Case Study:
Microsoft: Building a Collaborative Work Culture to Foster Innovation

Radha Mohan Chebolu
Associate Professor, Dept of HRM and Soft Skills, IBS Hyderabad (Under IFHE - A Deemed to be University u/s 3 of the UGC Act, 1956), Hyderabad, Telangana, India. E-mail: radhamohan@ibsindia.org

Jitesh Nair**
Assistant Professor, IBS Hyderabad (Under IFHE - A Deemed to be University u/s 3 of the UGC Act, 1956), Hyderabad, Telangana, India. E-mail: jiteshnair@ibsindia.org

The case describes how Microsoft, a market leader in desktop computing in 1995 with a 95% market share, faced its share of problems from 2000 to 2010 with existing products losing market share and new products not taking off. Microsoft executives blamed the system of stack ranking for the lack of innovation in the company compared to competitors like Google and Apple. Upon realizing this, Microsoft ditched its traditional performance management system in 2013 and took several initiatives to help create a new Performance and Development (P&D) system. The new P&D system focused on employees' skills and competencies and facilitated open conversations. Through 'Connects', employees received real-time feedback that helped them learn, grow, and focus on their strengths and key learning areas. Satya Nadella's push for a cultural shift and a growth mindset created an enthusiasm for a new era of innovation at Microsoft. These efforts to improve innovation, collaboration, and communication also led to a business shift. In November 2019, Microsoft achieved a one-trillion-dollar valuation, a 200% increase since Satya Nadella became CEO in 2014.

The company was sick. Employees were tired. They were frustrated. They were fed up with losing and falling behind despite their grand plans and great ideas. They came to Microsoft with big dreams, but it felt like all they really did was deal with upper management, execute taxing processes, and bicker in meetings.1
- Satya Nadella, CEO, Microsoft, in 2017

Going from feedback provider, to a manager, and then to the employee made it harder and slower to get valuable insights to the employee who needed it most. It wasn't as helpful as it could be. And our process didn't go far enough in promoting brain-friendly behaviors like asking for feedback that we learned about in our research.2
- Liz Friedman, Director - Global Performance and Development at Microsoft, in 2018

We decided to pilot a new program that shifts the mindset from traditional "feedback" to one of gathering "perspectives"-combining learning culture and behavior change with a new feedback approach that helps employees understand how to engage in the process in a more constructive way.3
- Kristen Roby Dimlow, Corporate Vice President - Total Rewards, Performance and HR Business Insights at Microsoft, in 2018

Introduction

In 1995, Microsoft Corporation (Microsoft) was a market leader in desktop computing with a 95% market share. Over the next decade, this dominance reduced and the company began to face a series of problems. Existing products were losing market share and new products were not taking off. This was especially the case from 2000 to 2010 when Microsoft lost considerable market share to companies like Apple and Google. By 2010, the company's market share had dropped to 70% (PC and Mobile OS combined)4 (Refer to Exhibit I for products launched in the 2000s). Ed McCahill, former marketing manager at Microsoft, said, "You look at the Windows Phone and you can't help but wonder, How did Microsoft squander the lead they had with the Windows CE devices? They had a great lead, they were years ahead. And they completely blew it. And they completely blew it because of the bureaucracy."5

Microsoft executives conveyed to the top management that the primary reason for the company's struggle was that it lacked quality innovations unlike its competitors Google and Apple. This information was also garnered through employee surveys that were conducted half yearly where the fundamental insight was "Employees at Microsoft simply did not want to work together". Microsoft manager, Bill Hill said, "I wanted to build a team of people who would work together and whose only focus would be on making

great software. But you can't do that at Microsoft."6 It was very clear that Microsoft needed a change in its culture that would encourage innovation and collaboration as well as professional growth. The new approach had to enable the managers to be flexible in allocating rewards in a manner that would best reflect the performance of its teams and individuals.

In 2014, Ballmer, who was to step down as CEO, decided that it was necessary to bring about changes throughout the company. One of his primary objectives was to break down the barriers to communications that were impeding new product innovation. As the first step, in November 2013, Lisa Brummel (Brummel), head of HR at Microsoft, sent an email7 to employees stating that the company would be getting rid of its performance review system known as stack ranking to better align with the goals of the "One Microsoft"8 strategy (Refer to Exhibit II for full email). As part of its new approach, Microsoft implemented a system that focused on employees' skills and competencies. Through a process called "Connects", employees received real-time feedback that helped them learn, grow, and focus on their strengths and key learning areas. This flexibility allowed managers to discuss performance and development throughout the year.

With a fresh vision for the future, Satya Nadella (Satya), who took over Ballmer's role as CEO in 2014, intended to shift not only the direction of product development (toward cloud computing and artificial intelligence) in the company but also its culture to make Microsoft more collaborative and empathetic. Under Satya's direction, the Microsoft team developed and implemented a new 'Perspectives Tool' in 2018 to foster innovation and launch new products. Some of the successful innovations were Microsoft Office for iPad, Office 365, OneDrive cloud storage, and Cortana smartphone assistant.

Background
Microsoft, a multinational technology company with headquarters in Redmond, Washington, US, was incorporated on April 4, 1975, by Bill Gates and Paul Allen. Microsoft had more than 140,000 employees working around the world.9 It employed a stack ranking system for performance appraisal. Employees were evaluated twice a year by their supervisors who were also subjected to ranking. In the stack ranking system, every team rating had to include a certain number of employees as top performers, good performers, average, and poor. This system led to a lot of unhappy employees and created a bad environment among the teams.

This also led to the focus being on short-term performance rather than long-term innovation. The best way to guarantee a higher ranking was for the employee to impress not only his or her manager but managers from other teams as well. That meant employees focused on gaining popularity and favor rather than on actual performance to receive a positive rating from their supervisors.

Kurt Eichenwald (Kurt), author of 'Microsoft's Lost Decade'10, blamed the system of stack ranking for the lack of company innovation. In his article, Kurt criticized the company stating that rather than crippling its competitors, Microsoft had crippled its employees. All the managers at the company were compelled to place their employees on a scale ranging from top performers to poor performers.

Microsoft realized that at the center of its cultural problem was its performance review system. To encourage innovation, collaboration, as well as professional growth, Microsoft ditched its traditional performance management system and took up several initiatives to help create a new Performance and Development (P&D) system.

Basis of New System
The primary objective of adopting the new system was to promote new levels of teamwork and agility for breakthrough business impact. Also, Microsoft intended to put in place an efficient feedback process since the previous feedback tool had taken time to convey valuable feedback to the employee who needed it most. The new P&D system laid emphasis on four important elements.

Greater Emphasis on Employee Growth and Development: Microsoft implemented a system that focused on employee's skills and competencies. Employees received real time feedback that helped them learn, grow, and focus on their strengths and key learning areas. One of the initiatives 'Connects', was a continuous feedback process that was nothing but a series of conversations or discussions that took place between employee and the manager with no specific timeline. This flexibility allowed managers to have 'Connect' discussions throughout the year. The new approach was the right fit for Microsoft as it had product development teams that worked on different schedules and projects.

Greater Emphasis on Teamwork and Collaboration: The new approach was very detailed in the manner in which successful performance was evaluated. It was not just the work that an employee did on his/her own, but also how he /she leveraged inputs and ideas from others, what he/she contributed to others' success, and how he/she added up to greater business impact.

No Longer an Adherence to the Bell Curve: Microsoft continued to invest in its rewards budget. However, as per the new approach, there was no longer a pre-determined targeted distribution of the rewards budget to employees that had earlier been based on stack ranking. This meant that managers and leaders had the flexibility to allocate rewards in the manner that best reflected the performance of their teams and individuals, as long as they stayed within their compensation budget.

Absence of Ratings: The company did away with stack rankings but it continued to align its performance rewards to the fiscal year. This meant that once a year discussions were centered on the proposal for and approval of rewards for employees. Microsoft decided to delimit the feedback that till then had been carried on throughout the year with award discussions that were held once a year. This ensured that employees who made the most impact to the business received truly great compensation.

Connects - Fostering Continuous Feedback
Connects conversations were designed to be held frequently, a minimum of two and a maximum of four in a year. The leads and managers were required to implement this with the senior managers accountable for tracking whether their subordinates were adhering to the mandate. Interested teams had the freedom to even have a monthly Connects session. Connects conversations were based on two categories of questions that employees were required to answer.

The first category of questions for discussion was designed around what had been achieved in the past quarter.

1. What impact did you have?
2. What opportunities were there for greater impact?

The second category of questions for discussion was designed to help employees look forward to future learning requirements and upskilling.

• What are your upcoming deliverables?
• What will you do to learn and grow in the upcoming period?

Based on the answers to these questions, every manager would go into the new reward allocation tool and enter the performance recommendation. Managers made adjustments to previous recommendations based on further discussions held as part of the Connects initiatives later in the year. The managers as part of Connects discussions gave feedback to employees on their efforts that had had very high impact as well as very low impact on projects. This enabled the manager to evaluate all team members using a common measure.

Based on the feedback discussions, recommendations for rewards were mailed by the managers to senior management who reviewed the recommendations and approved budgets for the rewards (hikes, incentives, promotions). After receiving the approval, the managers prepared for short reward discussions lasting for about 10 to 15 minutes with the respective employees. As such, performance-related conversations did not feature in reward conversations that just focused on reward outcomes. There was thus no year-end performance document, or rating that would go along with it.

Training for Managers and Employees
Microsoft prepared its managers to adapt to the new P&D system through a variety of training opportunities and materials. Managers were given virtual or classroom training and they watched learning videos so that they could have quality conversations with employees. This resulted in the managers becoming quite comfortable in conducting Connects sessions and delivering rewards messages to their employees.

Through the 'Connects' initiative, Microsoft assisted employees with their careers. Employees were offered a full range of career resources to help them achieve their personal goals. They had the option of either going deep into their field of expertise, or moving across to other business functions to experience other business opportunities.

Impact
This new initiative helped in changing the mindsets of employees and improved communication and coordination between and within teams. Connects conversations led to employees' expectations syncing with manager expectations. Employee satisfaction with the Connects initiative was 65% in 2014 compared to 50% in 2012. The managers' satisfaction also increased to 67% in 2014 from 46% in 2012. Asked about the impact of the new initiatives on culture and change, 54% of employees felt the initiative was positive (in 2014) compared to 38% in 2012. In 2014, 70% of the managers felt that the initiative had a positive impact - up from 33% in 2012.11

'Perspectives' - Creating a Friendlier Workplace
The earlier peer-to-peer feedback process encouraged employees to gather and give feedback and used a Likert-type scale12 - strongly agree to strongly disagree - with room for comments in the feedback tool. Instead of employees receiving the feedback directly, managers were given the responsibility of gathering, synthesizing, and providing it to all the employees and they rarely included actionable input. According to Liz Friedman (Friedman), director of global performance and development in Microsoft human resources, "Going from feedback provider, to a manager, and then to the employee made it harder and slower to get valuable insights to the employee who needed it most. It wasn't as helpful as it could be. And our process didn't go far enough in promoting brain-friendly behaviors like asking for feedback that we learned about in our research."13

Hence, there was a need for a new approach that fitted into a larger, company-wide culture shift to encourage employees to build on each other's work. The goal was to show employees that they could have healthy, open conversations with each other about what was working and what they could do better.

This initiative was part of the company wide change that Satya pushed for after he became the CEO in 2014. He wanted to foster a friendlier Microsoft workplace and was interested in a new tool for team members and colleagues to critique and praise each other's work.

Designing 'Perspectives'
At the direction of Satya, Friedman and her team partnered with Core Services Engineering and Operations (CSEO)14 and built a new feedback tool that would make feedback more actionable without triggering negative feelings. The Microsoft team built and implemented the new Perspectives tool in 2018. The CSEO team pulled in data from Workplace Analytics, which used an employee's calendar, interactions, and document sharing data to provide insights on work patterns-including who they worked most closely with on a regular basis, and those that they did not work with as frequently. Based on this data, each employee had a set of colleagues whom the employee could approach. The colleagues could suggest things that the employee should "keep doing" and actions they should "rethink." The "keep doing" category offered the person giving feedback an opportunity to call out the person's strengths and to suggest how they could leverage them further. "Rethink" suggested the person consider someone else's perspective on how to approach something differently. The basis of this initiative was employees were more receptive to feedback when they themselves asked for it rather than when it was given by someone. According to Friedman, "It puts our brain in a more reward-oriented state that allows us to be more open to learning."

Perspectives was designed in such a way as to ensure that the language was less intimidating and employees could initiate conversations and have more of a coaching feel than the traditional reviews did. When employees received feedback in the tool, they were also given the option to say thanks via Kudos, another CSEO-built tool that used the Microsoft PowerApps platform to make it easy to share a little love with the fellow employee who took time out to provide feedback. Perspectives gave Microsoft a new experiment in rethinking how they evaluated and critiqued employees. Managers had more open conversations and were more engaged in gathering input to help them continue to learn and grow while employees received fresh, valuable feedback. The initiative was a step forward in building company culture.

Benefits Accrued
The initiatives taken since 2013 through Connects and Perspectives to build a friendlier and more collaborative culture led to various benefits for the company. It helped improve collaboration across and within project teams, increased the pace of innovation, improved communication and feedback between managers and employees, and fostered leadership excellence.

Collaboration: The new system facilitated increased collaboration among top performers by ending the practice of directly ranking them against each other, which had resulted in unhealthy competition and disincentivized employees from working cohesively on teams. The initiatives also created more flexibility and increased the likelihood for true top performers to be identified.

In a survey conducted shortly after initiating Connects, 77% of the employees said they were not missing stack ranking; they felt that the new system was good and motivating. In addition, top performers, who had been '1's in the prior system, did not get demotivated; rather, their satisfaction either increased or remained the same. Dissatisfaction in the employees who had been ranked middle in the prior system, dropped to 14% in the new system.15 Innovation: Managers were better equipped to reward the unique contributions of their employees due to the increased flexibility in allocating rewards. The initiatives also resulted in providing managers with another means to facilitate creativity and to motivate the generation of new ideas. Microsoft came out with a series of successful innovations like Microsoft Office for the iPad, Office 365, OneDrive cloud storage, and Cortana smartphone assistant in the five years between 2014 and 2019.

Leader Experience: The bell curve system forced managers to eliminate high performers, leading to unnecessary frustration for both parties. Under the new system, leaders were not forced to rank employees as poor performers. They became more adept at assessing the social dynamics of situations and navigating challenges. Through Connects and Perspectives, managers could regularly check in with their team members to understand how they were advancing and what was hindering their progress. This rich data allowed them to understand the key strengths and growth areas of team members to improve business practices in real time.

Reduced Legal Risk: Microsoft had a history of lawsuits being filed by employees who alleged that the leaders were using forced rankings to disguise discriminatory behavior. The new system was able to circumvent this and it led the company to greater transparency and to nurturing a deeper sense of trust between manager and employee.

Improved Communication: Employee understanding about feedback and rankings increased due to the new system. The employees were empowered by being given more involvement in the process. It also provided the employees with clear expectations on goals. Even decisions regarding termination were perceived as being more fair - resulting in increased trust in management. There was an increase in prosocial behavior and organizational loyalty.

Looking Forward
The new initiatives Connects and Perspectives were only one part in the company's journey to improve the process of performance management and allow employees and managers to give each other continuous and friendlier feedback. According to Friedman, "It takes time to shift culture and this is just one way, though a valuable one, to help us get there," Microsoft believed that the initiatives would play a pivotal role and would be essential in further activating and sustaining its growth mindset. The efforts to improve innovation, collaboration, and communication also led to a business shift. Satya's push for a cultural shift and for recruiting employees who believed in continuous learning created an enthusiasm for a new era of innovation.

Perspectives was intended to help the employees have healthy, open conversations with each other about what was working and what they could do better. This would be essential to further activating and sustaining the growth mindset at Microsoft. The company had deprioritized Windows (part of More Personal Computing segment) and was prioritizing AI in its Productivity and Business Process and Intelligence Cloud segments16 to drive future growth.

Suggested Readings and References

1. Lara O'Reilly, "'One Microsoft' Strategy Unveiled", https://www.marketingweek.com/ one-microsoft-strategy-unveiled/, July 11, 2013
2. Mary Jo Foley , "Microsoft does Away with Stack Ranking", https://www.zdnet.com/ article/microsoft-does-away-with-stack-ranking/, November 12, 2013
3. Pradeep, "Microsoft Abolishes Stack Ranking Employee Evaluation Process", https://mspoweruser.com/microsoft-abolishes-stack-ranking-system-employee-evaluation-process/, November 12, 2013
4. Jeet Samarth Raut, "Performance Management at Microsoft: The Case of Stack Ranking", https://www.slideshare.net/jeetraut/human-resource-management-final-project-35808028?qid=9e06a9af-ae0d-4fab-8261-1c41ffc5fbfd&v=&b=&from_search=1, Jun 12, 2014
5. Roper Peckham-Cooper, "Performance Mgmt white paper", https://www.slideshare.net/ RoperPeckhamCooper/performance-mgmt-white-paper, October 2015
6. Josh Davis and Lisa Dodge, "How Microsoft Transformed their Performance Management System, A Case Study", http://neuroleadership.co.in/microsoft-transformed-performance-management-system-case-study/, 2015
7. "Performance Management", http://cdn2.hubspot.net/hubfs/457460/Landing_Pages_Content/ FINAL_doc_versions_all_campaigns_23_juni/PM/TEI_REPORT_PREVIEW_PM_2015_FINAL.pdf?t=1447859994740, 2015
8. "10 IT giants who changed their appraisal system", https://economictimes.indiatimes. com/corporate-industry/10-it-giants-who-changed-their-appraisal-system/slideshow/519234 70.cms, April 21, 2016
9. Anthony Leon and Tara Murphy, "For Companies Doing Away with Performance Management System and Having No Ratings over the Recent Years: What Has Been Learned?", https://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?article=1115&con text=student, 2016
10. "Performance Management", https://docs.microsoft.com/en-us/dynamics365/talent/ performance-management-overview%20, June 20, 2017
11. "The company was sick, Microsoft CEO Satya Nadella says in his autobiography Hit Refresh", https://www.indiatoday.in/technology/news/story/the-company-was-sick-microsoft-ceo-satya-nadella-says-in-his-autobiography-hit-refresh-1053284-2017-09-27, September 27, 2017
12. Oliver Staley, "A kinder, gentler Microsoft is replacing feedback with "perspectives", https://qz.com/work/1380162/a-kinder-gentler-microsoft-is-replacing-feedback-with-perspectives/, September 10, 2018
13. Marissa Stout, "How Microsoft uses live events in Microsoft 365 to run large virtual meetings", https://www.microsoft.com/itshowcase/blog/how-microsoft-uses-live-events-in-microsoft-365-to-run-large-virtual-meetings/, September 26, 2019
14. Hiten Shah, "The Most Important Turning Points in Microsoft's History", https://usefyi.com/microsoft-history/
15. Laura Brewer, "How Microsoft is Changing the Perspective on the Word Feedback with their New Perspectives", https://dynamicconsultantsgroup.com/blog/how-microsoft-is-changing-the-perspective-on-the-word-feedback-with-their-new-perspectives/
16. "Reinventing Performance Management", https://www.e-reward.co.uk/uploads/editor/ files/Michael_Armstrong.pdf