At Yahoo, a need to hit refresh

For nearly 10 years, Yahoo has delivered Web services to millions of people daily, and in the process made billions of dollars. But somewhere along the way, it has become mired in bureaucracy and an embarrassing inability to respond to more nimble (though considerably larger) Google. The question for Yahoo now: how do you reinvent a corporate culture and find a way to get an estimated 14,000 employees working on innovative projects once again?

More details of a plan executives hope will do exactly that should become public Tuesday. If early media reports are correct, Yahoo will announce plans to cut between 5 percent and 10 percent of its workforce when it releases fourth-quarter earnings.

Such a move will punctuate more than a year of internal wrangling at Yahoo, beginning with the departure of Chief Operating Officer Dan Rosensweig and entertainment head Lloyd Braun in December 2006, followed in June 2007 by CEO Terry Semel's exit. In the almost eight months since Yahoo co-founder Jerry Yang stepped in as chief executive and Sue Decker became president, the Sunnyvale, Calif., company hasn't managed to quell investor anxiety and stem losses in key search market share.

While the layoffs are a step to reduce expenses at the still-enviably profitable company, they won't solve the biggest problems at the Silicon Valley icon. In interviews with CNET News.com, Yahoo insiders, analysts, and others close to the company say changes in the executive suite have done little so far to change a company bogged down by ineffective group decision-making and a damaging aversion to taking risks.

"The biggest challenge Yahoo has is cultural," said Umesh Ramakrishnan, vice chairman of executive search firm Corporate Technology Partners. "It's gotten away from the creative company it used to be--that's the difference between it and Google. Yang needs to bring that culture back and bring innovation to the forefront."

In fairness, many Yahoo watchers do believe that cuts, which would be the company's first major paring since 2001, would be an opportunity to start fresh. Specifically, JP Morgan analyst Imran Khan said cutbacks would help Yahoo reach profitability targets, trim poor performing units like its social network Yahoo 360, and help reinvest in search, graphical ads, and partnerships.

Still, one source familiar with the situation said the proposed cuts don't weed out unproductive units or employees. Rather, Yang and Decker are likely to make cuts across the board, even within divisions that are performing well or are considered strategic imperatives, such as data services, according to the source.

"Instead of finding failing programs, they'll demoralize people hitting on all cylinders," the source said.

A culture is born
Yahoo, like Google, enjoyed a long period of growth and innovation during its first seven years. Under the direction of co-founders Yang and David Filo, and then-CEO Tim Koogle, it defined the term "portal." It launched hits like Web-based e-mail, instant chat, and Web search. In 2001, however, the dot-com bust hit the company hard, pushing its stock from a high of $475 in January 2000 to a low of $4 in September 2001.

Former Warner Bros. chief Terry Semel joined Yahoo in 2001 to turn the company around and build a media powerhouse with close Hollywood ties.

By many accounts, the Semel era transformed the company from a free-wheeling and innovative dot-com to a buttoned-down outfit where new products were subject to review by committee. Departments became responsible and rewarded for their own profits, much like many U.S. companies. At the time, the approach made sense and Yahoo saw dramatic financial improvements.

But those "big company" controls had a downside: they caused people to think about how to protect their own turf and put themselves--instead of the company--first, according to people familiar with Yahoo.

Of course, this sort of organization isn't unusual. Many mature organizations set up reward systems that ultimately pit one division against another--a structure that can prevent the exchange of ideas and teamwork and stall standout products, according to Raymond Miles, professor emeritus at UC Berkeley's Haas School of Business who recently published a paper called "The Ideology of Innovation" in the scholarly journal Strategic Organization.

"Now suddenly my boss is competing with your boss, because his department is less willing to share knowledge," Miles said. But "new ideas don't pop out of whole cloth of someone's head, they pop out of four or five people's heads."

That compartmentalization causes Yahoo particular grief because tech innovation demands speed and teamwork.

Most of Yahoo's products and divisions are dependent on one another in some way, and any new product requires cooperation from multiple groups. Everyone from those various groups must be willing to say "yes" for something to happen. When compared with innovative upstarts, that innovation by consensus is a time waster, and sometimes an idea killer.

"Instead of looking for reasons to say 'yes,' team leaders look for reasons for 'no' if they can't control it," said one source inside the company.

In November, Yang and Decker announced a plan to address these troubles. It started with a company-wide effort called "One Yahoo" to establish new behaviors toward teamwork and de-compartmentalize the company, according to sources. The idea was to emphasize that the needs of the corporation come before needs of individual business units.

Yang and Decker talked to executive vice presidents, who were told to talk to their next in command. Still, that effort has yet to lead to tangible results, according to people familiar with the company.

Sources interviewed by News.com also said that key managers, including Yang and Decker, want cultural change, but the commitment to "One Yahoo" dissipates below the vice president level, where everyday decisions need to be made. Yahoo representatives declined to comment for this article.

How has this culture affected Yahoo? Think of it from the viewpoint of an average Yahoo user. A woman might one day search for health information about the common cold, then visit Yahoo's health site, and then check her e-mail. For Yahoo to sell a comprehensive advertising package to a retailer like Target--which might like to reach shoppers with a message about cold medicine--the company's sales team ideally would sell Target a package of search ads, graphical ads on Yahoo Mail, and a sponsorship deal on the health page.

To pull that off, the deal might involve leaders from search and performance ad sales; graphical ad sales and sponsorships; Yahoo Mail; and the health editorial page. If any of those leaders' interests are misaligned, the deal could fall through or not meet its full potential. Sources familiar with the company said egos among team leaders can often get in the way of pushing through such deals.

Corporate patterns evolve over time, and they're hard to change once set, according to Adam Galinsky, a professor of ethics and decision in management at Northwestern University's Kellogg School of Management. Southwest Airlines, for example, started out in the airline business with restrictions that prevented its fleet from flying anywhere directly from its Texas hub, except for the four surrounding states. So Southwest had to develop quick turnaround times at those points in order to service the rest of the country, a pattern that made it faster than rivals, he said.

For any company to re-engineer a culture, it must overhaul all elements, Galinsky said. A company must have clear vision (or a compelling reason why change is necessary), define a strategy for the organization, set up a reward system that supports that vision, and hire people who fit into the vision. For example, if you want people to work in teams, but you reward them individually, the reward system doesn't work.

"Where most companies fail is when they change one part, but they leave all the other elements intact," Galinsky said.

Can Yang inspire change?
Yahoo has changed some parts of its culture, like overhauling management. And while company watchers say Yang has the personal capital with employees to run the company, he may not be the charismatic leader it needs to walk the halls and achieve change one person at a time. What's more, insiders say, is that Yahoo employs a few senior executives who are unwilling to change.

There's no doubt Yahoo growth has stagnated.

In the United States, the number of monthly visitors to Yahoo was 137 million in December 2007, up 5 percent from the same month in 2006, according to ComScore Media Metrix. But the company's total monthly page views declined 9 percent year over year from 33 billion in December 2006. In contrast, Google's total U.S. monthly page views rose by 76 percent to about 24 billion. Google's total monthly visitors also grew to 133 million in December, up 18 percent from the previous year.

Search was a similar story. Yahoo's share of the U.S. search market dropped to 23 percent in December, down about 5 percent year over year. Google's share of the search market was about 58 percent, up from about 52 percent last year.

Globally, Yahoo is second to Google, too. In December, Yahoo had 485 million monthly visitors worldwide, versus Google's 588 million, according to ComScore.

In its rivalry with Google, Yahoo also has struggled with identity: it's fluctuated from being a search player to being a media property focused on selling brand and graphical ads.

During the Semel years, Yahoo crafted an image as a media company by establishing new headquarters in Santa Monica, Calif., hiring Braun, and attempting to develop original programming. The results were, by most accounts, disappointing. And while Yahoo is still investing in original content (it just launched a new business TV show much like one it used to operate before the dot-com bust), Yang and other executives are taking the company in a different direction.

One former executive put it like this: "Yahoo's been weighed down by trying to do too many things and not being very good at any of them, (and) not having the commitment to excel at any of them."

Yahoo's future may be in its past, and Yang said as much at the Consumer Electronics Show earlier this month. Straight out of the '90s Internet playbook, Yang wants Yahoo to be the starting point for online users, with greater emphasis on mail, search, and personal home pages. The company also plans to deliver technologies including Yahoo's Go 3.0 mobile products and a new e-mail platform. Last October, Yang also said the company would focus on extending its advertising offerings beyond Yahoo to sites across the Web and open up Yahoo's technology infrastructure to third-party developers and publishers.

To trim down, Yahoo also indicated in recent months that the company would phase out or consolidate services like photos, premium music, and auctions.

Miles said there's another problem inside companies like Yahoo. Ideas for new products, if they're not in the strategic plan of product launches, are often stifled because they're competing against those in the product hopper.

In fairness, companies like Yahoo can suffer from their own success. Often, a new product that competes with or doesn't directly benefit what made that company a success can be ignored, or worse, killed off. As a result, the employees who had those new ideas leave. Yahoo has had a flood of executives depart in recent years to head up companies like online video site GoFish. In another example, Yahoo's former director of product marketing, Richard Frankel, just joined SocialMedia Networks, an ad network for Facebook, as its chief operating officer.

"Silicon Valley is awash with people who have left their company because no one would listen to them," said Berkeley's Miles. Because ideas flow upward from the company, Miles said, changing top management isn't always enough to recharge a business.

"If you're going to keep an organization young," he said, "you must continue to work on getting everyone on the same page with knowledge flowing up and down and across."