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'Microsoft Should Try to Implement Layoffs as Quickly as Possible'

Released: 18-Jul-2014 11:15 AM EDT
Source Newsroom: University of Chicago Booth School of Business
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Microsoft on Thursday announced that it would lay off up to 18,000 employees over the next year, with most of them coming from the newly acquired Nokia. The announcement came about a week after CEO Satya Nadella sent a 3,100-word memo to employees about a coming culture change. Reporters who are planning additional coverage on Microsoft may use comments in whole or in part from Michael Gibbs, a professor who has studied post-merger integration at the University of Chicago Booth School of Business.

"It is not surprising that the bulk of Microsoft’s planned layoffs are likely to come from the Nokia acquisition for several reasons. First, Microsoft's strategy for phones won’t be the same as Nokia's, implying restructuring. In particular, Microsoft wants to integrate their phone business with tablets. That implies that some parts of Nokia's organization will be redundant or even not needed in the new Microsoft structure.

"Second, my research with Kathryn Ierulli and Valerie Smeets on post-merger integration finds precisely this pattern. Employees from the acquired firm tend to have very high turnover in the first one to three years after the merger. The level of day-to-day integration of the acquired workforce with that of the purchasing company tends to be quite low. Merging companies tend to achieve integration and realize synergies through a small percentage of employees of two general types.

"The first type is senior managers, who coordinate and implement the changes. The second type is employees in R-and-D, who work together to share technology and ideas for product design. The latter group of Nokia employees are likely to be the most valuable to Microsoft, and thus least likely to be laid off.

"More generally, large and complex companies restructure regularly to refocus the organization on goals that have been underemphasized, and to adapt to changes in the market and strategy. This is a natural process. I once wrote a case study on Apple, in which they implemented 14 organizational restructurings in four years. It is also not surprising with a new CEO with a new strategy.

"Microsoft has announced that some of the layoffs will be implemented throughout the next year. Stringing layoffs out over a long period of time, through multiple waves, can be costly to an organization. It creates substantial tension, uncertainty and disruption for employees. This can damage the company's culture, at least in the short run. In addition it can make it difficult to plan for the future. Microsoft should try to implement layoffs as quickly as possible, and try to clearly state when the last wave of layoffs will be. Once this is behind them employees can focus on implementing the new strategy with confidence that they are not likely to be targeted next.

"Communication to employees by Mr. Nadella and other Microsoft leaders during this time is critical. The more candid and open they are able to be with employees, the more smoothly will these changes proceed, and the greater the credibility and enthusiasm they will have with employees as they attempt to make Microsoft more competitive for the future."

Professor Gibbs is available for further comment at michael.gibbs@chicagobooth.edu.

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