• by Bill Wise , December 11, 2006

Last week's announcement of a Yahoo reorganization wasn't necessarily a surprise. Yahoo's been hurting for a while now; and some kind of streamlining has appeared inevitable--especially after Senior Vice President of Communications Brad Garlinghouse came out with his "Peanut Butter Manifesto," in which he complained that Yahoo is spreading itself thin, like peanut butter on toast. What's surprising and delightful is just how smart Yahoo's reorg actually is.

The basic idea of the new structure is that Yahoo, which even by insider accounts has become a sprawling, red-tape laden megastructure, will now become a sleeker, three-pronged business focused on Yahoo's "three clients": audience, advertisers, and publishers. The reorg is so smart because, far more than just shifting business units around, it tackles Yahoo's most serious underlying problems of corporate culture.

Consider Yahoo's troubles. On the surface, its chief source of pain seems to be that it's gotten too big for its own good. One manifestation of that problem is product redundancy--which Garlinghouse discusses at length, pointing to overlaps like YME / Musicmatch, Flickr / Photos, YMG video / Yahoo Search video. A subtler version of the size problem is the oft-heard complaint that Yahoo does absolutely everything, but doesn't really stand out anywhere. Businesweek's Rob Hof sums up the problem nicely, complaining that Yahoo's got "many services I want, even [those] I can't really live without, but they rarely take them all the way to locking me in for good." A third manifestation of Yahoo's size is its burdensome bureaucracy.

But the fact that Yahoo's grown too big is really just the symptom, not the cause. The cause of the problem goes to another problem that Garlinghouse points out: a lack of real vision. The reorg provides that vision for the company, and places it at the crux of the organizational structure. And Yahoo has correctly chosen the vision of a customer-focused business as its new guiding light.

Centering a business around customers might sound obvious; but at Yahoo, it's a radical shift. Consider what CEO Terry Semel has told The New York Times about the restructuring: "Semel said," the Timesreports, "that when he joined the company five years ago, he focused on increasing the breadth of Yahoo products. Now, he said, the company is beginning a transformation to make itself 'more customer-centric, not more product-centric.'"

Why has Yahoo been focusing on its own products over customers? Because Yahoo has become a business that's focused on itself. Having more products means having a bigger, more powerful Yahoo, both in terms of offerings and in terms of market share. And a more powerful Yahoo is central to Yahoo's core mission of becoming "the most essential global Internet service for consumers and businesses." To understand how self-focused that mission is, compare it with Google's vastly different one: "to organize the world's information and make it universally accessible and useful."

There's nothing inherently wrong with a corporate goal of becoming "the most essential" player on the block. And that goal is what's led Yahoo to ultimately become the most popular presence on the Web. But an excessive focus on personal power can also devolve into expanding the business for expansion's sake--leading to spreading yourself too thin, product redundancy, and a large, unwieldy infrastructure. On a micro-level, a me-first/client second focus can also translate into infighting, turf wars, and a lack of loyalty towards the company--which are also manifestations of personal interest first, the client second (in this case, the client being the company itself). And as Garlinghouse describes in his memo, all of these problems describe Yahoo before the reorg.

Which is why the new reorg is a lot smarter than just a tightening of Yahoo's current infrastructure. That could have been achieved by simply sharpening the focus on Yahoo's already defined product categories like search, publisher, social media, and mobile. Instead, Yahoo's shifted the entire business structure to become client-focused. Which is a real revolution, one that will gets to the core of Yahoo's problem. A focus on customers fosters an emphasis on the usefulness of each product, and runs against the wasteful practice of creating an extra business unit just for the sake of having one; it calls for a focus on building quality products over amassing quantity; and it leads to an environment in which the entire business is focused on really getting things done--rather than on defending your turf or your piece of the bureaucracy.

Which is precisely what Yahoo needs now. And it's why the current reorg is exactly what Yahoo needs to get back on track.