mgmt memo

Managing For Growth And Profitability In Lan Hardware Business by Ralph Dormitzer, manager, Low End Networks and Communications Business Unit

The Local Area Network Ethernet (LAN) Hardware business is a growing, profitable and strategic business in a competitive and maturing market. To continue our profitability and to gain market share, we need to incorporate a set of business behaviors which we are identifying as commodity-like and which are focused on solving customers’ problems.

The customer environment that we are exploiting is the millions of PCs and workstations that are being used today as standalone computing appliances. The users who bought these appliances are discovering the benefit — and the necessity — of being connected to share computing resources, data, and peripherals; and to exchange mail and messages. They need to communicate both within the work group, externally to other functions in their company, and externally to customers and suppliers. The Local Area Network is the entry point for these customers to networking. Their LAN buy is the second major purchase after the per­sonal computer and is a key strategic business for Digital because it’s positioned between the personal computer and the enterprise network.

We are also exploiting a set of expectations about customer wants: ease of use, price- /performance and choice of vendor. The customer wants to connect to the LAN as easily as plugging in a telephone. It shouldn’t require any set up, any special knowledge, special tools or specialists, and it should make use of the lowest cost wiring available. Moves and changes should be as easy as unplugging from one wall jack and plugging into another. The LAN should be user centered — approachable, obvious, and convenient.

LAN customers are knowledgeable buyers. They are sensitive to price, performance and features as variables in a value equation. This puts a premium on our ability to price for value in the market; to be able to offer the lowest prices when appropriate and, when we consciously add value through performance, features or services, we price appropriately higher.

Customers also want choice of vendors. Like the telephone, there is an expectation that Local Area Networking products be compatible with those from multiple vendors, and that they interoperate using standard interfaces and protocols. Customers reject any possi­bility that might lock them in to a specific vendor.

Choice also applies to outlet. Like the phone appliance, customers expect to be able to buy the product from the outlet of their choosing, phone and catalogue sales in addition to direct and distributor sales.

Finally customers want "DUF." That’s the inverse of FUD - Fear, Uncertainty and Doubt. Customers now have FUD and don’t want it - they want DUF -Dependability, Uncomplication, and Flexibility. DUF is also the Digital Unique Factor, one of our competitive advantages over the plethora of small companies in this business. DUF is a set of value-added attri­butes which we bring to the product and to the relationship between the customer and ourselves: quality, value, worldwide service and support, and asset and investment pro­tection.

Today’s $5.4 billion LAN hardware market is expected to grow to almost $7 billion in 1994. This market is segmented between Ethernet and Token Ring. Ethernet is, simply, a superb high-speed LAN technology and has historically outperformed predictions. We intend to continue this performance and to take market share for Digital with our new cost-focused Ethernet products. Moreover, we are continuing to aggressively drive Ethernet technology with better and lower cost product. For example, we believe that with our knowledge and expertise we can soon deliver an Ethernet chip with a cost advantage of 10 times that of Token Ring. With that cost advantage, we can put an Ethernet interface into PC’s and workstations at the same cost as a serial line interface today.

Our strategy for profitable growth includes:

o Quality - "Six Sigma" benchmarking with the goal of being best in class in all aspects of the business;

o Lowest cost producer - fewer parts, smaller size, lower power, fewer manufacturing processes;

o Easiest to use/install product solutions - utility-like, no tools, 10-page instal­lation and operation guides, 10-minute installation, self-diagnosing, self-correcting;

o All channels - available where the customer wants to buy it

o Fast response - new product every six months, adjustment to market trends every three months, 24 hr. delivery; and

o Pricing — no frills entry price for the low end, value price for performance, features and service.

The camera industry provides an interesting example of a business that underwent both a customer usability and a commodity revolution in the 1960s, 1970s and 1980s. The early 35MM cameras through the 1960s were oriented to the knowledgeable and professional user. They were clumsy collections of multiple pieces requiring manual setting of f-stops, shutter and film speeds and required strobe units with shoulder mounted power packs. They were sold through specialty photographic stores and were high priced.

Then in the 1970s Canon, Olympus, Nikon and others came out with semi-automatic cameras. These cameras eliminated manual exposure control and provided for mounting unitized stro­bes on a hot shoe. The ease-of-use attributes and smaller overall size resulted in pur­chases by a whole new class of non-professional customers and sparked the migration of channels from specialty photographic stores to department stores and chains. These new cameras produced professional quality pictures and came at half the price of their pre­decessors.

Then came the 1980s. This generation of cameras added automatic focus, self threading and zoom lenses and incorporated the strobe in the body of the camera. LCD digital read-outs and audio feedback were added to tell the users just about everything they could ever want to know. Now, whole new classes of photographers, the disc and Instamatic camera users, migrated to the larger and better 35MM format. They got professional quality at a bargain price. The cameras became available from every conceivable outlet including mail order and the local convenience store. The camera market had become a commodity market. More than price, however, the customer got quality, availability, choice and ease of use.

It is the combination of these attributes which grew the market. In the process, customers became discriminating about value. I believe these lessons apply to Digitals commodity networking business.

Beyond the goals and strategies, the foundation of our business is a set of core compe­tencies out of which we build the product. First is our ability to shrink the product in size. We have called this silicon integration. It is more, however, in that we have taken a holistic view of the product, blurring the lines between the software and hardware disciplines. We are relentless in seeking code efficiency and asking whether code need be in RAM or ROM or in silicon. As the product shrinks so do our costs.

Second is our core competency in networking protocols and electrical interfaces. We derive our ability for innovative execution and reliable product from these skills.

Third is design. Design is a unique differentiator. European design of automobiles or kitchen appliances and Japanese design of electronic appliances are key differentiators for these products. Design in network hardware - particularly as it complements the overall ease of use, approachability and applicability - helps sell product.

Fourth is human factors - creating network hardware that is user-friendly. We want cus­tomers to have confidence in and to be able to install and set-up their desktop inter­connects by themselves.

On April 8, our new family of Ethernet smart hub products exploded into the marketplace. These products were designed with the customer in mind. They are the embodiment of our core competencies and incorporate our key strategies providing quality, lowest cost with outstanding ease of use. Concurrently we are actively developing all the channels which our customers want to use.

The hub replaces the Satellite Equipment Room rack at one-tenth the size. It needs no special ventilation or cooling. It mounts right on a wall, any wall or, if the customer prefers, in a rack. With its cover, it’s suitable for placement in an office. To expand or reconfigure a LAN is now literally a snap. The modules plug right in, and automatically configure themselves. You don’t have to brine the network down, and vou don’t need a system manager to reset parameters to put you on-line. This design gives us significant differentiation from the competition and, we believe, high customer appeal while solving the customer’s problems.

The April 8 announcement has had broad and favorable press coverage. The press picked up on our commodity-like advantages: ease of use, quality, price/performance, and choice of distribution channels. Perhaps with these products we are opening the era of the "point- and-shoot" style of networking.

ACE Initiative by Dom LaCava, Vice President, UNIX-based Software and Systems

April 9 was an important day for Digital. That day the Advanced Computing Environment (ACE) announcement was held in New York City and Brussels. On stage were Ken Olsen for Digital, Rod Canion for Compaq, Bill Gates for Microsoft, Bob Miller for MIPS and Doug Michaels for Santa Cruz Operations. Bill Gates said, "This is the most significant event in our industry since the announcement of the PC." That quote was picked up everywhere, worldwide.

We jointly announced a new RISC specification and two major operating systems — OS/2 version 3 and and a unified UNIX system (Open Desktop) from the Santa Cruz Operation. Twenty-one companies committed to this initiative on that day, and a dozen more have signed up since then. The major PC vendors and major production system vendors such as Bull and Control Data, NEC and Sony all committed to this set of standards.

The MIPS architecture, which Digital already uses in its RISC workstations, was selected as a part of the hardware specification. The data format known as "Little Endian" was also selected. This is the format used in the 70 million PCs and also the 10 million VAX users today.

Open Desktop incorporates major Open Software Foundation (OSF) technologies and will follow the Distributed Computing Environment (DCE) from OSF, the Distributed Management Environment (DME) from OSF, and Motif. We are putting full ULTRIX binary compatibility on this product; so all our ULTRIX applications will run unchanged.

Bill Gates announced OS/2 Version 3, a robust and very powerful new product. This 32-byte operating system will support all of today’s OS/2 and MS-DOS applications through Windows. It is also POSIX compliant and it will run on Intel386 and Intel486 platforms. They also have stated that it will run on the MIPS RISC architecture, with software developers’ kits in the hands of Independent Software Vendors (ISVs) by the end of this calendar year and end-user production systems by mid-1992.

What does this mean for customers? This means full, binary compatibility for the RISC line from the desktop to the data center. We have worked very hard the last two years to get 2,000 applications on our RISC ULTRIX systems. There are also thousands of SCO UNIX applications on Intel386 and Intel486 systems. And there’s about 25,000 to 30,000 appli­cations on MS-DOS. In other words, with systems that comply to the ACE standards, cus­tomers will have access to about 40,000 applications.

This is an ISV’s dream. They will make one port and know they have access to 20 other vendors. This will change the way they do business. From now on, ACE will probably be their first or second port.

ACE will change the dynamics of the industry. Customers will be able to select their hardware by price, quality and functionality and know that by buying ACE-compliant sys­tems, they don’t have to change their software at all. This means they will have invest­ment protection and the end of having to rewrite applications over and over again.

What does it mean for Digital? All of these vendors have embraced Digital’s RISC UNIX strategy that we’ve been working on for three years: OSF, MIPS architecture, Little Endian data format, and our TURBOchannel bus. We don’t have to change what we’re doing. We continue to move ahead, and we have an enormous opportunity right now because we are so far ahead of the rest in the development and availability of ACE-compatible products.

The final specification is expected in 30 to 60 days. It will be given to all the ini­tiative members under non-disclosure, as we move ahead building our compliant machines. But the DECstation Series 5000 machines we’ve been shipping since April 1990 are already ACE-compatible. They have the MIPS architecture, Little Endian data format, TURBOchannel bus, and ULTRIX software going to OSF. If you sell a customer a RISC ULTRIX system from Digital, the software they write on it today will run unchanged on ACE-compliant hardware tomorrow. We’re totally compatible. We are first. We have a leadership position. And we’re going to continue to take advantage of that leadership position now!

What are the opportunities for us? Customers who selected IBM’s RS 6000 or Sun SPARC systems in the last two months have asked us to come in and talk about ACE. They realize this change is significant and they want to take another look. The U.S. government is considering including ACE in their specifications.

Some ACE vendors have already asked us if we can act as an OEM, selling them the TURBO­channel Graphics option, VME options, FDDI, and other options we already have available. We can ship these components to them and they would put their own label on them. This would help them get to the systems market and would give us increased volume in the com­ponents business.

We also have a tremendous opportunity to sell our latest layered software, which now will be able to run on other vendors’ ACE platforms.

We also see systems integration and service opportunities. Some ACE vendors only sell through indirect channels. We will find these products in our accounts. We already know how to service and to integrate these products, and customers will need our help.

The ACE specification also allows room for innovation in such areas as graphics and multi- media. We intend to lead in innovation as well as bringing in our expertise from the VAX VMS area in symmetric multi-processing.

To most of the other ACE companies, who were great friends on the day of the announcement and are fierce competitors today, ACE represents a revolution. They have to get their strategy together and quickly design products. For us, ACE is a natural extension of our RISC UNIX strategy. We’re already there.

This initiative is open to anybody who wants to join. It is based on standards and pro­vides investment protection. One of our key messages is that we have products that are compatible today. Nobody else can say that now. For software developers, our platforms are the logical choice for developing ACE application now.

As Mark Shulman, a well-known analyst wrote three days after the announcement, "For the first time in a decade, Digital has now positioned itself as a major player on the desk." We have an enormous opportunity here, and we must take advantage of it.

Many Faces Of Systems Engineering by Bob Glorioso, vice president, Information Systems Business

In Digital today, it seems that systems engineering is done everywhere by everybody. That may be our opportunity and our issue.

To understand the role of systems engineering, consider a building. What this building looks like to you depends on your interest in it.

If you are going to meet someone there, when you enter the building you might expect to find a lobby and an elevator and someone to receive you. If you opened the door and saw a dark tunnel, you might be reluctant to enter. You want to feel comfortable. Maybe the building has some special helpful features. The name of the company you are going to visit might be on the elevator. Or there might be an automated "people mover" at the door that will take you to the office where you want to go.

You’d have a different perspective if you were going to construct the building. You want to use world-class components for this building. Maybe you buy world-class windows from one vendor and world-class window frames from another, and discover there is a one centi­meter gap between the frame and the glass on every window. These are world-class parts, but they just don’t work together. Say the air conditioning system is overloaded, and the heating system doesn’t work. You soon realize that buying world-class components doesn’t necessarily make for a world-class building. You have to think in different terms. You have to realize that all of the pieces in the building have to work together to make the whole and that somebody has to be responsible for making sure that they work together. They either have to specify the components or select them so that they work together.

In designing this building as in systems engineering, the pathway to success lies in paying attention to all the details.

Let’s look at systems engineering from the many perspectives we have at Digital. Archi­tects specify and define the design of the components and how they will fit together. Engineering people design components to meet the specifications and fit the systems en­vironment. They also may have to deal with marketing people whose job is to translate customer needs into system requirements and to characterize the actual performance of particular systems so we know what they can do for customers. We put applications on the system and make sure the applications work. When we sell the system, we configure it so that it solves the customer’s problem in a specific way. Then if extra help is needed to tailor it for the customer, our EIS people can do that custom work. We may recruit Manu­facturing to make sure that we have problem-free installations and delivery. That’s our internal view of systems engineering.

The technical systems people try to put components together in such a way that they work together, provide more capability than any of the individual components alone, and satisfy a specified set of needs. Today there is no clear boundary line between hardware and software - 1 don’t know of any chip built today that doesn’t have software involved with it. The art of designing a chip in such a way that it works on a board is really systems engineering work and requires taking a systems view, including considering the customer perspective.

From the technical viewpoint, putting a chip on a board, creating a module that does something specific and interfaces with other components, putting modules together in collections that we might call central processors (CPUs) are all important steps in sys­tems engineering. Collecting operating systems, net-ware, applications, storage and so forth is another important piece of systems work. Solving a business problem by collect­ing all of the pieces together is also systems work. But the question remains — what does the customer want? Like someone entering a new building, the customer may have a very different perspective of our final product.

The customer may say, "I don’t care what you do, but you have to put your technology together in such a way that it solves my problem." In other words, to that customer any activity that solves the customer problem with your technology is systems engineering.

We have to do our work in such a way that we satisfy what the customer is looking for. In this case, we would like to do our systems work so we satisfy the broadest range of cus­tomer needs with the minimum amount of work - which sounds like a good way to make money. A customer also wants to be flexible, to be able to change things to meet changing busi­ness needs.

We look at the system as chips and boards, collections of parts and testing, but the customer is looking for a way to solve a problem. These are both valid views.

Considering these ideas, let’s clearly define some of the things that we do. First thing, "systems marketing" means developing customer product requirements for the various Product Creation Units, based on the "Voice of the Customer" — the first phase of our four-phase quality program - and other market research. This includes the package, price, position and promotion - the complete solution for a broad class of customers. In addition, systems marketing supports the Field with marketing, technical support and training.

"Systems engineering" means defining and specifying, testing and qualifying all of the pieces. The pieces are typically designed to go together and to satisfy a broad range of customer needs. They take the ideas for building a system for a certain class of customers and make sure all of the pieces fit together and that they indeed do work as we expect them to.

The next phase is "systems integration." Integration requires systems engineering, but instead of engineering a system for a general class of customers it is focused on a speci­fic set of needs for a particular customer.

Systems integration should leverage off systems engineering work. And systems engineering should leverage off the component work. That’s one way to help keep down development costs. If we all understand where we are heading and we all work together, we should be able to make more money.

For example, in the Information Systems Business Units, we are trying to make sure that the specifications for the parts are correct, understanding how they go together to satis­fy a class of customer needs. We have to work together with multiple groups within Digi­tal — the groups that make the components and groups that focus on particular industries. We also have to work with EIS because we can provide them with some technology and some­times even some people that they need. As we do specific integration work, we learn what kinds of systems technology we might want to invest in to make the system integration work go better.

On the one hand we have the opportunity to develop tools that can lead the evolution from custom, individual integration work towards commoditization. On the other hand, we have to ensure that the components we are building fit together, so we don’t have a centimeter difference between the window and the frame. We need to exploit these two opportunities.

Our challenge is to make the best parts, to make them profitably, and to make sure they fit together in systems. And the systems have to make more profit than the sum of the parts because of the value we have added and for which the customer is willing to pay.

Systems Marketing by Peter Smith, vice president, Applications and Industry Marketing

Over the last year, we’ve identified three common customer buying habits and built busi­ness models around them: commodities, production or solution systems, and systems inte­gration. Services cross and are included in all three, but have their own unique business model.

In the commodity model, price is all-important. No cost is added unless it’s absolutely necessary. The capability offered has to be easy to sell, easy to install, easy to use. Indirect channels are important. Service may be a major marketing advantage but it is most often priced separately. Customers may buy through this model when they seek to downsize their systems or to buy smaller, less expensive computers than they have in the past, or when they seek what they perceive to be "vendor independence."

In the production or solution systems model - the VAX VMS model - the focus is on ad­dressing customer business problems, through functional or departmental solutions. This is a traditional area of strength for Digital, where system dependability, reliability, scalability and interoperability are important. Customers are looking for solid, tested, applications availability and total cost of ownership. Here the customer is willing to pay for the value. This is where IBM succeeded with the AS-400, due in large part to their systems marketing effort.

We still need to understand all of our costs in this production systems model, and be as crisp and efficient as we can be. We also need to identify the value of our systems marketing work, particularly in addressing the key customer issue in this area - pro­tecting their investments not only in hardware and systems software, but also in appli­cations, data and training. In this model customers really want our solutions expertise. This is where the statement "Our customers want us to tell them what they need," is par­ticularly cogent.

Systems integration requires a comprehensive approach. Here we need to continue to im­prove our ability to reuse the experience and expertise we get from one customer to meet similar customer requirements. To reduce our risks and costs, we want to go into a pro­ject with 70% of the solution already thought out, but priced for the comprehensive cus­tomized solution. As in the production systems area, these customers clearly want our solutions expertise as well as our capabilities in multi-vendor integration. This is the area where the Integration Business Units (IBUs) and systems integration groups are work­ing most closely.

The IBUs are one of the dimensions of Digital’s New Management System. They have two roles. They assure that the right portfolio of applications, the right application stra­tegy, the right solutions capability is in place for a specific market. Through systems engineering, they put together the integrated solutions that are necessary for that market and then make sure that the company makes a value-added profit in that particular area. They are also responsible for the company’s profitable plan that includes all the pro­ducts, applications, integration, service strategies and distribution strategies for a particular market or class of customers. This is where the systems and systems integra­tion marketing work is most apparent.

The FY92 business plans - the systems marketing and systems integration marketing work of the IBUs — directly relate to the three business models. Each IBU is normally focused on commodities, production systems or systems integration, but contributes to all of them.

For example, small business fits the commodity model. Price competitiveness is key. Indirect channels are essential. Every penny of the business model is critical to making profit. And differentiation often occurs by crisp execution and implementation to market. There have to be many applications available through general programs like ISVs or through indirect channels.

In contrast, the VAX VMS systems are at the heart of our health care business. We work closely with Cooperative Marketing Partners and put together automated medical record systems or laboratory information systems.

In banking, the focus is more on systems integration. Leveraging our systems integration work, we are building platforms for retail banking, investment trading and so forth.

All the IBUs are responsible for differentiating Digital capability, adding value as perceived by a class of customers, creating demand for Digital’s systems and systems integration and defining our systems integration strategies for that class of customers. They also create the guidance for sales, sales support and systems integration people regarding repeatable solutions and integration templates.

Electronic Data Interchange (EDI) As An Example Of Systems Integration Business by Gene Hodges, group manager, Office Information Systems

Electronic Data Interchange (EDI) technology can allow our customers to link electroni­cally with their customers and suppliers, for close communication and efficient exchange of the basic "paperwork" of doing business.

In this part of the systems integration business, it is relatively easy to quantify the benefit we can bring to the customer and to value-price our solutions. Our message to the customer can be precise and concrete. The benefit comes from reducing work-in-process inventory, administrative staff for order processing and cycle times for typical adminis­trative processes.

In EDI, we see an excellent opportunity for revenue and profit growth. We need to deliver solutions that are complete in all the details of the base VAX VMS hardware/software platform and the base software products needed to conduct the EDI dialogue between two trading partners. We work with third parties who have business applications and integrate those applications into our EDI solution so that they can serve as part of a continuous process to move information from a company out to its suppliers and customers.

EDI represents a major change in the way our customers do business. Often, they redesign the business process in the affected function to take advantage of the new efficiencies, reduce costs, and improve responsiveness to their customers. When they hire us as con­sultants for a fee to help them understand their problems, as a side effect we get a lot of information that can help us in the selling cycle, allowing us to propose a complete solution while understanding what this solution is really worth to the customer. We deliver that complete solution in cooperation with multiple third-party application pro­viders and service providers on a worldwide basis.

Our software and hardware engineering organizations create the base platform with VAX platforms and VMS, DEC Net and DEC EDI software. We characterize the components so we know how our base platform works with the various third party solutions. Then, we add the major services components.

Services is the part of the solution that really drives the sale. We offer a series of packaged services ("Q numbers") with fixed prices. These help us break a fairly complex selling cycle into a series of manageable pieces that are easier for our sales organiza­tion to understand. This makes it simpler to sell and faster to get an early order. In addition, we can sell the services up front and defer what normally would have been sel­ling expense shifted over to revenue and profit production. And finally, we offer a series of very sophisticated services to do whatever the customer needs in enterprise integration. The Integration Business Unit (IBU) acts as the responsible party to coor­dinate all aspects of the team, and the IBU marketing organization drives training in the Field as well as demand creation.

Over the last year, we found that it is a long march from the beginning of the sales cycle to the complete order. We learned that we need to take in money along the way, rather than wait a year to go through the sales cycle for a total job. Today, we break up the total job into deliverable and billable pieces, and take orders along the way. We might start with an analysis of the customer’s business need. Next, we need to prove that we can do the job. We do that by driving a pilot built around a series of service packages. We usually go back then and do a much broader needs analysis. First, we looked at a specific function or application set. Now we broaden our horizons to how we would imple­ment this type of capability broadly across the enterprise with hundreds of trading part­ners. Finally, we deliver the complete solution, including VAX VMS products, our leader­ship DEC/EDI base software, third party software, integration tools and additional ser­vices to implement and manage the solution. By breaking the solution into pieces, the cycle becomes more easy to sell and generates a steady stream of revenue.

This is high-margin VAX business which, in addition, gives us opportunities to sell desk­top devices, networks and other components. The customer does not tend to quibble about price — these are usually low- or no-allowance orders. And the technique of breaking the sales cycle into a series of consumable bites and using services to turn what could have been sales expense into profit is a model that can be applied in other areas of our business.

Powerframe by Warren Neuburger, group manager, Group Engineering

PowerFrame is an application for improving productivity in the development of electronic products. A "design data management framework," it may include electronic design automa­tion , mechanicalComputer-AidedDesign (CAD), embeddedComputer-AidedSoftwareEngineering (CASE) and technical documentation tools. Our PowerFrame product provides both the con­text and the visualization of the data created in the design process. Its uniqueness is in its ability to integrate applications or tools into a single open environment and its support for platforms from multiple vendors. Over the last three quarters, worldwide sales for this relatively new product have exceeded our forecast by a minimum of 40% per quarter.

In the commodity business, the PowerFrame application is sold into accounts with little or no Digital content. These are customers who buy whatever is fastest or in vogue. In the standard production systems business, we continue to expand our VAX VMS base. And in the systems integration business, we sell services around PowerFrame solutions.

We’re working on a mechanism to allow OEMs and large end users to do their own porting to new platforms, while allowing us to retain control over our core product. An added bene­fit to doing PowerFrame development on these multiple platforms is that we become users of the other vendors products and services and this gives us better insight into what these vendors actually deliver.

As a success story, in the commodity business, a company called Chips in Technology, located in California, uses Sun systems and IBM PCs to design chip sets for IBM PC clones. They had a CAD design environment that did not allow them to automatically keep track of design data, configurations or versions of designs for multiple designers. They were not and still are not users of Digital hardware. But today they use Digital software, running on their Sun and IBM hardware. Having broken into this new account with our software, we are establishing ourselves as the best at multi-vendor interconnects, and paving the way for future sales of hardware, software and services.

As an example of production business, Toshiba uses our PowerFrame application, running under VMS software, to integrate their diverse applications and platforms. Toshiba is a SunSPARCOEM.TheymanufacturelaptopPCs,Sunworkstationsandcommunicationsequipment at three plants in Japan. Toshiba wants to provide data management in their environment of VAX computers and laptop PCs. In limited production testing now, they believe in VAX VMS systems for PowerFrame server support. They are buying a VAX 6000 system to add to a cluster and plan to buy a VAX 9000 system next year. They do not believe that UNIX ser­vers are a viable alternative to VAX VMS servers. For them, the benefits of VMS software are smooth network integration, security, reliability through clusters and management services.

As an example of the systems integration business, Saab had a design problem with cable harness designs for their cars. They had a manual system of schematic entry and wanted to automate. The problems to be solved were time to market of new designs; reliability due to lack of configuration control; engineering change order (ECO) support and security; rigid­ity of the design process; and inability to implement policies. The PowerFrame product doesn’t solve all of these problems, but it provides the base for services to be applied to form a total systems integration. Saab bought hardware from us and initial services, and based on our initial delivery of those services, they are increasing their individual hardware base and ordering further services. The PowerFrame product is open enough to allow Saab to integrate the tools it has chosen.

Today, over twenty major software tool vendors have signed up to make their tools run under PowerFrame software as a part of the PowerFrame Synergy Program. This helps us provide a broader base for services to be added later.

In summary, our PowerFrame product is the world leader in framework technology.

Growth And Profit With Open Services And Systems Integration by Russ Gullotti, vice president, Digital Services

We have open VMS software, open systems, and also "open services." As an open services company, we do what our customers want us to do. We provide them with flexibility of choice and multi-vendor service solutions. We deliver a wide range of service support from the desktop to the data center, and we can manage the most complex information en­vironments for customers.

Today, Digital supports over 8,000 products from over 800 vendors. We’re leaders in the multi-vendor environment maintenance world. We set the standards for excellence in inter­national service capabilities, both in quality and in depth and breadth of our services.

Being an open services provider means that we must serve three business models -- commod­ities, VAX VMS systems and systems integration.

To deliver this breadth of services, we made a number of changes in our organization. In particular, we clustered some of our businesses to better be able to serve the different customer buying habits, to save money, to eliminate redundancy, and to make it easier for Sales and customers to see what we’re doing.

The Product Services Cluster, managed by John Rando, is our traditional services business­es. It includes Hardware Product Services (low growth, high profit), Software Products Services (high growth, high profit), and Desktop Services (explosive growth, just begin­ning to ramp up on the profit curve.) There are also businesses within businesses, such as our focus on maintaining non-Digital hardware and software.

Education and Consulting, managed by Pat Cataldo, is our knowledge-transfer cluster. Training continues to grow and remain profitable. But to keep that growth rate up we have to work on customized training in non-technical, non-traditional areas. For instance, perhaps we can train our customers on Just-in-Time for manufacturing, or provide training and support for a custom system integration solution.

This morning, Ken Olsen quoted Rose Ann Giordano, "Our customers want us to tell them what they need." There’s an important corollary to that — it’s fine to tell our customers what they need to succeed as long as we’re getting paid for telling them. Hence we cre­ated Digital Consulting Services, which includes Management Consulting, Organization Consulting, MIS and Applications Consulting. We’re learning to sell this expertise in­stead of giving it away. This business is growing 20% a year, and the profits are good.

The third cluster, Systems Integration and Support Services, is run by Max Mayer. It represents about a quarter of the company’s service capability. Here, we have combined our Computer Special Systems (CSS) and Software Services project capability to form Appli­cation Project Services. This is a very high risk, difficult business. We need repeata­bility and discipline. It is a very fast growth area. Profit is still a problem, but we’re getting better fast. Network Services is the organization that does the planning, design implementation and management of local area networks, wide area networks and global networks. It has excellent growth and good profit. Operations and Support Services includes, among other things, facilities management, customized support, recovery ser­vices, contingency planning services and disaster planning. This is a risky and very high growth business. They are on plan or ahead of it, but they are not yet where we want them on profit. Finally, the Systems Integration IBU is very high growth and is working to improve profits.

In Digital, business is "systems integration" if it has non-standard terms and conditions, some custom content, and requires a program manager to manage it.

The Systems Integration IBU is responsible for the business models: methods, tools, train­ing, program management and rolling together the profit and loss for our company in sys­tems integration. As systems integrators, we plan, design, implement and manage the customer’s solution needs. To do that, we use all of Digital’s open services, the pro­ducts and software from the Product Creation Units, third-party hardware and software and of course, our various partners.

We can’t be a systems integrator to everybody. We have to focus our skills in support of the marketing strategies of the various IBUs. We work with the IBUs and Sales to define as a team what skills we need, where we need to grow and where we’re going to rely on our partners.

When you look at our performance in systems integration over FY91, there is good news and bad news. The good news is that this business grew significantly more than we planned. The bad news is because we underestimated it, we ran short of program managers, resources and trained people.

In FY92, we plan to train hundreds more program managers and finish the roll-out of the Digital Program Methodology: one jargon, one method of proceeding and one process for managing systems integration projects. We’ll also elevate the skills of current program managers because the programs are becoming so much more complex as our sales people and customers develop more faith in our ability to do this work. The program manager works for the account manager and is the key to the success of the account manager.

We will continue to develop third-party alliances, working with the IBUs and Sales to figure out who our partners should be.

We’ve implemented improved controls and discipline in our programs. We do more up front qualification of programs, and the Executive Committee reviews and approves large pro­grams. But we have to do a better job of value pricing this work.

Two years ago no one knew we were in the systems integration business. Today we are ranked third, fourth or fifth (depending on who you ask) largest systems integrator in the world.

In FY92, we plan to improve our profitability by working closely with the IBUs and Sales. Our top priority is profit. We’ll work on our Application Integration Sets (AIS) "road maps" that tell us what applications to use to solve which problems with which customers, with which services, what departments and what products on which platforms. That should reduce risk and make us more predictable. We’ll also pre-configure systems and have platforms that we tailor so 70% of the systems integration work is done before we begin the project. We’ll make better use of our assets, including "reusable bid teams" - people who know how to win that business.

Finally, we’ll improve our global capabilities. Our Program Management Office has estab­lished global links, and we’ll improve on that and help work on global service pricing and service warranty. We’ll also improve our global training, methods and tools, as we focus on profit, profit and profit.

Systems integration is big and getting bigger. Today, we have roughly 1,000 projects and programs of all sizes going on at any one time. This is going to continue, and we’ve got to get it right. We’ve got to deliver the full range of services and products and learn how to do it at a profit.

We have a lot to be proud of regarding Digital Services and Systems Integration. Our services are flexible, with a single point of responsibility, the way our customers need it. We’re leaders in supporting a multi-vendor environment; and we’re well on our way to becoming the best world-class systems integrator.

Making Profit From Software by David Stone, vice president, Software Products Group

In the computer industry, we see successive waves of profitability. In the first wave, we we were motivated by selling computer hardware. Our service, operating systems and appli­cations were all intended to help us sell more hardware. That’s where the margins were.

As hardware became more of a "commodity," prices went down, and we couldn’t get the same kind of margins from hardware as before. Then we looked to software for the next wave of profits.

We expect that software will be the driving profit factor for the company over the next three to five years. By that time, commoditization will have struck there as well. We will still want to be profitable in software, just as we still want to be profitable in the hardware business; but the margins will be tougher. We expect the next wave of profits after software will be in systems integration.

Software differs radically from hardware in several important characteristics. It’s in­tangible, intellectual property. It’s hard to "show" someone software and hard to protect it. Also, software doesn’t break, so you can’t build a business around repairing it. If software doesn’t do what you want it to do, that’s because it has a design failure and needs to be re-engineered, not just repaired. Software also has enormously high incremen­tal profit. If you sell one more copy of a piece of software, your incremental cost is nearly nothing — regardless of how valuable and useful that software might be to a cus­tomer. Finally, the selling of software depends on technical support by very competent pre-sales and EIS people in the Field.

To compute the revenue vou would get from a given piece of software, take the mice.

divide it by the number of technical hours required to make the sale, multiply that by the hit rate (because if you only make the sale the half the time, you need twice as much as support as you would with a 100% hit rate), and then multiply by the number of technical hours available.

To get more revenue, you can adjust various factors in this formula. For instance, you can change the price. Or you can adjust the training and packaging to reduce the number of technical hours required. You can help sales people make better decisions about when not to bid, thereby increasing the hit rate. You can also improve the training technology to get people in the field trained more quickly. We have the opportunity to make very good profit from software in FY92, provided that we can get those pieces of the formula right.

Our competitors in software use the following strategy: they call our sales force and say, "We’ve got this great piece of software to sell on your machine. There’s free technical support. Just call this 800 number, and we’ll move a lot of hardware boxes for you." Yes, it’s good to move hardware boxes, but it’s even better if we can sell our highly profit­able software on top. In other words, we have to shift our orientation if we want to maximize the profitability of the total systems that we’re selling.

At the same time, the industry is evolving toward an "information systems utility." Dig­ital started by selling to departments and still sells to them. On top of that, we now do a tremendous business in selling products and services to integrate a whole corporation. Once a company has succeeded in integrating its own departments, it now wants to integrate with its customers and suppliers. Then they’ll discover that the integration work they have done would also be useful to other companies in their industry, and they will sell that integration to their competitors, as we now see to some extent in the banking and airlines industries. After that comes a worldwide utility, which provides the same service but is not specific to a single industry. Sometime around the year 2000, we can expect to see consortia of worldwide computing and communications companies delivering hardware and software capability as a utility service. Delivery through that kind of utility would be the ultimate in commoditization of computing resources.

The market will expand because the major companies in the world will give much of the work of their MIS departments to the utility. That work probably represents between 35% and 50% of all the expenditures that are being made for computing today.

In the utility model, there are basically three places you can sell. You can sell to the end-user, which is a very competitive, highly commoditized market, centered around the human interface device. You can sell to the corporate information officer, who is very interested in command and control, accounting, billing and efficiency. And you can sell to the developer who writes the applications that are used in this utility.

Basically, as we sell corporate information integration, as the industry moves toward the utility model, the industrial or commercial strength of our software and services will have to increase.

The job of our software business is to create the infrastructure that will allow corpora­tions to integrate themselves and will also allow for the growth of industry and worldwide information utilities. At the same time, we have to support the trend toward open, multi­vendor systems.

How can we do all this very complicated, expensive development work and still make money'

First, we have to commit to a set of standard interfaces, both existing and future, that will convince customers and the future information utilities that we will be able to interoperate with other parts of their infrastructure. Today those standards are the Application Environment Specification from the Open Software Foundation (OSF) and the X-Open Portability Guide, together with standards from the International Standards Organ­ization (ISO).

Second, we have to produce and sell world-class products with rich functionality that is not available through the standard interfaces. If we don’t get these products to market quickly enough, someone else will, and we’ll fall behind in the development cycle where new functionality leads to new standards and then another level of new functionality.

Third, we need to work the process of advancing the standards even farther and getting our technology accepted as standard.

We have done very well in the first and third categories. OSF, for example, has bought more than half of its technology from us. We’re packaging the Distributed Computing En­vironment software for them, and we have a very strong bid in for the Distributed Man­agement Environment software.

But, from a software perspective, we have to reduce substantially our time-to-profit and time-to-market. On the average, historically, we have taken four to five years to produce the first dollar of return on our software investments. That is an astoundingly long time. Today, we’re making money in software, and it’s a very attractive business for us. But the historical time-to-market of our products has been far too long. Fixing that is our major thrust right now.

In FY92, we plan to extend our existing, proven architectural capability and product delivery from the VAX VMS space to heterogeneous platforms, including ULTRIX of course. We will then be able to treat our software as a business and not just as a tool to leverage our hardware sales. We’ll be able to make substantially more profit on our intellectual property by judiciously selling it to our competitors and to customers who want to use it on our competitors’ hardware platforms. For instance, we are putting Motif, the OSF stand­ard windowing interface, on Sun platforms and expect to make a profit at it. We’re inter­ested in ACE, UNIX, IBM and Macintosh platforms and windowing terminals — all the places where we deliver Network Application Support (NAS) capabilities.

This business challenges our assumptions about how we’ve dealt with software in the past, but it is a wave of the future for us in making money. We have to package and sell our NAS software appropriately for these new heterogeneous markets. We’re currently working out details of the deliverables.

	Webseltzerbooks.com