©2013 Blue Hill Research. All Rights Reserved. ©2013 Blue Hill Research. All Rights Reserved.

Microsoft and Stack Ranking

James Haight, Research Analyst, Blue Hill ResearchHyoun Park, Chief Research Officer, Blue Hill Research

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©2013 Blue Hill Research. All Rights Reserved.

Microsoft’s Stack Ranking

•Derived from “vitality curve”popularized by former GE CEO Jack Welch

•Employees are internally ranked and broken into three buckets: the top 20%, the middle 70% and the bottom 10%.

Top 20%

Middle 70%

Bottom 10%

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The Bottom 10%

•At the end of the year, employees in bottom 10% are encouraged to improve or leave.

•The theory is that this

promotes a culture of high-performers and sheds those weighing the firm down.

A Players - Executives

B Players - IndividualContributors

Bottom 10% - Dead Weight

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The Big Question

“How is it that a company made up of some of the brightest minds in the industry can deliver us products like the Dare, the Zune and the Surface RT?”Is stack ranking or the vitality curve the reason? Does the vitality curve not work in tech firms?

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Stack Ranking hasn’t always hurt Microsoft

From 1997 to 2003, Microsoft outperformed all other companies in this group and outgrew the S&P 500 by almost 10-fold.

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So, What Changed?

•When Microsoft dove in to the consumer space, it lacked the creativity and imagination demanded by the consumer market outside of the Xbox.

•Stack ranking creates internal competition where

collaboration is harmful if it helps your peers surpass you.

“Microsoft has staked its future on gaining consumer consciousness and mindshare”

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Other Challenges with Stack Ranking

•The bottom 10% is difficult to calculate in early-stage products

•In Microsoft any given group of individuals may be entirely composed of A players or potential A players

•Where differentiated success can be difficult to measure, but 10% must be cut, the Vitality Curve does more harm than good.

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Microsoft Stack Ranking has outlived its usefulness

•Stack Ranking is most useful to promote a specific skill set or results valued by the company

•The past decade has proven that this focused model is no longer the key for Microsoft's future.

•Given the varied areas where Microsoft now competes, it is easy to see how Microsoft has voluntarily molded a workforce that is mismatched to handle its current challenges.

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Conclusion

“Microsoft must abandon the stack ranking practice or risk a continued misalignment of employee skills and company ambitions.” “Although Microsoft is composed of A level talent based on historical stack ranking, the Microsoft of today will not be successful if run by the A players of a decade ago.”

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