Outta Here at Microsoft
The software giant is losing key talent to the Internet

Michael Ahern's future at Microsoft Corp. looked golden. He was a top marketer at the most powerful software company in the world. In nine years, he had worked on one megaproject after another, from the Windows 95 launch to shaping the company's first e-commerce software. If he was patient, he'd be a vice-president in a couple of years--the elite of software's elite. But last April he threw all of that away and quit, leaving close to $1 million in stock options on the table so he could roll the dice on an Internet startup,

Is this guy nuts? If he is, a lot of other people are, too. In recent months, dozens of Microsoft's best and brightest have traded in their cushy corporate perches for the folding-chair atmosphere of Web startups. Others, flush with millions of dollars in Microsoft (MSFT) stock, have retired at the grand old age of fortysomething. And then there are the scores of freshly-minted MBAs and software grads from the world's top universities who are no longer making Microsoft their No. 1 choice.

After 24 years as a talent magnet, Microsoft is grappling with a brain drain. Even though the software behemoth has one of the lowest turnover rates in the computer industry, some experts believe the loss of key people at all levels in the organization could threaten Microsoft's ability to stay on top of the computer world. For years, company executives have preached that smart employees are their most crucial asset. ''This loss of talent is a serious problem, if not the most serious problem Microsoft is facing,'' says a programmer who left Microsoft this past spring.

What's prompting the exodus? Each person has his or her own reason for leaving, but there is a common thread among the 20 former key employees who talked to BUSINESS WEEK: The thrill is gone. Indeed, Microsoft is no longer the brash upstart that they fell in love with years ago. Today it's a behemoth with 33,000 employees working on 183 different products--often creating too many tedious layers for getting the job done. For some, the company has lost its sense of purpose. Gone are the underdog days when Microsoft was trying to best a software rival. Others say that the company is too wedded to its past success with Windows and is in danger of missing out on the next technological wave, the Internet.

Making matters worse, the powerhouse that William H. Gates III built has been branded as the bully of the Digital Age. On Nov. 5, a federal judge concluded that Microsoft is a monopolist with a sullied history of abusing its power to punish rivals and computer-maker partners--an image far from the one it cherishes as an innovator dedicated to bringing computing to the masses. People who set out to change the world feel let down. ''It's sad to see Microsoft take a beating,'' says one executive.

TOP PRIORITY. Is Gates worried about the losses? Not at all, he says. People who want to create software that will have a major impact on the world of computing, will choose Microsoft, he says, instead of a company that is more narrowly focused. Still, retaining talent is clearly a top priority at Microsoft these days. On Oct. 21, a group of executives including Gates met and puzzled over the brain drain. They identified 350 people they don't want to lose, and marched down the list talking over ways to make those stars' jobs more compelling.

It's something Microsoft President Steven A. Ballmer has been worrying about for over a year. He made career satisfaction one of his top priorities when he was promoted 16 months ago. In no time, he ditched a Microsoft practice of nearly two decades: offering salaries considerably lower than rivals with the promise that riches would be made up on stock options. Early this year, Ballmer raised salaries an average of 15%, with some of the most talented employees getting hikes of nearly 40%. Microsoft's salaries are still only in the 65th percentile of the industry range, according to its calculations, so it's planning another round of increases early next year.

In the meantime, Chris Williams, Microsoft's vice-president for human relations, is gathering advice from some of the world's top corporations. He just completed a 10-day fact-finding tour that included stops at General Electric (GE), News Corp. (NWS), and British Telecom (BTY). His conclusion: Microsoft has to reach beyond a cadre of star employees and make its management and leadership training programs available to everyone. ''This is my No. 1 priority,'' says Williams, who calls the loss of talented people ''an important problem.''

If you look at the raw numbers, it doesn't look like Williams has a lot to worry about. In fiscal 1999, the company's turnover rate was just 7.4%--half the industry average of 15%. What's more, Microsoft still has a good record in college recruitment. Seven out of every 10 grads it offers jobs to sign on the dotted line. Yet its turnover rate is edging up from the 6%, the rate it enjoyed in pre-Internet days.

STODGY PACE. That may not be the point, anyway: It's not so much the number of people packing their bags at Microsoft--but which ones. In the past 18 months, the list of departees reads like a Who's Who at Microsoft: Peter Neupert, a vice president in the Internet group left to head startup (DSCM). Steve Perlman, founder of WebTV, exited in May, saying he missed the pace of a startup. And John Ludwig, a vice-president in the consumer and commerce group, quit in October to spend time with his family--and maybe work for a Net company.

The departure of employees who lack marquee names, but have been major contributors, is just as telling. For example, Ben Slivka, one of the key players in Microsoft's Internet jihad in 1995, left after 11 years to join Inc. (AMZN) as a vice-president in charge of computing systems. And Hadi Partovi, the lead programmer for the company's Internet Explorer browser, quit last summer to form an Internet company, Tellme Networks Inc. ''Every week I hear about really good people leaving Microsoft,'' says Partovi.

When one person leaves, that often prompts others to go. Tellme has hired six former Microsoft employees and is currently interviewing five others. ''The more folks who leave Microsoft and are successful, the more additional folks will leave Microsoft,'' says Inc. President Naveen Jain, who was formerly a manager at Microsoft's MSN Web portal. ''Now people are realizing that there is life outside of Microsoft.''

It's not hard to see the attraction of startup life in dollars and cents. In the past, Microsoft's stock options have been a gold mine for many employees. But the company's stock has only increased 50% in the past 12 months. Meanwhile, people who get in on the ground floor of dot.coms see nearly instant wealth. For instance, Neupert saw his stock soar in value to more than $60 million after the initial public offering in July--less than a year after he joined.

College students are doing the math. James Chen, a grad student at Massachusetts Institute of Technology pursuing a master's degree in computer science, interned last summer at Microsoft and has a standing offer to work there. Instead, he's likely to stick with CampusCraze.Com, a Web company he launched to provide a community for students. ''Now there are a lot more options,'' he says. At Harvard business school, startup fever is raging. An estimated 50 companies have been created by graduates of the class of '99. ''In this environment, Microsoft is a little bit like IBM (IBM) was to MBAs 15 years ago--a solid choice that will look great on the resume and provide a strong launching pad. But not a company that will take you to the moon,'' says Harvard MBA student Andy Burtis.

Microsoft's 26-acre campus isn't exactly hip any more, either. After Patrick Nichols, a 1997 graduate of Cornell University, got job offers from Microsoft and Trilogy Software Inc., he chose Trilogy--a maker of e-commerce programs. A top Microsoft recruiter tried sweet-talking Nichols on the phone for 2 1/2 hours and offered to double his stock options. She gave up only after Nichols said it was Trilogy's fun-loving culture that Microsoft couldn't match.

Indeed, Microsoft is getting gray at the temples--and stodgy to boot. Programmers who left recently say it's now a firing offense if people working on the soon-to-be-released Windows 2000 operating system insert ''Easter eggs''--the equivalent of an artist's signature--in the pieces they create.

Others complain that the company's projects just aren't world-shaking enough to get really excited about. A lot of the engineering work focuses on making pieces of software like spreadsheets and word processors work together, rather than creating brand new products. ''There are lots of challenges at Microsoft these days, but few jihads. I wanted a jihad,'' says Ramesh Parameswaran, a former middle manager who worked on Windows 2000, which has taken a half-decade to build. He quit in August to start Inc., a Web site that provides expert advice on a wide range of topics.

Others who have left believe Microsoft is on the wrong track strategically. While rivals are focusing on new Web services, Microsoft concentrates most of its resources on old-fashioned operating systems and desktop programs. To disgruntled former employees, that means it won't be a leader in the next generation of software. ''Microsoft is holding on to its roots and not willing to let go,'' says a former Microsoft executive.

Now that Microsoft appears to be losing its antitrust battle, the internal grumbling could worsen. If Gates and Ballmer can't stanch it, this brain drain could turn into a gusher.

By Michael Moeller in San Mateo, Calif., with Victoria Murphy in Boston

To read a correction/clarification about this story, click here.

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Outta Here at Microsoft

TABLE: Microsoft: Who's Jumping Ship

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