Here’s Why Nadella is Exactly the Executive Microsoft Needs

Source: Stephen Brashear/Getty Images

Source: Stephen Brashear/Getty Images

It hasn’t been long since Microsoft (NASDAQ:MSFT) appointed Satya Nadella as its new CEO, and the new sheriff is laying down the law. Analysts predicted the Redmond-based software giant would cut back an estimated five to ten percent of its workforce, and they have been proven correct. In fact, the numbers exceeded expectations as the company announced plans to lay off 18,000 workers over the course of a year, making it the fourth-largest in modern tech history.

When you crunch the numbers as Forbes did, the total cutbacks amount to roughly 14 percent of Microsoft’s workforce. The vast majority of those being cut, 12,500, are entwined with Nokia, which Microsoft recently acquired. Another significant caveat in Microsoft’s announcement concerns the cutback in vendors and and contractors, which will be limited to terms of 18 months, followed by a required six months of removal from company resources. The number of external employees the company had on its payroll numbered 80,000 back in 2009, and it’s safe to assume there are more than that now.

Microsoft is not alone in the amount of vendors and temporary workers it uses, as other companies in the Seattle area, most notably Amazon (NASDAQ:AMZN), do the same thing. But it also adds up to a bigger hit to the economy than appears on the surface.

Nadella released an email addressed to the company’s staff, detailing the reasoning behind his decision, as well as what he plans for Microsoft going forward.

“We will simplify the way we work to drive greater accountability, become more agile and move faster. As part of modernizing our engineering processes the expectations we have from each of our disciplines will change. In addition, we plan to have fewer layers of management, both top down and sideways, to accelerate the flow of information and decision making,” Nadella wrote.

“Making these decisions to change are difficult, but necessary.”

Source: Alex Wong/Getty Images

Source: Alex Wong/Getty Images

Nadella has definitely sent a message, and for investors, deciding what exactly that message is a bit tricky. On one hand, the announcement can be seen as a reason for optimism. Microsoft has been around for a few decades now, and has been one of the most wildly successful companies in American history. Bill Gates built the main platform on which a great deal of computing is done across the world, and since then, Microsoft has ventured off into other corners of the market. Video games, mobile phones and search engines are some of the areas the company has focused on recently, with success in some arenas and failure in others.

To look on the bright side, Nadella could be taking a look at his company and finding that, like many other giant corporations, it has simply become bloated, and wants to rein things in a bit. It’s unfortunate that calls for redundancies in the way of jobs, but he is also shutting down some parts of Microsoft that he doesn’t think are promising, like Xbox Entertainment Studios.

So one way to look at things, from an investor’s perspective, is that Nadella is saddling up to increase Microsoft’s profitability, and isn’t afraid to take extreme measures to do it. This is exactly the kind of attitude shareholders want to see, and it could spur some action on the markets.

“Steve Ballmer threw a massive house party for a decade, and now Nadella is there the morning after cleaning up,” said FBR Capital Markets analyst Daniel Ives in a report from The Wall Street Journal.

“He’s using this opportunity to clear the decks so they enter the next fiscal year in a position to put good money into the strategic areas they want to focus on.”

However, when viewed in a different light, investors may be a bit shaken by the news. A company going through its largest layoff ever can’t really send a positive message, especially considering that Microsoft is up against more challenges than it ever has been. Competition is closing in on all sides, from Sony (NYSE:SNE), Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL) most notably.

Earnings reports are also due out this week, which may shed some light on to Nadella’s decision as well. The fact is, Microsoft’s executives wouldn’t have made such a huge cut to the workforce unless there was some pretty solid justification to do so, and by going ahead and dropping the hammer, they have sent the message that something needed to be done.

There are still plenty of questions going forward, and Nadella’s approach may be exactly what Microsoft needs to get back in the game. Cleaning up after Steve Ballmer is definitely a part of the strategy, and the cuts to Nokia and other parts of the business were not exactly a surprise. But there are also plenty of things to look forward to coming out of Redmond.

The signals, for now, are mixed, and it may be a great time for investor’s to hedge their bets.

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