How Middle-Aged Microsoft Can Save Itself

Happy Birthday, Microsoft! You are now 37.

And like other 37-year-olds, you're starting to look ahead. And you don't like what you see. Your arteries are starting to clog. You've added 30 or so pounds (not all muscle) in the last 10 years.

Yes, you've done well, but the 12,000 millionaires you created by your 1986 public offering have pretty much moved on. Curiously enough, two of the three billionaires you created are still active, Ballmer more than Gates. But Gates is busy saving the world (thanks, Bill!). And Ballmer? He's sounding a little shrill these days. And it's awfully hard to compete against a religion (Apple, if you get my drift).

But worse, you have become ... irrelevant. Kind of like Madonna. She still sells a lot of music, but nobody really notices her. Oh, you have bought things (Skype for $8.5 billion), and you still dominate office software and PC operating systems. But Bing? Yammer?

You're kind of like a 37-year-old who goes into a bar and says to the young barmaid: "Where have you been all of my life?" And she replies: "Well, sir, for the first 20 years, I wasn't born."

OK, maybe Dr. Howard can help you out here.

You've got a disease. It's called middle age. It's harder to detect but easier to cure in its early stages; it's easier to detect but harder to cure in its later stages. You're about halfway.

[ Microsoft still wants to make it in the smartphone game. See Windows Phone 8: What Microsoft Needs To Compete. ]

Great companies don't fall gracefully. They pound along ... and then fall quickly. Evidence: Motorola, Circuit City, Kodak, Bank of America ... Shall I go on?

Jim Collins, in his book How The Mighty Fall," talks about the five stages of decline. Stage 1: Hubris. Stage 2: Undisciplined Pursuit Of More. Stage 3: Denial of Risk. Stage 4: Grasping For Salvation. Stage 5: Capitulation To Irrelevance Or Decline.

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You are Stage 1. Lots of hubris. See my July 20 InformationWeek column, "Microsoft A Victim of its Own Success." The last decade has taken you from invulnerable to vulnerable, from focused to defocused.

The hubris stage is when you decide that you're bulletproof, that your momentum will carry you forward. The next Windows will come out, the next Xbox 360 will magically appear, Windows Phone will wow people, you can come out with a tablet that people will just buy. You will run the numbers on Office and just KNOW it will succeed because you are Microsoft.

The next phase scares the hell out of me, and I hope it does you. This is where you scale hubris and decide that you have the management chops to just do more: more versions, more growth.

In case you haven't noticed, the "best and the brightest" don't work for you anymore. I teach at MIT; most of my best students went to work this year for Amazon and Google. You just ain't getting them anymore, and it's not the weather in Seattle. When you stop filling those key seats with the best people, then you fill them with the Seattle version of "suits." But don't worry, you're still racking up sales and profits.

Actually, I do mean worry. I'm being subtle, because right after Stage 2 comes the problem: You start going into Denial, saying "our best days are ahead of us." They ain't.

This is where the warning signs are easily explained away. We had trouble with foreign currency. We missed our projections because the economy in China/Greece/Spain turned down.

In your youth, you were a technology company, and a great one. When everyone hates you, you must be doing something right. Then you became a marketing company. And now you're a company that's financially driven. Just when you think there's nothing fundamentally wrong, there's something fundamentally wrong.

But the scariest stage comes next, and that is when you begin to lurch from side to side, trying to pull the proverbial rabbit out of the hat. And here is your enemy: the investment bankers, who will come up with beautiful PowerPoints showing you that if you would just make this and that and score this acquisition, then you would be back on the path of prosperity. Kind of like those ab crunchers they sell on late-night TV that promise to help you lose 30 pounds in 30 days. It took you 10 years to get to where you are (or are not). It may take you another 10 to get things right again.

We don't even want to talk about Stage 5--capitulation and irrelevance or death. This happens when you keep grasping for those magic potions, do multiple false starts, and "reorganize" (the McKinsey Full Employment Act).

OK, what do you want to do about it? Some companies make it out of this dilemma. Apple comes to mind. And to an extent, IBM, P&G, and Intel.

First, kill the bean counters. Go hire the best young technologists. The stock price sucks, so don't worry about it. Spin them off into small teams. Don't buy big companies--you will just screw them up. Buy little companies with great brains--you want their brains more than their products. Put them into a separate company, where you own 50% and these young turks together have options on the rest.

Second, cut staff, big time. Maybe 20%. I don't know what all of those people do and neither do you.

Third, tell Steve it's time to go. He had a good run, but it's time. Keep Bill.

Let me recommend a book, Younger Next Year, whose authors say that if you work out hard six days a week, really hard, you can be physically younger a year from now. It takes discipline, commitment, and a sense of urgency.

Or as Lewis Carroll says in Alice in Wonderland: "If you don't know where you are going, any road will take you there."

Feel better. And Happy Birthday.