Marco della Cava

USA TODAY

REDMOND, Wash. — Last March, Microsoft unveiled Tay.ai, a Twitter bot that promised to usher in a new era of human-to-artificial-intelligence conversation.

Within hours, hackers turned Tay into a venom-spewing racist, and the project was quickly shuttered with a public apology.

In the old days of Microsoft, heads surely would have rolled.

But Satya Nadella, 49, a one-time company engineer who took the reins of the $500 billion tech giant three years ago this month, instead sent the Tay team a note of encouragement.

“Keep pushing, and know that I am with you,” he wrote in an e-mail, urging staffers to take the criticism in the right spirit while exercising "deep empathy for anyone hurt by Tay. (The) key is to keep learning and improving.”

The group responded with Zo, a new AI chatbot that debuted in December. So far, no issues.

Nadella says Microsoft must display 'enduring values'

“It’s so critical for leaders not to freak people out, but to give them air cover to solve the real problem,” Nadella says in an interview with USA TODAY. “If people are doing things out of fear, it’s hard or impossible to actually drive any innovation.”

A seismic cultural shift is rocking Microsoft under Nadella, part of a broad transformation that is moving the company away from an atrophying, software license-based past and towards a thriving, cloud-based future.

In the process, Nadella has managed to get investors and employees alike re-energized about a once dominant brand whose luster had faded. And while part of his strategy involves buying new companies and beefing up existing teams in order to tackle cutting-edge tech trends, ultimately he feels success comes down to reinvigorating Microsoft's in-house mojo.

"What I realize more than ever now is that my job is curation of our culture," says Nadella, who will explore this topic and others in a book due out this fall called Hit Refresh. "If you don't focus on creating a culture that allows people to do their best work, then you’ve created nothing.”

More Microsoft news:

Microsoft calls for 'digital Geneva Convention'

Did Microsoft just out-cool Apple?

Microsoft seeks 'exceptions' to Trump immigration ban

Innovation is the lifeblood of any company, but especially those that traffic in the fickle world of technology. For every Facebook there's also a Yahoo, shooting comets that cling to familiar paths and miss new trends.

For this one-time tech monolith, a cultural makeover capable of spawning revenue-generating ideas is critical to staying relevant.

"Microsoft has massive cloud growth from one direction," a business that is second only to Amazon Web Services, with a $13 billion a year run rate, says Jan Dawson of Jackdaw Research. "But then there's this drag from phone hardware and a move away from licensing, so there are a lot of things against them."

While Microsoft stock passed an all-time high set in 1999 and has rallied nearly 80% since Nadella took over, the CEO has yet to jumpstart revenue growth out of the single digits in the past year.

"There's so much legacy business with Microsoft, which is both a strength and millstone," says Dawson. "Any new stuff seems to just offset the long-term decline on other fronts."

Reviving the 'enduring mission'

Almost since its founding in 1975, Microsoft road the crest of a surging computer wave to staggering profits. Armed with a monopolistic mandate, the company did more dictating than listening.

But the 2000s were a humbling decade as Microsoft struggled to keep up with new trends and products, from smartphones to social networking.

“When I joined the company in 1992, we used to talk about our mission as putting a PC in every home, and by the end of the decade we have done that, at least in the developed world,” Nadella says. “It always bothered me that we confused an enduring mission with a temporal goal.”

Now, he says, “any decision about a new product or a new hire, I’m always thinking about that sense of purpose and culture."

Nadella credits his work attitude to a former Microsoft boss, Doug Burgum, currently the governor of North Dakota. "He said you're going to spend more time at work than you will with your kids, so it had better have that deeper meaning," Nadella recalls. "It was a turning point for me personally at work."

That missionary zeal even extends to making occasional phone pitches to promising college graduates. Far from being intimidated, “they’re fearless," he says with a laugh. "They say, 'I have five offers, tell me why I should join you?’”

Hackathons, town halls and big bets

Among the changes Nadella has put in place are campus hackathons to drive bottom-up ideas and monthly town hall meetings accessible to all 120,000 global employees. And top execs now travel more in order to better understand their enterprise customers' needs.

One of those road warriors, cloud and enterprise chief Scott Guthrie, says "these days, we acknowledge others may have better ways of doing things, as opposed to us saying, ‘Here’s how we do it at Microsoft.’”

Adds Kathleen Hogan, head of human resources and a 14-year veteran of the company: “There was more a fixed mindset here before, a need to know it all and look smart. Before, the competition was internal, but it needed to be with the world outside.”

To that end, Nadella has begun inviting CEOs of newly acquired companies to annual retreats that had been reserved exclusively for veteran company leaders. Under Nadella, Microsoft has made dozens of acquisitions including a massive $26 billion purchase of professional networking site LinkedIn.

Chuck Dietrich, a Salesforce veteran whose Mobile Data Labs AI company was bought by Microsoft in 2015, attended last year's executive retreat. He says Nadella has managed to alter a corporate reputation for being “stodgy, closed and insular. We (new hires) are being asked for our opinions, and even leading best-practice meetings.”

Embracing outsiders as potential allies seems like a shrewd move when profits and longevity hang in the balance.

"I asked myself the question, 'If we sort of disappeared from this planet, will there be any sensibility lost?'" Nadella says. His conclusion: Microsoft should have a role in bringing about the next computing revolution, one tethered to the cloud, artificial intelligence and augmented reality.

"I deeply understand (that)," he says. "I mean, I see the future."

Since taking over, Nadella has allocated some $35 billion towards R&D for projects such as the company's $3,000 mixed reality headset, HoloLens. Last fall's launch of Microsoft Teams aims to steal thunder from hit office communication company, Slack. And just last week, the company announced a new initiative called Healthcare NExT, which will leverage advanced technology to improve patient care and provide new tools to doctors.

It's still in the PC market

But the headwinds facing Nadella and his gradually turning ocean liner of a company are strong.

A slowing global PC market continues to chip away at revenue from software licensing. That part of Microsoft's business is transitioning steadily to a cloud-based subscription model, which is inherently less profitable.

Nadella also is unwinding a failed $7 billion Nokia acquisition made under his predecessor. A goal of getting its Windows 10 operating system onto a billion devices has hit a snag due largely to shortfalls in that mobile strategy.

What’s more, a growing number of cloud players such as Salesforce, Google, IBM and late-entry Oracle means increasing competition for enterprise customers. Meanwhile, LinkedIn’s full financial contribution has yet to be realized and HoloLens remains in the hands of developers.

Scott Kessler of CFRA Research lauds the stock bump under Nadella but suggests the honeymoon may soon be over as investors look for restructuring moves to hit the bottom line.

"FY18 (fiscal year 2018) will be the year where Nadella has to transition from someone who is new and learning and making these significant changes, to one who is about execution, about demonstrating improvement and traction with products and financials," says Kessler, who rates Microsoft shares a hold.

Microsoft co-founder Bill Gates, who remains on the company board, says his company's “ambitious product plans" will prove key to its success.

“I enjoy working with Satya, and the R&D stuff he is pushing is really building up a lot of strength for the company,” says Gates.

But, he adds, "it’s still a very competitive business we’re in. Google is the strongest by many metrics, though mainly on the consumer side. Apple continues to do well. Facebook is amazing. And Amazon is in our same town.”

Big changes from a 'consummate insider'

When Nadella strolls the expansive Microsoft campus, home to a third of its global army, there is no parting of the waters. Employees offer a quick nod or a smile.

If he seems like one of their own, that's for good reason. Nadella joined the company as a 24-year-old graduate of Indian and U.S. schools (Mangalore University, electrical engineering and University of Wisconsin-Milwaukee, computer science), and eventually was noticed for his work in the burgeoning cloud and enterprise group.

That all this change should come from a man who has spent a quarter-century at the firm is ironic. But, says Nadella, not surprising.

“I didn't start this (CEO) journey with a very explicit goal of change," he says. "I mean, I’m not an outsider. In fact, I’m the consummate insider. But I also have a worldview, a sense of purpose for this company."

Nadella says he drew inspiration from the company's founders, Gates and Paul Allen, who had created computer software for a hobby computer called the Altair.

"A lot of technology has come and gone since the Altair, but we are that same company, a company that creates technology (and) puts it into other people's hands so they can create more technology," he says. "That's where the empowerment comes from."

Much the way Gates and Allen envisioned a world where their language would drive a new age of productivity, Nadella doubled down on HoloLens just as its team members were sure they'd fall to the budget-cutting ax.

“In my world, you’re selling a vision, which by definition is something you can’t see,” says HoloLens guru Alex Kipman. “So you’re telling a CEO, this is super expensive and requires you have a long-term approach to life. Luckily, he does."

Nadella says it was easy to bet on the futuristic computing platform that allows humans to interact with holograms in space: "As a leader, you often have to suspend your disbelief and just go create."

Microsoft's leader comes across as a man who feels pleased if not shocked at where his life journey has taken him — from an Indian kid working with Microsoft software tools who dreamed of a career in tech, to an American citizen running Microsoft who meets with presidents and prime ministers.

And with that sense of good fortune has come a sense of responsibility, one that is focused on not just the next Microsoft quarterly report but also the legacy he will leave behind.

“Organizations should not be measured so much during a CEO’s tenure, but after,” says Nadella. “Because if it all falls apart after you’re gone, then you haven’t created an organization that is enduring.”

Follow USA TODAY tech reporter Marco della Cava @marcodellacava