The Terrible Management Technique That Cost Microsoft Its Creativity

Vanity Fair has an article in its August issue that tells the story of how Microsoft “since 2000 . . . has fallen flat in every area it entered: e-books, music, search, social networking, etc., etc.” According to a summary available online, the article finds a devastatingly destructive management technique at the heart of Microsoft’s problems.
Author Kurt Eichenwald interviewed employees and found that

Microsoft C.E.O. Steve Ballmer delivers the keynote address at the 2012 International Consumer Electronics Show, in Las Vegas, on January 9.

Analyzing one of American corporate history’s greatest mysteries—the lost decade of Microsoft—two-time George Polk Award winner (and V.F.’s newest contributing editor) Kurt Eichenwald traces the “astonishingly foolish management decisions” at the company that “could serve as a business-school case study on the pitfalls of success.” Relying on dozens of interviews and internal corporate records—including e-mails between executives at the company’s highest ranks—Eichenwald offers an unprecedented view of life inside Microsoft during the reign of its current chief executive, Steve Ballmer, in the August issue. Today, a single Apple product—the iPhone—generates more revenue than all of Microsoft’s wares combined.

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Eichenwald’s conversations reveal that a management system known as “stack ranking”—a program that forces every unit to declare a certain percentage of employees as top performers, good performers, average, and poor—effectively crippled Microsoft’s ability to innovate. “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,” Eichenwald writes. “If you were on a team of 10 people, you walked in the first day knowing that, no matter how good everyone was, 2 people were going to get a great review, 7 were going to get mediocre reviews, and 1 was going to get a terrible review,” says a former software developer. “It leads to employees focusing on competing with each other rather than competing with other companies.”

When Eichenwald asks Brian Cody, a former Microsoft engineer, whether a review of him was ever based on the quality of his work, Cody says, “It was always much less about how I could become a better engineer and much more about my need to improve my visibility among other managers.” Ed McCahill, who worked at Microsoft as a marketing manager for 16 years, says, “You look at the Windows Phone and you can’t help but wonder, How did Microsoft squander the lead they had with the Windows CE devices? They had a great lead, they were years ahead. And they completely blew it. And they completely blew it because of the bureaucracy.”

According to Eichenwald, Microsoft had a prototype e-reader ready to go in 1998, but when the technology group presented it to Bill Gates he promptly gave it a thumbs-down, saying it wasn’t right for Microsoft. “He didn’t like the user interface, because it didn’t look like Windows,” a programmer involved in the project recalls.

“The group working on the initiative was removed from a reporting line to Gates and folded into the major-product group dedicated to software for Office,” Eichenwald reports. “Immediately, the technology unit was reclassified from one charged with dreaming up and producing new ideas to one required to report profits and losses right away.” “Our entire plan had to be moved forward three to four years from 2003–04, and we had to ship a product in 1999,” says Steve Stone, a founder of the technology group. “We couldn’t be focused anymore on developing technology that was effective for consumers. Instead, all of a sudden we had to look at this and say, ‘How are we going to use this to make money?’”

A former official in Microsoft’s Office division tells Eichenwald that the death of the e-reader effort was not simply the consequence of a desire for immediate profits. The real problem for his colleagues was the touch screen: “Office is designed to inputting with a keyboard, not a stylus or a finger,” the official says. “There were all kinds of personal prejudices at work.” According to Microsoft executives, the company’s loyalty to Windows and Office repeatedly kept them from jumping on emerging technologies. “Windows was the god—everything had to work with Windows,” Stone tells Eichenwald. “Ideas about mobile computing with a user experience that was cleaner than with a P.C. were deemed unimportant by a few powerful people in that division, and they managed to kill the effort.”

When one of the young developers of MSN Messenger noticed college kids giving status updates on AOL’s AIM, he saw what Microsoft’s product lacked. “That was the beginning of the trend toward Facebook, people having somewhere to put their thoughts, a continuous stream of consciousness,” he tells Eichenwald. “The main purpose of AIM wasn’t to chat, but to give you the chance to log in at any time and check out what your friends were doing.” When he pointed out to his boss that Messenger lacked a short-message feature, the older man dismissed his concerns; he couldn’t see why young people would care about putting up a few words. “He didn’t get it,” the developer says. “And because he didn’t know or didn’t believe how young people were using messenger programs, we didn’t do anything.”

“I see Microsoft as technology’s answer to Sears,” said Kurt Massey, a former senior marketing manager. “In the 40s, 50s, and 60s, Sears had it nailed. It was top-notch, but now it’s just a barren wasteland. And that’s Microsoft. The company just isn’t cool anymore.”

“They used to point their finger at IBM and laugh,” said Bill Hill, a former Microsoft manager. “Now they’ve become the thing they despised.”