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Microsoft Layoffs Signal a Changing Culture

The cuts are partly related to Microsoft’s acquisition of Nokia’s phone business and partly a reflection of CEO Satya Nadella’s vision of a Microsoft that’s less management heavy and more agile.

In his first major organizational move since becoming Microsoft CEO in February, Satya Nadella announced Thursday that, over the next year, the company will cut 18,000 jobs — about 14 percent of its workforce. That represents the largest layoff in Microsoft’s history and a more aggressive cut than many had expected.

At least 1,351 of the jobs cut will come from the Puget Sound region, about 3 percent of the approximately 43,000 employees Microsoft has in this area.

The cuts are partly related to Microsoft’s acquisition of Nokia’s phone business and partly a reflection of Nadella’s vision of a Microsoft that’s less management heavy and more agile.

Most of the cuts — about 12,500 professional and factory positions — are former Nokia positions, with some Microsoft positions also being eliminated because of job duplication related to the Nokia acquisition.

The remaining 5,500 jobs cut across multiple functions, including marketing and engineering. Microsoft declined to specify which areas were hardest hit, though an internal email shows that the company is closing Xbox Entertainment Studios, which was just starting to produce original TV shows.

Of the 18,000 jobs to be cut, Microsoft was starting Thursday to eliminate 13,000 of them. The majority of the remaining 5,000 will be notified over the next six months.

Some of the jobs from the remaining 5,000 will come from the Puget Sound area.

“The emphasis on simplifying management structure and the fact that a lot of those corporate groups are here would imply that more local cuts are coming” as part of the 5,000, said analyst Sid Parakh of Seattle-based investment firm McAdams Wright Ragen.

No surprise

Layoffs have been expected after the April closing of Microsoft’s $7.5 billion purchase of Nokia’s handset business. That deal brought 25,000 Nokia employees — many of them in Nokia’s factories worldwide — onto Microsoft’s payroll. As part of that deal, Microsoft also committed to achieving annual cost savings of at least $600 million for 18 months after the deal closed.

Layoff rumors had gained strength in recent weeks, particularly with the start of the company’s fiscal year this month. And Nadella hinted layoffs were coming in a memo outlining his vision that he emailed to employees last week.

In that memo, he wrote about his vision of Microsoft as a “productivity and platform company for the mobile-first and cloud-first world,” and the need for sweeping cultural changes to make that happen.

Nadella issued a new memo to employees Thursday, saying the cuts “are mainly driven by two outcomes: work simplification as well as Nokia Devices and Services integration synergies and strategic alignment. ... It’s important to note that while we are eliminating roles in some areas, we are adding roles in certain other strategic areas.”

He said the company would “simplify the way we work to drive greater accountability, become more agile and move faster. ... In addition, we plan to have fewer layers of management, both top down and sideways, to accelerate the flow of information and decision making.”

Matt McIlwain, a managing director of Seattle-based venture-capital firm Madrona Venture Group, said Thursday’s layoffs, while bad news for those who lost their jobs, were good for Microsoft and demonstrated that "Satya’s playing for long-term transformational change.”

“It shows he has a plan,” McIlwain said, where “there’s coherency between strategy, culture and organizational structure ... and he has the clear authority to act on it.”

The mood on campus Thursday was “solemn, definitely solemn,” said a software developer who did not receive a layoff notice, and who asked not be named. “We were kind of determined to move forward. Everyone’s still excited about the direction.”

At the Mini-Microsoft website, praise for Nadella was not flowing.

Mini-Microsoft, a blog written anonymously by a person believed to be a longtime employee of Microsoft, had been largely inactive in the past couple of years but came back to life Thursday. Over the years, the blog’s comments section has served as a virtual gathering place for Microsoft employees when big events happen.

Mini, and many of the commenters, urged the company to get the cuts over with quickly, rather than spacing them out. Hit especially hard by the cuts, commenters said, were software testers in the Operating Systems Group and employees in the marketing group. The company has not said where the cuts are specifically happening, other than that they involve multiple functions, including engineering and marketing.

Microsoft will offer severance and job-transition help in many locations.

The company declined to say if, or how, the cuts will affect contractors and vendors, although Nadella alluded in his memo to changes that will “affect both the Microsoft workforce and our vendor staff.”

As a result of the job cuts, Microsoft expects to incur pretax charges of $1.1 billion to $1.6 billion over the next four quarters, including $750 million to $800 million for severance and related benefit costs, and $350 million to $800 million of asset-related charges, the company said.

Former Nokia business

Some of the biggest changes are coming to the former Nokia phone business, as its former smart devices and mobile-phone business units are merged into one, and as Microsoft kills off the Nokia X line of Android-based phones in favor of Windows Phone.

Microsoft will focus its efforts on the Lumia brand of Windows Phone smartphones, continuing to produce higher-end phones while adding more lower-cost Lumia devices to try to boost Windows Phone sales. (Despite being in the market for nearly four years, Windows Phone still has only a tiny share of the worldwide smartphone market.)

“It is particularly important to recognize that the role of phones within Microsoft is different than it was within Nokia,” Stephen Elop, current head of Microsoft’s Devices group and former CEO of Nokia, said in an email to employees Thursday. “Whereas the hardware business of phones within Nokia was an end unto itself, within Microsoft all our devices are intended to embody the finest of Microsoft’s digital work and digital-life experiences, while accruing value to Microsoft’s overall strategy. Our device strategy must reflect Microsoft’s strategy and must be accomplished within an appropriate financial envelope.”

Microsoft is also closing the 2-year-old Xbox Entertainment Studios, which just three months ago outlined its plans for a slate of original TV programs for the Xbox Live service.

Studio executives Nancy Tellem and Jordan Levin and some from the studios team will remain to focus on a smaller group of programs already in production, including a “Halo” TV series and a documentary series.

The company will continue to provide interactive sports content such as NFL on Xbox, and its app partnerships with content entertainment and sports-content providers will also continue, according to a memo from Phil Spencer, head of Xbox and Microsoft Studios.

The company did not say how many people will be laid off from Xbox Entertainment Studios, which has 35 employees in Santa Monica, Calif., 120 in Vancouver, B.C., and five in Redmond.

Strong labor market

The number of layoffs locally — at least the number known so far — should not have too much of an impact on the local economy.

Paul Turek, an economist with Washington state’s Employment Security Department, said the cuts are “likely to have some short-term impact on the area,” but that King County is the one county that’s probably best positioned to take such a hit.

“The labor market’s been moving forward, probably faster [in King County] than any other county in this state,” he said. That indicates “a growing labor force that’s attracting workers because of the stronger hiring prospects within the region.”

The unemployment rate in King County in May was 4.7 percent, compared with 6.1 percent for the state, according to Turek.

Sandeep Krishnamurthy, dean of the University of Washington Bothell School of Business, said the impact on the local economy will likely play out over the next six months to a year, most notably in the local residential real-estate market.

Local effect

Frank Artale, a managing partner with venture-capital firm Ignition Partners, said the cuts won’t have much of an effect on the local tech and startup culture.

“The local startup culture doesn’t suffer or benefit from changes like this from Microsoft or any other large organization in the area,” he said. “What would affect the culture is, if Amazon or Microsoft suddenly decided they were going to raise salaries and open up 5,500 positions.”

On the other hand, Madrona Venture Group’s McIlwain thinks that in the short term, workers leaving Microsoft could provide a pool of talent or sources of advice for local startups.

Longer term, if the cuts help Microsoft succeed, that results in having more money, angel investors and advisers in the local area, he said.

Second major cut

This is only the second time Microsoft has instituted such large, sweeping cuts.

In 2009, in response to the global recession, Microsoft had several rounds that added up to 5,800 jobs cut — about 6 percent of its workforce then. Some 1,500 were in the Puget Sound area.

The company regularly makes smaller job cuts, including a marketing restructuring involving 200 layoffs.

As of the end of its last fiscal year on June 30, Microsoft had 128,076 employees (including the 25,000 former Nokia employees) worldwide, 43,328 of them in the Puget Sound area.

The layoff news pushed Microsoft’s stock price up 3.7 percent to $45.71 in early trading, but it gave up much of its gains and closed Thursday at $44.53, up 45 cents, or 1 percent.

©2014 The Seattle Times