Ballmer's Legacy Still Incomplete

Aug 26, 2013 (10:08 AM EDT)

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Reactions to Microsoft CEO Steve Ballmer's impending retirement have pooled around two main points of consensus: Ballmer needed to go, and whoever replaces him will have a face a tough job. Speculation has naturally turned to the embattled CEO's potential successors -- but let's not get carried away.

Ballmer won't be out the door for many months to come. The interim will largely determine whether Ballmer is remembered for finally pointing the company in the right direction with his "one Microsoft" reorganization plan, or for leaving a once-mighty company in disarray. Even on his way out, Ballmer will continue to shape the challenges his replacement will face, and thus who the ideal candidate might be.

Regardless, Ballmer won't have absolved himself of missteps. Though he increased Microsoft's revenues with his impassioned salesmanship, he also missed tectonic shifts in the industry, such as the shift to mobile, and spent billions on failed attempts to attract consumers. The company's valuation is less than half what it was when Ballmer took over, its stock price is around three-fifths of what it was just before Bill Gates stepped down, and the company is coming off a quarter that revealed Windows 8 to be a disappointment and its Surface tablets to be a fiasco. Given what Apple and Google have done over the last decade, Ballmer clearly wasn't getting the job done.

What's unclear: the worth of the assets Ballmer will leave to his successor. Ballmer architected the "one Microsoft" plan, and with the wheels of the machine already in motion, coming months will determined whether the current CEO created a foundation for the future or whether his construction needs to be razed and rebuilt from the ground up.

[ Ballmer badly bungled Microsoft's client services strategy. Can the company recover? For more analysis, read Ballmer Is Off The Matrix. ]

In an interview Friday with ZDNet, Ballmer argued that Microsoft needs to continue cultivating a collaborative culture, claiming that it's less important to focus on Microsoft's Surface tablets than on the larger business model: "to deliver… high-value experiences that will span hardware innovation, operating system, consumer experience and enterprise experience."

Ballmer also asserted that Microsoft will have to pursue consumers. "If you're going to be in e-mail, you're going to be in e-mail. You can't say, okay, I only want to be enterprise email," he said, adding that the alternative is to "be like Oracle and not participate in certain high-value activities." Ballmer claimed that the Microsoft board supports him on this stance, and board member John Thompson, who also participated in the interview, confirmed as much.

This kind of rhetoric suggests Microsoft believes in Ballmer's long-term vision. If Ballmer's decision to leave really was his own, as he's claimed, this could well be the case. In discussing Microsoft's next CEO, some commentators have evoked Apple and IBM, companies that successfully redefined themselves after narrowly averting disaster. Microsoft is different from these companies, though, in that it is not on the brink of financial ruin. If the board believes in the company's current direction, it has the money to weather any storm.

In this scenario, the company could go with an insider who can steer the plan through short-term challenges. Julie Larson-Green, who oversees Microsoft's Xbox and Surface products, has been widely mentioned as a contender for the job, and she would make a great story, rising from failed Microsoft applicant to the company's eventual CEO.

But unless Ballmer's recent bets pan out, it's unlikely Microsoft will adhere so closely to "one Microsoft" as it is currently defined. Julie Larson-Green's prospects, for instance, will surely be informed by how the Xbox One fares against the PlayStation 4 this fall, how well the next round of Surface devices sell, and whether Windows 8.1 gains traction.

Indeed, Microsoft's board appears to be apprehensive about the company's direction. All Things D, citing numerous insiders, reported over the weekend that Ballmer's exit might not be as amicable as the CEO has implied and that board members evidently felt Ballmer's exit should come sooner rather than later.

There's also buzz around hedge fund ValueAct's alleged interest in gaining a seat on Microsoft's board and asserting more control over strategies it disapproves of, including, reportedly, Microsoft's decision to make its own hardware. Ballmer has denied that his decision was informed by the rumor, which has been touted loudest by Nomua analyst Rick Sherlund but is nonetheless reinforced by several sources. But whether or not ValueAct moves, Microsoft's board is surely aware that investor discontent has risen. Even if the company wants to follow through on Ballmer's plan, influential shareholders might not have the patience or faith to allow it.

And if Windows 8.1 flops not only among consumers but also among enterprises migrating off of Windows XP? One option would be for Microsoft to double down on new enterprise businesses. Satya Nadella, who ran Microsoft's successful Servers and Tools business and now oversees its Cloud and Enterprise group, could be in the running in this sort of scenario.

But if Microsoft wants to become an innovative company that spans the consumer-enterprise spectrum, it might ultimately look outside. A cultural overhaul would likely bring an end to the "stack ranking" system, for example, wherein a certain percentage of employees within a division have to be rated as sub-standard, even if all of the employees are producing excellent work. The result has often been company-wide dysfunction, with silos acting more like warring tribes than complementary assets. Despite calling for more collaboration, Ballmer has indicated the system might stay. If the company continues to flounder under that system as his tenure winds down, a change in blood might be necessary.

According to a research note by Wells Fargo Securities analyst Jason Maynard, if Microsoft maintains its "devices and services" goals, Nokia CEO Stephen Elop, whose company makes almost all Windows Phone hardware, might be the most likely outside candidate. Maynard noted, however, that Wells Fargo believes Microsoft should abandon this plan. Commentators have also suggested outside candidates ranging from Yahoo CEO Marissa Mayer to Oracle President Mark Herd to Tesla Motors and SpaceX founder Elon Musk.

But it's all speculation for now. Ballmer will make his case on Sept. 19, when Microsoft hosts its annual meeting for financial analysts. He'll also oversee a number of important events before leaving: the launch of Windows 8.1; at least a few new Surface devices; new enterprise products, such as Windows Server 2012 R2; the debut of the Xbox One; to name a few. The company will also continue trying to sell Windows 8 to companies that need to upgrade before Windows XP loses service in April.

Ballmer's execution in these tasks will determine whether his fingerprints are on the company's future successes, or just the things that the next CEO has to fix. They'll also likely dictate what kind of CEO Microsoft decides to hire.