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Last week Microsoft CEO Satya Nadella warned employees that the company had to change. Today the other shoe dropped.

In a letter to staff Nadella said that it will shed about 18,000 jobs over the next year, the bulk — 12,500 — to come from the Nokia cellphone division that it just bought.

That may speak volumes about the value Nadella sees in the US$7.3 billion Nokia acquisition — negotiated by his predecessor, Steve Ballmer, who wanted Microsoft to have a bigger mobile play so it could offer end-to-end solutions to business customers as well as kick flagging sales of Windows Phone-based smart phones.

[What Ballmer might have said to Nadella]

Not so, says Gartner analyst Ken Delaney, who in an interview wondered by Stephen Elop — the former Nokia CEO who now head Microsoft’s devices division that includes it — didn’t act sooner. But, he noted the Microsoft phone business “hasn’t been stellar” and Elop is doing something about it.

Carl Howe of the Yankee Group said “this is an adjustment saying there are large parts of this business that Microsoft didn’t want — like the phones that run Android.”

Layoff news sounds important, he added, but they don’t change corporate strategy; they’re a financial adjustment.

“Our workforce reductions are mainly driven by two outcomes: work simplification as well as Nokia Devices and Services integration synergies and strategic alignment,” Nadella wrote.

There will be synergies from the acquisition, he said. “The first-party phone portfolio will align to Microsoft’s strategic direction,” he added. To win in the higher price tiers, we will focus on breakthrough innovation that expresses and enlivens Microsoft’s digital work and digital life experiences. In addition, we plan to shift select Nokia X product designs [which now run Android] to become Lumia products running Windows. This builds on our success in the affordable smartphone space and aligns with our focus on Windows Universal Apps.”

At the same time Elop — whose division includes Nokia, the Surface tablets and X-box games — told staff there will be a consolidation of what had been the smart devices and the mobile phone units into one. Nokia engineering offices in Oulu, Finland, Bejing and San Diego will be reduced. A Microsoft manufacturing facility in Hungary will be closed.

The smart phone manufacturing business is changing, Dulaney said, with more suppliers making parts for handsets rather than manufacturers doing everything themselves. In that sense he expects Nokia will follow the footsteps of BlackBerry, which has contracted out manufacturing of some handsets to China’s Foxconn.

Meanwhile, Elop added, Microsoft will continue to push its Surface tablets, but in ways that complement sales by OEM tablet makers that use the Windows platforms.

A Microsoft Canada spokesperson this morning said it had no comment on the announcement at this time.

Nokia was once the leader in cellphones, but got hammered from smart phone sales of Apple iPhones and handsets running the Android operating system. As a result it was more than willing to sell the handset division when Microsoft came calling. According to IDC, Nokia didn’t place in the top five smart phone vendors for shipments in the first quarter. However, it was in second place in the quarter in overall mobile phone shipments (50 million) when shipments of its feature and smart phones were combined.

The layoffs will also come as Microsoft (Nasdaq: MSFT) simplifies its workflow, Nadella said. “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. This includes flattening organizations and increasing the span of control of people managers. In addition, our business processes and support models will be more lean and efficient with greater trust between teams. The overall result of these changes will be more productive, impactful teams across Microsoft. These changes will affect both the Microsoft workforce and our vendor staff. Each organization is starting at different points and moving at different paces.

“We are moving now to start reducing the first 13,000 positions, and the vast majority of employees whose jobs will be eliminated will be notified over the next six months,” Nadella said. “It’s important to note that while we are eliminating roles in some areas, we are adding roles in certain other strategic areas. My promise to you is that we will go through this process in the most thoughtful and transparent way possible. We will offer severance to all employees impacted by these changes, as well as job transition help in many locations, and everyone can expect to be treated with the respect they deserve for their contributions to this company.”

In SiliconValley.com a financial analyst was quoted as saying the layoffs were twice as many as Wall Street expected. Meanwhile Bloomberg News noted that Microsoft had promised to wring out $600 million in savings from Nokia.

Interestingly, in a February blog Gartner analyst Merv Adrian advised that Nadella “must quickly demonstrate that he’s not backing a ‘business as usual’ strategy, and that he recognize that design is front and center in client computing.”

Nadella “lacks direct experience in the mobile market,” Adrian added. “His insider status raises the risk of his being overly respectful of existing businesses, and hanging back from tough decisions that potentially threaten them but are critical to generating innovation. He will also need to shake up what is widely viewed as a culturally dysfunctional management structure.”

One thing that a number of analysts have said is Microsoft needs to consolidate its various operating systems — Windows RT (used on Surface tablets) and Windows Phone (on smart phones), for example, could be merged into a single platform.

 

(More to come on this story)

 

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