One of the most challenging things for a large successful organizations is to create an innovation large enough to make a difference. When a company’s on the brink of death, they will entertain many radical alternatives, but economic health is the enemy of change — which is one of Microsoft’s great problems.

Ray Ozzie, now the CTO of Microsoft, was at Lotus development when they dominated personal computer software. In late 1984 Ozzie founded Iris corporation to create new groupware products because he was convinced that Lotus’s healthy software application business would soon fall prey to suites of products — like Notes, or eventually Office. According to my friend and Diamond Fellow, David Reed, Lotus was making so much money and dominating the PC software space of the time, Ozzie had a hard time getting traction within the firm. So, he decided to start Iris.

According to David, there were a number of interesting features of the deal. First, Lotus had the right to fund Iris’s development effort, but if they did not, Ozzie and his partners owned the intellectual capital. Second, if Lotus did decide to buy out Iris, they had to commit at least $50,000,000 to launching the product Iris was creating. This structure is radically different than any internal innovation which I have every heard of, and I think there are some very important institutional innovations which Microsoft could learn from.

  • First, by structuring the innovation as a separate entitity with ownership of the intellectual property, it meant that the funding came from the board out of the capital budget, not the operating budget. It took Ozzie longer to develop the product and the market took longer to gestate than he anticipated. Like many innovators, he was a bit too early. If he had been inside Lotus and had been part of the operating budget, this mis-timing would have killed the project. His management would have been asking for the promised revenue, and his investment level would have been cut.
  • Second, by being in the capital budget and at the board level, he had a completely different organizational dynamic. Each year the board had to decide if they were willing to let Ozzie and his team take their intellectual capital to a competitor, like Microsoft. This unleashed the fear that they might regret not investing in this innovation by Ozzie, and regret is a much more powerful motivator than fear, as behavioral economists — including Dan Ariely one of our Diamond Fellows — have shown so eloquently.
  • Third, by getting Lotus to agree that they would spend at least $50,000,000 marketing Notes, Ozzie made the organization commit at a level which would be very hard to back out of. When all was said and done, Lotus spent about $100,000,000 launching Notes. This is the organizational equivalent of legend that Cortez told his men to burn the boats that brought them to Mexico so that they would win in battle.

I don’t think Microsoft has performed any of these type of institutional innovations. They have Ray Ozzie working inside the normal budgeting and ownership rules — and if the All Things Digital Conference in which he and Ballmer presented, Microsoft does not seem to be leading the way it used to.

I’d suggest that they create three separate entities which would be structured just like Iris. They would be independent entities and Microsoft would have the right to fund them, but if they did not fund them, the firm could walk with the intellectual property. If MS did exercise its option to buy them, they would have to spend $100,000,000 launching the new product. These three companies should do:

  1. a mobile solution company, to compete with Google and Apple;
  2. a company for their promising Microsoft Surface product, which could reinvent common spaces;
  3. a company to do search. Bing is too tied to the core business.

If they were willing to perform these institutional innovations for ownership and investment, maybe Ozzie could work his magic again. What do you think, could it work?

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Original Post: http://www.sviokla.com/business-strategy/innovating-at-scale-in-a-successful-company-what-microsoft-could-learn-from-lotus/

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