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