Microsoft Corp.'s new chief executive has signaled a new era for the company with a heavy finger on the delete key, erasing 18,000 jobs — 14% of the workforce.
Six months into the job, CEO Satya Nadella is targeting a red-tape culture that has rested on former glory. He seeks to restore a feisty spirit, capable of recapturing consumers lost to surging competitors.
“This is the most fundamental restructuring ever for Microsoft,” said Merv Adrian, a market research analyst with Gartner Inc. “This time, it’s less about playing catch-up and more about looking forward.”
Investors embraced the move — pushing Microsoft stock up 45 cents, or 1.02%, to $44.53 on a down day for technology stocks. The shares hit their highest level since January 2000, when founder Bill Gates stepped down as CEO.
Most companies see profits rise after layoffs, but the real test for Nadella is whether he can recapture Microsoft’s innovative past and compete for today’s more demanding consumers.
“We will simplify the way we work to drive greater accountability, become more agile and move faster,” Nadella wrote to employees. “We plan to have fewer layers of management, both top down and sideways, to accelerate the flow of information and decision making.”
The biggest layoff in the company’s 39-year history hit its Nokia division hardest, with 12,500 employees laid off.
Microsoft acquired the mobile phone company in April in a $7.5-billion deal struck in 2013 by Nadella’s predecessor, Steve Ballmer. A onetime industry leader, Nokia was considered a bloated company that failed to keep up with the smartphone boom.
Big cuts were expected, but Nadella gave no indication that Microsoft was pulling back on its mobile ambitions or fundamentally changing strategy. The cuts, analysts said, will create more cash for mobile device investment.
Nearly 13,000 job cuts will begin immediately, including about 1,350 at Microsoft’s headquarters in the Seattle area. More will come from Nokia’s engineering office in San Diego, its factory in Hungary and its offices in Finland and Beijing.
Layoff announcements are also filtering through other Microsoft divisions. Microsoft has three offices in the Los Angeles region, where employee prospects are as yet uncertain.
The cuts mark a defining moment for Microsoft, which seeks to trade in its image as a washed-up powerhouse and prove itself as a producer of groundbreaking products and services. It has gotten crushed by Apple, Google, Amazon and others in smartphones, tablets and just about anything new and exciting.
The company is in no danger of collapse. Its Windows operating system and Office software suite remain dominant at businesses in the U.S. and globally. Cash flow continues to gush at more than $17 billion a year.
During the Ballmer years, Microsoft proved ill-equipped to compete for non-corporate customers. Nadella seeks to slow the kind of long, painful, downhill slide historically seen at mature corporate giants, such as General Motors.
A look at profit-per-employee figures makes clear the need to drastically reduce head count. In 1999, just before the Gates-to-Ballmer transition, each of the company’s 31,400 employees represented $248,120 in net income. In 2013, each of the 99,000 employees accounted for $220,808 in net income, an 11% drop.
Over the same period — the Ballmer era — the stock lost more than 20% of its value, while the broad technology stock index was up 14% and Apple stock soared 2,500%.
Microsoft’s only previous mass layoff came in 2009, when the company announced that a “once-in-a-lifetime set of economic conditions” was requiring more than 5,000 cuts, about 6% of the workforce at the time. Since then, many of the industry’s original technology giants, including Intel, Hewlett-Packard and IBM, have announced trims in their workforces to keep pace with the innovation coming out of Google, Amazon and start-ups.
Ballmer, meanwhile, has retired from Microsoft and awaits approval of his $2-billion bid to buy the Los Angeles Clippers basketball team.
In a note to clients, FBR Capital Market analysts Daniel Ives and James Moore said that although the cuts will be “painful” for employees, they are necessary.
“Microsoft needs to be a ‘leaner and meaner’ technology giant over the coming years in order to strike the right balance of growth and profitability around its cloud and mobile endeavors,” the pair wrote.
Slashing the staff could speed up Microsoft’s development of new products, according to one analyst.
“There’s hope for a faster, nimbler Microsoft,” said Colin Gillis, senior technology analyst at BGC Partners. “The idea is to reduce the layers of management vertically and horizontally, so you can speed things up.”