At age 30, Microsoft grapples with growing up

Complaints about the company sound like the very ills it promises to cure with its software.

SEATTLE -- Microsoft Corp. promises its software will make people better workers -- more productive, more profitable, more able, as the company likes to say, to achieve their potential.

Yet some wonder why the software behemoth isn't taking more of its own medicine.

As Microsoft hits 30, critics reel off a list of complaints that sounds like, well, a Microsoft commercial: stifling bureaucracy, frustrating miscommunication, different units working on overlapping technology without adequate cooperation. In short, the very ills Microsoft promises to cure with its software.

Growing pains have delayed products, leaving the door open for Microsoft to be beaten to market by younger, more nimble competitors led by Google Inc. and Yahoo Inc. Meanwhile, Microsoft shares have been trading at about the same level for several years.

As it gears up to release a slew of new products, Microsoft is trying to untangle bureaucratic snags with a corporate shakeup meant to get the best ideas to market faster and increase the company's push toward over-the-Internet software and services.

Of course, no one would argue that the company co-founded by Bill Gates is in dire straits. Microsoft continues to earn billions from its flagship Windows and Office products, and the company is steadily making inroads in markets including mobile phones, video game consoles and server software.

But it isn't just Google and Yahoo that should worry Microsoft.

It's also up-and-comers big and small that offer products as Internet-based services. Salesforce.com, which manages customer relations, is a big one. Writely and gOffice, which provide Web-based word processing, and e-mail application Zimbra are among the small.

Web-based offerings give users easy online access to products and services, sometimes for free. The threat to Microsoft is that such products, by their very nature, could decrease the importance of Windows or Office.

A version of 'Kill Bill'

Google and Sun Microsystems Inc. announced a partnership last week that, while still vague, could eventually yield tools that provide, cheaply or for free over the Internet, an alternative to pricey Microsoft software such as Word or Excel.

"What you've actually got going here between Google and Sun is their own personal version of the film 'Kill Bill,"' said David Garrity, director of research for Investec's U.S. operations.

Microsoft insists it is in a strong position to fight its competitors.

Kevin Johnson, recently named co-president of a new Microsoft unit that includes Windows, servers and its MSN online division, said Chief Executive Steve Ballmer spoke about software as a service as long as six years ago.

The company was forecasting some of these potential markets a decade ago, he added.

"We've provided the vision of where these things were going."

Still, Microsoft now lags in some high-profile areas, although Johnson said there are plans afoot to help the company to expand further and quicker into the field.

Its competitors were the first to provide Web-based tools for finding things more easily on Windows-based desktops.

Microsoft also has played catch-up on developing its own online search engine, the technology that formed the basis for Google's explosive success. And while Microsoft was a pioneer in offering free, Web-based e-mail with Hotmail, Google and Yahoo have been quicker to improve their products recently.

The company continues to struggle with the issue of helping computer users instantly find what they need. When Vista, Microsoft's first significant Windows upgrade since 2001, is released next year after serious delays, it will initially lack a hotly anticipated data management system called WinFS that would let people swiftly find documents, pictures or e-mails.

Microsoft also is tailing its competitors in developing the money-making engine behind Google -- paid search.

This month, Microsoft begins U.S. testing of its own system for selling sponsored links next to its regular search results, which are based on a formula that ranks Web pages according to such factors as relevance.

Microsoft currently outsources that job to Yahoo, which has a contract with Microsoft through June 2006.

Microsoft also was in talks with Time Warner Inc. about a potential deal with its America Online unit that could help raise Microsoft's profile against Google. One potential option was some sort of online advertising partnership.

It's unclear where those talks stand now.

Johnson acknowledges that the company has sometimes been slower than some of its competitors. He says that's partly because Microsoft is focused on "the big, bold challenges," such as folding useful technologies into products instead of just rushing something out to market.

And analysts note Microsoft's track record of quickly playing catch-up and marshaling the forces necessary to stay ahead.

Johnson says the company's reorganization -- which groups its seven business groups under three large units -- is designed in part to streamline decision-making and make Microsoft more agile. If successful, such changes could help alleviate complaints that employee productivity is being slowed by management hoops that require too many layers of approval.

In one of the most high-profile cases, former executive Kai-Fu Lee complained in court of groups working autonomously that should be collaborating, and of being forced to report to too many people. Lee defected to Google and Microsoft sued, alleging violation of a noncompete agreement. The case is ongoing.

Microsoft also is seeing the downside of a longtime corporate culture that allowed several groups to work on the same technology, sometimes even in competition with one another.

That philosophy hasn't been as successful as hoped with search technology, where despite multiple efforts many analysts say the company still has work to do.

Johnson said Microsoft is trying to find ways to re-evaluate that approach while still encouraging individual groups to develop fresh ideas. "Bottoms-up innovation is a great thing," he said. But, he added, "At a certain point in that innovation life cycle you have to make decisions so you avoid duplicative or competitive work."

Microsoft is facing the classic dilemma that befalls a company that grows from a small startup to a major corporation, said the analyst Garrity.

There's really no way to manage thousands of employees without a strong corporate structure, but that structure will inevitably alienate some workers who remember the freewheeling early days.

"They're all victims of their own past success," he said.

Microsoft's reorganization appears to be an attempt to tackle the size problem -- to teach the elephant to dance, said Garrity, alluding to a popular corporate problem-solving book by James Belasco.

"I don't know if we can teach the elephant to dance, but they certainly look as if they are getting their tutu on."