Depends on the project's scope, who is working on it and also users/usage I'd say. Sometimes embedded documentation can be useful (Doxygen comes to mind). Given a ton of time, it probably should be done in stages, and created starting with the requirements document(s) to at least set the stage for the thought process. There's no blanket right/wrong for all projects. For Microsoft, my guess is that it would make sense to do the inner documentation in much the same way as external documentation is done--people are used to it, the system is already in place somewhere, etc.