Articles about DECmgmt memo
Vol. 10 No. 7__________________________________________________ Aug./Sept. 1991
"MGMT MEMO" was written by Richard Seltzer in Corporate Employee Communication for the Office of the President. It was written for Digital’s managers and supervisors to help them understand and communicate business information to their employees. You can reach Richard at email@example.com
Explaining The Restructuring Charge And Other Aspects Of Digital’s FY91 Year-End Results by Bruce Ryan, Corporate Controller
Review Of The Norwegian Pilot Project by Birger Kvaavik, Country Manager, Norway
Expanding Markets And Reducing Costs Through Strategic Relationships by Henry Crouse, Vice President, Strategic Relations
Project Athena - A New Model For Transferring Technology To The Marketplace by George Champine, associate director, Project Athena, and Jeanne Lyons, Project Manager, External Research
The Role Of The New Corporate Marketing Planning Organization
Update On Digital Services by Russ Gullotti, Vice President, Digital Services
Philips And Digital Agree In Principle To The Transfer Of Information Systems Activities
Corporate Licensing Office Formed
Digital’s year-end financial results include a restructuring charge of $1.1 billion or $8.18 per share. Basically, this charge is for costs associated with downsizing, facility consolidation and equipment writeoffs. A portion of these costs occurred in the fourth quarter of FY91, but most will occur in FY92 and beyond. The cost savings benefits from these actions will increase progressively quarter by quarter.
In large part, we are driven by technology. Our systems become ever more powerful, but considerably less complex, requiring less work to build and to service. And through our use of our own technology, our productivity in all areas — administration as well as engineering and manufacturing — has been increasing faster than the market has been growing. At the same time, changes in the industry have led to the proliferation of ever smaller and less expensive systems, with high competition and lower margins, which makes it all the more important to keep costs competitive. These trends are forcing not just Digital, but the rest of the industry as well, to make fundamental structural changes, to streamline, simplify and eliminate work.
Over the last two fiscal years, we have recognized restructuring costs totaling $1.6 billion. These restructuring actions must be taken in order to remain competitive in our changing environment. The important thing is that we have made the decision and now must complete the actions as quickly as possible. Future cost savings expected from restructuring will help future earnings.
In FY90, Digital had restructuring charges of $550 million. The majority of that money was spent on the people-related costs of downsizing. We did, however, at the same time reduce our facilities by about 4 million net square feet.
The FY91 restructuring charge - $1.1 billion - is currently planned to be split about evenly between people-related and other expenses (including facilities and equipment). That includes writing off equipment that is no longer useful because of excess capacity and technology change (obsolescence).
When we started this effort, we set targets for ourselves to get our whole structure to be world-class competitive. We’re not just trimming. We’re making what we have better than it was before.
Part of the facility expense is for leases on buildings that we are closing as we consolidate operations. For instance, when we consolidate several leased buildings into one building (as we did with the new Powdermill Road facility, MS02, in Maynard, Mass.), the leases in the buildings we are leaving may have a year or two to run and we may not be able to sublet them. In other words, while we do see immediate savings from the consolidation, we have to write off the cost of the leases for the unoccupied buildings, as well as other expenses that continue after we move out—such as property taxes, electricity and maintenance. Those costs can all be written off at the time of restructuring.
With this restructuring charge, the company takes all these one-time costs associated with a major change in the business and expenses them at one time. This way we get them behind us. We get them out of our cost structure. Then future operating financial results will reflect just our day-to-day operations and not costs that we are carrying as a result of restructuring the coporation for world-class competitive operation. We can write that activity off today and then go forward.
Analysts noted a number of positive points in our results, including:
o product gross margin up 2.6%,
o service gross margin up 3.5%,
o operating income up 62% (pre-restructuring)
o continued product momentum particularly at low end, with PCs and RISC workstations up over 100%, continued growth in VAX 4000 and MicroVAX 3100 systems, and
o strong service growth, up 23%.
Revenue growth and the effect of currency
Total operating revenues for the fourth fiscal quarter were up 17% from a year ago; and operating revenues for the year were up 7 %.
Excluding the effects of currency changes, our year-to-year growth was nearly flat. Even so, our revenue picture was better than the results posted by many others in the industry.
Digital has one of the strongest balance sheets in the Fortune 500. We have almost $2 billion in cash and very little debt. We are extremely strong financially.
Our inventory performance in the fourth quarter was outstanding. Inventories declined $48.4 million in a quarter of high volume with tremendous changes in the mix of business. In addition, accounts receivable showed a sharp improvement. In a quarter when we have our seasonally highest revenue growth of the year, we were able to improve our accounts receivable performance significantly over the previous quarter. Both these factors contributed to our positive cash flow in the quarter.
Cost reduction efforts
On a year-to-year basis the costs of the corporation grew at a low single-digit rate — still too high for flat revenue growth, but a good trend nevertheless. That cost performance shows the benefits of the programs that were recently put in place. They were effective and they need to be continued in FY92. In fact, because of the increasingly competitive environment, we need to work even harder on costs in FY92.
We’re not anticipating the economy to improve dramatically, and the marketplace is getting even more competitive. Therefore our efforts to reduce costs while increasing revenues have to be even greater in FY92 than in FY91.
A relatively small business entity, Digital Norway is in many ways representative of the Account Groups now being put in place across Europe. In fact, the Norwegian marketplace seemed to be a few years ahead of the rest of Europe since zero growth and open systems became the hymn of the computer market in Norway in 1987. Therefore, some of our experiences may be of interest to those who are in the middle of the change process right now.
The Norwegian computer market has been shrinking in recent years. So while Digital in Norway has stayed at a flat total net operating revenue (NOR), we have actually increased our market share from 5.7% to 7.1% over the last five years. Over the same period our overall investment level in Norway as a whole has decreased 10% in 1988, 15% in 1989 and 10% again in 1990. We expect 1992 to be the first year with an significant increase in investment --5%.
After several of years of zero or close-to-zero growth, Pier Carlo Falotti presented us with a challenge. "We believe that instead of feeling bad about the situation, the Norway Country Management Team should have the opportunity to learn and be a living example and pilot of how to prosper with zero-growth in revenue. We have directed them to assume they
are a distributor who has to survive with this situation and take all the necessary actions to simplify their processes, organization and reporting and take any other initiatives they feel are needed in their context."
When starting this pilot project, we were faced with three key questions:
o How can we be profitable in a zero growth market?
o How can we reposition indirect support resources to become more beneficial to our customers?
o How can we best handle the technology shift towards commodities and open systems?
The purpose of the pilot project was to enable Digital Norway to meet its financial targets in a zero growth market. Our mission was "to find innovative ways to free up the maximum possible resources to be used for customer oriented needs and work."
Our four key objectives were:
o Put in place an empowered, effective account management organization.
o Further develop our administrative and technical support systems (back office) to give first class support to the account manager.
o Retrain employees and provide stimulating work and if necessary, make use of extended education and/or relocation. (Establishing a feeling of security and trust is very important in this area.)
o Develop first-class communication regarding the work changes made so that everyone knows what is happening and, therefore, can contribute.
We started by defining "The Rules of Engagement" in a fifteen-page document that gives everyone an agreed-upon set of standards of interaction.
We learned that change is difficult to cope with - especially when it is your job content that changes. Many senior managers left during the change process. Only two of the 11 members of the former Country Management Team have the same role today as they had two years ago. Only five of the former CMT are now part of the Norwegian Management Team. Six new managers have now joined the team. We learned the hard way that the best leaders during the growth period may not be the best ones during tough times.
It takes a lot of effort from the team to create and agree on a clear vision, purpose, mission and objectives. Support from an independent and experienced consultant is critical to success in this effort.
We also learned the importance of involving customers in the change process. Our Customer Advisory Board has been helpful in shaping our new organization.
We succeeded in reducing the size of our organization and increasing productivity without loss of quality. We are proud of our achievements during the two-year-long pilot project:
o We reduced indirect resources from 38% of our total to 24% in two years.
o We have reduced the number of employees by close to 20%. This included reducing from 390 person-years to 336 person-years without a formal transition program. In addition, more than 20 employees left during May and June this year as part of a formal transition program. As a result, we started Q1 FY92 with less than 320 people.
o Through open communications during this difficult time we managed to keep the morale, energy and motivational level high.
o We reduced subsidiary expenses more than 10% during a period when annual inflation in the country was 4%.
o We managed to keep Digital’s NOR stable while the total market was shrinking, o We put in place a new management team and a very different structure. The necessary
organizational pruning, based to a large extent on work analysis, has been successful, while maintaining high morale in the organization.
We have now been running with an account-based organization for a full year. The Account Group managers have assumed full responsibility for their customers with enthusiasm. Their responsibility for profit as it was defined (Business Contribution Margin - BCM) made them very conscious of product mix, NOR, expenses in terms of Sales, EIS and Administration resources as well as the devastating effect of discounts and allowances on their bottom line. The pain of not forecasting and communicating resources needed for projects, particularly from EIS, has come into very sharp focus.
We knew from the start that our systems do not support the Account-based organization. It proved to be very cumbersome for the Account Group managers, and we welcome the new Account-Based Management Reporting System. Account managers and Account Group managers will use this to tell where they stand with respect to their financial goals.
A dedicated project manager for the change process was crucial to the success of the implementation. The role of a strong project manager was crucial to us in solving conflicts, maintaining good corporate values, and keeping the necessary discipline in the process. We put particular emphasis on communicating with the employees and showing a clear direction.
While we have now brought the Norwegian pilot to a conclusion, the spirit will remain the same. We are prepared to operate in a close-to-zero-growth market, and we will continue our efforts to optimize resources in a market that requires open systems and commodities as well as solutions and system integration.
Our dedication to organizational change has not, however, prevented us from making longterm investments. We have been successful with investments in three large projects (Defense, Telecommunications and National Taxation System) - from which we expect to reap benefits during the next few years. These were high-risk investments with relatively high initial costs and all of them were decided in our favour.
In all the work we have done in organizational changes and reassigning or eliminating work, we have strived to increase the quality of what we do in order to delight the customer. Therefore, it is only natural that we will, under the Total Quality umbrella, continue the work we started with the pilot. We will focus our effort now on improving the quality of the work we do face-to-face with customers. We will seek reliable and pertinent feedback from customers to find out if we are, in fact, delighting them and living up to our vision.
To do all this we need to focus on employee empowerment and simplify our internal behavior and measurement systems. We want to put top management priority on measuring the kind of behavior that leads to quality.
Strategic alliances and relationships have become commonplace in the computer industry in response to multiple driving forces. Competition has intensified. Strong contenders have emerged, most notably Japanese companies, which have "deep pockets" and vertical integration capability. The playing field is now international as global markets have opened. Growth has slowed in the U.S. Europe is preparing for 1992. Available capital has shrunk as a result of the 1986 tax increase on capital gains. Rapid technology changes have shortened product life cycles, demanding greater flexibility for a company to respond in a timely fashion. Customers have become more knowledgeable and proactive in setting standards, selecting operating systems, endorsing open systems and educating their management teams. In this environment, many companies, including Digital, have discovered that they can no longer do everything themselves.
Partnerships are now an explicit piece of Digital’s overall strategy. These powerful tools enable us to expand and enhance market opportunities and save investment dollars by focusing on our core competencies. A network of partners now shares in the resources, investments, risks, and market opportunities.
Over the past five years, Digital has become increasingly more active in partnering with many different groups, including technology suppliers, software vendors, universities, government bodies, industry groups and venture capitalists. We now sometimes find ourselves in the dual role of competitor/collaborator, partnering with some of our competitors. Examples illustrate the variety of Digital’s efforts.
Our External Research Program works with over 150 universities and research centers worldwide allowing some of the best and brightest minds to collaborate on research that will have significant impact on the world of computing.
Our leadership in many standards organizations and industry-wide groups, such as the Open Software Foundation (OSF), X/Open, and the Advanced Computing Environment (ACE) initiative, has enabled us to enhance customer value through multiple sourcing and accelerating standards.
Relationships with selected vendors, such as the following, have helped customers to work more smoothly in a multi-vendor computing environment and to extend our product set and capabilities.
o Cray Research — A cross-license agreement and technical exchange effort enhances the efficiency of major users of supercomputing technology.
o Tandy - Digital is an OEM for personal computers in the U.S. and other markets.
o Olivetti — Digital is an OEM customer for personal computers in Europe and for lap- tops/notebooks worldwide.
o MIPS Computer Systems - Equity investment and RISC chip technology license.
o NTT - Digital was selected as part of Multivendor Integration Architecture (MIA) Consortium to set computer architecture standards.
o StrataCom — An OEM and equity arrangement for a component of a wide-area networking product.
o Consilium — Equity agreement for manufacturing shop floor software and compatible products.
o Engineering Automation (EA) - Joint venture with ABB for process industry software.
o Quest - Equity and technology license for ceramic technology and manufacture of specialized parts.
These examples also illustrate the variety of forms of partnership available. A partnership must be structured to meet the needs of both parties. For Digital, it must fit within a business unit’s plan and conform to Digital’s product architecture, meet the required financial model, and support the corporate strategy. If one is dealing with a competitor, it is even more critical that the needs and areas of cooperation vs. competition be defined as clearly as possible.
A combination of tools can be used to create the best relationship. The more closely a relationship is tied to a core competency, the more tightly controlled should be the structure of that relationship. The tools can range from distributor arrangements to a controlling equity investment. Two constraining factors make the use of equity the exception rather than the rule to meet a common objective. Jim Osterhoff has stated that dollars for capital investment will be constrained in the foreseeable future and Digital’s cost of capital is high. Other arrangements such as technology exchanges, joint R&D, technology licenses, OEM contracts, and distributor arrangements, enable us to leverage relationships without necessarily using equity.
Our company-wide benchmarking efforts will provide us with data on what will make us a world-class competitor. Partnering is a way to achieve that status. A mutually- beneficial arrangement will allow us to:
o focus our efforts on core competencies,
o lower our investment in areas not considered core competencies,
o increase revenue in our current accounts,
o allow faster penetration or entry into other markets,
o provide greater flexibility and responsiveness to product cycles,
o broaden our set of alternatives, and
o leverage core competencies of other organizations.
The Strategic Relations Group is a core group of a dozen people who focus on non-tradi- tional, complex licensing and funding arrangements. We provide the expertise to help Digital’s business managers understand available alternatives and to fully work through the type of relationship they may need to develop. We also help coordinate the effort to ensure the appropriate legal and financial advice. However, long-term ownership belongs in the line organizations.
In addition to the core SRG staff, over 50 people in Digital focus on developing relationships with other companies.
The Investment Review Committee (IRC), established in 1990 by the Executive Committee and chaired by Jim Osterhoff, reviews and approves all capital and investment requests. The IRC has created a set of guidelines for this process. These are available from John Doherty, Strategic Relations, DTN: 223-5300 or Steve Whitney, Central Finance, DTN: 223-4495.
Our experience to date has shown that the right partnership is effective in cost reduction for technology access and accelerating market opportunities. We encourage managers to take advantage of this powerful tool and include it as a natural part of their business plans.
The recently completed Project Athena was an eight-year project undertaken by the Massachusetts Institute of Technology (MIT), Digital, and IBM to provide a high quality workstation-based distributed computing environment for research and education at MIT.
Digital derived a variety of benefits from its participation in Project Athena including setting standards, and developing product prototypes and requirements. Athena was a testbed for product evaluation, a showcase account, a developer of people and a neutral environment for working with other vendors. In some instances, the technologies were prototyped at Athena and then developed into products elsewhere. In other cases, the concepts were stimulated by activities at Athena and prototypes were developed elsewhere. The best known product handed off to Digital from Athena is the X Window System in the DECwindows product. Today, the X standard is supported by every major manufacturer of workstations. Another development of Athena was the Kerberos authentication service, which has also been endorsed by every major vendor of workstations.
Perhaps more importantly, Athena implemented and validated the client/server model of distributed computing and, in this context, developed an advanced set of system management services. These services have attracted world-wide attention as perhaps the only cur- rently-available solution to managing large numbers of workstations in a heterogeneous environment.
The External Research Group within Digital used Project Athena as its first example of getting innovative technologies to commercial customers, generating revenue for the company and then mainstreaming or spawning the business into within the company.
The old model of technology introduction consisted of five steps: 1) do research, 2) hand off to advanced development, 3) hand off to a product development group, 4) do the development and then 5) ship to customers and support. This "waterfall model" of technology introduction generally took 5-10 years and often failed or was too late. The new model is to take product directly from research to selected customers who need it and are capable of dealing with the problems inherent in using research prototypes.
External Research established an Innovation Technology Resource Center with the mission of developing, deploying and supporting innovative technologies for non-academic and academic customers in order to accelerate new corporate offerings. The ITRC is a virtual or fluid organization made up of a mix of business units within Digital who collaborate for the purpose of establishing themselves early in a nascent business. The Advanced Systems Development Group in conjunction with educational marketing, external research and the ULTRIX Resource Center developed, marketing intailed and supported what became Digital’s implementation of Project Athena software called "DECathena". Due to the fact that DEC- athena is not just software, but a set of configuration and practices, it is sold as a Service Product.
DECathena provides an excellent migration path to OSF/DME (Distributed Management Environment) and uses many of the components already accepted by OSF for the DCE (Distributed Computing Environment).
DECathena also provides additional elements critical to the cost-effective management of distributed systems that are not yet a part of the OSF architecture. By working with commercial customers, we are giving them a head start on where the industry is going, and we will work with them to take care of any changes as further development proceeds. Customers benefit from installing a DECathena environment through managing a large number of distributed workstations from a central location, thereby decreasing systems and operations costs through simplified maintenance and distribution, decreased staff required to install, repair and update systems and effective allocation of resources on the network. They also enjoy the increased security and support of other workstation clients.
After successful installations at Smithkline Beecham, Kodak, and Dupont, Digital announced DECathena as a Services Product offering with rollout in the September/October timeframe. Subsequently, First Boston also ordered a pilot system and Kodak ordered DECathena for a 500 workstation operational system. A new Integration Business Unit (IBU), managed by Jim Neumann, has been formed to focus on deployment of DECathena as Digital’s first "Open Systems Services Offering" for management of large scale distributed workstations in a heterogeneous environment. In addition, the continued development of the DECathena software will transition from the Advance Systems Development Group to The New Software Group in Central Engineering.
Because of the advent of open systems, workstation operating system software and hardware have become commodity products. However, because DECathena is the only available solution to the workstation management problem, and because only Digital supports DECathena, this technology has become an important differentiator that gives Digital salespeople entry to accounts where they otherwise would have no reason to visit. It also has generated significant customer interest in Digital as having a unique advantage in an otherwise undifferentiated commodity market. In some instances, the competitive advantage of DECathena is so compelling that contracts have been awarded to Digital that had initially been lost to the competition, and have been awarded to Digital when Digital was the highest bidder.
The ITRC has been quite successful in validating this new model of introducing technology directly to customers and in the process saving years in lead time.
One of the characteristics of the project that helped insure this success was the built-in requirement that the project actually deploy the technologies it developed. By co-loca- ting development and delivery, MIT reduced the risk of a purely academic research effort.
An aggressive program of technology transfer was carried out by the project but especially during the last two years of the program when results were becoming available. A monthly newsletter was generated and distributed to about 600 individuals who requested it. The newsletter was supplemented by sending technical reports to departments that might benefit from them. In addition, three notes files were created for electronic conferencing; one for project management, one for Athena software issues, and one for deployment issues.
The Athena development was undertaken to solve an important problem and to meet a pressing need; and thus could be reasonably expected to provide important and useful results at the right time. This "problem-directed research" is very productive, in contrast to technology-directed research in which some piece of new technology is explored in an attempt to find a problem that it solves. Since customers face the same problems that MIT did, and are eager for solutions, we were able to transfer the technology directly to selected parts of the market, saving several years of development time, giving us a leadership position and providing immediate help for customers.
Perhaps the most important lesson from Athena is the demonstration that industry and academia can work together to accomplish worthwhile objectives that neither could accomplish alone.
Bill (B.J.) Johnson has been appointed to the newly created position of vice president of Corporate Marketing Planning, reporting to Jack Smith, senior vice president, Operations. In this position, B.J. is responsible for Product Marketing, Corporate Marketing Services, Internal Communications and Public Relations. His new organization will complement and augment the existing Applications and Industry Marketing Group headed by Peter Smith, vice president.
According to President Ken Olsen, "The organization of marketing activities under Bill Johnson enables Digital to further increase its focus on customer and account needs. It effectively positions the corporation to meet the challenges of the computer industry in the 1990s."
According to B.J., the complexity of the computer industry and the increasing sophistication of customer needs "play into Digital’s ability to provide integration services across a multitude of industries on a global scale. Our job is to help our customers improve their competitive market positions regardless of the industry or geography in which they participate."
B.J. says that his key objective is to clearly define Digital’s products in terms of how they fit customers’ needs. "Today, sales people are confused about what products to sell to which customers," he explains. "When we were a one-strategy, VAX VMS company, this wasn’t a problem. Now, with UNIX and VMS products, personal computers and Network Application Support, the strategy is more complicated. We have to make it easier for sales people to answer the question ’why Digital?’
"At the same time," he adds, "Engineering now faces tighter budget controls than in the past. This means that when unexpected engineering problems arise, it isn’t possible to simply ’throw money’ at them to get them solved quickly. As a result, optimistic commitments regarding the availability of products sometimes aren’t being met and sales people who base their account plans on such commitments are embarrassed in front of customers. We need more realistic commitments, and Engineering needs to be held to them.
"We also have to make some changes in the way business units and account organization work together, so sales people get meaningful answers to their questions and so they get timely information regarding changes in product plans.
"1 have identified four deliverables for my first year on the job:
o Product messages that translate into sales strategies. This means clear, concise, consistent, customer-oriented and competitive messages for each and every product.
o More focus on competitive analysis. We are good at competitive analysis of products and technologies but need to look at services and business practices, such as investments in third-party relationships. We need to pull together the scattered competitive analysis resources throughout the company and bring this kind of information to marketing people so they can use it to plan their strategies and tactics.
o Closer links between accounts and other business units. I want to put in place a process for documenting schedules and dates and for managing change. We need a quarterly review of changes and requested changes, with an understanding of who can make changes and how. As with a contract, people have to be held accountable all the way around.
o Goals and metrics for marketing events. For example, for every announcement we should lay out on a time line what we intend to accomplish, especially in terms of customer benefits. And we should put in place measurements so we know whether we’ve accomplished what we set out to do.
"My idea of marketing is getting customers to understand that we have what they want. That breaks into three parts: know the customers, know what they need, and educate them that our product set fits those needs."
B.J., now a member of the Executive Committee, has been with Digital for 18 years in marketing and engineering leadership positions. Most recently, as vice president of Telecommunications and Networks, he was responsible for creating and integrating global networks for customers throughout the world. He is credited with increasing Digital’s networking business from $250 million to $1.5 billion in just four years. He will remain in charge of Corporate Telecom and the Telecom Business Group. His networking responsibilities will be handled by Michael Thurk, previously the Networks and Communications Business manager.
The integration of Customer Services and Enterprise Integration Services (EIS) into Digital Services is advancing on or ahead of plan. This is a complex undertaking. We are merging two organizations that would both be Fortune 500 companies in their own right. Now we have an organization that provides over 40% of the company’s revenue.
We have established the Digital Services framework, and the structural integration of Corporate Services is now complete. The Corporate Clusters, Business Units and Functions are all in place with their managers. They, in turn, will continue to fill in the framework with their own goals and objectives.
The geography Services organizations also have begun restructuring and will be continuing these activities for some time to come. Sergio Giacoletto has been named vice president, Digital Services, Europe, and Jerry Montague has been named vice president, Digital Services GIA. Their headquarters organizations are aligning to support the single Digital Services structure. Full integration of the Services organizations in their extended country structures will be happening gradually.
In the U.S., teams are now being formed to begin the integration process. Integration in the U.S. will be similar to GIA and Europe - geography headquarters first, then a gradual integration throughout the regions. Bud Keating and Ray Wood, Digital Service vice presidents for the U.S., will lead this effort.
In all cases, these activities will progress cautiously, taking care to avoid disruption of ongoing business. Current plans are for all integration activities to be completed by June 1992.
We have established the Digital Services framework, and the structural integration of Corporate Services is now complete. The Corporate Clusters, Business Units and Functions are all in place with their managers. They, in turn, will continue to fill in the framework with their own goals and objectives.
The geography Services organizations have also begun restructuring and will be continuing these activities for some time to come. Sergio Giacoletto has been named vice president, Digital Services, Europe, and Jerry Montague has been named vice president, Digital Services GIA. Their headquarters organizations are aligning to support the single Digital Services structure. Full integration of the Services organizations in their extended country structures will be happening gradually.
In the U.S., teams are now being formed to begin the integration process. Integration in the U.S. will be similar to GIA and Europe — geography headquarters first, then a gradual integration throughout the regions. Bud Keating and Ray Wood, Digital Service vice presidents for the U.S., will lead this effort.
In all cases, these activities will progress cautiously, taking care to avoid disruption of ongoing business. Current plans are for all integration activities to be complete by June 1992.
We know the transition has caused a certain amount of pain and stress, but the advantages of integration are great. In creating a single Digital Services organization, we eliminate the charter overlaps and redundancies that existed between EIS and Customer Services. We can proceed forward with Digital Services under one banner. This will clear up confusion with the field organizations and it will make us easier to deal with for our customers. There will be better coordination in Services and we will not appear disjointed to our customers or our account teams. There are also economies of scale that will be achieved that will help keep our costs lower, thus increasing profits for Digital.
Integrating Services also helps us prepare for growth and profit opportunities in the 1990s. It enables us to focus our energies "outward," positioning our business to line up with how our customers buy.
And we are seeing that customers buy things differently these days. Our customers used to buy VAX/VMS production systems with an application, and occasionally some customizing to go along with it. We built a sales force — and an overhead structure — to support this.
Certainly this continues, but we are seeing other behaviors as well. We have noticed different patterns to customer buying habits and the corporation has categorized them into four types: commodities, production systems, systems integration and services. Digital is in the process of organizing to address these patterns more directly.
We’ve organized Digital Services into three clusters of business units (Product Services, Education and Consulting Services, and Systems Integration and Support Services) to serve these buying behaviors. This also helps us to integrate ourselves more fully into the plans of the rest of the company.
As we’ve been integrating the Services organizations, we’ve joined together to develop a new mission and vision, and some objectives and strategies to help us achieve them.
Our Services mission is to:
Ensure our customer’s success in the use of information for their business by providing services with the best expertise, people, partners and technology available worldwide.
Our vision is: We are the best full service supplier in the industry.
o Our customers say it.
o Our employees know it and are proud of it.
o Our competitors strive to achieve our standards.
The objectives we’ve set are at a macro-level and we know it will take us some time to fulfill them all. These objectives are:
o We will create an environment that promotes continuous improvement in our performance and our learning. We will focus on training, and we will get better every day.
o We will become the #1 world-class systems integrator. Perhaps, we will be the biggest systems integrator in the world, but we will be the clear leader in integrating global customers across oceans and multiple countries. We will clearly be best-in-class.
o We will expand our multi-vendor services offerings to provide multi-vendor services for all our Services offerings. We will be even more "open".
o We will be an organization that focuses on the customer first, and then looks back in. We’ve got to leam to think from the customer perspective — from the outside in, rather than the inside out.
o Digital Services wants to be known for our collaborative behavior within Digital. The word ’interdependence’ will become part of our lexicon. Service strategies will be set jointly with other Digital organizations, and we will be working together.
o Finally* we will grow market share and we’ll do this while also achieving all of our goals for profitability and return on assets.
To accomplish all this, we have put a number of strategies in place:
o We will focus on building core competencies—program management, multi-vendor skills, consulting, etc. Training will be an area of great focus.
o We will work on enhancing our global operations. Our customers with international business concerns are counting on us to do this.
o We will work closely with the Integration Business Units (IBUs) to jointly decide the best way to present ourselves into our target industries, focusing on the areas identified as key strategic markets.
o We will balance our business management capability with entrepreneurship. We want to be responsible and keep good business regimen, but we don’t want to lose the spirit of new ideas and entrepreneurial ism.
o We will continue to build alliances. We cannot do everything by ourselves, and our customers will not even trust us if we try. We must work on partnerships.
o And finally, we will work harder to instill a total quality focus throughout Digital Services. We want total quality in everything we do, and we want to be known for that.
Digital is a services company as much as it’s a hardware or a software company. Digital Services is absolutely crucial to Digital — today, tomorrow, and for a long time to come.
Digital recently launched the "Open Advantage" campaign, which speaks to our ability to meet our customers’ requirements for flexible solutions and their desire to not be locked into a single vendor. Digital is uniquely positioned to do this, and along with "Open Technology" and "Open Business Attitude," "Open Services" is one of the pillars of the campaign.
Customers want to talk about "Open" and we have a great story to tell in Services around the whole environment called "Open."
We can provide multi-vendor support — we lead the industry in providing support for third-party equipment. It’s going to be a key area of strategic focus. We support 8,000 different products from 800 vendors and this is only the beginning. Multi-vendor support means different logistics systems and different thinking.
Digital’s "Open Services" provide flexible solutions. Our customers need unique support services and we’re going to provide them. If they want to stage something in Dallas, break it down, reship it to France and set it up again there — and have the warranty move across the ocean — we’ll work out a way to do that for them. That’s what being flexible means.
Digital Services also provides the customer with a single point of responsibility — one person to manage all the disparate parts of a solution, to make life easier for our customers. Customers won’t have to deal with multiple vendors themselves, and they can focus on their primary business and leave the rest up to us.
We’re setting the standard for services and we intend to become the benchmark in the industry, against which all other services companies will be measured. IBM may have an equal scope and reach, but they don’t have the "Open Attitude," Hewlett-Packard doesn’t have the breadth of services we do, and SUN doesn’t do too well in services at all. They will all be focusing on services someday, but for now we have the advantage.
We’re not only leaders in multi-vendor support, we also have a tremendous training organization. Last year we trained 160,000 internal students and 160,000 external students. If we look at that on a full-time student basis, it’s the equivalent of a 27,000 student university.
Two years ago, we launched our systems integration business. At that time we weren’t even mentioned as a systems integrator anywhere by anybody. Today, only two years later, we're consistently rated as third or fifth, depending on how things are counted.
In summary, we have integrated Customer Services and EIS to position ourselves for the future. We have highly profitable "traditional" hardware and software support businesses which will be maintained and encouraged to grow, and we are also building some new, high- growth businesses.
Services is very big business today, and will continue to be in the future. We are building an organization which will carry us forward to meet the challenge.
Philips Electronics N.V. (Netherlands) and Digital recently announced that they have reached agreement in principle, subject to consultations with the Philips’ workers’ representatives and the necessary official approvals, on the sale of most of Philips’ Information Systems Division to Digital.
The final agreement will cover the Division’s activities for financial institutions, small and medium enterprises, image and document management systems, and all related customer service activities. It will not include Dictation Systems and Smart Card, nor the manufacturing activities in Eiserfeld, Germany. The transfer is expected to be completed by October 1, 1991.
Philips president Jan Timmer said, "This move must be seen in the context of the ongoing rationalization of the information systems industry. Although the restructuring program of our Information Systems Division led to considerable improvements of its bottom-line, we are convinced that the longer term interests of our customers and employees are better served with this transfer of activities to the excellent Digital organization, with which we have had a close relationship for many years. This will allow us to focus our efforts on the personal computer sector of the information technology market. The personal computer business now forms part of the division for Consumer Electronics products."
Jack Smith, senior vice president, Operations, said, "Today’s announcement fits perfectly with our strategy of improving our position in the market for small and medium enterprises and financial institutions. Philips has a good market position, excellent products and an in-depth knowledge in specific areas of interest to us. Digital’s outstanding range of products and the expertise of our people, combined with the specific know-how of Philips, make a perfect match. We are both committed to the world of open systems and international standards, and together we will be able to provide new, additional benefits to customers based on our combined strengths."
Both companies also announced that they had agreed to explore the possibilities for cooperation in a wide range of areas including personal computers, components, CD-I (Compact Disk Interactive) and other multi-media applications that will increase the business potential for both companies.
All employees involved in the information systems activities covered in today’s announcement, approximately 7000 people, will transfer from Philips to Digital.
Philips Electronics N.V., founded in 1891 and with headquarters in Eindhoven, The Netherlands, is one of the world’s largest electronics companies, with sales of $30.8 billion in 1990 and 262,900 employees worldwide. Its products include lighting, consumer electronics, components, semiconductors, personal computers, communication systems, medical systems, industrial electronics and domestic appliances and personal care products. Philips and Digital already have a long standing relationship and both companies consider this agreement as a perfect fit. For Digital, the strengths of Philips’ Information Systems Division are particularly important:
o A good market position with small and medium enterprises specifically in the areas of general business applications, local municipalities, health care, printing and publishing, wholesale and distribution, travel and hotels.
o A solid market position in providing solutions to financial institutions, specifically front office solutions. (They have more than 150,000 seats installed in 20 of the leading European banks.)
o A tradition of commitment to standards and open systems. (Several years ago they announced a strong commitment to open UNIX systems based on Intel and Motorola. Their strongest focus is on the Intel platform, which fits very well with Digital's Intel- based line of products.)
Furthermore, the culture of Philips fits with Digital’s.
This agreement should be seen as an important element in Digital’s efforts to achieve future growth and development in Europe. It will increase Digital’s market share, expand its distribution channels and customer base, and also strengthen its system integration capabilities and product offerings.
A Corporate Licensing Office (CLO) has been formed to license out Digital’s patented and non-patented technology for revenue on a worldwide basis. The CLO is a corporate function that operates as Digital’s licensing agent in behalf of the Product Creation Units (PCUs). It works collaboratively with PCUs and others to enable them to develop and implement revenue producing licensing-out business strategies. The CLO reports to Martin Hoffmann, vice president and general counsel .
The CLO is already operating as the licensing agent for a number of organizations, including the Compound Document Architecture (CDA) Program; the Electronic Publishing Systems (EPS) Group; Distributed Computing Component Engineering (DCCE) for the LAD/LAST Program; International Account Development Program (IADP) within TNSG (The New Software Group); the Process Technology and Development (PT&D) Group; Telecommunications & Networks Manufacturing Group; U.S. Area Manufacturing (USM); and the Corporate Research Group (CRA). In addition, the CLO is working with many other organizations to help them develop and implement licensing strategies in support of their business plans.
Jan Jaferian has been appointed Director of the CLO. Since joining Digital in 1974, she has worked in various business, engineering, marketing, quality and strategic relations assignments in such organizations as ISB (Information Systems Business), LSG (Large Systems Group), CRA and GIA.
Jerry Lester, who brings twenty years of licensing experience as well as an engineering background, has been appointed Corporate Licensing Counsel to support the CLO. Jerry joined Digital in 1981, and has been Counsel for the former High End, Mid-Range, and Software Engineering Groups, as well as more recently the ISB and CRA Business Units.
Bill Bruckert, systems architect for the fault tolerant family of products, has been named Senior Consulting Engineer. He has contributed to the architecture of the VAXft family of products, as well as to the areas of system availability and reliability. Among his accomplishments, Bill has published an article in the Digital Technical Journal, authored a chapter in "The Theory and Practice of Reliable System Design", Second Edition, and is the holder of over 20 patents or applications in process. Since joining Digital in 1969, Bill developed several DECsystem 10 options and was the lead engineer for the VAX 8650 system.
George Champine has been named manager of the Infrastructure Technology Office in Corporate Information Management and Technology. He will report to John Pacy, manager of IM&T Infrastructure Strategies and Services. A critical IM&T strategy is the re-design of Digital’s information technology infrastructure to an enterprise model. George will concentrate on assuring the technical integration of the infrastructure to support multivendor products, services and technologies. As a member of the Corporate Research organization, for five years George managed Digital’s participation in Project Athena at MIT. Earlier, he represented Digital at Micro-electronics and Computer Technology Corporation in Austin, Texas.
George "Bud" Keating has been named U.S. Customer Services vice president, reporting to Don Zereski, vice president, U.S. Area, and Russ Gullotti, vice president, Corporate Services. Prior to this appointment, Bud served for several years as GIA Customer Services vice president. He joined Digital in 1981 and has held a number of key management positions within Customer Services at the Corporate level. He was appointed Business Ventures Group manager in 1986. Prior to joining Digital, Bud was the vice president of Customer Services for a Digital OEM and held other key service management positions within the industry.
Rich Nortz has been appointed vice president, Desktop Business, reporting to Don Zereski, vice president U. S. Area. In this newly created position, Rich is responsible for focusing all sales, marketing, service and integration efforts in the United States into a cohesive strategy that positions Digital as the number one supplier of Desktop products, multi-vendor Desktop integration, and Desktop services. Rich has managed the U.S. Customer Services organization for the past two and a half years. During this time the organization has seen significant improvements in customer satisfaction and major increases in profits.
Mike Thurk has been appointed group manager,
Networks and Communications Group (NAC) reporting to Jack
Smith, senior vice president, Operations. Mike has been with
Digital since 1980. His most recent position was the Networks
Business Group Manager and he has served as acting Networks
manager since April. Prior to joining Digital, Mike held
positions in marketing and engineering for GTE Sylvania.