Volume 9,
#6___________________________________________________________
Part 1 - July, 1990
"MGMT MEMO" was
written by Richard Seltzer in Corporate Employee
Communication for the Office of the President. It was
written for Digital’s managers and supervisors to help them
understand and communicate business information to their
employees. You can reach Richard at seltzer@seltzerbooks.com
State Of The Company Address by Ken Olsen,
President
Operational Issues And Business Units by Jack
Smith, senior vice president of Operations
DECWORLD ’90 by Peter Smith, vice president,
Industry and Product Marketing
VAX 9000 by Bob Glorioso,
vice president, Information Systems Business
Desktop
Interconnect Business by Ralph Dormitzer, group manager,
Low-End Networks and Communications
Ken Olsen Answers Employee Questions
On May 3,
1990, over 700 senior managers attended Digital’s State of
the Company Meeting in Merrimack, N.H. The first two hours
of the program, which addressed matters of general employee
concern, were broadcast live over the Digital Video Network
(DVN). This issue of MGMT MEMO summarizes that part of the
program. The next issue, which will follow shortly, will
cover the rest of the meeting.
Some people
ask, "When will we see change in our industry slow down?" My
answer is, "If you were worried about change, you shouldn’t
be in this industry." Change is coming faster all the time.
It’s the excitement of the industry, and that’s the job we
have picked.
We are
continuing to make significant progress in a number of
areas. For instance, in Manufacturing we are continuing to
improve our efficiency at a rate of 15% a year. That comes
partly from technology, partly from use of computer systems,
partly from experience, and partly from just hard work. That
continuing accomplishment presents us with a challenge — we
have to grow more than 15 % a year if we are going to use
all our manufacturing facilities and people.
In our Sales
operations in the U.S., we had a number of problems. We had
stifled our sales people and burdened them with too much red
tape. We have made significant improvements in that area. A
year and a half ago, when I visited sales offices in the
U.S., I had to take time to get people to tell me what was
bothering them. Eventually, they’d tell me about the
overhead, their layers of management, getting things done,
making decisions, having the freedom to do the obvious
things without having to get permission. Today, when I visit
an office, they are all organized in their complaints. I
recently went to Washington and found 20 people around a
table. Each one with a point, and they were all primed. And
none of the problems they wanted to talk about related to
the Field or their administration. Now they talk about
problems with support, with products, and needs for
education. So, while we have a ways to go yet in the Field,
we have accomplished much.
We also have
made significant improvements in Engineering, which always
has been the heart of the company. We are a product company
and are proud of our products. We have done magnificent
things, but this is an area where we have to keep making
changes and improvements.
When we
started our Engineering organization, we were influenced by
ideas from operations research, which had been used in World
War II for managing projects. We knew how much time
engineers spent on meetings, on travel, on being sick, and
how much they spent on their projects. We kept track of
projects and knew exactly where they stood . Some people
complained that the reporting was shallow. But the projects
we organized did get done.
When Gordon
Bell joined us, he said he didn’t need that. We could get
things done by sheer brilliance, hard work, brains, and
architecture; and we could drop the formality. And he was
right. We got a lot of things done just by good people
running things. But, in time, as we grew, informality became
impossible; and for a few years, we didn’t get any new
products out.
About eight
years ago, we changed the company and put a whole new crew
of people in charge. Once again, by architecture, brains,
hard work and good will we controlled Engineering and had
some great years with great products because of our people.
We have grown
factor of six since then. Our Engineering budget is now one
and a half billion dollars. We are now past the time where
that informal way of controlling things works. Now, we have
to show we can run that huge budget and those several
thousand people in a business-like way, just like we run
Manufacturing. This should be a help to the accomplishment
of engineering projects.
When we were
new, we used to laugh at IBM because they would change the
way they were organized so frequently — from centralized to
decentralized and back to centralized again.
Now we
recognize the need to make changes in an organization
periodically. It is in changes that you correct for things
that no longer work in the way they were intended. Today, in
our Engineering organization, we are committed to formality
in the discipline of management.
We often
complain unfairly about Finance. The tradition of Finance is
to report on history, not to help run a business which is
looking to the future. It is like driving a car looking out
the rear view mirror. But our financial people are very
good. People come to us to see what we have done. We have
learned to be very good in that area, and we are admired by
many large companies; and they follow us and often use our
equipment.
The next area
we have to work on and make a major improvements in is how
we market our products to different businesses. Years ago,
we broke the company into product lines. At one time, we had
30 of them, each run independently, like a business. They
each prepared a business plan. Manufacturing made the parts;
Sales sold them; and Services supported them. But the
product lines laid out their plans as if they were in
charge. They budgeted the costs for services, sales,
marketing, etc. and they figured out what price they needed
to make a profit. Their budgeting effort was difficult. As
with a home budget, there was never enough money coming in
to take care of all the things they had to do.
My theory is
that to live in the manner you think you should live would
take about 50% more income than what you are paid. Likewise,
in running a business, you cannot do all the things that you
think you should do for the size company you are. Making
those decisions is hard.
We did well
with product lines. We introduced computers to a couple of
dozen industries that had never used computers before. Much
of the growth of the company for the first 20 years came
about because of this organizational change.
Eventually, we
ran into trouble. The independence of the product lines
became more important than the company good. Success was an
enormous burden. When you are successful, it is awfully hard
to continue to learn and to do things differently.
About eight
years ago, we dropped that approach. We would maintain
business units for measurements, but would all work together
as one company. Many people who couldn’t i- magine working
together after so many years of being independent left us.
But working together produced miraculous results. We had
good years from working together as one company instead of
30 different ones.
In time,
however, we’ve lost many of the advantages of independent
business units. The beauty of working together was great,
but it had its drawbacks as well. We would spend money, and
no one had the responsibility to make sure the prices
balanced it. We built
some great
programs, but we didn’t figure out who would pay for them.
Little by little the profits decreased because people would
spend money well, for good things, but no one was
responsible for making sure that the pricing took that into
account. We didn’t go through the travail that is involved
with balancing all the things you want to do with the
income. And we couldn’t just keep raising prices to cover
the overhead we were adding.
To solve this
problem, for the last year, we have been developing ideas
for breaking the company into business units. Those ideas
are now quite well developed.
We don’t call
these units "product lines," but they are very close to the
product lines of the past. One of the differences is that we
don’t give them complete profit-and-loss responsibility. If
you give someone profit-and-loss responsibility, they start
to look at the manufacturing and selling costs, which are
the largest cost items, and they want to run those parts of
the company rather than do the things they are supposed to
do. Therefore, we just measure our new business units on
their return.
Business units
budget all the costs involved in their businesses and then
determine how they are going to get the money to pay for it.
That was an unbelievable shock to some people. They were
gaining market share and thought they were doing great.
Suddenly, they realized they had responsibility for profit.
There was an instant conversion in attitude.
I think this
organizational change will be one of the most significant
things we have done.
We want these
business units to propose what they will do using the assets
of the corporation — where they will get the income, and
how they will make a profit. That is the path we are on.
I am critiqued
all the time about the inefficiency of Digital. The outside
world would like to see us let go of 10% or 20% of our
people. Every day, we are pressed. My attitude is that when
we break the company into pieces, each piece has the
opportunity to succeed. When they have the freedom to run a
business, most of them will need people and will have to
improve efficiency. We want to give people the
responsibility to run a piece of the business, and let them
prove that they can do it successfully.
With this new
approach, we are not limited by the breadth of interest of
the Executive Committee or some staff of centralized
planners. Every company with a central planning group has a
very narrow view of which businesses to enter and is limited
to the span of interest of that group. If instead of a
group, the planning is done by one person, even if that
person is unusually competent and has a wide span, the span
could not possibly be wide enough for a company of this
size.
For
decision-making now, in theory, every business unit makes a
plan that tells what they will spend, what return they
promise, plus all other interesting and important
observations. The Executive Committee and the Board of
Directors then say yes or no.
That means
that all engineering projects - all 2,000 of them — get
proposed, reviewed, and approved. That is an impossible
number of things for an Executive Committee and a Board of
Directors to run, especially since they are to a large
degree not technical. But when we organize these projects in
a systematic way, the decision becomes almost automatic.
It is
interesting how useful our Board has been in areas in which
they are not expert. They have an enormous advantage of not
being in love with one kind of desktop device, or some
technicality in computer science. They have said "no" to
some of our most earnest requests and forced us to pursue
them until we had wisdom. And they can intuitively spot
projects which are unwise. I believe the contribution of the
Board of Directors is to motivate the administration to do a
good job.
I think you’ll
see major changes over time, and many of our weaknesses will
be solved. These ideas take time to sink in and be
implemented.
We see nothing
that guarantees an improvement in the external environment.
We need to change from within, and to keep learning and
improving in both good times and bad.
This turbulent
period has been called the "Information Age." Digital has
been instrumental over the last decades in helping to
create the reality that this term describes.
The first
principle of the Information Age is: "Information drives
change." Inseparable from that principle is the corollary:
"Without change there is no progress."
Our business
is change and progress. We strive to be the driving force
for change, as we have been in leading the way towards
seamless networks of distributed computing. But sometimes
change is thrust on us without our consent.
In the face of
unanticipated, unwelcome change, people, in their diversity,
experience abnormally high tension, uncertainty, cynicism,
or even despair. Times of change challenge our beliefs, our
sense of self, our spirit. Who are we underneath our titles?
How can we contribute? How can we play in this game if the
game is no longer the same? In such times of change, people
need clear, consistent information and trustworthy
communication.
At Digital, we
don’t have finished answers to the turbulence of today. But
one thing is clear: the way to manage change is through
consistency. The foundation of Digital’s business practice
is a core set of values that guide us at times of
uncertainty, and point us in the right direction.
The ability to
deal with change becomes a function of how well prepared
people are. We have always believed that people are our most
important asset. Sharing with our people the fundamental
values allows comfort in dealing with change. A bond of
trust is forged that together we are trying to do the right
thing - that we are going to protect our valued people, and
that those people are going to do their best for the
company.
Someone
suggested that we print the company values on 3 x 5 cards
and give one to every employee, so they could all refer to
their values card whenever they had to make decisions or
resolve conflicts. But it is important for all of us to
internalize Digital’s values. They must live within us, and
must be active intuitively and intellectually. No outer
icons of behavior can enable us to respond effectively
enough to succeed in the business environment we face today.
Our values
must serve as a seed force to enable us to transform Digital
into a new ideal — new in outer respects, but directly
rooted in those values on which Ken founded this company.
These values
include quality, honesty, simplicity, teamwork, leadership,
accountability and concern for people and the differences
among people. We value doing the right thing, always, in a
timely manner, and carefully. We are above all a company for
people.
These values
have built a global Fortune 27 company, an organization in
which individuals — from entry-level to executive — can be
successful; a company where prejudice and short-sightedness
or hierarchical protocols do not limit potential nor stifle
creativity.
In selecting
these values, our goal was to maximize the potential and the
contribution and the productivity of all of our people,
regardless of gender, or race or other differences.
For instance,
change has been thrust on us in such controversial areas as
employee drug testing, where we are required to subject our
employees to the same standards as some
client
organizations. Here we have created policies that are
consistent with our values of choice and trust and
preservation of human dignity.
Also, in the
last few quarters, our values and policies and the changing
business environment have converged and collided over the
central issue of balancing the workforce. How can people be
expansive, creative, personally engaged in a forward-looking
project, if they are worried about whether or not their job
is going away? The collective impact of such
counter-productive concerns harms us all. Newspapers trumpet
alarm. The rumor mill grinds away with stories of early
retirement, redeployment and downsizing. And the effect of
these signs of turbulence can be dispiriting even to loyal
and hard-working people.
But this
turbulence is a challenge to make us better. We are being
asked to reach deep inside and find ourselves. We are being
asked to create ourselves anew, to transform to meet the
present. This transformation may seem sudden; but, in fact,
we’ve been implementing transition programs in the U.S.
since 1983. Constrained by our sincere concern for our
people, we have moved carefully, considering each decision.
We looked at mounting cost pressures and our imbalanced
workforce, and considered many approaches.
We saw there
were more people in certain areas than there were positions.
We saw that future work would be different. When the work
changed, certain jobs went away. For example, Customer
Services has changed dramatically. Systems are now a
thousand times more reliable, and they virtually tell us how
to fix them. The result is that the work of Customer Service
engineers is different. It requires fewer people with
different levels of skill. Likewise, Manufacturing no longer
requires the same number of assemblers, because Engineering
designed out the need for assembly in the manufacturing
process. Meanwhile, market realities forced us to recognize
that our workforce needs had changed. We had to find options
to provide people with choices for doing meaningful work.
Our challenge
is to balance business success with our values. When we
don’t spend the time with our newer employees to help them
assimilate our values, we fail them. When people don’t have
meaningful work, we fail them. When we can’t give people the
chance to work to their potential, we fail them. In such
conditions, our values demand that we, whenever possible,
offer people a choice. That choice has become known as
"transition."
The transition
process deals with the issues of changed work in a changed
marketplace. Our core values always guide us in our
decisions and actions.
None of us
wants the company to be engaged in transition, but we are.
The primary thrust has been redeployment within Digital —
reskilling and retraining where necessary. In every case, we
are trying to do the right things.
Some people in
the U.S. who have been offered our Transition Financial
Support Option have volunteered to take it. Others will
follow.
We expect that
by the time the current phase of transition ends on July 2
of this year, over 2500 employees in the U.S. will have made
the choice to take the Transition Financial Support Option.
Decisions are
being made on a business-by-business basis. Future plans
will be based on business conditions and directed by
departmental human resource plans.
Change is
constant. To change in a way that’s best for everyone, we
need to plan better. We need to think about the human
resources of the company in a different way. We need to be
clearer on where we see the business going and plan ways to
get there by maximizing the potential of our workforce. In
other words, we have to find ways to help people maximize
themselves.
That takes
real leadership. You have to show the overall picture so
people can see how their pieces fit in. If they understand,
most of the time, people can and will do the right thing.
Historically,
we have grown fast and made large profits. Planning to meet
future business needs was a luxury we couldn’t afford. There
was too much work for everyone to do each day. We couldn’t
spare any of them for formal development. So we added more
and more people to solve the problem. We believed we would
continue to grow so fast that there would always be
meaningful work for every employee we had and could possibly
hire. Obviously that is not true today.
Management
needs to change the way it thinks about people and costs.
And employees need to change the way they think about work.
All this has to happen without losing our values and sense
of principles.
These changes
are already happening. Many employees have been flexible in
taking on new assignments. Career Opportunity Days in the
U.S. Field have helped place over 700 people from other
areas in sales and sales support roles. About 4000 employees
in Manufacturing have been retrained and redeployed. And
several hundred employees have changed jobs through a new
emphasis on integrated services under the Enterprise
Integration Services (EIS) organization.
Personnel is
working to create an infrastructure for Human Resource
Planning. This will help us do a quality job of staffing and
skill mix in the future.
Managers must take the tools and
processes that are developed and work with us to ensure that
the right people with the right skills at the right time are
available to do the work. We need to anticipate our people
needs with sufficient lead time to meet them.
In our business, this is no small task.
We’re all going to need to work together and communicate
with greater clarity and a common vision. Our task is to
balance the needs of the individual and the business through
the creation of hiring plans, placement plans, job rotation,
training plans, and transition programs, where appropriate.
The Human Resources Plan must encompass
both short-term and long-term personnel needs for each
organization. Managers know their business needs better than
anyone else. They should lead their organizations as if they
were running a business, projecting the human resources
necessary to meet business needs. Planning strategies for
skills development, and driving the changes to keep Digital
a competitive leader in the industry.
Done perfectly, a human resources plan
eliminates the need for downsizing. It is fully synchronized
with the business.
Effective human resources management
will help Digital attract and retain the best people. Rapid
changes in many areas will require employees to learn
continually. Continuous learning will only intensify in the
1990s. Employees will need more ability to define problems,
quickly sift and assimilate relevant data, conceptualize and
reorganize the information, make deductive and inductive
leaps with it, ask hard questions about it, discuss findings
with colleagues, work collaboratively to find solutions, and
then convince others. And they’ll have to be able to think
"globally," with a greater understanding of other languages
and cultures.
Performance evaluations and development
will help individuals gain new skills and levels of
knowledge. Effective human resources management supports
people and encourages them to do their best work. The way to
make human resource programs successful, both from a
business perspective and an employee relations point of
view, is through communications.
Employees have to be comfortable enough
to talk to any individual within the organization who can
resolve problems or answer concerns.
One avenue for communication is through
the Personnel representatives. Digital is committed to the
concept of Personnel as an employee representative, not a
management mouthpiece.
A program that Personnel can use for
self-empowerment is the Open Door Policy. The heart of this
practice is to allow employees to take issues to people
other than their managers, at various levels of the
organization, so issues can be resolved satisfactorily.
As we enter
the 1990s, it has become necessary to reframe the Open Door
Policy to ensure that Digital’s values are still being
adhered to during a time of organizational and business
change. Fear of retaliation — subtle or overt — must not
exist. We want employees to take advantage of opportunities
for improved communication.
The revised
Open Door policy calls for a designated resource in each
major organization. This "resource" is there to make sure
employees’ issues are addressed and that there’s not
retaliation against employees. A Corporate Open Door
resource will continue to be available when issues can’t be
resolved at the organizational level. We are committed to
making sure every issue comes to closure.
Digital’s
ability to meet its long-term business goals and to maintain
a competitive edge in attracting and keeping qualified
people in an increasingly diverse workforce, depends on our
ability to improve the work environment and opportunities
for growth.
More than ever
before, the Digital of today and tomorrow must be a living
expression of the values that shaped the beginning and
growth of our enterprise. We must daily serve our customers
and other people who depend on us. We must serve our
organization as if it were our own. Unless each one of us
takes responsibility, takes pride, takes ownership, takes
this company seriously, it will not flower and will not be
what it can be.
Our greatest enemy is mediocrity.
There is no
strength in numbers, if those numbers consist of people who
aren’t really there. Half a commitment plus another half a
commitment doesn’t add up to a whole. And if you multiply
that by thousands, it still doesn’t add up to a whole.
To go forward,
we need people of courage, with generosity of spirit,
brilliance, compassion, insight, humanity and humility. One
fully committed person plus another fully committed person
adds up to more than two. And if you multiply that by
thousands, you begin to glimpse the great force for change
within this company.
Our values are
not these words we say. Our values are what lies behind and
speaks through the actions we take. Digital is founded on
values, and its future lies in the fullest re-expression of
those values in the hot forge of the present.
"Doing the
right thing" has to be given meaning each moment, by each
one of us, in our thoughts and our acts. In this lies our
future.
Digital has a
profit problem. Our profit has been deteriorating now for a
number of quarters. In other words, our costs have been
rising faster than our revenues. When profit deteriorates,
stockholder’s equity deteriorates, and so does their
confidence in the company. We haven’t experienced that very
often in the history of our company.
If you look at
quarter-to-quarter growth, it is clear that our cost growth
is dropping rapidly. That’s good news. But the revenue line
is also dropping. In other words, we’re not generating as
much revenue on a percentage basis as we did the previous
year. That’s the profit problem: our costs are overriding
our return on revenue. That’s what we have to turn around.
When the
outside world looks at us, they consider profit, of course;
but they also look at our balance sheet, where there’s some
good news.
Net inventory
turns continue to climb. In the past five or six years,
inventory turns have more than doubled, putting about $1.3
billion on the balance sheet. That’s an indication that
hard work pays off.
We also have less capital spending this
year than we did last year. That’s good news.
With all our
problems, we’re still generating cash, which adds to a very
strong balance sheet and contributes significantly to why we
still have a AAA credit rating.
Accounts
receivable, measured in "days sales outstanding," is another
important part of the balance sheet. It tells us what bills
haven’t been paid by our customers, and is an area where we
need to improve. The days sales outstanding in FY90 was
worse than in FY89. One day of receivables outstanding is
worth $60 million. In other words, for every day we improve
our receivables, we can put $60 million on the plus side of
our balance sheet.
We have a very
strong balance sheet, but we have to keep working on the
opportunities for improvement.
Costs remain a
problem. We can think of these costs in two categories:
people-related and non-people-related costs. By
people-related costs, we mean salaries and fringe benefits,
which for Digital amount to $5.5 billion a year. That figure
also includes $750 million we spend each year on agencies,
contract workers and temporary people.
Over the last
few months, you’ve heard a lot about this piece of spending
and what we’re doing about it, particularly with our
transition program.
People costs
are very difficult to work. These are gut-wrenching issues
for the people involved and for the managers who have to
deal with them. But, nevertheless, they must be faced.
This is my
third major transition program since I’ve been in the
company. You didn’t hear much about previous transitions.
That’s because, in the past, transition programs were mainly
centered in Manufacturing, and were mainly due to changes in
technology - labor going into silicon, and freeing up people
to do other things. Also, in the past, the environment was
different. The industry was booming. Companies were starting
up all around us. Jobs were plentiful. People had plenty of
places to go, and most of the people could easily learn the
new skills required in other areas of the company. For the
most part, that is not the case today.
Today, the
work is changing, and some jobs are being eliminated, never
to return again. That’s an issue we all must face, just as
we have in the past with the change in technology. Jobs
will be restructured; duplication will be eliminated; some
jobs will no longer be needed. That’s what we have to
understand and be committed to resolve on behalf of the
company.
Non-people-related
costs add up to roughly $4.5 billion. We can deal with these
costs without the gut-wrenching feelings we experience with
people costs. Of course, these do affect people, but they
don’t necessarily require the elimination of positions.
If we could
eliminate ten to fifteen percent of those non-people-related
costs, this could represent a savings of $450 to $675
million a year. If you can imagine how many positions you
would have to eliminate to save that same amount of money,
you’ll get an idea of how very important this area is. These
costs include what we spend on materials that do not go into
products; for instance, what we spend on pencils, papers,
chairs and desks. It also includes telecommunications and
discretionary spending, which means travel and meetings.
There is a tremendous opportunity for us to save significant
costs as we work these issues.
I want you to carry away two very simple
messages from this speech.
First, we are
not making enough profit to keep us in the forefront of the
industry and for our customers to continue to have
confidence in us as a growing company. We need very
significant improvement so we can increase our profit and
invest in our future.
While we’re
eliminating some jobs, never to return, at the same time we
have to hire people for other jobs that are being created.
And we may not be able to reskill people to take those new
jobs.
We’re not
going to be able to fix this problem fast enough. That means
we’re going to be adding expenses as we invest.
Since we’re
here for the long pull, we’re going to invest where we need
to. But when you add the need for more profit, and the need
for more investment, that puts additional pressure on cost.
Second,
remember that we’ve been here before. Because cutting costs
is so difficult, it is easy to rationalize that if we get
more revenue, we’ll be able to absorb some of those costs.
But that usually doesn’t happen.
Of course,
we’re going to work hard on revenue. I think we have
tremendous opportunities relative to increasing revenues.
I’m not de-emphasizing revenue. But you should spend against
revenue only after you get it, not before.
Business units
Finally, I’d
like to give a quick sketch of our "business units" and how
these pieces fit together. We start with the most important
part of our company — our customers. The closest entities to
our customers are our selling and support units, which are
organized by geography - US, Europe, and GIA. We also have
application business units, around which we will build the
corporate plans that will drive the expenditures across the
company. For now, these include: Services Applications,
Manufacturing Applications, Public Sector, Small Business,
and Telecom Applications.
We have had
business segments now for over a year, and we’re in the
process of changing them. The significance of the change is
that these units are "application" business units. They’re
focused on the customer and how the customer looks at
Digital, rather than how Digital looks at itself. They’re
focused on the support mechanisms in the Field, to support
the customer. There will also be some cross-application
groups, which will provide services to the application
business units.
In addition to
application business units, we have two business units in
the Field — Enterprise Integration Services (EIS) and
Customer Services - and five product business units, which
usually consist of manufacturing and engineering entities.
For now, the product business units include: Unix/RISC,
VMS/VAX, Networking, Storage, and NAS/Produc- tion Systems.
Basically, the
significant change from where we were a year ago is the
focus on applications and on the customer.
Change in our
markets and technology is now an ongoing way of life. We
need to learn to not only live with it, but to manage it to
our advantage.
Three years
ago, at DECWORLD ’87, we were proud of the very broad range
of capabilities that we had as a company, but our focus was
still largely that of a mid-range vendor. Today, we have a
full range of systems from desktop PCs to data center
mainframes.
Three years
ago, applications played across any Digital VAX system.
Today, we’re further along than any vendor in delivering
that same remarkable capability across multi-vendor systems.
Considering
the additions of our product line, and all of our expanded
software, service and solutions offerings, we have indeed
been managing and driving change and, thanks to the great
range of our present capabilities, we now see major
opportunities for the future.
These opportunities fall into at least
three categories.
Competitive,
broad-based production systems allow us to build on
our investments and to make major marketshare inroads with
traditional mainframe suppliers. In end-user computing we
can win our deserved share of the desktop. We offer very
competitive workstations and servers an can enable
multi-vendor desktops and applications to work together. In
systems integration, in its broadest sense, we can
lead in quality and integration in terms of distributed
computing and applications solutions, with capabilities such
as our Network Application Support (NAS).
These
opportunities reflect major, growing market potential, in
areas where Digital already has true leadership and unique
capabilities to offer. We have a great story to tell.
One of the key
ways we’ll be telling that story will be through DECWORLD
’90, which is a coordinated set of activities for customers
throughout the world. It will be held in Boston in July;
Canberra, Australia, in August; Cannes, France, in
September; and Tokyo, Japan, in November.
DECWORLD ’90
is intended to reduce selling cycles for our sales people,
as well as to increase revenues in FY91 and beyond.
Building on
past DEC WORLDS, it will have the excitement and interest
that our customers expect from an event, but it will offer
also the benefits of a focused problem-solving educational
experience.
We will tailor
the DECWORLD ’90 experience for each and every customer so
that they can focus on the solutions that meet their
particular business problems. In fact, the entire DEC WORLD
’90 has been organized around customer requirements - in
particular, the requirements of senior functional managers,
as well as senior information systems managers. It will
showcase our production systems, end-user systems, and
systems integration capabilities.
We think of
DECWORLD ’90 as the computing equivalent of Disney’s Epcot
Center. For example, DECWORLD ’90 in Boston will offer ten
Discovery Centers, ranging from banking to manufacturing, to
federal government. These Discovery Centers will give
customers an opportunity to learn through hands-on
demonstrations, workshops, and interactive seminars.
The program
assumes the active planning and participation of our account
managers. Using the DECWORLD ’90 program guide, they’ll be
able to help customers match their individual problems, as
spelled out in the account plans, with our demonstrated
solutions.
This year,
we’re focusing as much on new customers as we are on
strengthening relationships with our existing customers.
This means that for many visitors, DECWORLD ’90 will be
their first major contact with Digital. This important
interaction is a great opportunity for us to demonstrate,
in a way that directly relates to the customer’s business
problems, that "Digital has it now" is as powerful a message
today as it was at DECWORLD ’87.
As serious as
the program is, it will also be a lot of fun. Discovery,
participation, learning, innovation, interaction and
excitement are all part of DECWORLD ’90.
The VAX 9000
system is the "hottest" machine, with the fastest I/O
(input/output) that Digital has ever built. It has all the
features that our customers expect from mainframes. For the
first time, we’ve got a high-end machine that outperforms
all the competition.
This system
fulfills all of our performance expectations with one
exception: it’s even faster than we expected. We announced
it as a 30 VUPS (VAX units of performance; VAX-11/- 780
performance is one VUP) system. After Digital Review Labs
ran their benchmark, their conclusion was that it’s not 30
VUPS — it’s 40.
In customer
benchmarks, the VAX 9000 computer regularly beats machines
from our toughest competitors in "hot boxes,"
supercomputers, and commercial mainframes. In fact, some
customers actually asked to watch the benchmark running
because they didn’t believe the superb performance we were
getting.
The VAX 9000
system has plenty of raw power for both commercial and
scientific applications. With this machine, we now have all
the ammunition to win in commercial transaction processing
and supercomputing.
Existing
orders show an interesting distribution of applications,
with two-thirds for commercial and transaction processing,
and one-third scientific and technical.
We’ve also
been making tremendous inroads against our competitors.
Better than one-third of all orders for VAX 9000 systems
represent new competitive wins. Some of these customers are
planning to move out their existing machines to make way for
the VAX 9000 system.
Our first
customer shipment was installed, up and running just seven
hours from delivery. For a mainframe computer, that’s
phenomenal - especially for the first one.
In Q3,
manufacture of complete systems got underway in Burlington,
Vermont, and Galway, Ireland. In Q4, we begin shipments of
VAX 9000 Model 210 systems. In Q1 FY91, we plan to ship VAX
9000 Model 410 and 420 systems, as well as VAX 9000 vector
systems. Looking ahead to Q2 FY91, we plan to ship VAX 9000
Model 430s and 440s and, for the first time, ULTRIX software
will be available on the VAX 9000 system.
In the coming
months, ever increasing numbers of this system will be hard
at work, in technical and commercial applications throughout
the world. The VAX 9000 system is helping our existing
customers extend their computing power and, along with the
VAXft 3000 system, our software products and our services
offerings, it is opening new accounts for new applications
in such areas as banking, insurance, manufacturing,
universities, science, and technology.
The VAXft 3000
system is important to Digital because it means new
business. Half of the orders we have received thus far have
been either for new applications with existing customers, or
totally new business for Digital. We needed a fault tolerant
machine because our customers wanted us to be a full
supplier of all solutions.
The
fault-tolerant market is growing rapidly. Over the last five
years it has had cumulative, compounded annual growth of
24%. We should be able to capture a major percentage of this
market.
We are going
after new applications in four primary areas:
telecommunications, financial services, government and
transportation.
When you think
about fault tolerance, you usually think about bank
transactions, and activities of that nature. But a wide
variety of other applications also require fault tolerance.
For instance, CSX in Florida recently purchased a VAXft 3000
system to schedule locomotives. When computers are down,
they lose about $200,000 a minute because cargo doesn’t
move.
Fault
tolerance is particularly important in applications where
even a brief loss of computing could mean a threat to life
(such as air traffic control) and where it could mean the
loss of large sums of money. As a subcontractor on a major
sale of air traffic control systems in Canada, Digital
stands to get about $100 million in business because we now
offer fault tolerance. PRC, a supplier of fire, ambulance
and police services in California, selected the VAXft 3000
system as their platform for their bids that include fault
tolerance, and over the next few years they will be doing
about $10 million a year of business with this machine. In
addition, a value-added reseller that sells to banks in
Chile, Thailand and other parts of the world, has already
ordered 20 VAXft 3000 systems.
The
competition will say that this is a point product, that
Digital is a delayed entry into this market, and, maybe,
that it is too expensive. Unlike competitors such as Tandem
and Stratus, Digital is a full supplier of products. We have
offered a wide range of high availability solutions with
VAXcluster systems since 1983. Now, the VAXft 3000 computer
can be included in VAXcluster systems or can be used in
stand-alone configurations. With our VAXcluster solutions,
including VAX 9000 and VAX 6000 systems, customers can
expand their range of performance from nine to hundreds or
even thousands of transactions per second (TPS). That means
we don’t have to concentrate on putting all the performance
in a single box.
With the VAXft
3000 system, we don’t have to sell against fault tolerance.
Now, our sales force has the opportunity to sell with fault
tolerance and high availability, and capture the market that
can be ours.
In addition,
we have very aggressive product plans. We will vastly
increase the performance of our products through clustering
and higher speed processors.
Regarding
price, the Aberdeen Group said that, comparing apples to
apples, the VAXft 3000 system is better than what the
competition offers.
Lastly,
because we are a full supplier, with a large customer
support force, we can provide support within two hours in
the U.S. if a customer has a problem with any of these
products.
Today, Digital
is positioned to seize leadership in connecting and serving
desktops. This is made possible by our product strengths in
networking multi-vendor, desktop personal computers (PCs)
and terminals, and our market strength in general-purpose
networks and servers.
With over 50
million PCs at potential customer sites, we have an
unparalleled opportunity to expand our business. Our success
stories includes sales that start small, connecting ten
desks, and grow to a hundred, a thousand and ten thousand
connections, and include the large, do-it-all-at-once sales,
which connect an entire enterprise.
Our message is
that Digital is the vendor that can solve the customer’s
problem by connecting their desktops, and by providing a
unified environment, without regard to numbers of
connections, or type of desktop device — whether terminal,
PC, or workstation.
With the
recent announcement of VMS services for MAC, we now have a
single integrated solution using DEC LANworks software (the
new name for our personal computing software architecture)
and a VAXserver to support Macintosh, MS-DOS, and OS/2
clients on the same network.
The desktop
interconnect business includes the network hardware,
software, and services that our customers need to connect,
manage, use and maintain their terminals, PCs and
workstations in a network. These include:
o network
hardware (terminal servers, DECconnect wiring, Ethernet
devices, and DEC Ether- work controllers),
o network software (DEC LANworks
software, formerly known as "PCSA"),
o applications (from both Digital and
third parties), and
o value-added services (including
consulting, installation, and training).
With this set
of products and services Digital is uniquely positioned as
the vendor who can solve customers’ problems by unifying and
simplifying their diverse environment.
This segment
of our industry has a projected growth rate of 25 % and 35 %
growth compounded annually, through the mid-1990s. The total
value of hardware, software, and services in the desktop
interconnect business is projected to be over $22 billion
worldwide by 1993.
As there is no
other strong industry leader who can supply this range of
products and services, Digital can become the market’s
obvious vendor of choice for this business.
In addition,
this business is strategically important to the company.
Each desktop connection leverages up to $4,000 in revenue.
This revenue comes from initial network software and
hardware, applications, servers, other network components
and services, plus the value of the desktop device itself.
In addition, the desktop interconnect helps establish
Digital’s presence in an account both at the small sites and
within the workgroup and provides an annuity stream.
As an example
of "do-it-all-at-once" wins, Digital recently secured a
major contract with Societe Generate, France’s third largest
bank. The project includes connecting over 2,000 satellite
branch banks, 200 hub branches, and over 20,000 desktops.
In the
category of "start small and grow" wins, Digital began with
Dow Chemical three years ago, supplying PC network software
to connect a few desktops in their Michigan Division. The
relationship matured and resulted in enhancements to the
network software and has flowered to include Dow Research,
the Texas Division, and, most recently, the Louisiana
Division. We have now connected nearly 5,000 PCs at Dow
Chemical. Even those Dow sites that were primarily
IBM-oriented have started moving to our LANworks PCSA
software.
In summary,
the desktop interconnect business is a significant
opportunity and an exciting success story.
In response to
the "Digital Quarterly Report" (DQR), a live video program
broadcast the week before the State of the Company Meeting,
employees submitted a number of questions. Many of these
questions were answered in the State of the Company
presentations and were helpful in putting those
presentations together. Others were answered by Ken Olsen,
president, in the morning over the Digital Video Network
(DVN) and in the afternoon after the formal presentations.
The following is a sampling of those questions and Ken’s
answers.
A few days ago, the press reported
that Hewlett-Packard would pass Digital in computer
revenue in a couple of years. Why not use our cash to
acquire a sizable computer business, thus pre-empting
HP’s offensive?
"Where we rate
in terms of size is fun to think about, but not important,"
answered Ken. "As for acquisitions, for years we’ve looked
for ones that would make a real contribution to our
business."
Ken suggested that we will need the
skills of our employees if we succeed with our plan. Jack
said giving a transition package to 2,000 people was "the
tip of the iceberg" of the total cost opportunity. Are
these views contradictory?
"No, they
aren’t contradictory," Ken explained. "We need almost as
many people as we have to let go. And, although we would
like to use people inside, there are some whose skills we
just don’t need anymore because of changes in technology.
"We said
something else that also might have sounded contradictory,"
he added. "I said we have to grow, and Jack said we have to
deal with costs. Either one of those would solve our
problem. The obvious answer is that we have do both. That’s
our message."
Recently, there have been price
increases in VAX/VMS systems, while discounts are
announced for our RISC/UNIX line of computers. Are you
discouraging new customers from choosing VAX/VMS systems?
"No, our
investment in VAX/VMS products is very large, and the
functionality we offer is enormous," noted Ken. "Our goal
with our VAX/VMS products is to provide the highest
reliability and quality. That costs more. Also, UNIX
products can be purchased anywhere, and the competition
keeps the price low.
"In the long
run, we expect to charge approximately the same for the two
kinds of hardware. The software pricing will reflect the
service and quality we provide, as well as the differences
in our cost. That approach will enable us to compete with
those vendors who have no service and just offer raw
hardware, with simple functionality.
"We’re not
there yet. We’ll have to evolve into it. It’s one of the
things I hope to come out of our new business unit
operations."
We have many great VMS software
products. Would you consider porting our operating system
to other processors, for instance, PS/2, RISC, etc.?
"No, it is not
practical to put our operating system on their machines,"
said Ken. "Getting it on a VAX machine is hard enough. But,
in the next year or two, we will do some very exciting,
radical and fun things.
Can we expect any changes in our
marketing and advertising strategy in FY91? Most of our
advertising seems to be concentrated in trade and market
publications, with only a small portion being placed in
the major papers and magazines. Can’t we start advertising
more aggressively?
"On the one
hand, we are concentrating our selling to large companies,"
explained Ken. "Since there’s only so many of those, we
advertise to that small number of people we want to hit,
rather than in the general magazines. And we do quite well
with the large companies. On the other hand, we have to
broaden our base, which will change our advertising.
"We performed
a very difficult change in the last ten years. We were a
technical selling operation. Now a large percentage of our
business is commercial, where we do a good job for many
large customers. That’s a major accomplishment.
But our
marketing hasn’t changed accordingly. We still put most of
our effort into the announcement of new products. We have to
be much more creative to get our key messages across.
"The key
question of marketing is, what’s your message? It has to be
stated simply so it can be understood by our sales force and
customers. You cannot advertise complicated messages. When
we’re successful, we’ll have a marketing message so simple
people will understand it, and no one will notice we didn’t
do flashy marketing."
At one time it was not unusual for
employees to take on projects, largely in their own time,
without any promise of being rewarded, if they thought the
projects would benefit the company. Is this the type of
entrepreneurial spirit still valued at Digital?
"An
entrepreneurial attitude means being creative and taking
responsibility," noted Ken. "You don’t have to invent the
whole thing, but you do have to take responsibility.
Somebody could be an "entrepreneur" by starting a store
that was like thousands of others. He or she becomes an
entrepreneur not by innovation, but by taking complete
responsibility. We need that.
"The
underlying question here may be — should someone invent
something and try to convince the company to exploit it? On
the one hand, a company can only do so many things. We’re
always guilty of running off in too many directions. For us
to adopt ideas, they have to fit with what we’re doing —
with our skills and goals.
"On the other
hand, we have to encourage rather than stifle new ideas.
Life is filled with such conflicts and paradoxes that we
have to learn to balance.
"The whole question of entrepreneurship
and creativity within the company is difficult.
"Basically, there are two classes of ideas
— followers and leaders. One class of ideas consists of a list
of all the things we missed because we didn’t follow the rest
of the industry. We should have seen which way the world was
going and gotten in line.
"Other ideas relate to deciding where the
world needs to go and showing them the way. That’s how we’ve
made significant contributions to the world.
"As a company gets older, there’s more
tendency to follow. But it’s terrifying to think of the
possibility of Digital following. Rather, we have to decide
what our unique contribution is and invest our effort there."
seltzer@seltzerbooks.com
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