Microsoft's board of directors must hire a new CEO from outside the company's ranks to follow through on retiring chief executive Steve Ballmer's promise to reinvent the tech giant, analysts said.
Even then, with the challenges Microsoft faces from declining PC sales and its inability to capitalize on the massive shift to mobile computing, there's no guarantee of success. But who the board selects will really be the first and best indicator of whether the strategic shift and recent reorganization -- both aggressively promoted by Ballmer -- can remake the once-dominant technology company.
"It will be telling, who they pick, when it comes to whether the new direction works," said Michael Silver of Gartner in an interview Friday. "It really depends on who they select."
Silver was referring to the mutation of Microsoft from a company that sells packaged software to one that stresses devices -- both its own as well as those built by its long-time partners like Hewlett-Packard and Dell -- and services, often software sold as a service through subscription.
Most analysts believed that the strategic direction and corporate reshuffling were not at risk because of Ballmer's impending departure.
"Ballmer's retirement is not a repudiation of the strategy," argued David Cearley, also of Gartner, adding that the decision to refocus the technology giant was supported at the board level. "I think it's very likely that Ballmer's decision [to retire] is part of a broader strategy of the reorganization in July geared toward shifting the company's culture."
Others countered that the new CEO would not only have to implement the strategy -- a difficult task in itself -- but may demand the power to change that strategy before accepting the challenge.
"Ballmer had the approval of the board to change the company. He got board buy-in," said Patrick Moorhead, principal analyst at Moor Insights & Strategy, pointing out that the board could reverse its decision. "I think the strategy is on the table and the reorg is on the table. It really depends who comes in as CEO."
Most experts hoped that Microsoft would look beyond its own ranks for a successor, who would be just the third CEO of the 38-year-old company after co-founder Bill Gates, then Ballmer, who took the reins in 2000.
They reasoned that a current executive promoted to the top spot would simply be a "same old, same old" copy of Ballmer who would lack the motivation to dramatically change the company.
"They will look at both internal and external candidates," said Moorhead, noting the promise made by the Microsoft board to search far and wide. "But I believe they have to look at outside more than inside. The object of the strategy is change. Investors want to see a change. If they choose an insider, it will appear as if Microsoft isn't committed to change. So the optics of the thing looks good only if they pick an outsider."
Cearley echoed Moorhead, saying it's "highly likely" that the selection committee and board would focus on new faces. But he also pointed out another reason why outsiders have to be considered.
For all Ballmer's faults, real or perceived, there is no one now at the company who can match him. "There's no clear and obvious successor, no obvious person inside the company who has all the skill sets," said Cearley. "So I think it's highly likely that they'll be looking outside at candidates in the IT industry as well as ones not in the IT industry."
While a new CEO must have credibility among Microsoft's workforce, technology is so pervasive that people from other industries should not be automatically precluded. "The world today is not divided between technology and non-technology companies. Every company has a huge technology component. What the candidate needs is a strong appreciation of technology," Cearley said.
With no immediate successor named, said experts, it was clear that Microsoft did not have a CEO succession plan. If it had had a current executive in mind, the board would have announced the promotion Friday, they said. The long search timeframe also pointed to the lack of a plan.
Instead, long-time Microsoft watchers were reduced to playing Kremlinologists, the intelligence analysts who once studied photographs of Soviet Union military parades to predict who was on the way up, who was on the way out.
Those pundits went for broke on Friday, handicapping the chances that a new CEO would arise from a pool of current and former executives, including Stephen Elop, now the CEO of Nokia, a close partner of Microsoft; Paul Maritz, former chief executive at arch-rival VMware; Satya Nadella, now the head of the company's cloud and enterprise group, but before that the leader of the revenue-generating Server and Tools Division; and even Steven Sinofsky, the former head of Windows who was ousted last November after clashing with Ballmer.
To the analysts, picking from current and past executives would be a mistake.
"If [Ballmer] gets to pick a clone of himself with the same direction and strategy, Microsoft is in big trouble longer term," contended Jack Gold of J. Gold Associates. "What they need is a leader with a new direction, a visionary who can bring back innovation and provide products people are willing to spend money on. Unless such a leader is found, Microsoft is in for a continued, albeit slow, decline."
Outsiders won't have it easy. "Walking into the Microsoft culture is not without its own challenges," Cearley pointed out.
So what about Gates, who remains chairman of the board? Gates' name has been regularly trumpeted as a replacement for Ballmer, a possible savior if he returned to again run the firm he co-founded with Paul Allen in 1975.
While most dismissed that talk again Friday as delusional, Cearley saw it as a possibility -- long shot and temporary, though it would be.
"We are at the beginning of a long search, and there are many things that can happen over the next year that could change," Cearley said, outlining his Gates theory. "If things fall apart, if the company is on an incredibly negative path, or the reorganizational change isn't working, that's a scenario where you could see Gates coming back as a stabilization CEO."
The choice, certainly, will be up to Gates. He has his foundation to run, and from all signs, is happy doing that. But he also remains a major shareholder, with nearly 398 million shares as of late May, according to regulatory filings. At Friday's closing price, Gates' stake equaled $13.8 billion. That's a lot of money to risk with a newcomer, inside the company or not.
"He will be a primary voice on the selection committee," said Cearley. "But whether he becomes more actively involved in the company is up to him."
The new CEO, whether from inside or outside the company, will be in for a tough time, analysts agreed.
Microsoft is at a crossroads, something Ballmer himself admitted during interviews Friday, with Windows revenue declining as PC sales badly slump. And even though it remains an extremely profitable business, revenue from its best-producing groups is still tied to Windows' success. More importantly, the company is increasingly seen as having missed the boat on the switch to mobile and the consumerization of technology, areas where it may be too far behind to catch up to Google and Apple and a blizzard of smaller fry that add users at astounding rates.
That's why Ballmer's retirement announcement, big though it was on Friday, will pale in comparison to what Microsoft does after he's gone.
"Steve's leaving is a major event because he's been such a part of the Microsoft story for so long," said Cearley. "But the real watershed will be the person who follows him."
Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, on Google+ or subscribe to Gregg's RSS feed. His email address is email@example.com.
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