Microsoft: Competing on Talent (A)

Christopoher A Bartlett

Full case of 27 pages is available at:

http://harvardbusinessonline.hbsp.harvard.edu/b01/en/common/item_detail.jhtml;jsessioni
d=UIITEN1NE3ALGAKRGWDR5VQBKE0YIISW?id=300001

Summary of Case

In summer 1999, a front page article on Wall Street Journal reported that:

“Tired of grueling deadlines, frustrated by the bureaucracy that has accompanied

Microsoft’s explosive growth, or lured away by the boom in high tech start ups, dozens of
the company’s most capable leaders, all around 40, have opted out – at least
temporarily….”

Foundations of Microsoft’s human resources philosophies, policies and practices

Recruitment: attracting the best and the brightest

Bill Gates had long recognized that it took exceptional people to write outstanding software. In
the initial stages, they recruited “smart friends” extremely intelligent but not necessarily
experienced, new college graduates.

In 1992, Gates acknowledged that “Take our 20 best people away, and I will tell you that
Microsoft will become an unimportant company”. He considered helping his managers hire the
best of all possible candidates as his greatest accomplishment.

For Gates, acquired knowledge was less important than “smarts” – the ability to think creatively,
and experience was less important than ambition – the drive to get things done. And, to raise the
bar continually.

One of the prime responsibility of Steve Ballmer, since he was hired in 1980 as assistant to the
President was recruiting coordinator. Steve’s mantra was:

“We want people who are smart, who work hard, and who get things done”.

Microsoft had a standing policy “If you get a kick-ass guy, get him”

Selection: ensuring that the best gets in

Every candidate had to survive an intense interview process that many found harrowing. Ach
was interviewed by atleast 3, sometimes upto 10 Microsoft employees. The candidates were
tested more on their thought processes, problem-solving abilities, and work habits than on
specific knowledge or experience. Indeed the company preferred people who did not have to
unlearn different company values, work habits or technological approaches.

Interview followed “drill down” approach; subsequent interviews will concentrate on areas that
the first set found to be weak.

The purpose of interviews was to push the candidates until they failed, to get a full understanding
of both their strengths and their limitations. Only, “hire” or “no hire” recommendations.

Prospective manager interviewed in the end. But, also, a so called “as appropriate” interviewer
was also involved so that only good gets in, and not just good people for specific jobs.

Tight control on head count; always n-1 philosophy is followed for staffing requirements.

Steve Ballmer preached that the default decision on a candidate is “no hire”; unless one can
identify a clear reason why the person should be hired. This helped to keep the bar high, and a
very low selection ratio.

A person who is just OK is blocking the seat for some one exceptional; a poor performer gets
weeded out, a mediocre might continue to occupy the place.

Work environment: the caffeine culture

Hot house of innovation and hard work.

Software developers dominated the company. Separate office cubicle, that can be done up to
individual tastes. Creating a college like atmosphere. Provide a sense of social belonging.

Values of frugality: salaries were modest. Travel was coach class. No obvious status symbols.

The vision was ”a computer on every desk in every home, running on Microsoft software”

Gates worked hard to keep the “small company” feel. He continually restructured the
organization into small units – typically with 30 to 200 people – further dividing these into work
groups with responsibility for a product, project or program. So, conscious attempt was to have a
collection of small groups rather than an integrated entity.

The model was not efficient, but effective, stemming from the limited cross unit coordination.

Through out the 1980s and much of 1990s, much of the direction setting, coordination and
control was managed by Gates personally. His legendary intellect, high energy involvement and
intensely competitive nature led him to adopt a very hands on style. He saw his role as assessing
the fit and competitiveness of the entire product portfolio and making the tough technology
versus commercial trade offs.

Development through stretch and challenge

There was very limited educational and training opportunities. But, there was may “stretch”
situations. People move to manage 200 people from managing 10 people. This creates either
growth or death.

People could grow as individual contributors (say as technical gurus) or advance on the
management track (as a product manager) but obtain same recognition, compensation, and
promotion opportunities.

Vertical growth, as well as horizontal growth. For the latter, employees were encouraged to
develop themselves by switching jobs, typically every 2 or 2.5 years.

Experiential learning: Microsoft had a long tradition of promoting people who were in charge of
failed projects – “if you fire the person who failed, you are throwing away the learning.

Mentoring: New hires understood that it was their responsibility to learn from a whole range of
experienced people including team leads, experts, and particularly their formally appointed
mentors, often equally young but more experienced colleagues who took on the primary teaching
responsibility in addition to doing their work.

Review and Reward: the Options driven Engine

Gates believed that employee ownership raised motivation and retention. Key employees were
given equity in lieu of high salaries; a strategy that conserved cash for growth.

A well established linkage between individual performance and reward. Gate’s style of providing
brutal, honest feedback got institutionalized in a process of direct, clear semi annual performance
reviews tied to pay increases, bonus awards, and stock option grants. Setting specific quantifiable
objectives every six months was the norm. Eventually, the acronym SMART was applied to
performance objectives – SPECIFIC, MEASURABLE, ATTAINABLE, RESULTS BASED,
TIME BOUND.

Learning from mistakes, during semi annual reviews. “the disease model of management”

Performance review interactions were soon recognized as one of its best employee development
forums.

1 to 5 performance scale: 25% received 3.0 or lower, 40% received 3.5, and 35% received 4.0 or
higher.

“The beauty of this rigorous review system is that it has become part of the fabric of
Microsoft. People gripe and complain, but our surveys show that employees really
appreciate that opportunity to reset goals and get a view of how they are doing”.

Most managers reviewed objectives every month or so with each individual, so that employees
avoid performance review surprises and big deviations from the agreed goals.
There were very few 4.5 and only 2 or 3 persons with 5.0 scores across company every year.

Reward: Merit increases were awarded on the basis of one’s present skills while bonuses
rewarded achievements in the immediate past period.

Options were awarded on the future value to and potential at Microsoft.

Public recognition and awards were not widely employed, at least at the higher levels. “We tend
to be very parsimonious with praise around here”.

Microsoft through the 1990s

From small personal start up, it was now a big company, but there was still a desire to hold on to
the underlying people philosophies that many felt were at the heart of the company’s success.

Recruitment: Still viewed as a prime responsibility of everyone in the organization.

“The person being interviewed has to be smarter than half of your group.”
n-1 rule for staffing the projects remained.

By mid 1990s, the campus recruitment vs selection ratio was 50:1. Out of all computer science
graduates of USA (25000), 8000 were shortlisted, and after review, 2600 were targeted for
campus interview, and 800 were invited for final interview and 500 were chosen.

Experienced recruits: Needed managers to fuel the growth. A team of 300 recruiting experts
whose job was to identify the industry’s most talented people, build a relationship with them, and
eventually attract them to Microsoft. Stalking the talent.

Performance of recruiters: number of “contacts” they maintained (that is, potential recruits),
percentage of conversion to staff, and their performance once they joined the company.

Managing culture in the 1990s.

20000 employee level.

Started periodic employee surveys: designing, conducting and interpreting data on organizational
climate and employee satisfaction.

Job satisfaction was consistently around 80% (compared to 73% in other IT firms and 64% in
Fortune 500 companies).
Attrition rate: 7% in 1998, half than industry average.

Where then is the problem?

 Amongst employee who have spent 7 years or more, and in senior positions, attrition was close
to industry average.

So, in 1997, internal experts developed “Organisational Health Index (OHI).

“With control over compensation largely outsourced to NASDAQ, the work environment
became the biggest retention tool we had to manage…… It is about keeping alive our
entrepreneurial spirit, ability for individual action, and the opportunity to make a
difference”.

Steve Ballmer was appointed the President in 1998. Staff strength was then 30000. He conducted
one to one interviews with a cross section of 100 employees. And concluded that the company
needed two things:

• A greater sense of clarity and excitement about the company’s direction, and
• More freedom to act without bureaucracy or red tape.

Accordingly, he proposed and the company changed its vision: “to empower people to do anything
they want, any place they want, and on any device”. His second priority was to develop leaders
capable of clearing the obstacles, making decisions quickly, and defining clear goals. His
conclusion was that top management have to push authority down and replace it’s traditional hands
on control with coaching – what he termed “turning over the keys”.

OHI measures, using 19 carefully selected employee survey questions designed to correlate
directly to a person’s intent to stay at Microsoft, was implemented in the fall of 1998. The OHI
data was tabulated and index created for each VP. Ballmer insisted that all VPs make OHI focus of
their first slide in their annual business review meeting.

Development in the 1990s.

One of the constraints being faced: lack of sufficient capable managers and leaders.

So, the company decided to put on more effort on leadership and management development.

From “Darwinian approach to leadership development (happen chance) to formal leadership

development programmes.

Chief Operating Officer, Robert Herbold, recruited from P&G, where leadership development is
taken very seriously, convinced top executives to review Microsoft’s key people more
systematically.

A formal approach was developed – a combination of career planning, early identification and job
slotting programme.
From internal research, it was concluded that about 70% of a person’s development came from the
job they were currently in; 20% came from mentoring relationships, and 10% from formal training
programmes.

One senior executive explained about Ballmer:

“He is not interested in HR. He is interested in “Do I have the right people in the right
places making the right decisions for the company?”

Review and Reward in 1990s

“Microsofties wear golden handcuffs. They are the stock options that vest each year”.

“Sometimes I feel like I am running a volunteer organization”. Said one VP.

As the company grew, one major concern was the noticeable decrease in the understanding of what
it took to succeed at Microsoft. As a result, around 1994, the company set out to identify the core
skills, capabilities and values that were dear to old timers and those at the top, but less visible to
new comers or those deeper in the organization.

To develop the “competency model” HR specialists asked 50 old timers to describe what made
Microsoft successful. About 110 value ideas were identified, from which six “success factors”
were freezed: taking a long term approach to people and technology; getting results;
individual excellence; a passion for products and technology; customer feedback; and
teamwork. Some were widely understood; but the last two were more recently emphasized values
and tended to be more aspirational. For successful implementation of these six core values, a set of
29 individual competencies were developed; with each one described behaviorally at four different
levels of performance. These competencies, printed on cards, became the tool kit for performance
review process, recruitment interviews, career development sessions, etc. There is a continued
demand for the cards by managers.

Salary was moved from 50th percentile of the industry to 65th percentile. The number of non
executive ladder levels were increased from 12 to 22 to reward high performers more frequently
with promotions.

Protecting the Past, Building the Future

Work life balance: Ballmer is advocating this.

People who were hired for their drive and passion didn’t easily rebalance their lives.
Reality of business was such that there would always be pressures, deadlines, and demands that
required extraordinary effort.

But, would any significant softening of the company’s hard core macho culture compromise the
very heart of its competitive advantage. “It is a very delicate balance”.
Questions:

1. What is the difference between philosophy, policy and practice.

2. What is the down side of the company’s standing policy “If you get a kick-ass guy, get
him”
3. How will an experienced manager will merge with the values, resource constrained
management model and frenetic pace of the company?
4. Recruitment and selection is a matter of fit. What does one test in interview – the
attributes that the person is supposed to possess, and how is he likely to apply the same
on the job. How can the interview panel vouchsafe that the person will apply his
attributes to deliver the desired results on the job?
5. “He saw his role as assessing the fit and competitiveness of the entire product portfolio
and making the tough technology versus commercial trade offs.” From the case summary

If a bright guy recruited is working on a promising project, with out of the world product
on anvil, suddenly finds that his project has been scrapped because it doesnot make
commercial sense, is he likely to work hard in his next project? Discuss.
6. Psychological contract: can you see this facet of employment in Microsoft? How does it
get institutionalized such that attrition is so low.
7. Performance appraisal system – a gripe and groan session?
8. How is the Performance Management System here driving and shaping the company’s
future?
9. Would such smart kick ass guys of Microsoft really need training?
10. In a company like Microsoft, is it likely that there will be too many “prima donnas” –
talented guys with great image, giving consistently high results. How to manage ?
11. Smart people donot like rules. How did HR manage to institute the various programs
described in the case
12. Competency Model? How does it help?
13. How does a company manage to retain its founding values as they grow from few
hundreds to about 50000.
14. Now, as the company enters a new century, were they thinking of going SOFT?