We went through a number of different design revisions to try and address these issues as elegantly as possible. We experimented with several accordion designs, which stack sections on top of each other but only allow one or two to be open at a time.
We also experimented with designs that involved only one scrolling region, but showed fewer entries per section.
The final design combines aspects of both approaches. It is a ducking accordion design with only two sections. The bottom section has two tabs, one for chat and one for gadgets, with room to add more tabs in the future. The upper section, which contains labels, expands to show all of the visible labels when you mouse over it. This allows you to see chat contacts but still give quick access to the labels. Best of all, you can easily adjust the balance between labels and chat to fit your own personal preference by dragging the divider between the sections up and down.
This design went through a number of iterations as well. We carefully adjusted the timing and triggering behavior of the expanding labels section to minimize accidental triggering. We noticed in usability testing that having the labels section expand when you are mousing over the Inbox label delete didn't work for everyone. We tweaked the system only to expand if you moved your mouse below the inbox label and keep it there for a moment. We also tried to ensure that if you are moving your mouse to click on a particular label or chat contact, that label or chat contact will never move out from under you.
The end result is a system that is more flexible, more responsive, and always keeps your chat contacts and unread count visible without adding a lot of complexity or requiring too much clicking around.