniverse).

 

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