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Brier Dudley offers a critical look at technology and business issues affecting the Northwest.

July 14, 2014 at 3:05 PM

Microsoft layoffs loom, how far will Nadella go?

Washington state needs to brace itself for the next big Microsoft update.

Microsoft image of Nadella during a July event.

Microsoft image of Nadella during a July event.

Last week’s “vision memo” from Microsoft Chief Executive Satya Nadella was a stage setter for drastic changes he’ll announce on or before July 22, when the company reports its fiscal fourth-quarter earnings.

One analyst predicted Nadella will announce he’s cutting at least 6,000 jobs, which would be the largest layoff in Microsoft’s history.

If that all happens locally, it would erase the past six years of growth in the state’s software-publishing sector and be a bigger hit than Washington Mutual’s demise, which erased 3,400 Seattle jobs.

But my guess is the biggest cuts will be away from Microsoft headquarters and in the far-flung operations of the Nokia phone business the company acquired in April.

Pruning has been happening for some time. When Microsoft announced the Nokia deal last September, it involved 32,000 Nokia employees.

Before it closed, the number of Nokia employees coming onboard had fallen to 25,000, in part because several factories were left out of the deal.

Further layoffs were expected. The remaining questions are how far they’ll go and whether the overall reorganization that’s under way will address continuing concerns that Microsoft is bogged down by thick layers of management and process.

Speeding things up will take more than layoffs, though. The criticism continued after Nadella’s predecessor, Steve Ballmer, cut 5,800 jobs during the economic downturn in 2009.

This time around, with Nokia in play, the layoffs could be dramatic enough to sate Wall Street vultures who have been hoping Nadella would bring out the ax. They may also appease the newer Microsoft board members who have pressed for a shake-up.

It’s no wonder Microsoft carefully choreographed the news last week and Nadella stuck to the script.

The combination of a big layoff, an effective reorganization and continued emphasis on the hot market for cloud services could extend Nadella’s honeymoon and Microsoft’s stock rebound into 2015, when we’ll start hearing about the next wave of products and more about the next version of Windows.

Meanwhile, Nadella and Amy Hood, Microsoft’s chief financial officer, are letting investors know that cost cuts are in the works.

Hood told investors in the previous earnings call, in April, that severance costs related to the Nokia merger would be detailed in the next earnings report — on July 22.

Nokia image

Nokia Lumia Icon carried by Verizon

She reiterated that Microsoft expects to cut more than $600 million worth of expenses in the combined company before the end of 2015. Those expenses would be related mostly to salaries and benefits; at roughly $100,000 apiece that could be 6,000 jobs.

In one swoop, Microsoft could outsource much of Nokia’s phone-manufacturing operations, removing thousands of jobs from its payroll without gutting the main software factory in Redmond.

But Nadella hinted that cuts could happen at home as well. His memo talked about a flatter, leaner organization, saying the company will “streamline the engineering process” and employees will see “fewer people get involved in decisions and more emphasis on accountability.”

This was offset by his pledge to invest in new initiatives, including more training programs, incubation opportunities and a “data and applied science” program to help engineering groups analyze market opportunities.

Nadella also said Microsoft will continue acquiring new companies and hiring more people.

In a series of interviews after the memo was released, including one with my colleague Janet I. Tu, Nadella refused to discuss the possibility of layoffs or provide more details. More information will come with the earnings report, he said.

Nomura analyst Rick Sherlund speculated Friday that Microsoft is planning to trim its head count by 5 to 10 percent, including perhaps a 25 percent reduction in the newly added Nokia group. That would be around 6,250 to 12,500 jobs; Microsoft now has about 125,000 employees, including 43,000 in Washington state.

“I’m assuming the cost structure’s bloated in the company and everybody knows it, and he’s going to do something with respect to the job cuts,” Sherlund told me. “The fact he said, ‘I don’t want to talk about it’ raises a red flag.”

Nadella wanted people to stay focused on the content of his memo, including his latest plan to tune the organization and double-down on productivity and platforms.

That’s understandable. But perhaps next time the vision memo shouldn’t arrive when everyone’s waiting for details about an impending layoff.

Comments | Topics: layoffs, Microsoft, nokia


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