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Articles about DEC
Volume 8, #5 July, 1989
On May 4, 1989, over 700 senior managers attended Digital’s State of the Company Meeting in Merrimack, N.H. One key message from that meeting was that Digital has to be flexible and adapt to change to remain successful in the future. Speakers described changes in internal operations intended to better meet customer needs and to make it easier for customers to do business with Digital. They also emphasized the importance of the company’s philosophy and such values as honesty, integrity, trust, goal setting, innovation, creativity, and providing value to customers. The following are summaries of the speeches.
State Of The Company Address by Ken Olsen, president
Digital’s Integrated Application Environment - Leadership In The 1990s by Peter Smith, vice president, Product Marketing & Systems Engineering
Understanding And Explaining Digital’s Product Strategy by Bill Strecker, vice president, Product Strategy and Architecture
Information Management Systems by Grant Saviers, vice president, Storage and Information Management
Transaction Processing by Dennis Roberson, manager, Transaction Processing Group
The Role Of PCs In Digital’s Application Strategies By Henry Ancona, Vice President, Business & Office Information Systems
PC Local Area Networks by John Rose, group manager, PC Integration
Opportunities With Large-System Customers by Bob Glorioso, vice president, High Performance Systems
Systems Integration by Russ Gullotti, vice president, Corporate Enterprise Integration Services
Financial Status And Issues by Jim Osterhoff, vice president, Finance
Our Selling Philosophy And Strategy In The U.S. by Dave Grainger, vice president, U.S. Sales & Services
Digital’s Values In Times Of Change by John Sims, vice president, Strategic Resources
Ken Olsen Responds To Questions From The Field
We have the best people, best products, enough money, and magnificent technology - we have no excuse not to be the best company with the fastest growth and the best and highest quality service. The challenge ahead of us is to change with the technology.
With this year’s budget, we’re simplifying the Field. The U.S. Field operation under Dave Grainger will be the account support team. Every customer will have a Digital team supporting them. Big customers will have one, two or three dozen people supporting them. In the case of small companies, we may have one, two, or three dozen customers per person. Our people will know the customers’ problems and politics. They will know the future needs of those companies and will make sure that we do our part in filling those needs. Each account will have a plan and a budget. That budget will call for the staffing, promise a return to justify it, and include all the resources necessary to carry out the support.
Ail of us are here to support the sales people, because they are the ones who support the customer. The sales person is the manager of the account. That means that he or she has the responsibility to make sure we carry out what we have to do to satisfy the needs of the customer.
Our sales people can’t know everything about all our products. We encourage them to learn everything they can, but they still need support from specialists. These specialists will be budgeted by, be trained by and be part of the group that develops the products. They will serve as one of the resources of the sales team. The product group is clearly responsible for the product message presented by sales to the customer. The rest of us are there to help.
I have a daughter who at the age of 15 went shopping in Boston twice a week. She kept telling me how much money she was saving me by buying things on sale. 1 knew there was something wrong with this, so I told her, "You set a budget. Lay out in a budget anything you like. Then you live with it, and I’ll support it." When she set the goal, she was so stingy I knew she couldn’t live with it; so twice, without any suggestion from her, I raised it. It was still tremendously less than when she was "saving money for me." There’s a lesson there. When we set goals for ourselves, we set high standards. And measurements are important so we know how we’re doing.
We owe it to our well-trained and well-educated people to have them set their own goals, then see how they do and let them get the satisfaction of a job accomplished. This approach is absolutely opposed to the idea of goals, set from on top and policed.
Sometimes we backslide. When the company was driven from self-imposed goals, we grew 30% and 40% a year. There might be a hint of an idea of why we’re having difficulty growing 10% right now. As Drucker said, measurements are intended for encouraging self-motivation; they’re not there for the boss to use to drive the individual.
Our values are an important part of how we make decisions and conduct business. First of all, we believe in honesty — not just when it pays, not just when someone’s looking, and not just when it’s good business.
Our belief in honesty has many implications. You can be technically honest, but actually dishonest. You can present everything that’s factual in such a way that the customer or your boss walks away with the wrong impression. That’s dishonest.
Remember, it’s hard enough staying out of trouble being honest. Maintaining a lie is intolerable.
We also have certain beliefs about people. We never guarantee that we won’t have a layoff. We couldn’t guarantee it. But we do take care of people problems with very careful consideration.
At times like these, managers should look at employees as they would their own families. You encourage them to grow and to learn. You are firm with them and hold them to plans. You also challenge them to create jobs that are exciting.
When we find that we have an imbalance of people — too many here and too few there, too many with this skill and too few with that - it’s our responsibility to work that out thoughtfully. That means that sometimes, we have to re-train or move people, and sometimes we help them find other positions.
We believe in giving people a chance. We all make mistakes. At one time we had a senior person who wasn’t getting his job done. The vice-president who was his boss said to me, "Ken, let him go." I answered, "Not one of you people would be here today if I fired you when you made your first serious mistake." That’s probably true of all of us.
We want to trust people, and we should make it easy to trust people. Start with the assumption that people want to be honest. Then make sure you never have an accounting system that lets people mix up their money and company money.
I want to have each account team and each product team have a plan, and then trust them. 1 want to make it easy to trust them. All of their expenses get reported every month. They know exactly where they stand. All the results and dates are clear. Everybody knows automatically whether or not they make their dates and budgets. Also, when a budget is approved by the Executive Committee and the Board of Directors, that budget is sacred for a year. Budgets should be formally presented and argued once. Results are reviewed. If some catastrophe happens, obviously budgets are changed. The budgets do not need constant politicking and watching.
The last area that we have to work on is creativity and invention. Most big companies do not allow creativity. When a central committee does all the planning, the span of products is limited to the breadth of the committee. When staff has to review all projects, only projects which have already been done by somebody else get through the system.
In his book Mr. Morita of Sony said that when he introduced the Walkman*, he knew that none of the groups in Sony would allow it. He couldn’t show it to the engineers. They had never seen one and wouldn’t have anything to do with it. The marketing people couldn’t carry on a market survey, so they would have nothing to do with it. And the financial people wouldn't even consider it because there was no data on it. He knew he had to do it all by himself and his future depended on its success. It turned out to be one of the great innovations in the home electronics business.
We don’t want to be like the normal big company, with all of the financial control and all of the staff, who have absolutely no obligation to get anything through, only an obligation to keep us from getting into trouble. One way to stay out of trouble is not to let in any Walkman. And the worst organization is the one that thinks it is innovative, but nothing gets through the staff. That’s a challenge. We encourage a lot of innovation.
We have the resources, the people and the money. The market is out there. There are a lot of new questions out there, and we’ve got to find the answers. There’s no limit to what we can do, if we set about to do it.
*Walkman is a trademark of Sony Corporation.
It’s very easy to make mistakes predicting a future solely on the basis of technology. There is no question that we will continue to need leadership technology to assure competitive price/performance platforms — and I have no doubt that we are, and will continue to be, committed to putting many MIPS on the desktop in our departmental systems and in the data center. But that’s not enough.
We need to adapt our technology and provide solutions to meet the organizational, economic and cultural challenges that shape the way people and enterprises really work today and in the future.
In the past, developers have offered single applications that would greatly enhance the productivity of an individual, such as spreadsheets and word processing systems. Many of these applications were well written and truly helped individual productivity.
Over time, applications proliferated independently. They didn’t look or feel the same, resulting in the need for heavy investment in training by the customer. Most importantly, they didn’t work with each other, either on the desktop or throughout the organization. This placed limitations on their overall effectiveness and on their ability to solve real business problems. As a result, some effort was made to develop applications that would look and feel the same to the user. This is becoming more and more common today, and represents a genuine gain in ease of use for the end user.
That’s a step forward, but it still doesn’t address the major problem: the inability of applications to work together to solve complete business problems.
Many customers have therefore invested to develop customized solutions to maximize their existing applications. In a particular customized situation, all the pieces can be made to work together to solve an organization’s business problems. The drawback is that these solutions have no flexibility. Unfortunately, in today’s competitive climate, no business problem remains static, and customized solutions can quickly become outdated.
A better approach that makes sense for both customers and application designers is to build on an architecture or an application environment, as Digital has done. This approach provides users with the consistent look and feel that will help individual products, but also one that has been designed from the beginning to allow applications to work together.
It maximizes investments in older applications and has the built-in capacity to integrate present and future applications as well. This is key to providing a comprehensive environment for our partners’ and customers’ applications development activities, and to Digital’s systems integration approach.
This is only possible with a very disciplined approach to the system architecture. And this means carefully defining the pieces and how they work together.
If the architecture is well done, it will provide comprehensive capabilities to solve today’s business problems and it will evolve over time to take advantage of changing technology and customer requirements.
This means that without changing the overall system architecture, we can change or evolve one component of the architecture to an open systems standard, for example, as we did with DECnet to OSI networking software. Or, we can introduce new, parallel components, while maintaining overall system integrity and continuity for customers and applications partners who have made major investments.
In our vision, software developers want to be able to write applications only once and then deploy them on any size system anywhere in the customer’s enterprise.
Our customers need to be able to gain access to the applications they need to get the job done; to communicate with people within their department and across their entire organization; and to share information and resources with their colleagues around the company. They need to be able to do these three things no matter where they are located or what system they are using.
The backbone supporting these needs is what we have called the Application Integration Architecture or AIA. Simply stated, AIA defines the standard which provides a foundation for the development of products that support the building of a distributed computing environment, embracing applications running on Digital and non-Digital platforms.
A full range of applications built on this powerful application integration foundation is critical to our strategy. With our software partnership programs, we continue to assure availability of a wide range of applications. Together with our internally written applications, our applications partners continue to be an inherent and critical part of our systems strategy for providing solutions to customers.
From an application partner and customer viewpoint, what’s important are the actual tools, products and applications delivered based on this foundation. Announced in January 1988, Network Application Support (NAS) provides common applications access, communications and information and resource sharing across multiple systems both Digital’s and other vendors. Think of NAS as the deliverable built on the Application Integration Architecture just as DECnet software is the deliverable built on the Digital Network Architecture or DNA.
Evidence of our success with software developers is the impressive number of companies that have been through our various training programs — many have committed to deliver applications based on our DECwindows environment and the Compound Document Architecture on both VMS and ULTRIX operating systems. Over 700 have been through DECwindows training. Over 200 have committed to build applications, of which some 120 will run on ULTRIX software.
Conveying these strengths to our customers is critical as we move into the 1990s. We need to differentiate ourselves from the competition in crisp and clear terms.
We can be successful if we:
o Just say yes to the past — assuring our customers that our applications environment embraces multiple vendors systems so they can enhance existing applications, and not have to replace them.
o Just say yes to the present - helping our customers choose the best platform for the job with confidence that they will be part of our unified software environment.
o Just say yes to the future — offering the best software development capability in the industry for applications in a distributed computing environment, helping our customers build for the future.
For ourselves, we should remember that we are in a continuing period of change. Extrapolating past success is dangerous. Digital is becoming more and more a software company. As we do, we must balance the need for technological innovation with the need for continuity and smooth application of technology to our customers’ needs. The challenge for us is to look at things differently, behave differently and work differently, as we move into the 1990s.
Our product strategy is evolutionary. There’s much which carries over from the past, but there are significant changes as well.
In the late 1970s, we set out to provide a family of computer systems built on:
o one hardware architecture (VAX and the Digital Storage Architecture),
o one software architecture (VMS, VIA and ALL-IN-1),
o one communications architecture (DECnet), and
o one local area interconnect (Ethernet).
We often represent our overall system architecture in a layered fashion. At the bottom lies a hardware architecture. On top of that lies a communications architecture, then an operating system architecture, an information management architecture, an application integration architecture, and finally the applications themselves, which come from a number of sources, including Digital, third parties, and customers.
By executing our focused strategy, we built a broad range of compatible computer systems: the same software runs bit-for-bit across the full range of our architecture. We have a high-quality, highly-functional software system; excellent program development tools; industry-leading networking; and a rich application base. All this has led Digital to the number two position in the computer industry.
However, nothing stays the same. The strategy that was right for the late 1970s needed to evolve to respond to changes in technology and market conditions that occurred in the 1980s and are expected to occur in the 1990s.
Microprocessor performance is increasing at a dramatic rate - 50% to 60% a year - leading to dramatic effects in a very short time. Already, microprocessors are challenging the largest mainframe computers in terms of performance. At the same time, the graphics- iconic user interface has become established as the wave of the future, and industry standards have become pervasive. Standards affect all the areas where Digital traditionally has added value: the instruction set, the operating system, the network, the languages and so forth.
Recognizing the advantages of microprocessor performance, customers have moved applications to distributed microprocessor-based computers. But they need to link all these machines together into a coherent distributed computing system.
Today, our customers are less interested in the components that make up information systems (disks, CPUs and operating systems) and are more interested in how all these are tied together with applications to solve their business problems.
Depending on how you count, Digital has about 7% of the information systems business. So
we should expect that when we sell our solutions to our customers, about 93% of the systems that they have came from other vendors. To provide a distributed application environment, we have to integrate with those other systems.
The competition has changed, too. Many of the competitors we faced in the late 1970s are no longer significant factors in the industry. Instead, we’ve attracted new competition, in particular from IBM and Sun. Meanwhile, Hewlett-Packard has executed a strategy similar to ours and is challenging us by doing many of the same things that we’re trying to do.
What opportunities result from these changes? First, we can provide a broad-based alternative to IBM enterprise-wide information systems. Second, we need to respond to the challenge that’s coming from other vendors, such as Sun, who are introducing a new style of computing. We can do that by providing competitive workstations and servers. Finally, we need to identify areas where we can lead, such as distributed computing and information system solutions, as opposed to system components.
To respond to those opportunities, we are working on:
o desktop computing,
o enterprise-wide networking,
o industry standard operating systems,
o transaction processing and databases,
o the establishment of a contemporary applications environment,
o distributed computing, and
o systems engineering or application platforms.
In the area of desktop computing, Digital has a very strong position in terminal-based systems, shipping about half a million video terminals a year. In addition, we’ve initiated a major program to create leadership 32-bit desktop systems, which build on our VMS and ULTR1X operating systems. Some of those products have been announced already.
In the area of enterprise-wide networking, we are evolving DECnet software from proprietary protocols to the OS I international standard protocols. This change is essential for us to realize our vision of multi-vendor networks. We are also investing in the components to build very large wide-area networks and in improving the speed and reducing the cost of local area networks.
Today, many customers have established policies that require that their operating system interface will not be proprietary to any particular vendor. Also, there are many areas where the best applications run on UNIX systems, and our customers need access to these applications in order get their jobs done. Responding to these needs, we are aggressively developing both VMS and ULTR1X software within the confines of a common, single system architecture.
Because VMS and ULTRIX operating systems have different strengths and weaknesses today, we are even-handedly marketing and selling both, to match real customer needs and requirements. At the same time, we’re working with other computer vendors to insure that the UNIX interface is a true industry standard, and not just another proprietary operating system. In addition, we are working to include support for software standards, such as the POSIX interface, in our VMS operating system.
Many enterprise-wide transaction processing applications require very large, very high- performance databases. Digital has initiated a major program to enhance our database and transaction processing capabilities, to state-of-the-art levels.
Digital has had the lead in distributed applications, based on our DECnet, VMS, VIA, and ALL-IN-1 software. However, the changing technology, and changing application requirements have motivated an across-the-board updating of our application environment. Our overall program in this area is known as Applications Integration Architecture. Products already announced include our DECwindows graphics interface, and our Compound Document Architecture (CDA), which not only handles text and numbers, but also graphics, images, spreadsheets and tables. We are implementing these developments in both VMS and ULTRIX software.
Our overall distributed information system model consists of client systems and server systems. Typically, applications run on client systems that are deployed on desktops or at workgroup or departmental levels. Data resides on the servers which are typically deployed at the departmental and enterprise levels. Our network and our distributed systems architecture links all of this together. The program name for our distributed system services is Network Application Support (NAS).
For major application areas, such as engineering, factory, laboratory and office, we are developing application platforms that include suites of applications (often from third parties) with all the integration software they need to work together. We believe that application platforms will make it much easier for sales people to sell, and much easier for Software Services to customize those platforms into the particular solutions needed by our customers to solve complex information system problems.
Our current product strategy can be summed up in four points:
o a desktop-to-data center family of computer system products based on a single comprehensive system architecture, including both VMS, and ULTRIX operating system components;
o complete local and wide-area networking products that are built to the emerging OS1 standards;
o a high-level distributed system architecture, implemented as a comprehensive set of network application services, to build business applications for multi-vendor networks;
o a set of application systems that facilitate economical solutions to complex information system problems.
Basically, today, we have the same six layers of our architecture, but we’ve enhanced those layers to include some additional elements. At the bottom, we have added RISC hardware platforms. Our networking strategy has evolved to DECnet/OSI. We now have two equally strategic operating systems (VMS and ULTRIX). Our VMS operating system is aggressively supporting standards. We’re moving to an information management architecture that is common to both VMS and ULTRIX software. And, at the applications integration layer, we’ve introduced our Applications Integration Architecture, and in particular our DEC- windows environment.
The ability to integrate an enterprise depends on a structured, purposeful approach to organizing information. That means giving people access to data no matter where it resides, and in whatever format. It also means enabling them to transform that data into useful information that can be given meaning in a relevant context. We call our solution "the information network."
We’ve moved into an era of database systems with sophisticated management tools that make network-wide transactions increasingly possible. While we can provide order and structure to all the bits, we’re still managing the use of data on a rather low level.
There is no way to stop the proliferation of data. At a recent Gartner conference on storage products, 10% of the users said they already have more than a terabyte of data in their computer systems. That’s equivalent to filling the Mill completely with four-drawer file cabinets, stacked wall to wall, and floor to ceiling.
We already have devices that can store trillions of bits and retrieve them at the rate of millions per second. And we’re on the threshold of another massive growth in data collection - the ability to incorporate image, voice, and unstructured objects into our computer storage.
If the real objective of better information systems is effective and appropriate action, giving people the right information in the right place at the right time becomes a priority. '
The opportunities are enormous, and Digital is already a leader in distributing computing
and information. The keys have been our advantages in distributed computing and multivendor interoperability. Now another aspect of distributed environments is coming to the fore — the fact that most customers have data stored on equipment from many vendors and need to share information. And Digital is poised for leadership again, as the industry pacesetter in the sharing of information, enterprise-wide in the new, distributed multivendor setting.
Our response to that challenge comes in three dimensions:
o an overall action plan for integrating the enterprise by connecting heterogeneous environments into our enterprise networks,
o a strategy for applications integration that will help people become more productive with information,
o and the technological road map for building the products customers need for storing, retrieving, and gaining access to data.
The major challenge in enterprise integration is the need to support a broad range of software and hardware environments in a multi-vendor network. Our objective is to make the Digital computing environment transparently available to the user anywhere in this multi-vendor enterprise, by providing easy interoperability and consistency throughout. We’ve already made good progress on this.
In terms of information management, there are three styles of computing. Two of them, decision support systems and transaction processing, are database-oriented. Then there are all the other applications. Most applications running today don’t use a database, but every future application should be built on one.
Decision support systems are the ad-hoc, spreadsheet, query types of systems that put emphasis on the end user. They’re widely used in business to access information that may be part of a transaction processing system or a manufacturing application or a corporate payroll. Information that’s most likely created and managed by dedicated applications or by a transaction processing system. Digital’s DEC Decision and Team Data decision support products are flexible and easy to learn and open the door to effective end-user decision making.
We have an aggressive on-going, third-party program to provide additional decision support tools. We encourage this because these languages and tools are rather like flavors of ice cream. Individual tastes vary. The more choices we have available the better.
The second area where the database is key is in transaction processing. Suffice it to say with ACMS and DECintact products, we are creating an environment that has the right capabilities and features for distributed, high-performance, high-integrity, transaction processing.
The transaction processing emphasis is on performance-critical storing and retrieving of data. No mistakes are tolerated. The key products, besides the database, are transaction processing monitors and forms systems. In general, our approach is the opposite of decision support computing. We do not support monitors from third parties, since the criteria is not multiplicity of offerings but integrity, performance, product quality, and fully integrated support.
That we can support simultaneous computing in multiple environments is a key differentiator for Digital overall. That transaction processing, decision support and applications are well integrated into the information network is a real Digital strength.
Most of today's applications were not built on databases due to past performance and capacity limitations. Those issues are behind us. Databases now provide a standardized, efficient, and secure way of storing and retrieving all enterprise information and should become the underpinning for applications in the future. Use of a database assists application developers in addressing the needs of their users more rapidly and efficiently. Use of a database also insures that people can re-use underlying data and information as applications change to meet business needs.
What role does our Rdb distributed database system play in integration? Very simply, it manages information, stores it, guarantees its integrity, facilitates interoperability, and delivers the data to the people who need it. Our integrated architecture for achieving this is Digital Distributed Database Architecture, DDDA.
From time to time we’ve been asked why we’re incorporating the run-time environment of our Rdb database system in every release of the VMS operating system. The answer is that the technology for storing everything in a database is so sound that much of our other software is already using an Rdb database to store their own critical parameters. It’s just smart practice to take advantage of a resilient, structured, easily-accessed environment that’s stable over time and, which is also usable by other people. It leverages productivity, provides flexibility, and promotes efficiency. Every company should put everything they know in distributed Rdb databases.
Meanwhile, storage technology continues to advance. An increasingly broad set of high- performance, cost-effective storage subsystems are available to manage and store customers’ information. Our quality, reliability, and performance are at industry-leadership levels today. Our goal, which we’ve met in several areas, is to have technology and cost leadership as well.
For programmers and customers who see the problem as a memory hierarchy, the issue is maximizing performance and minimizing cost. The operating system and CPU hardware have been the means to optimize the interplay of the CPU with its caches and main memory. Now customers are demanding we automate the overall information management task, too.
Our job is to insure that the right data is on the right storage device at the right time. We believe we can do that best under the umbrella of an integrated architecture. We are calling this plain AIM, or Architected Information Management. It’s a cooperative program among storage, database and the operating system people. Current and near-term elements of AIM include library management, back-up capability, performance optimization, and system availability. AIM will give our customers large productivity gains and reduce costs on the operations side.
In the area of hardware technology, Digital has leadership in many of the component technologies. We have the best applications integration strategy in the industry. We’re strong in database and the interoperability capabilities that let people work with and manipulate information for increasing productivity. The market is recognizing these capabilities.
With continued investment and attention to the challenges, Digital is in a strong position to be the industry leader in this next evolution of computing — implementing the information network that is the integrated enterprise.
The handling of business deals with computers is a very large, rapidly growing business opportunity. In 1988, transaction processing (TP) represented an estimated $30 billion a year business. Current industry projections indicate a compound annual growth rate of over 13% during the next several years. That would make it a $75 billion business in 1995. The computer business as a whole is only growing at about 8% a year.
Transaction processing is demonstrating this rapid growth based on its provision of exceptional, real time control for all areas of a customer’s enterprise. It is being used in virtually every major industry and in the full range of large institutions like governments, hospitals and schools.
To cite, specific examples, transaction processing enables banks to provide credit card and automated teller machine services to thousands of customers. Financial institutions throughout the world use transaction processing to monitor funds flow on a real-time basis. This allows them to use sophisticated strategies to manage money and, therefore, to have more money at their disposal than would otherwise be possible.
In a manufacturing environment, transaction processing is used for everything from order processing, inventory management, and warehousing to scheduling, distribution, purchasing, process control — even personnel.
In retail businesses, it’s very important to know exactly where your goods are in the pipeline, to keep your flow of goods and exchange of money active and to keep your inventory turnover high. That’s how you avoid keeping goods on the shelves that aren’t selling, and you make sure the goods that are selling are in constant and uninterrupted supply. Real-time control over these factors is key to success.
In a hospital, transaction processing can make all the difference in life-and-death situations. It enables an emergency medical dispatcher to make sure the right doctors and specialists are called, the appropriate facilities are made available, and the right supplies — such as blood of the proper type — are where they are needed. And it does this in a time-critical environment, with no room for error, while economizing use of valuable resources.
In telecommunications, cellular telephones have created a brand-new set of transaction requirements for tracking and billing phone calls. Digital’s distributed transaction processing has quickly gained marketshare in this fast-growing industry.
Transaction processing allows you to understand your situation continuously. In any business or institutional endeavor, that’s the kind of power that propels success.
Before Digital announced its DECtp products last July, the Gartner group estimated Digital’s 1987 position in transaction processing at roughly 4% or $1.1 billion. As our transaction processing customer base has expanded and matured, we have established a strong set of over 25 reference accounts, representing a wide range of industries.
We are taking tremendous advantage of the opportunities offered by the economic unification of Europe in 1992. Our DECtp solution is being particularly well-received in Europe because our capabilities allow corporations to expand across country boundaries, while maintaining consistent functionality. We are making similar progress in GIA, and particularly in the Pacific Basin, where our growth rate and opportunities are extremely large.
Our transaction processing announcement last July has had a dramatic effect on our FY89 results. We are nearing the 2,000 mark in DECtp-monitor- based systems. This complements the 11,000+ systems we have sold with our Rdb database product. This growth in TP systems translates to Digital transaction processing revenue growth of over 50% from year-end 1988.
Transaction processing is a full systems approach to computing involving all elements of the Digital layered architecture. Our FY89 hardware and software announcements have enhanced our transaction processing capabilities at the system level across the domains of function, capacity, performance, price and standards compliance.
Beyond the applications portfolio, the critical software elements of a transaction processing system include:
o the tools required to develop applications, testing and VAXset CASE products,
o the forms that provide the interface with the user,
o the monitors, which provide "traffic cop" coordination between the various functions of a transaction processing system,
o a strong database capability, and
o the operating system, which serves as the firm foundation.
Our plan is to migrate and enhance our existing tools, forms, monitors, database and operating systems into a full set of strategic offerings.
This has already begun to happen with the recent announcement of our leadership, international standard compliant, forms system - DECforms. Over the next two years we intend to merge our two current monitors into the DECtp monitor, a merger of functionality that preserves the ACMS and DECintact interfaces, and therefore the existing applications investment.
Rdb — the most popular database on VAX computers — also has considerable enhancements coming that improve not only its transaction processing performance, but also its flexibility in handling distributed environments.
VMS software is being enhanced to incorporate transaction processing primitives to improve transaction processing performance and functionality.
Finally, our leadership tools will be greatly enhanced and further integrated as we continue to evolve this critical application development environment. Our recently-released Debit-Credit benchmark results show that we have clear price/performance superiority over - not only IBM - but also Tandem, the two leaders in today’s transaction processing marketplace.
Beyond offering price/performance superiority, we offer our customers tools and an environment that allows them to rapidly develop their applications. And we offer the capability to distribute transaction processing over geographies and over organizations. Our client-server-based architecture — DECDTA — is something the competition simply does not provide. This guarantees future growth capabilities, and protection of our customers’ investment in their DECtp solution.
Given the worldwide opportunity and rapid growth, and the successes that we’re seeing in many parts of the world, transaction processing is a pivotal challenge for us at Digital. Our obvious challenge is to take advantage of this substantial opportunity in order to move our business along in the 1990s.
Digital is positioned to win in the PC local area network (LAN) market. We have the products, services and the application strategies.
The market in general is positioned for growth. Industry projections show that by 1991, worldwide shipments of PC LANs by U.S. manufacturers will total $16 billion. In addition, PCs on LANs will represent another $17 billion.
The two areas projected to show the most growth are in servers and customer services - Digital’s traditional strengths. So we’re already positioned for success in the 1990s. But there’s some stiff competition. Novell and 3Com have been the key competitors in the niche market of small, dedicated packaged LANs. But now major computer vendors, such as IBM and Hewlett-Packard, are entering this market in a big way.
We have the products, the services and the will to win. Our strategy fits our strengths in networking, servers, and standards. Our challenge is to ensure that we all understand the strategies and that we all work together to dispel the myths surrounding Digital and its PC and LAN strategies.
The first myth is that Digital’s desktop strategy supports VAX and RISC workstations only and excludes PCs — that MS-DOS*, OS/2* and Macintosh* are poor second cousins.
The reality is that our strategy gives users access to applications using any combination of video terminals, VMS and UNIX* workstations, MS-DOS and OS/2 PCs, and Macintoshes via our Network Applications Support (NAS) program, which we announced a year and a half ago.
NAS provides the means for building an enterprise-wide network so that systems from multiple vendors can all work together. It provides common applications access, communications, and information and resource sharing across these systems. Now we’re in the enviable position of providing an integrated approach, not just for our own products, but for every desktop device that makes up our customer’s environment.
The result of our NAS strategy is to give customers interoperability on a new scale - going beyond just network connectivity to sharing information from application-to-appli- cation and worker-to-worker. Only Digital provides this common set of services across a heterogeneous computing environment.
The second myth is that PCs have very low selling yields. The reality is that selling PCs as part of complete systems will give high yields.
Today, when a proposal for a timesharing system is made to a customer, video terminals are included naturally as the desktop device. But PC sales are often viewed as standalone device sales, which indeed have low sales yields.
We’re not in the business of selling standalone PCs through our direct sales force. That’s what our indirect channels are for. PC sales should be viewed the same as video terminal sales. The PC is simply the desktop device in a complete system. Half of the order for the complete system is on the desk. The other half is the network and servers.
You can sell the complete system and get orders for all of it, or only get the server half of the order. And the incremental selling cost for the PC half of the order is low, particularly when you use DECdirect distribution.
The third myth is that Digital does not embrace PCs or LANs in our applications strategies. In fact, all of Digital’s application groups have strategies that incorporate all of the different types of desktops.
These application strategies for PCs and PC LANs are based on user needs and fall in three categories:
o standalone PC users,
o users who already have PCs on their desks and want to integrate them, and
o users who have a mixture of terminals, PCs and workstations and want to integrate all of them into a complete system.
The first category — standalone PCs — has a simple answer. Good indirect channels — DECdirect distribution and our distributors — have been set up for this purpose.
The second category is those users who already have PCs and want to integrate them to support many common applications, share information and resources and make the work group more productive. Here we sell to the end user. By selling the appropriate PC LAN to the end user, we provide the PC integration required.
For instance, when engineering prototypes are subjected to a wide variety of tests, the results of each test must be collected and analyzed. Most of the leading laboratory test instrument manufacturers use PCs as the basis for their products. By integrating PC-based testing instruments into a LAN, significant improvements in data acquisition, analysis and control can be achieved. Likewise, in the retail branch bank today, there are PCs on most desktops, but little integration. The pressure is on these banks to improve profitability and competitiveness by reducing operational overhead and improving the quality of service. Integration of the PCs into a LAN with communication services to headquarters is a clear winner to streamline information flow.
If the customer has more than just PCs, the answer is to sell an integrated environment that’s optimized for a mixture of terminals, PCs, and workstations.
For example, when office users need to work together, regardless of the desktop device they are using, and gain access to common applications and data, our strategy is the
ALL-IN-1 Office LAN or the ALL-IN-1 Phase II strategy. ALL-IN-1 software supports many common applications and provides the integration environment for business applications.
Some think ALL-IN-1 software only supports terminals. In fact, of the over two million ALL-IN-1 users today, close to 50% already use MS-DOS PCs or Macintoshes.
As another example, PCs on the shop floor need to connect to the Manufacturing Build database to pull down critical information about the design and manufacturing procedures for a product. This data comes from many sources, such as computer-aided design (CAD) from a workstation or manufacturing documentation from a PC. Using the Live Links features of Digital’s Compound Document Architecture, any changes are automatically reflected in the Manufacturing Build database, which eliminates out-of-date information.
Also consider workstations in engineering. Our strategy is to integrate the PCs supporting engineering functions, with the CAD and computer-aided engineering (CAE) workstations, to share documentation, data and project information.
In conclusion, the reality is that Digital’s NAS strategy supports video terminals, PCs, Macintoshes, as well as VMS and UNIX workstations.
The reality is that, although selling standalone PCs results in low yields, selling PCs as the desktop device in a complete system, through DECdirect distribution, actually increases yields.
And finally, the reality is that PCs and PC LANs play a critical role in Digital application strategies.
*MS-DOS is a trademark of Microsoft Corporation. OS/2 is a trademark of International Business Machines Corporation. Macintosh is a trademark of Apple Computer, Inc. UNIX is a trademark of AT&T Bell Laboratories.
I plan to take aim at three other myths: that Digital has few competitive PC and PC local area network (LAN) products; that Digital offers little in the way of service and support for these products; and that Digital’s pricing for these products is not competitive.
We’ve been in the PC integration business since 1985, when Digital introduced our DECnet DOS product. In 1986 we followed with the introduction of the Personal Computing Systems Architecture and its flagship product - VMS Services for MS-DOS. That software allows any VAX computer to act as a server for PCs.
Digital has led the way in using minicomputers as servers for PCs. The Gartner Group recently stated, and published studies show, that the VAX computer is a more powerful and robust PC LAN server for most applications than any Intel-based PC. Digital offers the broadest line of PC servers in the industry, because the VAX computer family is the broadest in the industry. This means we can meet the needs of even the low-entry level LAN market. Only Digital has the capability to integrate between 10 and 10,000 PCs within the enterprise-wide network.
Last fall we released our PC LAN Server 2000 product, intended for the turn-key PC market for work groups of 8 to 30 users. This was the first in a family of dedicated VAX-based PC LAN servers that will keep Digital in the price/performance leadership position in the dedicated PC LAN market.
But as good as our products are, they’re even more marketable when they’re backed up by Digital’s top-flight service and support. Field service is a major factor in Digital’s overall success with PC LANS. Digital plans, implements and services networks of all sizes today. We also service IBM PCs, popular clones such, as Compaq, and Zenith, and the Apple Macintosh.
Field Service is committed to installing and servicing LANs of any size from any vendor. We will soon announce an extensive portfolio of service products which will assist customers in installing, maintaining, supporting and connecting their multi-vendor desktop environment. Whether customers need remedial and software application services or integration support to get them from the stand-alone environment to the networked enterprise, Digital service will meet their needs.
Finally, Digital’s PC and PC LAN products are price competitive. In fact, the list price for our PC DECstation products is 20% to 30% lower than IBM, Compaq and Zenith.
When we introduced the PC LAN Server 2000 system last fall, we went out of our way to price it competitively. Also, while the competition charges anywhere from $5,000 to $25,000 for server software on our VAX computers, Digital packages its PC server software products with DECnet software. This means that the over 100,000 installed VAX computers with DECnet software are already licensed to integrate PCs.
Furthermore, we have recently reduced the price of our popular PC network integration kits from 35% to 50%, bringing the cost per connection to under $500. This makes Digital’s PC integration products even more accessible to a broader segment of the marketplace. These pricing adjustments are part of Digital’s ongoing commitment to price products competitively with the marketplace.
At the same time, we’re making significant investments to reduce selling costs. For example, Engineering is focusing on more products that are customer-installable so a variety of channels can be used to sell them. And Digital is investing in an all-channel strategy, which is designed to minimize selling costs by maximizing the use of our indirect channels that have lower sales overhead, such as DECdirect distribution and authorized dealers.
I'd like to reinforce the point that selling PCs and PC LANs can be profitable. For every connection of a PC we sell, the customer spends over $3,000. That includes the cost of the connection and the cost of supporting the connection, whether for networks, VAX servers or expansion on our VAX products and services. Selling PCs and PC integration is a system sale, with plenty of follow-on business. Small companies with small LANs are always growing.
PC integration is a core technology that has many commercial and technical applications. Our challenge is to be creative in the ways we sell it. We’ve already sold many PC LAN solutions for use on the manufacturing floor, as well as for remote data processing and scientific data acquisition and also for use in banks and in insurance companies.
Digital is committed to PCs and PC integration as an integral part of our desktop and Network Applications Support strategies. PCs and PC integration are essential components of system sales. They represent incremental opportunities. They offer excellent yields when sold with complete systems.
To be successful in the future, Digital must exploit new markets - areas where our presence hasn’t yet been felt to the fullest. One of the most significant of these opportunities is large systems customers — customers who need commercial transaction processing and high-performance technical computing solutions.
These customers must be on the edge of innovation to succeed in their business world. They must have confidence that we will continue to provide them with the innovative solutions they need. They are making major long-term investments in Digital as a vendor. In return, thev exnect us to make maior investments in them — not iust a dollar commitment -- but rather a commitment to this market and to their future success. And the commitment must come not just from one piece of Digital but from the whole company.
Last month, I talked with 45 of our most valued European customers. These companies represent a wide range of products and industries, but there was general agreement about the challenges they all face, in particular, the challenge presented by the increasing pace of business.
For example, one banking customer of Digital manages assets valued at about $70 billion, and transacts business valued at $200 billion every day. That’s business totaling three times the bank’s assets transacted every day. That’s business done at computer speed. Increasingly, it is in fact the speed of computers that sets the pace for international business.
The pace of business is mirrored in the pace of changing technology. At Digital, 90% of the products we sell today did not exist three years ago.
The companies who win are the ones that can quickly integrate the latest technologies into the way they do business. They’re first to market with new products, first in productivity, and first to recognize and act upon new market trends.
Volvo is a Digital customer that uses technology to get a competitive edge. By using computer integration, Volvo’s new "factory of the future," which employs 1000 workers in Uddevalla, Sweden, will produce 40 cars per worker every year. In contrast, at traditionally organized auto plants in Europe, each worker builds only six cars a year.
Clearly, Volvo isn’t just keeping up. It’s helping to set the pace in its industry. That’s why it’s successful in Europe, in America, and around the world. "Setting the pace" is becoming a requirement for survival — for Digital as well as for our large systems customers.
In a world where technology is relied on for competitive advantage, an "adequate" solution just isn’t good enough. Today, a company must be able to select the very best solution for a job, no matter where that application might come from. This means making multivendor software, and hardware work smoothly together.
Digital has hundreds of large systems customers in Europe who also do business in the U.S. and the Far East. That means the system we use to run our business must work worldwide as well.
But, even worldwide distributed computing can’t stop at the boundaries of a single company. Companies must work with one another, buying materials from, and selling products, to one another. In a world of multi-national, multi-industry corporations, it’s not uncommon to buy from and sell to the same company. Links between one company’s computing systems and those of its vendors and customers can make doing business easier and more productive on both sides of the transaction.
Customers require commitment. We have to demonstrate that we’re committed to their businesses. We have to demonstrate it in our relationship with them, in total support for their business, and, of course, in providing the best products to meet their needs.
We must never forget that it’s people who buy from us, not companies. That’s why we need to learn the languages they speak, and what factors are important to their success.
The reverse is true too: customers buy from people, not companies, and they like to buy from people they know and trust. A key to developing a solid relationship is continuity. Customers expect a consistently high level of support and service every time they contact Digital.
A big part of this commitment is predictability. Large system customers need to know what products to expect. They need a two-year view in which to plan. We typically give them just six months. They don’t want to have to make decisions between our alternative solutions. They want us to tell them what they need to solve their problems. When we’re confused, our customers are even more confused, and they don’t buy.
Support means giving our customers the help they need, when they need it. Customers want us to help them plan their systems, to help them decide what to buy. After they buy, they want continuous consulting from a person they know and trust. They want this person to give them advice on how to grow and to solve new business problems as they arise. They simply require this level of support. And, of course, these customers require the best products, including services, applications, software, and hardware.
Customers’ service requirements are becoming more specific and demanding. They want rapid installation so they don’t see their new systems sitting around not working for a long period of time. And they want transparent maintenance to insure the system is always up and the data are always there.
These customers are beginning to look upon their information systems as a utility, and they want the same carefully managed, guaranteed system availability that we all expect from the gas company and the electric company.
In the area of applications, integration is becoming a critical need. Very few enterprise-wide problems can be solved with a single application. And, in the multi-national corporate environments of the large systems customer, these multiple applications have to work together.
In the area of new systems, we’ve made a concerted effort to develop products that meet the real business needs of large systems customers. Our new products for transaction processing/commercial and high-performance/technical users are specifically designed to combine Digital’s traditional strengths with new technologies to provide superior performance on customer-oriented metrics. These metrics focus on measuring work — not in computer terms, but in terms of the job the customer needs to do.
All these large systems applications are "mission critical." For example, the business lost when systems are down can be incredibly expensive for a bank that transacts more than three times its own net worth every day. In a case like that, the money saved from preventing one failure could pay for the entire system.
To make the most of these opportunities, we need a commitment from Sales, Support, Manufacturing, Engineering — from everyone in the company. We must all commit to win.
Digital is setting a target to become the industry’s number-one world-class systems integrator. The worldwide total of all data processing spending is in the range of $200 billion, and $70 billion of that could be classified as systems integration. But only $10 to $15 billion is currently being provided by systems integrators. The rest is being done by the customers themselves, and they are looking for help, according to our sales, industry marketing and product marketing people. Customers want this help so that they can focus on their real business of gaining a competitive advantage. The growth of systems integration is projected at 25% per year. This is where the action is. We have the skills, the people and the commitment, and we recognize this huge and growing market as strategic and important to Digital.
What do we mean by "systems integration"? Definitions vary widely, but some key words appear in most: project or program management, interoperability among different vendors, full responsibility, prime contractor, and single point of contact.
From a Digital perspective, systems integration projects are usually complex and customized. Digital serves as the prime contractor or a major subcontractor. It is typically multi-vendor and cross-functional and may cross geographic boundaries. We share the risk with our customer for what is frequently a "bet-your-business" venture for them. This work is generally done on a fixed-price basis.
Not all systems integration efforts are huge. The small integration efforts that we do
every day for our customers are part of our uniqueness. We will not force-fit our customers into any specific model of systems integration. In fact, it is likely that the ability to provide the $1 million integration solution for a customer will be the confidence builder that gets us the $50 to $100 million system integration order at a later date.
Perhaps the most important aspect of systems integration is that a marriage of sorts occurs with the customer. We have seen this already with several accounts. The implications to account control and account penetration are enormous.
The words "Digital's Enterprise Services" represent Digital’s shorthand for the full range of integration capabilities and services that we offer our customers. Enterprise Services are the "product." Systems integration is not a product. It is a process, a way to deliver a product. Digital Enterprise Services include our abilities to plan, design, implement and manage integrated solutions.
Let’s look at these stages of systems integration.
First, in planning, to be a complete and effective systems integrator, we need to understand our customer’s business. Where are they going? What are their problems? What strategic advantages are they seeking over their competitors? How are they organized? By planning with them and providing management as well as strategic and organizational consulting, we can better help them determine how technology can help them succeed. Planning with them also helps us do a much better job on the design stage.
Next comes the design stage. Here is where we bring specific technology into the picture. This is where we design the solution. What are the architectural needs to meet the requirement specs? Here is where true systems analysis and design skills come into play. Here is where network design is crucial. Organization impact may be assessed here also. We change much more than machines and software when we do systems integration. We may also change people’s titles, organizations and managers, the meetings they attend, and so on.
Implementation is where all the pieces of our company, and those of our partners, come together to "assemble" the solution to the customer’s problem. We create it, test it and maybe stage it. Then we deliver it and train our customers on how to use it.
And lastly, Digital’s Field Service organization will manage the network and the computer room if the customer wants us to. Sometimes we’ll even build the computer room. We will string the cables, manage the system, and maintain all of it, including the third-party equipment. Field Service brings superb, creative offerings to the management stage of systems integration.
Systems integration is not new to Digital. We are good at it, and we are going to get better. Examples of our success in developing our skills abound in each of our geographies.
Our products integrate easily with each other and with other companies’ products. Our products were designed to be integrated. This makes our work as systems integrators so much easier and gives us a distinct advantage over our competitors.
How will we go from good through great to number 1? First, we need to organize a bit differently. We could probably deal with $1 billion of business without too much change, if that was as big as we would ever be. But going beyond that will take focus and an organization to lead us.
In my new position as manager of Enterprise Integration Services (EIS), I report to Don Busiek, who is vice president of all Professional Services. The three EIS managers — Bill Ferry, Jerry Montague and David Barlow — will manage many, but not all of the functions necessary for us to become leaders in systems integration. For example, in the U.S., Bill Ferry will manage Software Services as he does today. In addition, he will host manage CSS and Educational Services. These three businesses are crucial to Digital systems integration efforts. Program Management also reports to him as does Jon Caputo, as Systems Integration Business (SIB) manager. The Systems Integration Business will be responsible for the tools, methods and strategies necessary for us to grow our systems integration capabilities. This model will be repeated in our other geographies, GIA and Europe, in roughly the same fashion. However, in these latter two geographies, the Information Management function also reports to EIS.
Some of our priorities are:
o to understand which markets we will go after and which we will not;
o to further define what products we will offer and, recognizing that we can’t do it all, o to work actively to create alliance partnerships;
o to develop and train excellent program managers; o to develop a clear operational and business model; o to continue our work on architectures and platforms; and o to strengthen our project tools, methods and disciplines.
In days gone by, Sales and the customer were the program managers, and our sales people had no single point of contact to help them pull together all the diverse resources of Digital. In the EIS system integration model, the program manager will assemble the appropriate team of players to win and deliver the business with Sales. Each of Digital’s businesses and functions will be asked to bring its value-added input to the table. These inputs are valid and valuable, but we cannot spend time maximizing the pieces; we will focus on the whole. For the life of the program, the program manager has got to be the "boss" of the program, just as Sales will always be the "boss" of the account.
We need to train the program managers to understand the models of our different businesses and to listen carefully to the value added of each of the team members. But in the final analysis we need to maximize profits for Digital, not the pieces of Digital.
This is easy to say, but it will be hard to do. A fundamental behavioral change needs to occur if we are to attain our vision of being the best.
EIS is not a division, yet it has to accomplish the work of a division. To succeed, we need teamwork. To succeed, we need to accept the role of the program manager as a non- functionally aligned team leader whose job is to maximize the company’s position, satisfy the customer and, with Sales, present himself or herself as the single point of contact on any specific program.
When we make this happen, there will be no excuse whatsoever that will keep us from becoming the number one world-class systems integrator.
Educating The Field About Our Product Strategy And Products by Jack Smith, senior vice president, Manufacturing, Engineering and Product Marketing
At our rate of growth, we double almost every three or four years. Processes that were put in place about ten years ago were designed for a company a quarter of our size today and, most likely, are out of date. When they were designed there was good reason for them. But today, with changes in complexity and size, a lot of these things just don’t make sense any more. They’re not adding to the productivity of our sales and support people. In fact, the processes may be detrimental to what those people are trying to do.
We need to remind ourselves that the only reason we’re in business is that our customers have decided to invest in us. The reason customers have decided to invest in us is because our sales people and our support people have convinced them that we have value. The only reason our sales people can convince them that we have value is because they have confidence that we will support them in what they have to do in order to support the customer.
We have to remember that our customers see our sales and sales support people and pass judgment on our company based on their performance. In other words, everything we do must be focused towards making our sales and sales support people better-educated, more knowledgeable and, through that, more productive. In other words, no matter what we do in the company - whether it be engineering, manufacturing, or whatever - should contribute to the confidence and the productivity of our sales and support people. And the training of our sales and sales support people is key to our success.
What our customers are interested in has changed over the years. Customers no longer want to talk about bits and bytes or MIPS. They don’t want to talk the language of the box. They want to talk about our particular style of computing, how our approach is going to solve their particular problems. If that’s what they want to hear, we have to make sure that our people are trained to provide that level of information. Some of that is already built into our training curriculum, but to a large extent it is not.
The first clue we had of this came when we started our "university sessions." The first one was Network University, which was followed by DECtop University, a few months ago. In surveys, the people who attended those sessions told us that was the best training that they had ever had at Digital. We probed to find out why. They told us that it was hands- on solution time and competitive analysis. It was the first time they were able to see the breadth of our products in a training environment. At DECtop University, the products were limited to those that operate in the desktop environment, but we showed the whole breadth of products in that area. They could see the solutions running. Then, in break-out sessions, they could ask questions about particular solutions. More importantly, much of the content at DECtop University and Network University was competitive comparison. The hit of the show at DECtop university was the demonstration of the DECstation 3100 system relative to SUN’s products. At that time, the DECstation 3100 system was just a gleam in most people’s eyes. Showing it in operation and comparing it against SUN’s latest model was an enormous success.
We need more of that kind of training, and we need to do a better job of it. That’s what we intend to do with the "Summer School," which will be held in this summer at Brown University in Providence, Rhode Island. We have about 5,000 people signed up. Each session will run about two and a half days, over seven weeks.
It will be run along the lines of DECtop University. There will be lots of equipment with lots of solutions running. There will be even more emphasis on competitive analysis. In addition, it will deal with how to position our products in relationship to one another; for instance, VAX/VMS vs. RISC/ULTRIX solutions.
So the Summer School will be even more intensely directed toward product positioning, product understanding and comparisons with the competition. It will also help sales people answer the questions that the competition brings up when selling against us.
It should be a very exciting time, and I encourage as many people to attend as possible.
The company’s recent financial performance can be measured against several key "barometers of progress": growth; profitability and asset management.
First, let me remind you that we are still a triple-A company (according to Moody’s), and our financial condition is very strong. Over the first three quarters of FY89, we repaid $150 million of debt and returned over $800 million to our shareholders through share repurchases — and we wouldn’t have done all of that if we didn’t have plenty of cash in the bank and confidence in our future.
Let’s review our progress, beginning with growth. In our last full fiscal year, we were an $11.4 billion company, which made us number 30 on the Fortune 500 list of U.S. industrial corporations. As evidenced by our rapid progression up the ranks of the Fortune 500 - from 55th in 1985 to 30th last year - we are still a high-growth company by standards of American business in general.
Over the past several quarters, while revenue has continued to grow in absolute dollars, our growth rate has been declining. Throughout FY87 and early FY88, our quarterly performance was running 23-25 % above the prior year. QI ofFY88, ifyou recall, was DECWORLD in Boston, and our product strength, profitability, public exposure, and customer mindshare were at a peak. But as we found out, even having all our stars lined up was not a guarantee of future success.
During the following quarters, financial markets became unsettled, which seemed to affect the general computer market; and the competition began to make their own claims about networking, which served to confuse the market and blunt our competitive advantage. After the DECWORLD peak, our growth rate began to trend downward.
Throughout FY87 sales were strong and profit margins were improving. For FY88, we came much closer to our cost target than we did for our revenue target. Early in FY88 we could see a revenue shortfall coming and began to initiate cost restraints; but it wasn’t until three quarters later that we managed to turn the cost trend downward.
Basically, momentum builds in cost and it takes time to change direction. Someone remarked recently that costs have the maneuverability characteristics of a supertanker.
The result of our trends in revenue and cost growth has been a declining trend of profit margins.
During this period we have made major investments in people, facilities, products and market programs; and we have had very successful DECWORLDs, product introductions, a DECtop University, and many other events. But the combination of all of these hasn’t stopped our downward trend of revenue growth and profit performance.
Not only is our profit margin down this year, our absolute dollar profits are also lower than a year ago. Through three quarters, our revenue has grown by $1.1 billion, but our operating profit is down by $170 million.
While cost performance can be obscured by significant increases or decreases in revenue, good asset performance is a clear reflection of management’s attention to basic financial controls. In the three major categories of operating assets — receivables, inventories, and property, plant and equipment — our investment since 1985 has grown about 62%. During the same period, revenue has increased by 90%. In other words, the operating assets turn rate - a measure of productive use of these assets - has improved from 1.3 to 1.5.
Inventory performance continues to be the bright spot in our financial picture. Our inventory level is presently about $1.7 billion — essentially the same as it was four years ago. Inventories have been held constant while revenue has nearly doubled.
The key to effective inventory management, as being practiced in Manufacturing, Field Service, and elsewhere, is to distinguish between the material we need and that which we have simply because we’re inefficient. We have managed to improve inventory turns steadily during the last four years from 2.3 in 1985 to 3.8 projected for this year.
During the same four-year period, receivables have grown in concert with revenue. Our days-sales-outstanding, at 73 days, are running only slightly under the level of four years ago. On the surface, this would indicate very little improvement in this area. But that’s not entirely correct. Within this $2.9 billion, there has been a quality improvement - in terms of collectability. The portion of receivables over 60, 90, and 120 days old has declined, reflecting improvements in the important functions of credit and collections.
I believe receivables represent a very substantial opportunity for us. We need further improvements in:
o predictability of delivery dates,
o shipment completeness and accuracy, and
o timeliness of systems installation and start-up.
We also need a more level pattern of shipments throughout each quarter.
Not only can we sharply reduce receivables, but we can improve customer service at the same time.
Our fixed investment in property, plant and equipment is growing rapidly. Since 1985, we have added fixed assets, net of depreciation, of $1.7 billion.
Since 1985, our cumulative net investment in land and buildings (combined) has more than doubled, reflecting growth into more large Digital-owned facilities and higher real estate costs, especially overseas, where most of our growth has occurred. Improvements in buildings that we lease have increased 155% in four years. And net investments in machinery and equipment have grown by 72%, reflecting primarily investments in semiconductor, storage, and interconnect technologies.
Our capital spending both this year and last have been in the $1.5 billion range — about twice the annual spending level prior to FY88.
Looking ahead, I see these elements in the computer industry environment:
o increased competition in virtually all market segments;
o a continuation of technology-driven price reductions - at an accelerated rate - and a trend toward commonization of prices in Europe as we head toward 1992;
o a hardware/software imbalance that is not likely to be corrected in the near term; and o slower industry growth, resulting largely from the combination of the first three factors.
Throughout our history we’ve been unique in what we had to offer. But along with the trends listed here, there is a growing similarity in the product directions of the major computer suppliers. Even without a competitive product advantage, companies in the past could survive, and even thrive, simply on the strength of industry growth. Without that growth, it’s a different ball game.
As product differences diminish, industry growth declines, and price competition further increases, the advantage will shift to those companies that are the most productive and have, by virtue of their efficient cost structure, the most flexibility to compete in a price-competitive, buyers’ market. A competitive cost advantage is likely to be a major factor in gaining market share and achieving growth opportunities. I see cost emerging as a much greater factor in determining who will succeed in this business in the years ahead.
In our current cost structure, about 50% of our total cost is paid out in weekly paychecks to Digital employees and for employee benefits; 22% is used to purchase material to make and service the products we sell and for non-production purposes; 18% is spent for outside purchased services, including contract personnel, consultant’s studies, travel, advertising, etc.; and the other 10% is for lease expense and depreciation of facilities and equipment.
Of our total costs, only about 35% represent direct value to the customer - i.e., direct costs of the products and services we sell. The other 65% is spent on sales calls and in our development labs, offices, and the non-production areas of our factories. It’s spent on planning and deciding what we’re going to do for the customer; how, when, and where to do it; and all the arrangements for making it happen. It’s affected by our internal systems and way of doing things. It’s all tied up in the internal workings of Digital.
In other words, in going after internal productivity, we have about two-thirds of our cost to work with.
In three of the last five years, and again in FY89, we planned revenue growth higher than actually achieved, and we put resources in place in anticipation of that higher growth. As a result, our internal productivity has been generally less than planned. During the 1984-88 period we added $6 billion more revenue and 36,000 more employees. During that same period, IBM added $14 billion of revenue with 8,000 fewer people. IBM is now in its fourth consecutive year of downward-trending employment. And Hewlett-Packard has grown by $4 billion in revenue, and added 5,000 employees.
We’re playing in a tough league, with some of the top companies, not only in the computer industry but in all of industry. Not being the best in this group doesn’t mean we’re on the brink of financial disaster. But, on the other hand, our present position certainly does not measure up to the standards we set for ourselves. We’re obviously not happy with it, and the kind of press this generates doesn’t help in our selling efforts.
As 1 said at the outset, we are still a Triple-A company — and I believe we can hold that if we don’t let profitability decline any further. We are well-financed, with virtually no debt on the balance sheet and more than adequate cash to support current operations.
Our costs are under control, but they are planned too high and are not sufficiently responsive to changes in business conditions.
While we’re not achieving the high standards we set for ourselves, we are still performing at the major-league level in profitability. That, combined with excellent progress in inventory management, has kept us strong financially.
And we’re investing. Our confidence is showing.
The outlook for Digital still contains a lot more positives than negatives. Most encouraging of all is that the negatives are mostly self-inflicted. They are not created by the environment, by government regulation, or by economic catastrophes. They are better thought of as challenges, which we can manage.
In my opinion, we are facing a new environment in our industry that places a premium on cost efficiency. It requires an unprecedented level of commitment to improve internal productivity.
These challenges will not be met just by asking more of our people than they are giving today. Continued growth and prosperity requires that we do things differently — that we question everything we do internally in terms of its value to our customers — and that we create, and accept change.
The 1990s present great challenges to every industry. But our industry is unique in many ways. Some people would say our industry is maturing because growth is lower. But I say, "How can an industry that's selling 50% greater price performance every year be mature?"
We are part of a $200 billion industry. Our strategy in the U.S. is to hold the line on spending and refocus our energies to take better advantage of that market with the technology and products that this company has to offer. To do this, we must focus absolutely and completely on customers’ needs. That means readdressing our cost structure and realigning our resources.
How do we win in the 1990s? We start today by first solving every outstanding customer problem, and then we maximize every sales opportunity. "All Hands on DEC" was created to meet these two objectives: solve every customer problem, and maximize every opportunity. "All Hands on DEC" is clear evidence that we can win.
Over half a billion dollars of business activity is now being impacted by our "All Hands on DEC" programs. Over 1,600 people have volunteered their services to assist in ensuring field success. The essence of "All Hands on DEC" is people working collaboratively with the kind of responsiveness our customers expect. As we move into FY90, this sense of urgency and this kind of adaptability will become integral to our operating style. This will become the norm.
What we’ve been learning from "All Hands on DEC" reinforces the fact that to grow we need to add greater skills and more technical resources to our Field organization. With the multitude of product introductions — a new family of machines at least once a year — it is difficult to maintain our product expertise in the Field. One of our primary objectives this year is to strengthen this expertise through revitalizing our sales training programs and ensuring close linkage between our customers and our technology expertise.
We also believe that the strength of industry and account management will be a key differentiator for Digital in the 1990s. Accounts (customers) are the basis of our business. Account sales will be organized and specialized by industry. Industry marketing will allow us to understand, focus on, and sell more effectively to our customers.
The U.S. planning process begins with account plans which are integrated at the district level. The plans require the active involvement of account sales people as well as people from Sales Support, Field Service, and Software Services. Through this planning process we will achieve goal congruence.
Most of the decision making will be decentralized to our districts or our cross-district account managers. The district sales manager is the leader and is responsible for the plan and for carrying it out. I want to give a strong message of empowerment to our sales managers: "You are the decision makers. We expect you to be the ones to close the business on all products and all services."
Organizing around accounts and in the industry dimension allows us to replicate application successes around common types of customers. This approach allows our managers to focus on a few rather than all types of business. And it allows us to create a communications network with our product people and with our industry marketers. Our district resources and sales people will be able to get the help they need when they need it.
We’re also putting a plan in place to link our product groups and our Sales Support organizations together. Sales Support is the structure that we will use to bring the strength of our product and marketing groups to our customers. These resources will be organized within the districts and evolve as necessary to support a direct link to our product groups. This change will simplify and improve communications. And I believe that it will result in higher quality products, higher quality solutions, and a dramatic increase in our business.
Digital Competency Centers (DCCs) are important in that effort. DCCs include Application Centers for Technology and Systems Integration Centers, extending our reach to the customer. Competency Centers allow us to focus enough critical mass to do the complete job that we need to do, plus solve our customer’s problems, on both big projects and little projects. We’re establishing such Centers out of our existing resources. We have already planned two of them — one in New York area for the financial services industry and the other in Detroit for discrete manufacturing. In addition, we have a similar set up in Washington for the Federal Government Systems Group. There we have, in addition to technical resources and special skills for government systems, proposals and bid teams and special marketing resources.
The opportunities that we have in front of us will require a lot of change. Yes, change feels disruptive; but it is unavoidable. To compete effectively in the marketplace, continuous change must be a part of our Digital values. Plans for organizational change should be part of our planning process. We ought to anticipate the kinds of change the organization has to make a year from now, two years from now, three years from now, so that we can participate in it fully and be excited about it. Anticipating tomorrow’s needs and embracing change are the attributes of an industry leader.
Another part of embracing change is figuring out how to do work in different ways. We already have a number of success stories that illustrate the value of innovation. For example, through outbound and inbound telemarketing, we have increased our DECdirect sales 300% since February. DECdirect distribution is now an $800 million business. We also have a series of simple programs that clearly distinguish us from competitors in the ad- on business. One is the fast order, fast ship, fast install effort. You order your product today; we ship it today; and we install it tomorrow. Those are the kind of initiatives that are going to put us ahead in the 1990s.
At Boeing, we responded to and won a major project by offering ourselves as a prime contractor and then working in partnership with consulting firms and software providers. We completely and totally listened to our customer and then prototyped the application. The net result was one of the largest system integration projects in the industry and the largest computer-integrated manufacturing (C1M) project in Digital’s history. We need to encourage more of that kind of creativity.
Another part of embracing change is deciding what work to stop doing. We all need to get our organizations to take a closer look at the work that we’re doing. Does it really contribute to our customer’s needs? Does it provide a better solution for our customers? We’ve got to let go of some of the work in order to better position our own resources to meet customer needs. And this can come through simplifying our operating environment.
For example, one of the most exciting things about our products is our ability to transport software seamlessly from one VAX system to another. Unfortunately, the business structure that we have to support that application architecture requires hundreds of new part numbers for software every time another VAX computer is introduced. I know of a situation where a competitor’s bid for a single workstation consisted of four line items, ours was 31. Resolving this type of issue allows us to focus on things that are more productive and can better serve the customer.
Our mission is to provide the highest quality information systems, products and services to our customers worldwide. Our goal is to be a quality organization and do a quality job. And as we achieve quality, growth comes as a result. Quality relationships with customers are probably the most critical aspect of our goal. We depend so much on our existing customers. We’re continuing to develop those relationships, to grow the opportunities with those accounts. We also depend on them for sourcing and identifying new opportunities and new customers. How we’re perceived in the marketplace and by our existing customer base is key to our success with new customers.
Our sales philosophy is to completely satisfy customers’ needs before, during and after the sale. Our goal is to provide not only quality solutions but also to maintain enthusiastic support for them. Our sales people need to be the best in the business - the best trained and the most knowledgeable about our customers’ needs. They must completely understand our product capabilities as well as industry application strategies. They need to also be business partners and entrepreneurs. They need to be working with customers to help them define the solutions to their critical needs for success in the 1990s. Each and every sales person must know the customer, know the products, know the competitors products, know the difference, and know how to use our internal resources.
As we enter the 1990s, I believe we are well-positioned and just beginning to see the benefits of a more responsive operating style. The market is demanding, and the competition is extensive. But we have the people, the products and the competence to grow our leadership position in the 1990s.
We are facing more significant challenges today than at any other time in our history from the global competitive marketplace, the technology race, the economy, our customers, the cynical press and skeptical Wall Streeters. We seem to do our best when the going gets a little tough on the outside.
We have all the ingredients for continued success as a company. We have the people, products, money, customer following, reputation for excellence and history of achievement. There are good reasons for our employees to feel good about Digital, its future and their role in it.
People are our most valued, most envied, and most sought-after resource. They are what makes us go. It is their competence and hard work and loyalty that has brought the company to this point; and it will be their competence, hard work and loyalty that will keep us growing into the future. If we have any passion for winning, it must be felt by them. They must be the fire in our corporate belly.
The other thing that gives us an advantage over other companies is the Digital value system — the feelings and beliefs of our people that make Digital the company it is and will continue to be. The source of our greatness as a company lies not only in what we do, but in who we are and how we do things. We are a hard-working, high-performing organization. Our primary goal continues to be quality. Our overriding priority continues to be customer satisfaction, and our hallmark continues to be excellence.
In today’s fiercely competitive environment, it is as important to keep the faith as it is to keep the books — to remain committed to the simple but powerful ideas on which this company was founded. Digital’s bedrock values must hold us together and keep us centered. These values provide our stability in an environment of constant change.
Ken reminded us today how these values — such as honesty, commitment, quality, completeness, simplicity, and receptivity to people and their ideas — must continue to set us apart from the competition.
These values are translated into practice by:
o listening to our employees and by acting on what we have heard,
o treating each other with respect,
o creating and delivering quality products and services,
o reducing red tape for our customers and for those within the company,
o taking responsibility and being accountable for our actions, and
o knowing our areas of expertise and developing ourselves professionally.
Our values are based on Digital’s corporate philosophies that were developed 32 years ago. With all the other changes that have taken place over our first 32 years, these beliefs have remained unchanged. One of those philosophies, "the first rule," says "when dealing with a customer, vendor, or an employee, do what is right to do in each situation."
These philosophies are a recipe for leadership. True leaders inspire their people to do the right thing. Within this framework, we need to maintain an environment in which every employee at every level feels respect for our past, involvement in our present, and responsibility for our future.
As members of Digital’s leadership corps, each of us has the responsibility to ensure that our people are invested in Digital’s values, which support the success of the company. These values must be institutionalized in our organization, and they must be passed on and perpetuated in our culture throughout the world.
If we say that our employees are our most valued asset, they must be treated that way and be made to feel it. We must continue to provide a working environment in which creativity, innovation and risk-taking are valued and rewarded, and we must show the same loyalty and support we expect.
We must also recognize that because of its traditions of success and its reputation for quality, Digital continues to be the object of very high expectations by the outside world. We are seen as a standard of excellence in industrial leadership, commercial success, social responsibility and good corporate citizenship. Sometimes these expectations are unreasonably high, particularly on Wall Street, but we can’t let them distract us from our real mission which, simply put, is to satisfy our customer, employees and shareholders, and to stay in business forever.
We face three key challenges. The first is to manage change. For Digital, change is a way of life. If we don’t change, we won’t survive. Our job is to manage change. Our people are bombarded with change. They know this and generally have embraced it as part of their working lives. But change can still represent a threat to them and us.
We are the gatekeepers of change. We must see it in a positive way and prepare our people to embrace it. As our competition intensifies, however, we will continue to make changes ranging from reorganization to redeployment of resources. Our job is to make sure the effects of these changes don’t weaken the morale or destroy the spirit of your people.
The second challenge is to keep values alive and breathe life into them where they have been weakened. We must make sure that what we do matches what we say we believe.
Values offer us strength. But they are fragile. When times get rough, we are tempted to regard them as unnecessary. This is not acceptable. Our core values helped to make this company what it is today. And we must protect them and make sure they stay part of how we do our business. We need to be vigilant. If we are not, our values will slip away.
Honesty, quality, creativity, risk taking, and respect for the individual are not up for grabs.
Our third challenge is to support an environment for creativity and innovation. People need the best working conditions to maximize their contributions to the company. They need to work in an environment that fosters free thinking and empowerment, an environment of creativity and innovation.
If for any reason, creativity or the energy that supports it is stifled, the company is at great risk. Unnecessary layers of bureaucracy and red tape can and will suffocate us. We are responsible for fighting off any such tendencies. We must maintain a creative environment where two-way communications and trust prevail.
To do this, we must lead. We must work with our people in setting clear goals and removing obstacles in their path. Then we get out of their way and let them do their jobs. This is the way we empower them and create an environment that will assure Digital strong and continued growth.
At the end of the program, Ken Olsen, president, responded to a number of questions that had been submitted by people in the U.S. Field organization. The following is a summary of a few of those questions and answers.
Innovation, creativity, and even programs like "All Hands on DEC" are impacted by dwindling resources brought about by cost constraints. Have you any encouraging words or direction on managing these resources or how to achieve long term goals when faced with a short-term survival goal? Is the spirit of entrepreneurship nonexistent or discouraged?
Having budget responsibility or being an entrepreneur does not mean freedom to spend money. It means responsibility to have a budget that fits together. We have more resources than we need to do all the support we want for sometime to come. If we exploit what we have, we'll have a lot of growth.
Being in charge of a budget means going over every single expense item, cutting out all of those which aren’t critical, and concentrating the money on those things that are important.
When the company had product lines that were working well, the budget was an ordeal, yet it was a wonderful experience. It was the most fun time of the year. That is when you were in control.
How do we know whether to sell RISC/ULTRIX or VMS/VAX products?
The answer is obvious: use the machine where the software is. There’s very rarely any overlap. When things only play on RISC workstations, recommend a RISC workstation. When it’s a critical commercial application, the software is not available on UNIX or ULTRIX operating systems, so recommend a VMS solution. Normally, there’s no question at all.
Sometimes customers insist on UNIX* or ULTRIX software. For instance, a big financial organization told us that their trader station program was going to run on UNIX because they read they could buy pieces from anybody and they would all fit together. After a few months of doing that, they sheepishly came back and bought our VMS operating system.
What are we doing about software for our UNIX workstations?
When SUN was making fun of IBM and Digital one or two years ago, they said they’re going to free the world with a universal software system that anybody can use. Everybody’s computer will play everybody’s software.
Now when we’re giving them a hard time with a better and faster workstation, they change their story. Now they say that software can't be transported to Digital hardware without an awful lot of work. Unfortunately, that statement is right. It is going to take a while to get applications software transported.
For those people that want to do their programming on the ULTRIX operating system, we’re in good shape already. But when there’s a particular application that has been on one machine, transporting it is a major job. We’re doing quite well in getting software companies committed to this task, but it does take time. We have a large number of engineering and science applications that are now becoming available for the DECstation 3100.
Anticipating this delay, we committed ourselves to make a VAX workstation first. And our VAX workstation is now the largest selling workstation in the world.
Does the introduction of RISC signal the end of our VAX family?
No. In fact, when we came out with our UNIX/RISC workstation, the sales of our VAX products mushroomed. This means that when people see we're broad minded they have much more confidence in our traditional products. Similarly, in the past, every time we brought out a new machine, the old one sold well. The evidence that we were investing in the future gave customers the confidence to buy the old one. We are investing more in VAX VMS than ever before. It was designed and planned after UNIX and the major IBM systems
What is our strategic commitment to large, high-end systems?
About a half a billion dollars. You hear all sorts of things from the press, for instance that workstations are taking over high-end computers and that minicomputers are on their way out. The nice thing about the high end is that the market is so big, you don’t need very much of it to produce an awful lot of income.
* UNIX is a trademark of AT&T Bell Laboratories.