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Volume 5 Number 2                                              March 1986


Giving Customers The Competitive Edge Today


Digital’s Financial Strategy by Jim Osterhoff, vice president and chief financial officer


Product Positioning For The New VAX Systems


What IBM's Workstation Announcement Means To Digital by Steve Teicher, group engineering manager of Workstations


Keeping Data Secure With VAX/VMS by Steve Lipner, manager, Secure Systems Development; and Peter Damon and Sandie Marrinucci, VMS Base Product Marketing


Putting Pay At Digital Into Perspective


Direct Deposit Campaign Aims To Increase U.S. Participation


Giving Customers The Competitive Edge Today


Digital’s use of its own products has helped give the company a competitive advantage -- for instance, bringing products to market quickly, reducing inventories, providing management with timely data, and responding to customer needs. Customers can use those same products and techniques to gain competitive advantages in their various industries.


That was the main message of the February broadcast of "Between the Lines," a program intended to keep employees informed on current business-related issues. This show is aired over the Digital Video Network, a pilot project now available in 18 locations in the U.S. and Canada.


Win Hindle, vice president, Corporate Operations; Jack Shields, vice presi­dent, Sales and Service; Jerry Witmore, vice president, Basic Industries Marketing; and Bill Koteff, manager, Engineering Product Planning, all discussed Digital's strong product position and new, aggressive stance as "the best company in the computer industry."


"The momentum has been building for Digital in the course of the last year," said Win. "Our competitive product position has improved to the point where we have unequaled products in the market today. In addition, we have had much better financial results in the last several quarters. And that cul­minated with our Quarter Two financial report in which Digital had results that were better than anyone in the financial community had predicted. For example, our inventories today are well over 25% lower than they were a year ago.


"So the combination of better-than-expected financial results and a very good product position has given both investors and customers a strong, positive feeling about Digital."


"We have a window of opportunity," emphasized Jack. "To take advantage of that, we have to convince our customers that they cannot afford to postpone purchases. We have to let them know that we have the technology today that can help them to solve their current problems and gain competitive advantage in their various industries."


"We've made some rather remarkable progress over the last 15 months," added Bill. "Since the introduction of MicroVAX II and the VAX 8600, we have

extended the range of VAX processing power by several fold, and at the same time we have entirely replaced the earlier generation of VAX machines.


"Local area and wide area networks have been a remarkable advancement for both our customers and ourselves. The coming together of this networking technology has brought about dramatic changes over the last couple of years. We're now shipping thousands of network nodes a month."


"We're really on our second generation of network products today with our local area networks, whereas others are still talking about announcing products in the future," added Jack.


"Our advertising theme is 'Digital has it now,'" noted Jerry. "And that's what we are proving at DECWORLD '86. We view that show as the real marketing of our company and its total solutions. Just for that show, we put together one of the largest private data networks in the world, serving as a node on Easynet, Digital's own private data network which is one of the largest in the world.


"Over 17,000 customers pre-registered for DECWORLD '86 (20,000 attended), more than twice what we had last year. We're showing them what we can do, not just talking about it in advertising, like lots of our competitors do. We're saying 'we have it’ and then leading 20,000 customers out on the floor and saying, 'Here it is. It works. It's fully integrated. It plugs together. It fits your company. We are able to provide you the products you need to do your work and to be more competitive.’"


"We have to keep driving home that message of having it now and demonstrat­ing, not just talking," Jack Shields emphasized.


"We're very confident," added Bill Koteff. "For DECWORLD '86, within 72 hours we’re taking 200 computer systems, installing them in three different locations in Boston that are our plants, powering them all up, loading all the software, and building a network. It speaks well of our product set and the confidence we have in networking. Nobody else in the world can do that."


"In fact, 98% of the 200 computers at DECWORLD '86 hadn't even been an­nounced when we held the last DECWORLD 15 months ago," observed Jerry Witmore. "That’s how much progress we've made in little over a year."


"I want to show the customers that I host at DECWORLD how Digital is differ­ent from all the other companies," said Win Hindle. "If they just read the magazines and read the advertising, they would think that eight other companies had the same capabilities that Digital does. It's only by bringing those customers to DECWORLD '86 and pointing out what we can do now that the customers will see the difference."


"With DECWORLD '86, we're trying to position ourselves as understanding customers in the environments that they work in," explained Jerry. "We're taking all of the technology capabilities that we have and bringing them to bear on the problems that give them competitive advantages in their indus­tries. We have a competitive advantage in our industry by virtue of our technology. We want to translate that for our customers into a competitive advantage for them — managing their assets, bringing products faster to the market, working on productivity improvements, just like we use our own capabilities to do those things in our own company."


"In 15 months we have announced six major new processor products. And every product has been introduced and shipped within 30 days of introduction," said Jack. "Security analysts and the press are recognizing that an impor­tant difference between Digital and our competitors is the seriousness of our commitment to our customers — that we only announce a product when we have it; when we can actually do the job for the customer and make the customer successful."


"Every industry is going through tremendous change — not just the service industries like finance and telecommunications, but also the 'smokestack,' basic industries," added Jerry. "In industries like oil and gas, chemicals, pharmaceuticals, and automotive, companies are restructuring, looking for ways to survive, seeking competitive advantages. And this is creating a massive opportunity for us in terms of computer technology and information processing, helping our customers to integrate their companies."


"Independent consultants are saying that Digital is the best company in the computer industry today," observed Win. "We have no reason to feel like we're the underdog. We need to be quietly confident, know our products, know our customers, and know our customers' problems. We have the total solution that we can give to the customer. We have to get that message across. And we have to understand our customers' problems better so we can apply our technologies and capabilities and support services to meeting customers' competitive needs.


"We are in a very good position, but I don't want us to get complacent. When you're in this role, it's all too easy to become complacent.


"We're all very proud of what we did in Q2," he noted. "But there's a Q3 to come and a Q4 and the next year. We are an excellent company and we've told the world we're going to be even better. Our profit rate in Q2 was higher than than it had been in nearly four years. But we're still nowhere near the goals we've set for ourselves. We have to get from 9.5% up to 16% profit. And that's going to take a lot of hard work.


"I wouldn't want anyone to get the feeling from our conversation today that we have everything completed and that somehow we can all relax and not work so hard, because that isn’t true. We’ve got a lot to accomplish in the next couple of years."


"The products we now have are the result of having invested about $3 billion in research and development over the last seven or eight years," added Bill. "That represents about 10% of our operating revenues. As the company grows, so does our research and development investment. In the future, you'll see more of the same — more VAXs, more networks. You'll also see innovation in areas such as artificial intelligence.


"We inside Digital have sometimes been criticized for the fact that we run our company with several thousand computers. I think we're just a few years ahead of where our customers are. They are going to be using several thousand computers internally.


"In Hudson, in our semiconductor research operations, we've basically given the designers unlimited computer power. And in just a few years, they've produced a premier processor chip — the MicroVAX chip — and now they’re turning out graphics chips and communications chips. They were able to accomplish that because we provided them with lots of free computer power. And I think our customers are going to begin to do that as well.


"As computing power becomes less expensive, customers are going to tackle problems they couldn't tackle before," said Bill. "We've gone through a time in the computing industry when people basically automated manual processes. And we are now to the point where they are designing a process around automation. That’s a completely different way of addressing a problem.


"I think you're also going to see a fundamental shift in emphasis away from from processors to data. Over the years, people have worried more and more about the processor. But now it turns out that the most important asset of a company beyond its people is its data -- design data, market data, and financial data. And the management of that data across a network of maybe thousands of computers and hundreds of thousands of users becomes very important.


"It takes tremendous amounts of processing power to manage data, to move data around in networks, to index it, to reference it, to transmit it and so forth. That’s an area of technology where we’re investing heavily."


"I think that, over the next couple of years, one of our greatest marketing opportunities is to show other companies how they can gain competitive advantage by moving data around their organization faster than they do today," added Win.


"We can talk about Digital — the way we run our own company -- as being the largest experiment in information management that has been undertaken," Bill continued. "There are 40,000 people inside the company who are reachable by electronic mail. Easynet, our internal network, has at any one time about 4,000 computers, and, at odd times, grows to 8,000.


"By using our technology internally, over the last 10 years we have built one of the largest commercial test beds for networking. And now we have to figure out how to take the advantages that we’ve gotten out of that and translate them into messages that people can understand about the importance of moving data around and managing it. Then we can sell those advantages. We easily have a decade's lead on the competition in that kind of experiment."


"Yes," Jack reinforced, "Digital's experience in applying computers to solve problems is a point that we should exploit. There are things that we do internally that to us seem obvious and that could benefit our customers. We have to continue to make people aware of all the good work we’re doing in the application of computers ourselves. For instance, in artificial intel­ligence, we made great strides in developing XCON and XSEL, some of the first products in the industry, while everyone else was treating artificial intelligence as a research project. We should point out how we use computers for simulation, to help us bring products to market quickly. We should tell customers how we have succeeded in running our company with much less inventory while increasing our net operating revenues by almost 25% per annum.


"We have clear examples where we have been successful in making our company more competitive, and now we have to do a better job of figuring out how to communicate that to our customers.


"We also have to be more aggressive. We have the products now. There aren't any areas of applications where we aren’t the best. We want to make sure that any bid, any quote, any opportunity -- particularly a large project -- quickly gets the management attention it needs. With the products we have and with more new products coming, we are in a position to be very aggres­sive in pursuing long-term business opportunities."


"From a customer's perspective, having the hardware and the software and the applications still doesn't mean having the solution," said Jerry. "Having a solution means having all of that plus whatever services and support are uniquely required to make it a solution in the eyes of the customer. And we without question have the best service organization in the industry."


"The network teams that we have in the districts are working on projects that we never would have even thought of a few years ago," added Jack. "We can do the complete job, the wiring project, the total network for the customer. We not only have the products; we're a full supplier. In a rela­tively short time we have become a supplier of complete solutions. We not only have it all, but also can do it all."


The next edition of "Between the Lines" will be broadcast May 14 at 2 p.m., EST. That will be the first interactive airing of the program. In other words, viewers will be able to ask the speakers questions.


Sites on the Digital Video Network (DVN) include: Santa Clara, Calif. (WRO); Denver, Colo. (DVO); Colorado Springs, Colo. (KSO); Phoenix, Ariz. (PXO); Rolling Meadows, Ill. (RLO); St. Louis, Mo. (STO); Dallas, Texas (DLO) ; Houston, Texas (HSO); Memphis, Tenn. (MMO); Atlanta, Ga. (ATO and IPO); Washington, D.C. (DCO); Bedford, Mass. (BUO); Boylston, Mass. (BYO); Burlington, Mass. (UFO); Maynard, Mass. (PRO); Marlboro, Mass. (MRO); Kanata, Canada (KAO). If you are at one of these sites, to view a videotape of a previous broadcast, contact your local DVN coordinator. If not, call Carl Ehramjian, DTN 273-3588, or (617) 264-3588.


Digital’s Financial Strategy by Jim Osterhoff, vice president and chief financial officer


Successfully managing a company the size and complexity of Digital requires clear direction in a multitude of strategic dimensions. Understanding the dimensions of our financial strategy is essential to understanding the company.


I think of Digital's financial strategy as having four key elements: volume growth, asset management, margin improvement/cost control, and stock appre­ciation. In order for the company to be successful in the future, we need to succeed in all four of these areas. Two or even three out of four won’t suffice.


Volume growth


Digital has an outstanding historical record of volume growth, pacing the computer industry throughout the '70s and early '80s. For a 2-3 year period prior to 1985, while we were experiencing a lull in major new product introductions, the flow of new products from our competitors continued to be brisk. Despite this, we continued to gain market share during this period, thanks to the strength of our existing product line and a remarkable job done by our Field organization.


The changes occurring in our product set are dramatic. In FY84 less than 10% of our sales came from "new" products (defined as one year old or less at the start of the fiscal year). In the last 12 months, we have added major new products and capabilities to our offerings. Still others will be brought to market before the end of this fiscal year. Therefore, we have reason to be optimistic about the prospects of continuing to out-perform the industry, and we project that about half our FY86 sales will come from new products.


Although we cannot accurately predict the economic factors which have a significant impact on overall industry volume, we are well postured to capitalize on any improvement in the economic picture.


Asset management


Looking at the second element of our strategy, asset management, we see an improving picture. Accounts receivable and inventories were both down in FY85, which is good news. But we still have a long way to go to be among the industry leaders. I believe we have the potential not just to match them but to be the best.


Most assets are non-productive; that is, they cost us money rather than earn money for us. How quickly we can convert them to productive assets has a major impact on our financial strength. In FY83 our assets grew signifi­cantly faster than our revenue; both receivables and inventories were excessive. In FY84 we began to turn the corner, but it was in FY85 that we significantly slowed down the growth of asset dollars. In FY84, $100 of assets were required to support every $100 of revenue. In FY85 that number was reduced to $95 of assets for every $100 of revenue. That means we have been able to get some additional leverage and productivity from our assets. Our asset-to-sales ratio is a major factor in determining our future needs for new outside capital.


As we look to the years ahead, substantial new financing could be required to support our sales growth. We can mitigate that requirement somewhat by seizing the opportunity represented by receivables and inventory. We reduced DSO (days sales outstanding) by nearly 10% in FY85, from 83 to 75. This converted $180 million of non-earning assets (receivables) into cash; but to understand the opportunity still ahead, consider our DSO in relation to the standard payment terms for customers, which on a worldwide basis averages about 35 days. Delivery and installation time, order skew, and other factors under our control account for most of the difference -- 34 days, which represents $700 million of non-earning assets. If we could improve upon these factors by 50%, that could free up $350 million of cash, and by 1990 these improvements could amount to nearly a billion dollars. That's nearly a billion dollars we would otherwise have to borrow or raise by issuing new shares of stock.


Inventory is a similar story, except here we can point to even greater progress. A year ago we had over $2 billion tied up in inventory. Despite inflation and higher volumes that have occurred in the interim, that total has been reduced to under $1.5 billion. The reduction has all been added to our cash balance.


Despite our outstanding progress, we still have a long way to go to be truly asset-efficient. We still have inventory that is standing still, doing nothing -- or, worse yet, getting in the way. In addition, we still incur major obsolescence expense each year — writing off and disposing of in­ventory for which we have paid good money and incurred storage and handling expense.


Nowhere in the company are the results of cross-functional teamwork and cooperation more evident than in reducing inventory. Much of the inventory improvement achieved during the past year has resulted from the joint efforts of the Field and Manufacturing to coordinate sales plans and pro­duction schedules. More collaborative efforts in such areas as new product start-up and end-of-life planning can produce further inventory savings and also lower obsolescence expense.


Profit margins/cost control


The third point of our strategy is two-pronged: profit margins and cost control. In addition to controlling costs, margin improvement can be achiev­ed through a variety of means, including higher prices, lower discounts, richer product mix, etc. While all elements of the margin equation are important, cost is perhaps the most critical. It is the key to our long-term survival in a highly competitive environment.


Over the past few years our cost growth has exceeded our revenue growth, and our break-even point has become dangerously high. This is not a problem that can be corrected in one or two quarters. It is a long-term problem that re­quires permanent solutions. Squeezing waste out of our spending is impor­tant, but it won't solve the problem alone. We need to work more efficient­ly. At the bottom line, improved productivity means doing less business with ourselves and more business with our customers.


The largest component of spending for the corporation is employee costs. Salaries, wages and benefits represent roughly half our total costs. At Digital, hiring an employee is a long-term commitment. We feel good about that, and it's one of the things that set us apart. But this quality carries with it a heavy responsibility. Each year the average cost for an employee increases.


Cost control can be thought of as the permanent elimination of waste and non-productive activities. We must examine ourselves critically and ask how we can do our jobs more effectively with fewer resources. Where do we have duplication — not 100% duplication but 5 or 10% duplication? Where are we spending premium costs because we didn't do the job right the first time? What could each of us do to help another person or component of the company

be more proficient? Where is there slack in the system? Where are there Digital people who don't find it necessary to put in 40 full hours a week to get their jobs done? Where are we paying more than we have to pay for goods and services? Where are we just doing business with ourselves that has no ultimate benefit to the customer? Where do we have unnecessary complexity in our business — in our products, in the way we approach our customers, in our own organizations, in the way we interface with one another? What could we get by without — for a day, a week, a month, or possibly a year? The answer to these questions and others like them can lead the way to produc­tivity gains.


Stock appreciation


The last part of our financial strategy, stock appreciation, is really the result of improvements in the other three — and the key to keeping the cycle going. Those of us who are stockholders in the company have a personal interest in the price of our stock, and as employees, Digital's market per­formance is a matter of pride. From the standpoint of running our business, stock price is important for another reason. Simply stated, growth consumes capital. As our sales revenue has grown from zero toward the $7 billion mark, the investment in assets to support the business has grown nearly as much. We presently have $1.6 billion invested in receivables and $1.5 billion in inventories, and over the years we have invested $3 billion in property, plant, and equipment. Less than half our total investment has come from profits earned over the years. More than half has been funded by debt and by sales of additional stock to employees and on the open market.


A major portion of our funding, therefore, has been dependent on the invest­ment community's confidence in our company; and that confidence is deter­mined by how well do do our jobs, as indicated ultimately by our financial results -- the key measures being operating profit margin and asset manage­ment.


Each element of our financial strategy is related to the other three, and the financial success of our company truly does require progress in all four elements. Working on the elements of this strategy in unison will lead us to the results we all want.


Product Positioning For The New VAX Systems


Digital recently announced a new series of systems — the VAX 8200, 8300, 8650 and 8800 — all of which are available now. At the high end of these products with the VAX 8650 and 8800 , and at the low end with the VAX 8200 and 8300, Digital is targeting specific applications.


The VAX 8800 performs well in computation-intensive, multi-stream workloads. These types of workloads are common in the technical applications of engi­neering and science. For instance, the VAX 8800 offers significantly more performance in applications such as discrete and continuous simulations, and finite element analysis.


The VAX 8650 is Digital's largest general-purpose VAX and the leading product in the office, MIS and manufacturing applications.


The positioning of the VAX 8200 and 8300 follows a similar pattern. The VAX 8300 is a multi-processor system that should be sold in the same computa­tion-intensive markets as the VAX 8800, but where the power of a VAX 8800 is not required. The VAX 8200 is the replacement for the VAX-11/780 and is the general-purpose system for all marketplaces, but with significantly better price/performance .


What IBM's Workstation Announcement Means To Digital by Steve Teicher, group engineering manager of Workstations


IBM recently announced its first 32-bit workstation, the RT Personal Com­puter. We interpret this announcement to mean that IBM has decided to be a major competitor in the UNIX technical workstation marketplace.


Digital is strong in scientific and engineering markets, but IBM, thanks to its tremendous size, can put a lot of resources into selling its worksta­tions. Those resources will include in-depth sales training, the development of application packages and substantial expenditures on advertising, seed units and all the other things necessary to penetrate the market quickly. We need to react appropriately to counter this challenge, especially since the choice of a technical workstation has a major influence on the rest of the computing equipment that a customer will buy.


IBM's early presence in the personal computer marketplace and their aggres­sive marketing made their PC a winner. We do not believe that IBM will be able to repeat that success here. The workstation marketplace is already established, and we were leaders in it well before IBM's entry.


Far more engineers and scientists use Digital's VAX equipment to get their jobs done than use IBM equipment. Customers are familiar with us, and the array of applications software that runs on our equipment. From a product point of view, we believe we have a substantial functional edge, a more in­tegrated solution, a solution that better addresses the needs of engineers and scientists.


IBM has had some penetration on the desks of engineers and scientists with their personal computer products, but those have not been used for the key design parts of the engineers' and scientists' jobs. In addition to the PC, IBM has a different, incompatible subsystem called the 5080 Graphics Term­inal which hooks up with their mainframes. The RT announcement adds a third set of products which aims at the middle ground between those two.


Digital has one architecture -- VAX — and two operating systems -- VMS and ULTRIX — across a broad compatible range starting with MicroVAX II for under $20,000 and reaching upwards to clusters of VAX 8800s. IBM now has six incompatible computer architectures and seven incompatible operating systems to cover that same range of performance.


A customer who is interested in getting an engineering solution can come to Digital and take one of the 2,000 applications running on a VAX and run it without recompiling on our workstations, or they can have their applications vendor quickly change the graphics interface to exploit the graphics of the VAXstation family and then run that same program on a VAXstation or on a VAX 8800 .


In contrast, with IBM, an applications vendor would have to provide several entirely different implementations in terms of operating system, disk file structure, graphics design and networking to cover the IBM line. We expect this to be a major handicap to IBM, since most users want the flexibility our consistency of architecture provides.


We have found from our own internal use of VAXstations that high-performance networking is essential for accessing large databases. We offer a kit that allows the user to open a graphics window on a workstation that may be run­ning a program on a VAX 8650 or 8800. So we can actually deliver a full 6 to 12 MIPS of computing power onto the user's desk with interactive graphics. In contrast, IBM offers no software support for implementing any kind of networking scheme for the RT.


So we believe we have a clear edge in workstation products, but we have to outdo IBM in marketing as well as in products. That means working closely with customers, pointing out the long-term benefits of working with Digital and emphasizing our long-standing commitment to this technical marketplace.


Keeping Data Secure With VAX/VMS by Steve Lipner, manager, Secure Systems Development; and Peter Damon and Sandie Marrinucci, VMS Base Product Marketing


In this age of computerization, the sharing of databases, resources and programs has become an important part of doing business and increasing pro­ductivity. Protecting the confidentiality of this information has become an important factor in the selection of a computer system.


VAX/VMS offers four kinds of security features designed to prevent unauthor­ized access to or tampering with the system: password controls, access controls, a security audit log and encryption.


For login, the system checks encrypted passwords and establishes restraints such as the number of retries allowed, the length of passwords, and the time-out limit. The time-out limit determines the amount of time allowed before the system disconnects from the user. The user must then redial or reinitiate the login process.


Unfortunately, there are some dishonest individuals who attempt to break into computer systems. They very often use programs designed for the spe­cific purpose of finding a user name/password combination that allows them access to the system.


Should an excessive number of login failures come from a particular channel (a specific combination of terminal, node, and user), the channel will be shut down. The potential intruder could run a break-in program for days totally unaware that the channel has been disconnected. The channel will continue to remain inoperative for as long as the login attempts continue in addition to a period of time previously set by the system manager. It is important to note that the owner of this account will not be prevented from logging in from another terminal or node during this period.


Passwords are a key part of the process that enables authorized users to access the system. In most cases, a password created by the user is suf­ficient. However, just as some high-security installations require two separate keys to trigger a series of events, you may require two separate passwords to gain access to sensitive data. For example, a personnel admin­istrator may be asked to update employee salary records. Before the admin­istrator can gain access to these records, the personnel manager will be required to input a secondary password. Access will be allowed only with the correct primary and secondary passwords.


VAX/VMS also provides the ability to define system-level passwords. Requir­ing a system-level password prior to a user password is useful when access to a particular system must be restricted. Once the user has established a connection to the system, the system requires that the user type a password "in the blind" in order to get the system announcement message. Once the system announcement message is received, the user can follow normal login procedures. This feature is particularly useful in deterring potential intruders.


In addition, VAX/VMS meets security requirements that are often expressed by auditors. It allows a file's owner to control the sharing of information (access control lists) and provides a full range of auditing features to allow file owners or system managers to monitor the use of a VAX/VMS system.


The VAX/VMS Security Audit Log keeps track of data access and attempted logins. It allows a system manager to produce reports that reflect both the use of the system by authorized users and any attempts to gain access to the system by unauthorized outsiders.


How can a user determine if someone has been tampering with his or her account? VAX/VMS provides users with two different types of messages at login. The first message informs the user of the date and time of the last interactive or non-interactive login. (All interactive login failures are automatically entered into the Security Audit Log). The second message informs the user of any failures since the last successful login. These messages are important because they help users determine if an unauthorized individual has tried to use their accounts. For example, a user might log in on a Monday morning only to find that there have been 28 failures since the last successful logging in. By verifying this information with the system manager, steps can be taken to investigate and take further security measures if necessary.


For customers who need the security of encrypted (coded) data, an optional software product, VAX Encryption, includes the following:

o a set of library routines,

o a validation program to test data sets to verify the implementation of the Data Encryption Standard algorithm,

o modification to the VMS backup utility to support encrypted backup savesets, and

o documentation to describe encryption and key management, the user interface, and the modification to the backup utility.


VAX Encryption can be called from applications to perform various steps in the encryption process. It also provides tools for creating, managing and deleting keys used in coding and decoding. Files may be backed up to tape or disk using VAX Encryption. This additional level of security means that having possession of a tape reel or having access to the on-disk backup does not allow access to the data file.


All these VAX/VMS security features are available on the entire VAX family of computers, from a single MicroVAX II to a cluster of VAX 8800 systems.


Putting Pay At Digital Into Perspective


An article similar to this one will appear in Digital employees within the next month. The intent is to provide better understanding of the environment affecting the pay program and, ultimately, their salaries.


Managers are receiving this advance notice so they can discuss pay in a general way with employees who report to them and can better appreciate the 1986 salary guidelines that have been established.


The basis of Digital's pay program is to pay competitively. Taht hasn't changed. What has changed, and always does chagne, is the environment that determiens competitiveness.  One result of this changing environment is that Digital's spend nubmers have been decreasing these past few years and will be lower in 1986. Even so, Digital has had and will continue to hae a fully competitive pay program. We do, however, have the challenge of managing, compensation inthis changing environment, as well as of managing employees' expenctations about their compensation.


Our effots to deliver competitive pay are influenced by and influence several factors. These factors are described below.


U.S. Economy


Salary increases for all U.S. industries have been dropping over the last four years, and this drop is expected to continue, according to the latest American Compensation Association salary budget survey. This drop has occurred for several reasons.


One reason is that all U.S. industry ahs been going through harder times. As the United States becomes more a part of the international economy, competition from overseas grows... resulting in a need for greater productivity. This is one reason salary increases have been less throughout the United States.


Another reason is the drop in the inflation rate from a recent high of 13.5%  in 1980 to less than 4% each year since 1982.  Although Digital,  pay-for-performance philosophy, does not grant having a cost-of-living increases, inflation can raise or lower compensation levels for an industry or the

whole economy. Pay increases tend to follow the inflation curve, with a slight lag. So, pay increases are typically less than inflation at the top of the cycle and slightly above inflation at the bottom of the cycle. This relationship may vary, but is relatively stable over the long run.


Computer Industry


Over the last 20 years, the computer business has grown phenomenally. Digital and other computer companies have scrambled to keep pace with the demand for our products. Sales could and did grow between 30% and 40% annually.


Now, the market is crowded with many competitors and an increasing array of products. As a result, the computer industry is behaving more like industry generally. Signs of these changes have surfaced in the current softening market and tightening profit margins. Some computer companies have had layoffs or shutdowns. In addition, pay increases in the computer industry are slowing down just as they are in other industries.


Need for and availability of qualified people


The level of compensation considered competitive is related, in part, to the need for and the availability of qualified people. During the last two decades when the computer business was booming,' the demand for employees was relatively high and the supply was low. Companies were growing quickly and needed more and more people with the qualifications necessary to meet busi­ness needs. Digital alone grew from 7,800 employees in 1972 to more than 67,000 in 10 years -- more than 7 1/2 times larger. Yet, when the computer industry was in its infancy, there were not many people with the necessary skills and experience to perform the work. So, the competition among the computer companies was stiff for those relatively few qualified individuals. This resulted in more substantial salary offers to attract those relatively few candidates and more frequent and larger salary increases to retain employees than in companies in other industries.


Productivity improvements and technological advances have also reduced the need for large numbers of additional people and, because of the evolution of the industry, the supply of qualified individuals is increasing. Digital's current hiring restrictions, which are expected to continue for some time, is evidence of this change. We do, however, continue to need some experi­enced and skilled people to fill necessary positions as they become open. For most of these positions, however, there are more individuals available with related skills and experience than in the past.


Job Movement


Employees will be staying in positions longer. The norm at Digital a few years ago was for employees to change jobs on average about every 18 months during our rapid growth. This rapid flux is slowing as the need for addi­tional people slows. Business needs also require managers and employees to conduct business in a more cost-effective and efficient way. In effect, employees in the successful computer companies will be working smarter.


So, employees must clearly understand the need to work more cost-effect­ively. They have the advantage of being in a job longer and becoming more


familiar with their jobs. To reinforce this behavior, part of the perform­ance review that determines salary increases should be clearly linked to these efforts to contain costs.


Delivery of pay for performance at Digital


We in Digital pay individuals competitively by basing their ending salaries on their skills, abilities and contributions relative to the job they are performing. The first step is ensuring that employees are in jobs that they can perform or learn to perform with some training. The salary range for each job is based on defined responsibilities and required skills; this range is competitive with what other companies pay for jobs with similar responsibilities. So, the entire salary range is competitive depending on the qualifications and performance that an employee exhibits in fulfilling the job requirements.


An employee's qualifications and performance carry different weights at different times. The starting salary of a new employee should be based on the qualifications he or she brings to the job. Once an employee has been on the job for a while, however, performance becomes a more critical factor in determining that employee's salary level within the range. Stronger perform­ers should be in the high end of their salary range over time. Weaker per­formers, regardless of length of service, should be in the lower end of the salary range. Performance is rewarded by ending salary, rather than by the size or frequency of salary increases. Each salary range is designed to offer the flexibility necessary to recognize differences in performance.


The intent of differentiating ending salaries is to give greater rewards to the stronger performers and, by seeing the positive effect of hard work and results, motivate all employees. Our challenge is in managing the compensa­tion program in a way that attracts the most qualified candidates and retains a quality workforce. The compensation program in place enables managers to leverage the available dollars to achieve appropriate ending salaries.


Direct Deposit Campaign Aims To Increase U.S. Participation


In early April, Payroll will launch a campaign to increase the number of U.S. Digital employees in the Payroll Direct Deposit Program by at least 20%. Today, 65% of all U.S. employees use direct deposit. While managers need not be actively involved in promoting the program, their support and understanding is important to help Digital reach this target.


For the company, direct deposit, or electronically transferring funds,

o Is a more reliable way to distribute pay than issuing paychecks directly to employees. Direct deposit through the federal banking network to individual checking accounts is not vulnerable to weather, air or courier strikes or other physical interference.

o Reduces banking and associated company processing costs.

o Keeps funds safe while they are in transit. There is no live check to be lost or stolen.


For the employee, direct deposit, besides being safer,

o Makes an employee's pay available without a trip to the office or bank.

o Offers employees a choice of over 28,000 U.S. banks for their checking accounts. Nearly every bank, savings and loan, and large credit union (including DCU) participates in direct deposit.

o Allows employees to move funds from checking to savings or other accounts through any bank offering automatic transfer services.


In March, cost center managers will receive advance copies of the direct deposit literature that will go to non-participating employees. PSAs will receive literature, background information and updated enrollment forms to make it easy for employees to sign up.


In April, non-participating employees will receive a brochure at home highlighting the advantages of direct deposit, outlining how direct deposit works and answering common questions. Local Digital newsletter articles and posters will also appear.


In July, enrollment will be measured against the the goal. Direct deposit will continue to be offered, as usual to new and current employees.


With your support, the company can reach its goal of having 85% of the U.S. employee population in the Direct Deposit Program. This success will reduce costs and improve payroll distribution.  privacy statement