Microsoft reorganization makes sense for giant

Company getting too big and unwieldy to to be managed efficiently, analysts say

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

Microsoft Tuesday consolidated six divisions into three, each one with its own president: 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 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 (customer relationship management) and ERP (enterprise resource management) applications. And the new entertainment division will oversee the development of entertainment and digital devices, such as Internet Protocol television (IPTV), Xbox and other consumer-oriented digital lifestyle products.

This 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, said Rob Enderle, principal analyst for research firm the Enderle Group in San Jose, California.

"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.

An issue like this should be resolved under the reorganization, not only because it aligns different groups that previously were separate divisions, but 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 [Microsoft Chief Executive Officer Steve] 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, it 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.

This 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.

Copyright © 2005 IDG Communications, Inc.