End of an Error

During my summer internship at Microsoft in 2011, our VP had lunch with the ten of us in her organization who were part of the program. It was an opportunity for us to share with her what we were working on, and a chance for us to ask her questions about her experience and the future of the company. I remember one intern asked her what she would change about Microsoft if she could.

“Someone forwarded me an email the other day,” she said. “It was a cartoon of the org charts of the various tech companies. Have you seen this?”

We knew immediately what she was talking about — this cartoon had made the rounds in the tech recruiting circles. We laughed in affirmation. Yes, Apple completely revolved around Steve Jobs; Google seemed super disorganized.

“Well, I think they got it right,” she said. “And I think we could do without the guns.”

The way I see it, there are two big factors that led to a culture characterized by such internal conflict. The first is the fact that the various divisions at Microsoft were managed as six separate P&Ls, as if Microsoft were no more than a holding company. That’s partly due to an outdated business model and, as I’ve previously argued, partly due to the legal environment in which Microsoft was forced to operate for more than a decade. Ballmer’s “One Microsoft” strategy is supposed to remedy this by grouping products by functional areas (operating systems & devices, application & services, etc.) rather than have each product group operate completely independently.

The second and, I think, most significant factor is the stack ranking of employees as part of the annual performance review process. For those unfamiliar with the system, it was one whereby employees were ranked against each other to fight for scarce rating scores forced to a curve. I won’t go into details about it here, just because I think they’re kind of boring, and are about as useful as studying the org chart of the Soviet economic bureau, the mechanics of medieval torture devices, or other discarded tools of human suffering. Last year Vanity Fair published this article that does an OK job describing the system; while they mess up a few details they nail the pernicious impact this has had on collaboration and creativity. If enough readers want me to elaborate I could do a separate post on how stack ranking was actually implemented.

But it’s a new era at Microsoft, with our head of HR having announced that stack ranking has come to an end! While details on the new performance & development system are scarce, I’m in the camp that says there’s no possible way it could be worse than the old one. In short, the new system gives managers more freedom to compensate their people without fitting them to a curve (i.e., forcing someone to take the fall.) I’m a big believer that there’s no better system for an efficient allocation of resources than giving local actors the resources and authority to invest as they see fit. On that front, we’re taking steps in the right direction.

But the big question I have is how long will it take to undo the damage stack ranking has caused to Microsoft’s culture? Two decades later the economies formerly part of the Soviet Union are still struggling to develop free market dynamics and the institutions that support them. At Microsoft, those in positions of influence are those who previously excelled in the old system that emphasized competition over collaboration. Adam Grant had another fascinating article today on a similar topic: how much can a system change your behavior, versus how much do certain types of people select into a given system? I’m hopeful that the change we’ve made frees us to be the creative and collaborative organization we aspire to be.

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