On which divisions? They seem to have a lot of contractors, they can just decide not to renew contracts when the ongoing ones are over. Probably a pretty easy way to reduce expenses without making much noise.

Every division.  This is a workforce culling opportunity.  Cull the low performers to increase per-employee efficiency.  Every company will do it.  Only companies in serious trouble will cull entire divisions.

Microsoft doesn't need to lose employees. They have sustained large profits, HUGE cash reserves, no competition in most of their markets, and guaranteed revenue from Windows/Office for the next 10 years at least whatever happens.

The only division which loses cash at all is the Search/Zune/Xbox 360 division. That's the first division any good manager would cut, but it's strategically important (spread of .NET, Silverlight, DirectX, Internet Explorer and other technology) to keep the Windows/Office monopoly so cutting it would hurt them elsewhere.

Actually the Entertainment division seems sustainably profitable for the time being, given that they've been profitable in the past few quarters and 360 software sales are very high. Cutting it now would make no sense (not that Microsoft would cut any major divisions of course).