Will Nadella Shake Up Microsoft More Than Expected?

Microsoft yesterday named Satya Nadella to succeed Steve Ballmer as the third CEO of the software giant. The decision followed a protracted search process in which a number of other high-profile executive names had bubbled to the surface, including Ford CEO Alan Mulally, former CEO of Nokia Stephen Elop and former Skype CEO Tony Bates.

"The fact that there was a five-month search for Ballmer's replacement, which included more popular names, most likely means that Nadella was also not Microsoft's first choice."

The response has been lukewarm to the board's decision to go with 22-year Microsoft veteran Nadella, a native of Hyderabad, India. The common sentiment seems to be that Nadella will continue the policies of his predecessor and won't shake things up the way an outsider might have.

Some Doubt Nadella's Willingness to Make Strategic Changes

"Yankee Group has previously suggested that Microsoft hire someone from outside the company, a person unburdened by the internal politics, with a fresh perspective and a drive to change the stalling business of the software giant," says Boris Metodiev, senior analyst with the Yankee Group research firm. The company instead went for the safe option, choosing a Microsoft veteran who has been heading its fastest-growing division, cloud services, as well as its enterprise group."

"It is hard to imagine that Nadella will embark on any major strategic changes, which was probably expected with the appointment of a new CEO," Metodiev says. "The fact that there was a five-month search for Ballmer's replacement, which included more popular names, most likely means that Nadella was also not Microsoft's first choice."

But while Nadella has spent two decades at Microsoft (most recently as executive vice president of Cloud and Enterprise), he can claim a lot of the credit for quietly reshaping Microsoft from within--from a software company to a services company--and allowing it to weather the sharp decline in its PC-focused business as well as it has. Windows Server, System Center, Visual Studio, SharePoint, SQL Server, Dynamics, Windows Azure and Outlook 365 all fall within Nadella's purview.

Nadella Helped Build Microsoft Commercial Business

"Technology journalism and analysis is so tightly focused on consumer and mobile markets that it has largely ignored Microsoft's remarkable success in business software and services," says industry analyst Steve Wildstrom of Techpinions.

"The enterprise, and to a very significant extent, small and medium business, remain Microsoft territory. Tablets, mostly the iPad, are gaining ground, but business is still overwhelmingly PC country, it is likely to remain so, and it runs on Windows and Office," says Wildstrom "Corporate mail and collaboration is largely Exchange and SharePoint, SQL Server has a big chunk of the mid-range database business and Dynamics has been coming on strong in CRM, ERP and analytics."

Wildstrom suggests that rather than a weak move that will keep current Microsoft strategy in place, the decision to go with Nadella is about reinforcing strength. After all, Microsoft earned an operating profit of $14.3 billion on revenues of $29.7 billion in the six months that ended on Dec. 31. Microsoft's commercial operations, of which Nadella's Cloud and Enterprise group comprises the lion's share, accounted for 55 percent of those sales and 66 percent of those profits.

Some industry watchers have expressed doubts that Microsoft can maintain its commercial business in the post-PC era, but Nadella says he's heard such talk before--10 years ago when Microsoft first made a play for the enterprise market.

"As of late, there has been a lot of interest in what I call the commercial business, which spans nearly every area of enterprise IT and represents about 58 percent of Microsoft's total revenue," Nadella wrote in a blog post in October as he outlined his cloud roadmap. "It's a critical business for us, with great momentum and one to which we are incredibly committed."

"But as people look to our commercial business in this age of cloud computing, big data and the consumerization of IT, people are asking questions about our future strength in the enterprise," he added. "Will Microsoft continue to be at the core of business computing in, say, 10 years? I'll be honest that there's a little dA(c)jA vu in that question; 10 years ago many people doubted our ability to be an enterprise company and today we surely are."

"Nadella has done a remarkable job getting Microsoft to move fast on the cloud and begin staking out a strong position against difficult competitors, such as Amazon."

Nadella outlined a compelling vision for Microsoft's future in the cloud, arguing that it is uniquely positioned to excel in the cloud based on a combination of top-notch, first-party SaaS applications (like Office 365, Dynamics CRM and Xbox Live), a public cloud at global scale that supports a broad range of third parties with fully supported platform and infrastructure services, and the ability to seamlessly support hybrid cloud deployments infrastructure tools like Windows Server 2012 R2 and System Center 2012 R2.

Microsoft Now Exists in Mobile and Cloud-First World

Given that vision, it's no mistake that Nadella's first statement to Microsoft employees as CEO was to tell them the company cannot rest on its laurels while reinforcing that they now live in a mobile-first and cloud-first world.

"While we have seen great success, we are hungry to do more," Nadella wrote in an email Tuesday.

"Our industry does not respect tradition--it only respects innovation. This is a critical time for the technology industry and for Microsoft. Make no mistake, we are headed for greater places--as technology evolves and we evolve with and ahead of it. Our job is to ensure that Microsoft thrives in a mobile and cloud-first world," Nadella wrote.

Nadella has charted such a course for Microsoft before. For instance, he helped Microsoft see the value and potential in open source software.

"Satya has reinvigorated Microsoft's server and tools business," venture capitalist and former Microsoft executive Brad Silverberg wrote in a guest commentary for CNET.

"He's done a remarkable job getting Microsoft to move fast on the cloud and begin staking out a strong position against difficult competitors, such as Amazon. Most of all, he recognized that the world has changed and that to be relevant and become a leader again, Microsoft needs to embrace those changes and offer solutions for customers that fit in that new world. Whereas once open source was regarded as a cancer at Microsoft, Satya has found a way for Microsoft to add value while supporting new standards, like Linux, Hadoop, Ruby on Rails. It's exciting to see Microsoft play well in this new world and offer differentiated solutions."

"Relevancy, not longevity, is what Satya said was important," Silverberg adds. "I couldn't agree more, and when I read those words from him, I knew he was the right person to lead the company in this critical next stage."

New CEO Must Deal with Windows and Windows Phone Struggles

Nadella faces a considerable challenge as he steps into the CEO role. While Microsoft's commercial business has continued to thrive, its Windows and Windows Phone businesses have struggled.

"Keeping the parts of the company he knows well on track is the easy part for Nadella," Wildstrom says. "Fortunately, the cash that continues to pour out of the Microsoft enterprise engine buys plenty of time to fix the not-so-good parts. The first challenge is dealing with Windows. Not being a stupid company, Microsoft realizes that it made a fundamental mistake in the design of Windows 8."

Salvaging Windows after that debacle may be Nadella's first concern. Figuring out what to do with Windows Phone and Nokia will likely be a close second.

"Now that the other shoe has fallen, we will begin to see what sort of changes Nadella will be making in Microsoft's foggy future," writes Stowe Boyd, researcher-at-large with GigaOm Research.

"What does he think about Nokia: Is it the key to the future or a boat anchor threatening to swamp Microsoft's mobile aspirations? Will Xbox be spun off? Will Bing be shut down? Will he come out and say that enterprise software and cloud are the future of the company? Or will he simply follow the 'fight every sector' model that Ballmer set up for the company? I can't wait to see what happens in the first 90 days."

This story, "Will Nadella Shake Up Microsoft More Than Expected?" was originally published by CIO .

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