Microsoft Laying Off ‘Thousands’ to Focus Resources on Cloud Business

Rumors started circulating a week ago that Microsoft was preparing to lay off employees, but the scale of dismissals was unclear. On July 6 Microsoft announced that it was carrying out a major restructuring that would result in the layoff of “thousands” of sales personnel, the majority of whom work overseas. The purpose of the restructuring is to streamline its sales division and focus it on cloud computing and other areas that show the strongest prospects for growth. But the move might also surprise those who have observed Microsoft’s generally strong revenue and profit growth in recent years. In fact, the restructuring has little to do with the need to cut costs by downsizing. Rather, it is to fine-tune a business that is already doing well and to recognize how important the cloud and online applications have become to Microsoft’s business model. Read on to learn about Microsoft’s restructuring plans:

Initial media reports said that Microsoft was planning to cut 3,000 people from its sales workforce. While Microsoft said it was cutting “thousands” of positions, it wouldn’t confirm how many employees would lose their jobs. In any event, the total layoffs amount to only a small fraction of Microsoft’s sales organization.

According to media reports, about 75 percent of the affected employees work overseas. Microsoft didn’t say why such a large proportion of the affected employees come from its overseas operations.

Microsoft said it needs to streamline its sales operation to attract customers across certain industry verticals it has identified as the most important and profitable. Specifically, the restructuring is all about focusing more on the cloud.

Sales of Microsoft’s Azure cloud services were up 93 percent year over year in the past quarter. The number of paying customers for the company’s cloud-based Office 365 services has doubled in just two years. Current projections indicate Microsoft’s cloud revenue will exceed $15 billion this year. Clearly, Microsoft needs to position its sales organization to take the fullest advantage of this market opportunity.

While layoffs are all too common in today’s business world, most companies restructure and fire employees because of declining revenue and profits. Microsoft, however, is exceedingly profitable and makes billions per quarter. So why restructure? According to reports, Microsoft has decided that cloud services—not desktop software or hardware—will prove critical to its future. It wants to reduce headcount in those non-core divisions and put more resources into its cloud operations.

Microsoft was clear in saying that the layoffs are not a cost-cutting measure. Rather, the company said it will reinvest the money it’s saving through the layoffs into areas it believes are most important to its future profitability.

Microsoft noted in an interview with CNBC that it will be working with its sales staff to focus on the sale of “big packages.” In other words, the company wants its sales staff to sign cloud services deals with enterprises, which would generate significantly more in revenue than what it’s been attracting already thus far.

Microsoft’s decision is all about the enterprise. Its business has been focused on volume sales to enterprises since it began selling boxes of Microsoft Office and other business applications to corporate customers. The company is repositioning its operations to find and attract big companies that haven’t already signed on to its cloud services to boost its own profits and to keep big competitors such as Amazon Web Services at bay.

Although Microsoft hasn’t said exactly how many employees will be affected by the layoffs, the number will amount to only a tiny fraction of the company’s total workforce. Microsoft currently has more than 121,000 employees worldwide, including about 71,000 in the U.S. If the salesforce layoffs total as much as 3,000, it would represent about 2.5 percent of the company’s global workforce.

As noted, Microsoft has said it plans to reinvest the cash it will save as part of its layoffs. And while the company didn’t say specifically where that cash might go, news reports indicate that Microsoft will hire new salespeople who can help build its cloud business. Microsoft’s workforce numbers actually might rebound quickly.