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mgmt memo
Highlights
From The Annual Shareholders Meeting
Software
And Employee Development Emphasized In 'Between The Lines'
The
Role Of Digital’s Board Of Directors
Update
On VAXcluster Systems by Bob Glorioso, vice president, High
Performance Systems
Update
On Industry Marketing by Rod Tuttle, Marketing Services
manager, Basic Industries Marketing
U.S.
Tax Reform: Its Impact On Digital by Bill Modahl, manager of
Tax Affairs
The
Effects Of U.S. Tax Reform On Ira, SAVE Plans prepared by
Corporate Compensation & Benefits
Change
In U.S. Tax Withholding For Tuition Reimbursement
"The goal of the company is to make computing
easy, useful and productive. We also want it to be satisfying,
exciting and fun," Ken Olsen, president, told shareholders at the
Annual Meeting. "Someone might ask, 'Doesn’t everybody try to do
that?' The answer is — it’s not easy.
"It takes a lot of effort to make things easy
to understand. And we haven't always been successful at it.
Hopefully, we're continuing to learn. We want computing to
motivate people to use computing, to make it exciting, and to make
it so people don't want to leave the computer.
"Today, we are really a software company," Ken
observed. "We used to design a computer first, then put
peripherals on it, and then design software to run on it. That
made us, from my point of view, basically a hardware company. The
software was secondary.
"Then when the time was right for us to state
our strategy, it was clearly a software strategy. The hardware was
designed to meet that software stratÂegy. Today we plan all our
hardware to accommodate the software, and not the other way
around. And the software defines how the computers are used and
how easy it is to use them.
"We developed a system we called clustering,
which I look at as a very complex piece of hardware that makes
possible the elegant software that allows a large number of
powerful computers to share one database at very high speed. When
I first saw the cluster, I said, 'It won't sell. It’s too
complicated.' But, when customers first saw it, they immediately
bought all of our production. They understood what was needed to
make that elegant software that goes with clustering possible.
"This morning, we announced Local Area
VAXcluster Systems. With this softÂware, we can tie a group of
computers together with our local area Ethernet networking for the
use of a work group, which is a group of people who work together
on one problem. In the factory, a group of machines and a group of
workers are called a "cell", but they are a work group. In
Engineering, a group of engineers designing, working on the same
project, sharing drawings, sharing calculations and sharing the
data is a work group. In the office, there are work groups sharing
data and problems. In the laboratory, there is a group working on
a project, doing experiments, calculations, and sharing and
collecting data. These work groups are then all tied to the
corporate network. This allows truly easy, satisfying, fun,
exciting computing."
Local
Area VAXcluster Systems
Announced at a press conference held just prior
to the Annual Meeting of Shareholders, Local Area VAXcluster
systems extend VAXcluster software capabilities and benefits to
MicroVAX II and VAXstation II users.
This software product allows for the
interconnection, via Ethernet, of up to 13 VAXstation II or
MicroVAX II client systems to a central MicroVAX II or VAX server,
which manages the system software, all software applications and a
shared common file system. Local Area VAXcluster systems allow
participatÂing computers to act as a single system — egually
sharing resources such as disks, tapes and printers, and using a
single distributed file system, while maintaining the independence
of each processor.
Companies that already have Ethernet installed
can continue to use it for standard network traffic and Local Area
VAXcluster systems. There is no need for additional wiring.
Systems constituting the VAXcluster do not have
to be physically close to one another — they can be anywhere
within the realm of an Ethernet network and still operate as a
single system. This means that members of a work group or
department who need to closely share data, files and software need
not be located in one place, but can be dispersed throughout a
large facilÂity .
One system manager can perform of the
management functions for all the clients of the Local Area
VAXcluster
System, thus eliminating system management
tasks (such as backing up disks) for individual users. Since the
client systems in a Local Area VAXcluster don't need disks,
Digital has also introduced lower-cost, diskless versinos of the
MicroVAX II and VAXstation II systems.
Digital
to repurchase stock for employee stock plans
Immediately after the Annual Meeting, Digital's
Board of Directors authorÂized the company to purchase, on the
open market for cash, up to five million shares of the company's
common stock, to be used for employee stock plans. This represents
approximately four percent of the company's outÂstanding shares.
According to Jim Osterhoff, vice president,
Finance, "We believe the deciÂsion to acguire shares will enhance
shareholder value by virtue of improved
return on equity and earnings per share."
Explains Mark Steinkrauss, manager, Investor
Relations, "Over the years, the company has raised hundreds of
millions of dollars through employee stock plans — which is a
tremendous indication of the confidence that employees have in
Digital. These plans have always been funded by issuing new
shares, which diluted the value of existing shares. Today, with a
cash balance of over $2 billion, the company feels it is an
opportune time to stop further dilution of the stock. The
announcement was greeted enthusiastically by our shareholders and
Wall Street analysts."
The purchases, which are expected to fund the
employee stock plans for this fiscal year and next, will be made
from time to time between now and June 1988 as market conditions
warrant.
"Many people have failed in our industry and in
other industries because they became complacent. It's a challenge
to us continuously to make sure that we show due respect for the
dangers," noted Ken Olsen, president, in the fifth edition of
"Between the Lines," Digital's quarterly video communiÂcations
program, which was broadcast live on November 7.
"The industry is moving faster today than at
any time in our history. We have no reason whatsoever to take any
glory from what we've done because we're moving headlong to make
it better and faster. And, the competition is right there with us
or right behind us, so we can’t stop and congratulate ourselves
that we've attained anything of significance yet.
"We as a corporation have a goal that we often
state in software terms. We have to have the discipline to make
sure that everything fits together. And there's no place in our
strategy for hardware that doesn't fit into that software
strategy.
"When you drive a car, you are not allowed to
drive on the left side of the road; you are not allowed freedom to
stop on green lights and go on red lights. Once you obey those
rules and disciplines, you have a lot of freedom. And those
disciplines are important in order to have that freedom.
"Within the corporation, people have to know
where they are going, how they are going, what the goals are, and
then how it all fits together. And within that discipline, there's
enormous freedom.
"When we developed the PDP-11 and the PDP-8
computer families, we made changes with each model that made the
software difficult or impossible to use. So we are passionate
about not making that kind of mistake again, like someone who
gives up smoking is passionate about getting others to give up
smoking. We know what it’s like when you don't have that
discipline, and we won't let go of it.
"We've learned from our mistakes, and that's a
big advantage over the people who haven't learned vet," he
concluded.
"One of the responsibilities of Personnel is to
ensure that management manages our most valued resource (our
employees) in the best ways possible," added John Sims, vice
president, Personnel/Administration.
"We've said we want to be number one in what we
do. We've also said we want to have an environment that is
conducive to the development of every one of our employees, and a
place to work where they have freedom but where there is also
enough discipline so that creativity can occur," John continued.
"But technology and skill needs are changing so
rapidly that it is difficult to see clearly three to five years
out. We have to plan and anticipate what skills will be needed,
but we can't guarantee those needs won't change. So both employees
and the company have to strive to understand both the work that is
needed today and what is likely to be needed tomorrow, so we can
co-plan and co-develop to make the necessary skill matches.
'*We are now trying hard to understand the role
of training as a subset of total development. We have had a kind
of training system where internal offerings were very limited
except in skill-specific training that we needed to support the
development, service and sale of products.
"Now, taking a longer-range view, we need to be
concerned about the total development of all of our employees. We
need to study training from the perspective of how it fits with
job rotation, job enrichment and broadening responsibilities,
knowing when to strategically use outside training so our people
are fully prepared."
During the program, a viewer in Phoenix,
Arizona, asked Ken, "Now that IBM is going to have products out
next year that look a lot like MicroVAXes, and now that they've
agreed to support Ethernet products, do you think they're going to
be a much greater competitive threat next year?"
Ken replied, "Announcing a new computer and
also tying to Ethernet do not automatically solve the problem IBM
has of too many computers and too many ways of doing networks. One
more of each doesn't solve that problem. It will be a year and
half or maybe two years before they get the computers they
announced into production. But those machines do have the
potential of being significant someday. The bigger ones are
somewhat faster than MicroVAX and somewhat more expensive.
"But the key thing is the software. We started
off with a set of software goals, and we built the computers that
fit. Introducing a new computer is insignificant until they have
the software that makes it fit with the network. And that's a
major job. That's the challenge, and that's where we've got to
keep our eyes open."
In response to a question about software
charges from a viewer in Chicago, Ken noted, "The history of
software charges is interesting. We tend to forget that when we
started this business, the idea of how you would charge for
computers was not at all developed. Back then, software was
something you gave away free with a computer, and you serviced it
forever for free.
We thought that you write the software once and
after that the manufacturing cost was verv little. sr> VOII
could afford to rrivo it awaw
"We may have been the first one to charge for
software. Today the cost of developing and supporting software is
a major cost to the corporation, And we have to keep developing
ways to charge for it which are not offensive to the customer and
which give us the return necessary to keep this enormous business
going and to provide the services that people want.
"Some software is still given away free. For
instance, some people can get UNIX free from the University of
California. But when software is free, the customer doesn't get
updating, debugging and other services that cost money.
"Rental looks like a promising way of charging
for software. But it will probably be some time before we truly
learn to balance all the factors and make sure that we charge what
is needed in order to provide the services that customers want."
Videotapes of this and previous "Between the
Lines" broadcasts are available from Marty Wheeler (DTN 251-1310),
and from Digital Video Network (DVN) coordinators: ATO - Atlanta,
GA (John Miles, Dick Crosby); IPO - Atlanta, GA (Rick Wallace);
BUO - Bedford, MA (Peter Trusevitch); BYO - Boylston, MA (Pat
Harmon); CXO - Colorado Springs, CO (Ed Dahlgren, John Inman); DVO
- Englewood (Denver), CO (Cheron Wicker); DCO - Landover, MD
(Larry Morris); DLO - Dallas, TX (Kristy Bird, Larry Dixon); HSO -
Houston, TX (Joanne Poole); IVO - Irvine, CA (Elaine Sanfilippo);
KAO - Kanata, Ontario (Helen Gordon); KYO - Piscataway, NJ (Vera
Herman); LAO - Los Angeles, CA (Patti Flack); MKO - Merrimack, NH
(Glenn Shemmerhorn); MMO - Memphis, TN (Judi Blalock); MPO -
Minneapolis, MN (Dave Anderson, Donna Ulberg); MRO - MarlÂboro, MA
(Tammaris Mitchell); PKO - Maynard, MA (Richard Bonazzoli, Judy
Marcus); PXO - Phoenix, AZ (Esther Gentile, Leslie Sudds); RLO -
Rolling Meadows, IL (Eileen Feinberg, Jim Wright, John Bulanda);
STO - St. Louis, MO (Carol Murphy, Dave Berry); WRO - Santa Clara,
CA (Charlotte Davis, Farrell Hinkle) .
The Nov. 7 broadcast of "Between the Lines"
included a discussion of the role of the Board of Directors and
present and future challenges facinq the company. Ken Olsen,
president, provided his views and excerpts of videoÂtaped
interviews added the comments of the two most recent additions to
Digital's Board — Phil Caldwell and Bob Everett.
Phil Caldwell is the senior managing director
of Shearson Lehman Brothers Inc.. In 1985 he retired as chairman
and chief executive officer of Ford Motor Company. He has been a
member of Digital's board since 1980. Bob Everett recently retired
as president of MITRE Corp. He was elected to the Board this past
July.
"A board cannot run a company," observed Ken.
"They cannot take the time or be responsible for everything. But
they do have an overview of the company, and their responsibility
is to make sure that all the plans and goals make sense. Even
though they can't get involved in detail, being distant, being
Removed, they can pass judgment on what’s going on.
"As a result, because of their presence, they
encourage executives, when they make plans, to make them in such a
way that there are no mistakes or weaknesses. The motivation to
avoid being dumb or stupid in a presentation to the Board drives
people to be wise.
"Sometimes when we take too narrow a view,
because of the personalities involved or because we're involved in
our own small area, the Board will point out that we're missing
the overall or long-term view. They do that very well."
"The role of a board of directors is to help
the management of the company see itself as others see it," added
Phil Caldwell. "That was of great importance to me in my role at
Ford. I looked to the Board to test ideas, to provide a different
view of external factors — which are terribly important in the
success of any business these days — and also, just to provide
counsel."
"I believe that board members are not brought
in for their specific experÂtise, but for their ability to have
some picture of the whole enterprise and how it fits together, to
synthesize matters," added Bob Everett.
"A board member brings to the table a set of
experiences about the technolÂogy, about management, about running
companies, about people, and feelings about society and economics
and politics and all the things that impinge upon the company,"
Bob continued. "A board member also has to bring a knowledge of
the company and how it functions and what it’s trying to do.
"I'm new. I bring a set of experiences of the
outside kind. But I'm just starting. I’m learning about the
company. And until I learn some more, I'll be careful about what I
say. Digital is a very large company. It takes time to learn about
it."
In the Nov. 7 "Between the Lines" broadcast,
Ken also reflected on the criteria involved in selecting new board
members. "They have to have something to offer. They should
complement the strengths and weaknesses of the administration. We
also have to get along well together because the
board has to work cooperatively as a team. And
they also have to be free of any interests that might conflict
formally, legally or even emotionally with the company. And they
have to have sincere interest in the good of the comÂpany .
"The choice of Phil Caldwell and Bob Everett
was guite easy. General Doriot has known Phil for many years. Phil
was a student of his. General Doriot recommended him, and we were
about to ask him to join the Board, when I was invited to have
lunch with him. I was about to bring up the subject when I
realized the reason for the lunch was for Phil to invite me to be
on the Board of Ford. In time, we decided that there would be no
conflict and it would be a good idea to go ahead and ask Phil to
join Digital's Board. By then I knew him well, and there was no
question that he would be a good asset. He was the one who led
Ford through one of the most significant industrial turnarounds in
the history of this country.
"Bob Everett had been my boss back at MIT,
starting in 1950. So I've always held him in the greatest esteem.
He was responsible for many of the ideas and inventions that make
computing as we know it today. So we've always been waiting for
Bob. When he retired from MITRE, he became available; and he's an
enormous asset."
As part of the "Between the Lines"
presentation, Bob commented on Whirlwind, the project at MIT on
which he and Ken worked in the early 1950s. "Ken calls it the
first minicomputer, which is kind of funny when you look at how
big it was. Whirlwind was built in the late 1940s and ran for five
years or so. It occupied several large rooms. It was built out of
vacuum tubes and consumed a lot of electrical power. There were
dozens of technicians who worked on it all the time to keep it
running.
"It emphasized speed and ran at about 1/10 of a
MIP. It had very extensive terminal eguipment — drums, tapes,
light guns and displays. It was used for experimentation and
things like tracking aircraft.
"We probably had 100 people at the laboratory
during most of the time it was being built, and spent years and
millions of dollars building that machine. Tloday, just 40 years
later, you can buy the compute power of Whirlwind for almost
nothing, and it fits on a fraction of a chip."
Ken, Bob and Phil all talked about the
challenges facing Digital, both now and in the future. "Bob
Everett's co-leader on Project Whirlwind, Jay Forrester, was asked
once why IBM was successful," said Ken. "Other people had given
simple answers like, 'They do good marketing.' But Jay said, 'IBM
does everything medium well, and no one has ever done that
before.'
"The lesson is — there is no one thing that you
have to do. You have to do everything at least medium well, and a
few things very well.
"We are now doing well because we are 97,000
people all working in the same direction with the same goals and
working very well together. And that is the key thing that we’ve
got to maintain. And along with that, we’ve got to make sure that
we take care of every single detail — every detail that customers
want, and that includes the details that customers don’t know they
want," said Ken.
Bob added, "Despite the enormous growth in the
computer industry in the last 40 years, and the enormous changes
in the technology — the low cost of computing, the low cost of
memory, the high speeds of machines — I think we're still in the
early stages of the evolution. Computers are going to become more
capacious and more extensively used in people's day-to-day lives.
And this evolution will go on for many decades.
"As we gain more understanding about how things
work, we should be better able to make machines which are more
life-like, more intelligent, more able to do things that people
have to do today. That's going to be a very exciting development.
"It’s going to take a long time. I won't live
to see its fruition. Maybe nobody will live to see its fruition.
Maybe it will continue inSefinitely.
"One of the strengths of Digital is the fact
that it has a larger vision," Bob continued. "The purpose of the
company is not to generate computers or a particular set of
products, but rather to contribute things that are needed for this
evolutionary flow, and to contribute them earlier and better than
other people do."
"The key challenge facing any company, and it
certainly is true in the case of Digital, is to be competitive
with your products," observed Phil. "DigiÂtal is enjoying great
success today because of sound product decisions that were made
three to five years ago. The challenge is to make sure that the
next generation of products is equally sound.
"To be successful in business, you must have
products that are needed, used and demanded by your customers. But
you also have to produce them at high quality and at low cost. And
you have to sell them at a fair price. You cannot do any of those
things unless you have the right kind of people with the right
kind of training and, above all, the right kind of attitude.
Fundamentally, the company has to be fair with all who serve its
interests and has to be perceived to be fair. You have to take
into account not only the individuals who work for the company,
but their families and their children, their hopes and
aspirations. During my time at Digital, I’ve seen great
sensitivity to all those factors throughout the company. And the
concern is genuine."
VAXcluster systems have grown to be an
important element in Digital's overall engineering and marketing
strategies.
By the end of FY86, 4,300 VAXcluster systems
had been delivered, accounting for nearly 11,000 VAX processors
and 7,000 Hierarchical Storage Controllers. In FY86 alone, 1,864
new clusters were formed and 4,438 VAX processors were installed
in clusters. The largest customer installations now contain the
processing-power equivalent of over 40 VAX-ll/780s and over 50
gigabytes of disk storage.
When we first introduced VAXcluster systems, we
offered the pieces a la carte, intending them primarily for
technically sophisticated customers. Now we're sellinq them in
non-technical end-user markets, competing directly with IBM.
(About 40% of the VAXcluster systems installed are connected to
IBM SNA networks.) So we're now providing these capabilities in a
more packaged way.
We now deal with clusters as a Systems Focused
Business Unit. In other words, we have a system engineering group
that adds value by designing systems based on pieces developed
elsewhere in the company, providing a way of building,
positioning, selling and installing complete systems. We provide
tools for doing custom configurations and tools to help people
operate clusters better; and we will be providing standard systems
that will allow a VAXcluster to look to the customer like a single
computer system, with a single part number. For instance, a
customer who wants a machine of X performance which requires four
VAX 8700s will be able to order that as a standard package and it
will be sold like one computer. The customer will get one console,
and it will look and work like one computer system. Then they can
add more storage and applications, as needed. (Our applications
and industry marketing groups are making available a variety of
third-party software applications that run on VAXclusters.)
When clusters first came out, Digital's primary
goal was to provide more VAX/VMS computing than one could get with
a single CPU performance. Sales people used them to leverage
multiple VAX-11/780 sales for a single appliÂcation. Then when we
came out with the VAX 8600 and the subsequent VAX 8000 series
machines. VAXcluster systems came to be used in areas where high
availability and high data integrity are required.
Today, VAXcluster systems are most frequently
used for business applicaÂtions, followed by technical
applications and software/communications. They are now commonly
used in banking. They are also being used by telephone companies
to satisfy high availability requirements.
Digital's Cluster Qualification/Verification
Group in Salem, N.H., uses a customer viewpoint to test very large
and complex VAXcluster systems. This testing has resulted in the
early detection of a number of latent problems in component
products and the group has been proactive in finding and fixing
problems before they reach the field. In Q4 of FY86, they tested
over 45 different VAXcluster configurations. The largest
configuration they've tested contained 14 VAX 8800s coupled with 2
HSC70s. All together they've performed 23,8000 hours of testing on
VAX processors, HSC50s, HSC70s and software, such as volume
shadowing.
Now, three and a half years after the first
VAXcluster announcement, this technology is still unigue to
Digital. We're the only company whose proÂducts enable customers
to start with a relatively small system and grow on that base
without any changes, adding computers to VAXcluster systems and to
networks. A customer can start out with a few hundred thousand
dollar investment and grow to a multimillion dollar system just by
evolution.
We're way ahead of
the competition here. And we've got to stay ahead by continuing to
add to the base technology the systems engineering that makes
these systems useful for larger numbers of customers in a wider
variety of applications than ever before.
t
For each of the last two years, senior
engineers and engineering management have devoted approximately
one week to a major conference to discuss key strategic issues
facing the company.
The first of these conferences, Forum '84,
focused on Quality. Forum '85 was devoted to developing products
for the International Marketplace.
On October 19-24, 1986, the third Forum
conference was held in Killinqton, Vermont. While this conference
was historically an engineering conference, this year marked the
first time that there was significant participation from the
marketing and field organizations. The theme of Forum '86 was
"Complete Systems". The goal was to give participants a better
appreciation of our customers' definition of completeness.
Five customers, representing different
industries, geographies, and views of their need for complete
systems, were invited to share their business and computing
problems with the qroup. The customers who participated were:
o American Express, Phoenix, Arizona, a large
financial services company; o CERN, Geneva, Switzerland, the
European high-energy physics research consortium;
o
National Semiconductor, Santa Clara, California, a semiconductor
manufacturer;
o Reuters, London, England, a worldwide
information and news company;
o Transalta, Calgary, Canada, a power utility.
Each of these customers shared their view of
the degree to which they require a computer vendor to supply
hardware, networks, system software, applications software, and
services in order to solve to their business problem.
Prior to Forum, each customer worked closely
with a member of the Forum Workshop committee to choose an
appropriate business problem which was
developed into a "case". These cases,
supplemented by customer presentaÂtions, were used in the
workshops as a way of clearly focusing on the key issues.
Four cross-functional workshop teams worked on
each customer problem. Over the course of the meeting, the teams
made recommendations to the customer on how Digital could meet
their computing needs now and in the future. While each team
worked independently on a solution, they had a chance to share
their work with the customer and with the other three teams at the
concluÂsion of the workshop process. In addition, there were two
workshop sessions that looked at Digital's internal needs.
Because of the complexity and long-term
implications of each problem, the solutions that each of the teams
developed were different. The?teams were given feedback from the
customer on how well their proposals met the customÂer's short-
and long-term needs and the practicality of the aoproaches.
As a result of these workshops, attendees
developed a better understanding of our customers' reguirements
for complete systems. It was clear that there are no simple
definitions, and that to some customers a complete system is a
piece of hardware, while to others it is all of the hardware,
software, applications, networking and services that solve a
business problem.
Our customers also gained valuable insight
about how they could solve their business problems. Feedback from
one of the Digital account managers who accompanied the customer
throughout the Forum indicated that, as a result of the
conference, their customer was considering using Digital systems
in applications that were previously exclusively IBM.
In a presentation at Forum '86 in Killington,
Vt., Steven Smith, a vice president at Paine Webber, provided
insight into how Wall St. views Digital. Covering the computer
industry for Paine Webber, Steve provides advice to security
analysts, portfolio managers and Paine Webber stock brokers. As he
pointed out, the institutional investment community is very
important to Digital because they own over 80 percent of the
company's stock. The following article is based on some of his
remarks.
Steve believes the current computer slump is
not just related to capital spending. "Over the last few years
there has been a dramatic rise in the percentage of capital
spending that corporations are putting into computers. But, when
we look at the banking industry, there is no evidence that they
have really had a substantial improvement in productivity.
Productivity in the banking industry basically hasn't changed over
the last 25 years. Obviously, you see more and more functions and
more and more services, and the business has become somewhat more
competitive. But if you were on the board of directors of a major
corporation, seeing the spending figures go from 5% to 25%, you
would ask what you are getting for that investment. It's a
guestion of an industry's ability or lack of ability to really
capitalize on this technology.
"I don't want
to make the PC the scapegoat," he continued. "But I do think there
was an element of PC myopia in the
computer industry three or four
years ago, and we are still suffering from it. There was a belief that
you could solve a lot of problems just by PCs. Digital was one of
the excepÂtions to that rule. Nevertheless, it was a major
distraction to the industry.
"It is possible that IBM could regret the day
that it ever introduced the PC. That’s because the PC was such a
radical change away from the mainÂframe, from their traditional
approach, and certainly it endorses many of the concepts of
distributed computing that Digital has been promoting since the
1970s.
"How do my clients see Digital?" Steve asked.
"They say — yes, Digital has product excitement, but where does it
go from here? You've cut costs, but there's a guestion of whether
expenses are beginning to go up again. The final question is how
long is it before we see the repeat of that disastrous quarter of
a couple years ago?
"There is concern about the impact of the next
generation of microproÂcessors, and about the aggressive pricing
that some vendors are offering on these products for right now.
"And another concern is that Digital has
churned its base, that the new products have taken advantage of
this pent-up demand that was created by the lateness of some
products, and that over time it will slow down.
"From a more financial point of view, Digital's
performance is so good, its numbers so impressive, that 'Wall
Street' wonders if there is room for more positive surprises.
"This week, at Forum
'86, you have been dealing with customers' issues," Steve
observed. "I bet one of the surprises is how complex some of the
problems are — not just in a technical way. And it's not just
large customers who are having these problems. Small and
medium-size businesses, in many cases, have almost as difficult
problems to solve as these very big customers do. And these
problems cannot be solved by simply walking into a computer store.
They are fundamentally related to the nature of the busiÂness.
"When I sit in on your workshop sessions where
you are talking about soluÂtions to the problems these customers
are dealing with, it’s surprising to note that some of the
solutions you are presenting to the same problems are quite
different. But here you are all dealing with the same product set.
"The problems that customers are facing are
often bewildering. If you are having difficulty configuring and
solving these problems just out of your own product set, imagine
what it’s like when you've got to deal with all those other
vendors as well. Imagine the time spent and the money spent
looking at the alternatives. It's very difficult, and it’s not
going to get any easier.
"In general, I see a new awareness of Digital
in the minds of the end-user marketplace, among Chief Financial
Officers (CFOs), and senior executives of large corporations
today. I think they've got the message. The message that 'Digital
has it now' is a strong story."
Progress On
The Materials Architecture by Kevin Melia, vice president,
Material/External Resources
Back in QI of FY84, we began streamlining our
material process from the first signals of what products customers
need to final delivery. This includes sales information on
expected orders and manufacturing information on parts available.
It involves close coordination between the Field and
Manufacturing, and close, predictable relationships with vendors.
In short, we want to have an integrated process from customer to
customer.
An important part of the process is getting
guality information on what the sales people and customers need
into Manufacturing as guickly and accurately as possible, so that
we can make plans on that basis and put the necessary resources in
place.
Another important piece of the process revolves
around execution of orders — the ability to take a complete and
accurate ordet from the customer, give an accurate commitment date
to the customer, get the order to our supply points, and to have
the material available to meet those commitment dates for the
customer.
We are working to shorten the cycle times --
the time it takes to get information from our customers to the
vendors plus the time from delivery of raw material and parts from
our vendors until installation at a customer site — to arrive at
the right balance of inventories and cycle times to meet what the
market wants in order for DEC to have competitive lead times.
The "Materials Architecture" is the plan we
started working with two years ago to reduce the growth of
inventories and to give Digital the best materÂial processes in
the industry. This architecture is not an end in itself but a
means of supporting the corporate goals of customer satisfaction,
return on assets and making it easy for the customer to do
business with us and also making it easy for the vendor to do
business with us.
At its preparation, the Senior Materials
manager decided the plan was a three-year plan, which would
consist of nine modules with guarterly time frames and show
accountability and the work we need to do to streamline our
materials processes. These modules include: demand/supply,
production planning and execution, material acguisition, systems,
leadership, renewal, new products and end-of-life product and
order fulfillment.
We also recognized that about 70% of the work
of the Materials organization is within our direct control, and we
are dependent on working with the other functions to deliver the
other 30% of the plan. So success depends very much on us working
together cross-functionally to achieve significant breakÂthroughs
.
Order transaction processing (OTP) is the front
end of the customer-to- customer process. The OTP task force is
co-chaired by Don Hunt for ManufacÂturing and Mike Kalagher for
the Field. Don and Mike have Anil Sitole and Dave Beresford
co-chairing the implementation of the OTP plan. We are dependent
on OTP for ensuring we get clean orders from customers, and for
moving functionality from manufacturing closer to the customer.
They plan to give us the tools and technigues that enable
Manufacturing to get inforÂmation to the Field so salespeople can
commit on deliveries at the point of
sale and also for Manufacturing to get the
necessary information faster from the customer.
The Materials organization is working from the
vendor forward to ManufacÂturing, and OTP takes it from
Manufacturing to the customer. So they've got some significant
things to deliver to us and we've got some significant things to
deliver to them. Together, we're striving for a totally
integÂrated process.
We have to synchronize demand and supply.
Inventory is an indicator of how well we are doing that. For us to
have a competitive advantage, we have to be able to supply our
customers better than our competition. We believe we can do that
by shortening the cycle time and working on flexibility and doing
a good job around planning. This demands working with and
integrating with other functions - PBUs, Areas, Finance, etc. *
We have set a target for ourselves of reducing
the cycle time on a number of our major products by 50% in FY87
and then reducing it by 50% again in FY88. We need to reduce cycle
times on these products from over 200 days down to about 60 days
eventually in order to maintain competitive lead times and good
asset management.
We also have an opportunity to build closer
relationships with our vendors, to improve their performance in
supplying the goods that we order plus or minus one day and to get
guality to the level we need. We want to control long-term
relationships with our vendors by sharing information which will
help us understand our vendors' manufacturing processes, their
technical capabilities, cycle times and inventory problems, so
neither we nor the vendor gets surprised, and we make it easy for
the vendor to do business with Digital.
In the last 2 and 1/2 years, we have focused
very much on inventory and we have made significant progress and
we have a better understanding of the causes of inventory. Our
goal of the Materials Architecture is to fix the causes and
strategically use inventory as a means when necessary to achieve
competitive lead times and responsiveness to our customers.
In summary, the streamlining of our materials
process demands an infraÂstructure and discipline to follow
through on our plan. The intent of our materials architecture is
to have a plan of action and is in support of the corporate goals.
The Industry Marketing groups have developed
plans, established directions, and implemented a number of
programs in the last six months.
To help Digital penetrate the largest and
leadership accounts, Industry Marketing, with Sales, has developed
a "Named Industry Account" list — a collection, by industry, of
the specific accounts the company is targeting. In the U.S., that
list includes about 250 accounts across all 14 major targeted
industries, including about 75 Corporate Accounts.
In addition, a "Geography Plan" has been
distributed to all U.S. areas and districts, listing all sites of
the Named Industry
Accounts within that geographpy. These are organized by industry,
which, for the most part, corresponds with the Field Salees
organizatino. On-line reporting systems are being developed to
help the Named Industry Account managers, who manage the total
enterprise across all geographies, monitor their progress against
goals.
This past summer, B.E.S.T. (Business Enterprise
Solutions Training) provided industry training and information for
Sales people. The objective of the training was to provide the
understanding, by industry, of the major opporÂtunities that exist
within a business enterprise. Additionally, information about the
influences on the industries can help sales people develop better
business relationships.
Each industry group is developing "Marketing
Guides" for Field Sales to provide a reference document and an
update process. These guides follow a consistent format across
industries to ensure readability and usefulness.
To ensure that sales representatives have taken
the prerequisite training to allow them to be effective in the
competitive sales environment, Industry Marketing is developing
the concept of an "Industry Sales Specialist." The material that
was developed for B.E.S.T., an augmentation with the Marketing
Guides and a current industry overview will serve as an in-field,
salesÂtraining program to bring all specialized sales people up to
the same level as those who attended B.E.S.T.
Other programs are being developed to help
condition the customer environÂment to help our sales
representatives in their selling activities. These include
advertising programs, press coverage for the media that serve the
focused industries, and brochures and other collateral for people
to use in the selling cycle.
Erline Belton-Willis has been named
Corporate Employee Relations manager, reporting to Carol Burke,
Corporate Personnel manager. Erline has been with Digital for 10
years, most recently as Group Personnel manager for the Terminals
Business Unit. She has also been plant Personnel manager in
Phoenix, training and organization development manager for
Colorado Springs and management development trainer in Corporate
Personnel.
Donna Blaney has been appointed U.S.
Field Personnel manager, reporting to Dick Walsh, Personnel
manager, Field Operations. Donna has been with Digital for over 10
years and has held a variety of Personnel management positions.
Most recently, she was the Headquarters Personnel manager and was
responsible for all Personnel activities for approximately 10,000
employees in the Headquarters area. Prior to Digital, she was
director of staffing and placement at Northern Telecom and held
various personnel positions in the airline industry.
Jim Grochmal has been promoted to Senior
Consulting Engineer, reporting to Steve Jenkins, Senior
Engineering manager for Advanced VAX Engineering. Jim has been
with Digital since 1976 and is currently the technology manager
for Advanced VAX Engineering in the Mid-Range Systems Business
Group. He contributed to the development of the first generation
of VAX products and has played a key role in the technology
selection and implementation for the recently announced VAX 8800,
8700, 8550, and 8500 products.
Harvey Jones has been named Corporate
Compensation and Benefits manager, reporting to Carol Burke,
Corporate Personnel manager. Most recently, he was vice president
of human resources for Interactive Data Corp. Previously, he had
held several Personnel positions at Digital, including group
PerÂsonnel manager for the Commercial Group and for Terminals
Manufacturing, senior Personnel manager for Finance and
Administration, and Corporate Compensation manager.
Pam Lathan has been named U.S. Area
Manufacturing Group Personnel manager, reporting to Abbott Weiss
and functionally to Dick Farrahar and Linda St. Clair in the
Manufacturing/Engineering Personnel organization. Pam preÂviously
was the Northeast Area Personnel manager, responsible for
Personnel support to 3,000 field employees located in seven states
throughout New England.
Mark Roberts has been appointed
Corporate Product Operations manager, reporting to Harvey Weiss,
vice president, U.S. Operations. Mark will be responsible for
ensuring the execution of the current product shipments plan,
overseeing the "12+ process" on behalf of the Field and
coordinating worldwide product announcements. In addition to his
new responsibilities, he will continue to manage U.S. Volume
Channel Operations. He joined Digital in 1971 as a software
specialist. Later, as manager for Office and InforÂmation Systems,
he was responsible developing and introducing ALL-IN-1.
Geoff Sackman has been appointed Human
Resource manager for the Field Finance organization, reporting to
Dick Walsh, manager, Field Personnel, and Dick Fishburn, F&A
manager, Sales & Service. Geoff, who has been with Digital for
12 years, is currently Corporate Personnel Operations manager,
(continued on page 18)
Previously, he served as Corporate Personnel
Policies and Procedures manaÂger, Personnel manager for LSI and
Far East Manufacturing, and Compensa- tion/Benefits/Administration
manager for Manufacturing. He came to Digital from the Ford Motor
Company, where he held a variety of positions in PerÂsonnel and
Labor Relations.
Digital emerged from the U.S. tax reform with a
significant reduction in tax liabilities, but our perspective on
tax reform is not simply to assess its direct impact on our
company. We are more interested in its impact on the entire
economy, because our customers span a broad range of industries.
Digital cannot be successful unless our customers are successful.
Here are some aspects of tax reform as they
impact Digital:
o An overall rate cut is effective July 1,
1987. Digital will pay 46% for the rest of FY87, and 34% for all
of FY88. For example, if our FY88 U.S. pre-tax profit were $700
million, our tax savings would be $84 million, easily overcoming a
loss of investment credit of about $30 million.
o The research & development tax credit has
been extended three years at 20% (it had been 25%). For Digital,
this is worth about $12-15 million per year.
o The investment tax credit of 10% is repealed
as of January 1, 1986, which effectively raises the cost of owning
capital eguipment. Computers are now eligible for 200%, 5-year,
declining balance depreciation, up from 150%, and one can elect to
apply this to any computer equipment placed in service after July
31, 1986. This gives an accelerated write-off against a high rate.
However, most non-computer equipment will move from a 5- to 7-year
life, and real estate will be given a 31.5-year straight line
treatment.
One of the original objectives of tax reform
was to lower rates across the board by broadening the tax base.
The intended means of accomplishing this was to repeal various
incentives and special tax breaks. The final bill reflects that.
Many specific incentives have been eliminated, and overall rates
have been dropped for both individuals and corporations.
The repeal of the 10% investment tax credit
furnished a large share of the revenue that was necessary to make
the tax bill a reality. This will have a negative effect on
purchases of capital equipment, and the sharp drop in capital
spending currently being seen suggests that investment incentives
may eventually have to be restored.
Tax rates have been lowered, from a top of 50%
down to 28% on the personal side, and from a top of 46% down to
34% on the corporate side. Bringing down high marginal individual
and corporate tax rates was a significant achieveÂment, but one
that was attained at considerable cost. The $120 billion cut in
individual taxes that was necessary to give momentum to the bill
is questionable policy at a time of high deficits. The
corresponding increase in business taxes will fall largely on
manufacturing and international business — already the weakest
sectors of the U.S. economy.
On the business side, the specific tax
provisions that are being eliminated are far larger than the
lowering of the corporate tax rate — and the added the
individual’s taxes. This effectively substitutes a visible tax
with a hidden one. The taxes paid by corporations ultimately fall
on individuals -- in their capacities as stockholders, customers
or employees. When a company's tax burden is increased, those people will pay inthe long
run, whether through a lower return on their investment, lower
wage increases, or higher prices for the products and services
that they buy.
The heavier burdens on savings and investment
may result in lowered capital formation and, as a result, slower
growth in jobs and real income.
Under the previous tax code, there has been a
wide disparity in tax burdens placed on various industries. Tax
reform has helped alleviate this. The high-technology, service and
marketing sectors had been paying higher effective rates than
heavy manufacturing, banks, and some other industries. In general,
the computer industry had benefited less from special breaks than
many others — and has therefore not been as negatively affected by
their elimination as other industries. In recent years, the
computer indusÂtry has had an effective tax rate of nearly 30%,
compared to an, average for all corporations of 16-18%. By
repealing many of the special incentives and lowering the rates,
tax reform will place industries on a more even basis with respect
to their tax burdens, and that's a very positive feature of the
legislation.
We view the Tax Reform Act of 1986 as a
beginning, not an end. We expect that there will be substantial
revision next year. Rather than looking at it as a one-time event,
it is really the beginning of an ongoing process.
We face more tinkering with basic definitions
and concepts in the code to expand the definitions of taxable
income, including capitalization of many items now currently
deductible. This kind of tinkering can fall very unevenÂly on
different industries, and we will continue to work hard in our
affilÂiations with industry and trade associations to help our
elected officials understand our priorities and concerns.
The Tax Reform Act of 1986 will have an impact
on Digital's SAVE Program and employees' opportunities to make
contributions to an individual retirement account (IRA). Although
many of the details are still unclear, it is possÂible to
highlight some of the changes.
The SAVE Program and IRAs are different types
of tax-deferred savings plans and are treated differently by tax
reform. Most significantly, tax reform still allows all full- and
part-time Digital employees to continue to be eligible for
participation in the SAVE Program. However, some employees and
their spouses will be limited or prohibited from making
tax-deductible IRA contributions starting with tax year 1987.
IRA
eligibility
Employees will not be eligible to contribute a
tax-deductible $2,000 to an IRA if they are members, vested or
not, of Digital's pension plan or another company's pension plan
during the tax year, and the adjusted gross 1987 inÂcome exceeds
certain limits noted below. Employees are members of Digital's
pension plan if they have at least one year of full or permanent
part-time service with the company.
If adjusted gross 1987 income will be between
$25,000 and $35,000 (single) or between $40,000 and $50,000
(joint), employees will be able to make a reduced tax-deductible
IRA contribution of less than $2,000. The amount, to be determined
by the IRS, is based on adjusted gross income.
Finally, employees will not be eligible for any
tax-deductible IRA contriÂbutions if their adjusted gross 1987
income is above $35,000 (single) or $50,000 (joint). However, they
will be ab.le to make after-tax contributions of up to $2,000 to
an IRA and have tax on the interest deferred until withdrawal.
If these guidelines eliminate participation in
an IRA, there is an alternaÂtive that can help employees maintain
some tax-deferred savings — the 401(k) SAVE Program.
SAVE
eligibility
Virtually all full- and part-time employees
will be eligible to enroll in SAVE after tax reform.
Beginning in 1987, the maximum yearly SAVE
contribution will be $7,000 or 8 percent of an employee's adjusted
gross income, whichever is less. This dollar limit will increase
in the future to reflect inflation. Unlike the IRA, however, if a
spouse is also a member of a 401(k) program, at Digital or
elsewhere, employees may contribute an additional $7,000 into that
plan as well. In addition, the Tax Reform Act requires
discrimination testing which will set limitations on contributions
of employees earning over $50,000 per year. Employees will be
notified if further restrictions on their contributions are
necessary.
Hardship withdrawals can still be made for the
purchase of a primary resiÂdence, for tuition and to cover some
medical expenses. However, beginning in 1987, any early withdrawal
will be penalized by an added 10 percent excise tax except for
medical hardships. Employees can still borrow money from their
SAVE accounts; however, interest payments on the loans will no
longer be tax deductible.
The Tax Reform Act also replaces the 10-year
forward averaging of lump-sum distributions from SAVE and the
Digital Pension Plan with five-year forward averaging, except for
employees who reached the age of 50 before Jan. 1, 1986. Employees
who fall into this category may continue to use the current
10-year averaging schedule.
December
15 enrollment deadline
WitM the new IRA restrictions, the 401(k) SAVE
Program is an alternative that can help maximize tax-deferred
savings. As the Dec. 15 enrollment date nears, employees may wish
to consider joining the plan, or if already a participant,
adjusting their contribution level to take into account the
8-percent maximum contribution and $7,000 limit to save tax
dollars.
Before doing anything, employees should analyze
the impact that the stillÂchanging tax laws will have on their
individual situations.
Employees who decide on SAVE can join the
program in one of two ways:
o Use the Touch-Tone enrollment system.
Employees who do not have Touch-Tone instructions or a security
code number to access the system should contact Investor Services
at DTN 223-6097.
o Fill out and mail the SAVE enrollment card
available at local Personnel offices.
As the full impact of tax reform becomes
apparent over the coming months, more information will be made
available.
Effective immediately, tuition reimbursements
that do not exceed $5,250 for courses classified by the U.S.
Internal Revenue Service as "not required for the employee's
current job" will no longer be subject to tax withholdings. Since
Jan. 1, 1986, the law has required employers to withhold taxes
from tuition reimbursement payments to employees for courses
determined "taxÂable."
Digital will not be
returning taxes withheld during 1986 for reimbursement payments.
For those employees who have had taxes withheld for tuition
reimbursements, the overpayment in taxes will be left in federal
and state withholding accounts and applied towards the employee's
1986 liability. Employees will recover the excess amount of taxes
withheld when they file their 1986 individual tax returns. 1986
W-2 forms will be adjusted to
reflect the reduced gross income. FICA
overpayments will be transferred to federal withholding accounts
where applicable.
The 1986 Tax Reform Act includes a two-year
extension of Section 127 of the Internal Revenue Code, which
governs educational assistance. The extension is retroactive to
Dec. 31, 1985, and increases the cap of education assistÂance to
$5,250 per year. Section 127 is scheduled to expire Dec. 31, 1987.
For more information about tax withholding of
tuition reimbursements, contact your local PSA or Personnel
manager.
In January, Digital will release version 2 of
SMS (Salary Management System) to help U.S. managers and
supervisors prepare their 1987 Salary Plan. The Salary Management
System is a software package introduced last January that offers
supervisors a flexible and simple way to plan and manage
employees' salaries. SMS allows supervisors to test how various
pay plans might affect a group's total spend plan, helping to
integrate individual salary plans with a group's overall business
objectives.
Specifically, SMS allows supervisors to:
o Effectively use available salary dollars to
deliver salaries based on performance, the foundation of Digital's
compensation philosophy.
o Understand how potential salary plan changes
affect a spend number by using a modeling capability that can
calculate various salary plans as often as needed.
o Ensure that a salary plan conforms to
targeted freguency, promotion and participation rate metrics.
o Plan salaries based on a company-wide
compensation philosophy using one consistent salary management
system.
Using the feedback received from managers and
supervisors last year, the company has modified SMS for 1987
Salary Planning. Version 2 has corrected bugs and made SMS simpler
to use. The goal of SMS this year is to provide managers with a
stable, familiar system that will be a solid foundation for more
significant changes in the future.
SMS.V2 improvements available in January will:
o Make it easier for supervisors to call up
their direct reports' records.
o Provide a more complete history on each
employee.
o Provide additional information in existing
reports about pay rates and salary equity for groups of employees.
o Help supervisors consider pay equity by using
the SMS pre-planning tools to project employee performance
ratings, to rank order employees and to align employees by range
position.
o Provide more complete descriptions and
examples of how to use SMS in the 1987-88 Salary Management System
Users' Guide for Supervisors.
In addition, this Spring, SMS will be available
as a year-round salary manÂagement tool. Year-round SMS will
feature a salary plan tickler to remind supervisors when
employees' reviews are scheduled and will allow on-line review of
salary plans. The system will also offer salary management
reports which measure actual spending against
salary plans. Additional measurement reports will provide
information about actual promotion rates, frequency of increase
and employee participation.
U.S. managers and supervisors will receive more
specific information about SMS.V2 at Salary Planning Kick-Off
Meetings in January.