Microsoft’s office: Why insiders think top management has lost its way

By Gary Rivlin, contributor

The traffic jams begin at 5pm on the dot at Microsoft's Redmond campus.

FORTUNE — What’s the matter with Microsoft?  After spending weeks tracking down and talking with a long list of former Microsoft (MSFT) employees, many of them veterans with fifteen or more years with the company, the question is how long do you have to hear the answer.

Corey Salka, who worked at Microsoft from 1992 until 2009, brings up the anti-trust fight.  The company decided to fight the U.S. Justice Department rather than settle and things were never the same.  Salka points to the humiliation colleagues felt watching Apple (AAPL) mock them in its ‘I’m a Mac, You’re a PC’ campaign.  For years Microsoft took it, he said, without so much as counterpunch.

“That would have been inconceivable in the 1990s,” said Salka, who describes Microsoft as “a more cautious company than before.”

Philip Su, who spent a dozen years working at Microsoft before taking a job at Facebook, sees a less motivated workforce as a root cause of Microsoft’s lost mojo.  Su remembers when he kept a sleeping bag at the office but that was in the late 1990s, when Microsoft still reigned as one of Wall Street’s better stories.  The new reality these days, Su said, are daily traffic jams in Redmond at 5 PM.

That’s the problem with a stock that is no longer splitting every 18 months, Su said.  With a share price stuck at $25 for the better part of a decade, people tend to leave in a much more narrow time frame than in the past.

“When there’s so little correlation between how hard I work and my income and other rewards,” Su said, “it’s a lot harder to ask people to work that hard.”

Plenty of former employees point an accusing finger at CEO Steve Ballmer.  How can they avoid doing so?  When Ballmer took over the company eleven years ago, Microsoft had only to let slip it was entering a field to cause trembling among competitors.  These days, though, the company is known more for its misses, fumbles, and stumbles than its hits and big scores.  It should be a contender in the tablets and smart phone markets; it was working on an e-reader more than a decade ago but instead company executives have only one answer when critics bring up its flubs: Well, at least we didn’t also blow the Xbox.

A survey of more than 1,000 Microsoft employees conducted in October by showed that only 51% of them approved of Ballmer’s performance as CEO.

(Read Fortune’s: The problem with Microsoft…)

“There’s certainly a lot more dissension with Steve than there would have been even three year ago,” said a former middle manager who recently left the company after 15 years.  “There’s this sense that under his direction, the company has really lost its way.”

By all accounts, Microsoft can be the most political of workplaces.  In the old days, when the company was the envy of the tech industry, its people knew the competition so intimately that the best product managers could rattle off the birthdays of the CEO’s kids.  These days, though, it seems the competition sits in an office one or two buildings over.  One former exec spoke of a “moat around Redmond” — and how little attention those inside the castle, especially those occupying management positions, pay to the world outside.

“Microsoft is such an inwardly-focused company,” he said.  “By the time you’re in a senior position, it’s like you spend 90% of your time focused on internal battles and internal power structures.”

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James Whittaker for one grew sick of it.  A leading figure in the software testing field, he started consulting for Microsoft in 1994 and eventually went to work for the company full-time.  He was someone who met regularly with Bill Gates.  And yet he found that even well-regarded old hands like himself didn’t have the juice to compete on the merits.

“Instead of a culture that said, ‘Let’s experiment and see which ideas work,’ the culture is one of, ‘Let’s kiss enough ass so maybe they’ll approve of our product,’” said Whittaker, who quit in 2009 to work for Google (GOOG).  Maybe the worst of it: those in authority often attained their position because they had been lucky enough to be in the right place at the right time, succeeding when the company was riding high and despite producing a mediocre product.

“It’s a culture that actually awards the political assassins,” said a software engineer who thought he might be one of the exceptions — an outsider able to thrive despite moving to Redmond mid-career.  He was well aware of Microsoft’s reputation for being hostile to those hired into senior positions from the outside but he was flabbergasted just the same when a top exec showed up in his office one day to spell out the facts of life inside Microsoft shortly after he arrived on campus.

“He’s standing there telling me, ‘I can have your team broken apart any time I want, just remember that,’ ” he said.  As far as he could tell (he didn’t last long), the coin of the realm within the company was one’s relationship with Ballmer, Gates, or both.  One of the “kingpins,” as he described them, will drop that he recently had dinner with Ballmer  — and then hint darkly at how miserable someone of his considerable clout  can make other people’s lives unless they toe the line.

“I still want to believe there’s an opportunity for them to become a great company again,” said Rebecca Norlander, who left Microsoft in 2010  after 19 years on the job. “But Microsoft needs to change.  And in some cases change dramatically.”

Microsoft alum generally give their former colleagues credit.  (Well, except the rather bitter former top exec who said he was selling every last share of stock in a company because “there’s something cancerous inside the company right now.”)   In the 1990s, the world mocked Microsoft when this mass market maker of relatively cheap software announced it was getting into the more sophisticated world of business applications.  These days, Microsoft’s business software division contributes more than $4 billion a year to the corporate bottom line — more in profits from this one family of products than much of the
500.  And  of course business software takes a distant third to Windows, which  generated $18 billion in profits last year, and Office, which produced $17 billion in income.

Yet success can breed bad habits — a point several Microsoft alum hammered home.  More than one employed the vocabulary of a therapist describing an unhealthy, co-dependent relationship when speaking about Windows and Office.  Small devices are the future and it’s on this front that Microsoft is having its biggest failures.  Yet Ballmer & Co. remain in denial, they say, because the great gushers of cash Windows and Office generate means they don’t feel the urgency they otherwise would –shielded from the pain of its many disappointments by two of the more successful franchises in the history of business.

The company continues to thwart promising internal projects whose proponents who suggest a platform that isn’t Windows-centric.  Its people continue to write applications for Windows and then, after the fact, tailor them for use on a phone or a tablet or in a browser, no matter how ragged the fit.  Meanwhile its in fifth place in the smart phone market, despite more than a decade of effort, with less than a five percent market share, and an after-thought at best in tablets.

“All their internal machinery is still pointed toward Windows,” James Whittaker said. “Windows always has to be first and the web is second.  So the entire company is pointed at a platform becoming increasingly irrelevant.”

Of 16 ex-softies I polled, half thought it was time for Ballmer to leave.  But it’s not like the other half necessarily thought the company’s CEO was doing a good job. A few did — but most of the others wondered who else might do better.

Maybe that’s the most damning criticism offered by those who’ve devoted much of their work life to Microsoft: it is so unwieldy and complex a beast that even some of those who spent an hour or more telling me everything that’s wrong with the company concede that, short of breaking it into two or more parts, the board has no choice but to stick with Ballmer and hope he can harness the company’s considerable talents and turn things around.

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