At Yahoo, a need to hit refresh

news analysis If Yahoo could be placed on a psychiatrist's couch, the Internet giant would be told it was suffering from an identity crisis.

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.

"The biggest challenge Yahoo has is cultural. It's gotten away from the creative company it used to be--that's the difference between it and Google."

--Umesh Ramakrishnan, vice chairman, Corporate Technology Partners

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."

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