Volume 9, #6___________________________________________________________ Part 1 - July, 1990
"MGMT MEMO" was written by Richard Seltzer in Corporate Employee Communication for the Office of the President. It was written for Digital’s managers and supervisors to help them understand and communicate business information to their employees. You can reach Richard at email@example.com
On May 3, 1990, over 700 senior managers attended Digital’s State of the Company Meeting in Merrimack, N.H. The first two hours of the program, which addressed matters of general employee concern, were broadcast live over the Digital Video Network (DVN). This issue of MGMT MEMO summarizes that part of the program. The next issue, which will follow shortly, will cover the rest of the meeting.
Some people ask, "When will we see change in our industry slow down?" My answer is, "If you were worried about change, you shouldn’t be in this industry." Change is coming faster all the time. It’s the excitement of the industry, and that’s the job we have picked.
We are continuing to make significant progress in a number of areas. For instance, in Manufacturing we are continuing to improve our efficiency at a rate of 15% a year. That comes partly from technology, partly from use of computer systems, partly from experience, and partly from just hard work. That continuing accomplishment presents us with a challenge — we have to grow more than 15 % a year if we are going to use all our manufacturing facilities and people.
In our Sales operations in the U.S., we had a number of problems. We had stifled our sales people and burdened them with too much red tape. We have made significant improvements in that area. A year and a half ago, when I visited sales offices in the U.S., I had to take time to get people to tell me what was bothering them. Eventually, they’d tell me about the overhead, their layers of management, getting things done, making decisions, having the freedom to do the obvious things without having to get permission. Today, when I visit an office, they are all organized in their complaints. I recently went to Washington and found 20 people around a table. Each one with a point, and they were all primed. And none of the problems they wanted to talk about related to the Field or their administration. Now they talk about problems with support, with products, and needs for education. So, while we have a ways to go yet in the Field, we have accomplished much.
We also have made significant improvements in Engineering, which always has been the heart of the company. We are a product company and are proud of our products. We have done magnificent things, but this is an area where we have to keep making changes and improvements.
When we started our Engineering organization, we were influenced by ideas from operations research, which had been used in World War II for managing projects. We knew how much time engineers spent on meetings, on travel, on being sick, and how much they spent on their projects. We kept track of projects and knew exactly where they stood . Some people complained that the reporting was shallow. But the projects we organized did get done.
When Gordon Bell joined us, he said he didn’t need that. We could get things done by sheer brilliance, hard work, brains, and architecture; and we could drop the formality. And he was right. We got a lot of things done just by good people running things. But, in time, as we grew, informality became impossible; and for a few years, we didn’t get any new products out.
About eight years ago, we changed the company and put a whole new crew of people in charge. Once again, by architecture, brains, hard work and good will we controlled Engineering and had some great years with great products because of our people.
We have grown factor of six since then. Our Engineering budget is now one and a half billion dollars. We are now past the time where that informal way of controlling things works. Now, we have to show we can run that huge budget and those several thousand people in a business-like way, just like we run Manufacturing. This should be a help to the accomplishment of engineering projects.
When we were new, we used to laugh at IBM because they would change the way they were organized so frequently — from centralized to decentralized and back to centralized again.
Now we recognize the need to make changes in an organization periodically. It is in changes that you correct for things that no longer work in the way they were intended. Today, in our Engineering organization, we are committed to formality in the discipline of management.
We often complain unfairly about Finance. The tradition of Finance is to report on history, not to help run a business which is looking to the future. It is like driving a car looking out the rear view mirror. But our financial people are very good. People come to us to see what we have done. We have learned to be very good in that area, and we are admired by many large companies; and they follow us and often use our equipment.
The next area we have to work on and make a major improvements in is how we market our products to different businesses. Years ago, we broke the company into product lines. At one time, we had 30 of them, each run independently, like a business. They each prepared a business plan. Manufacturing made the parts; Sales sold them; and Services supported them. But the product lines laid out their plans as if they were in charge. They budgeted the costs for services, sales, marketing, etc. and they figured out what price they needed to make a profit. Their budgeting effort was difficult. As with a home budget, there was never enough money coming in to take care of all the things they had to do.
My theory is that to live in the manner you think you should live would take about 50% more income than what you are paid. Likewise, in running a business, you cannot do all the things that you think you should do for the size company you are. Making those decisions is hard.
We did well with product lines. We introduced computers to a couple of dozen industries that had never used computers before. Much of the growth of the company for the first 20 years came about because of this organizational change.
Eventually, we ran into trouble. The independence of the product lines became more important than the company good. Success was an enormous burden. When you are successful, it is awfully hard to continue to learn and to do things differently.
About eight years ago, we dropped that approach. We would maintain business units for measurements, but would all work together as one company. Many people who couldn’t i- magine working together after so many years of being independent left us. But working together produced miraculous results. We had good years from working together as one company instead of 30 different ones.
In time, however, we’ve lost many of the advantages of independent business units. The beauty of working together was great, but it had its drawbacks as well. We would spend money, and no one had the responsibility to make sure the prices balanced it. We built
some great programs, but we didn’t figure out who would pay for them. Little by little the profits decreased because people would spend money well, for good things, but no one was responsible for making sure that the pricing took that into account. We didn’t go through the travail that is involved with balancing all the things you want to do with the income. And we couldn’t just keep raising prices to cover the overhead we were adding.
To solve this problem, for the last year, we have been developing ideas for breaking the company into business units. Those ideas are now quite well developed.
We don’t call these units "product lines," but they are very close to the product lines of the past. One of the differences is that we don’t give them complete profit-and-loss responsibility. If you give someone profit-and-loss responsibility, they start to look at the manufacturing and selling costs, which are the largest cost items, and they want to run those parts of the company rather than do the things they are supposed to do. Therefore, we just measure our new business units on their return.
Business units budget all the costs involved in their businesses and then determine how they are going to get the money to pay for it. That was an unbelievable shock to some people. They were gaining market share and thought they were doing great. Suddenly, they realized they had responsibility for profit. There was an instant conversion in attitude.
I think this organizational change will be one of the most significant things we have done.
We want these business units to propose what they will do using the assets of the corporation — where they will get the income, and how they will make a profit. That is the path we are on.
I am critiqued all the time about the inefficiency of Digital. The outside world would like to see us let go of 10% or 20% of our people. Every day, we are pressed. My attitude is that when we break the company into pieces, each piece has the opportunity to succeed. When they have the freedom to run a business, most of them will need people and will have to improve efficiency. We want to give people the responsibility to run a piece of the business, and let them prove that they can do it successfully.
With this new approach, we are not limited by the breadth of interest of the Executive Committee or some staff of centralized planners. Every company with a central planning group has a very narrow view of which businesses to enter and is limited to the span of interest of that group. If instead of a group, the planning is done by one person, even if that person is unusually competent and has a wide span, the span could not possibly be wide enough for a company of this size.
For decision-making now, in theory, every business unit makes a plan that tells what they will spend, what return they promise, plus all other interesting and important observations. The Executive Committee and the Board of Directors then say yes or no.
That means that all engineering projects - all 2,000 of them — get proposed, reviewed, and approved. That is an impossible number of things for an Executive Committee and a Board of Directors to run, especially since they are to a large degree not technical. But when we organize these projects in a systematic way, the decision becomes almost automatic.
It is interesting how useful our Board has been in areas in which they are not expert. They have an enormous advantage of not being in love with one kind of desktop device, or some technicality in computer science. They have said "no" to some of our most earnest requests and forced us to pursue them until we had wisdom. And they can intuitively spot projects which are unwise. I believe the contribution of the Board of Directors is to motivate the administration to do a good job.
I think you’ll see major changes over time, and many of our weaknesses will be solved. These ideas take time to sink in and be implemented.
We see nothing that guarantees an improvement in the external environment. We need to change from within, and to keep learning and improving in both good times and bad.
This turbulent period has been called the "Information Age." Digital has been instrumental over the last decades in helping to create the reality that this term describes.
The first principle of the Information Age is: "Information drives change." Inseparable from that principle is the corollary: "Without change there is no progress."
Our business is change and progress. We strive to be the driving force for change, as we have been in leading the way towards seamless networks of distributed computing. But sometimes change is thrust on us without our consent.
In the face of unanticipated, unwelcome change, people, in their diversity, experience abnormally high tension, uncertainty, cynicism, or even despair. Times of change challenge our beliefs, our sense of self, our spirit. Who are we underneath our titles? How can we contribute? How can we play in this game if the game is no longer the same? In such times of change, people need clear, consistent information and trustworthy communication.
At Digital, we don’t have finished answers to the turbulence of today. But one thing is clear: the way to manage change is through consistency. The foundation of Digital’s business practice is a core set of values that guide us at times of uncertainty, and point us in the right direction.
The ability to deal with change becomes a function of how well prepared people are. We have always believed that people are our most important asset. Sharing with our people the fundamental values allows comfort in dealing with change. A bond of trust is forged that together we are trying to do the right thing - that we are going to protect our valued people, and that those people are going to do their best for the company.
Someone suggested that we print the company values on 3 x 5 cards and give one to every employee, so they could all refer to their values card whenever they had to make decisions or resolve conflicts. But it is important for all of us to internalize Digital’s values. They must live within us, and must be active intuitively and intellectually. No outer icons of behavior can enable us to respond effectively enough to succeed in the business environment we face today.
Our values must serve as a seed force to enable us to transform Digital into a new ideal — new in outer respects, but directly rooted in those values on which Ken founded this company.
These values include quality, honesty, simplicity, teamwork, leadership, accountability and concern for people and the differences among people. We value doing the right thing, always, in a timely manner, and carefully. We are above all a company for people.
These values have built a global Fortune 27 company, an organization in which individuals — from entry-level to executive — can be successful; a company where prejudice and short-sightedness or hierarchical protocols do not limit potential nor stifle creativity.
In selecting these values, our goal was to maximize the potential and the contribution and the productivity of all of our people, regardless of gender, or race or other differences.
For instance, change has been thrust on us in such controversial areas as employee drug testing, where we are required to subject our employees to the same standards as some
client organizations. Here we have created policies that are consistent with our values of choice and trust and preservation of human dignity.
Also, in the last few quarters, our values and policies and the changing business environment have converged and collided over the central issue of balancing the workforce. How can people be expansive, creative, personally engaged in a forward-looking project, if they are worried about whether or not their job is going away? The collective impact of such counter-productive concerns harms us all. Newspapers trumpet alarm. The rumor mill grinds away with stories of early retirement, redeployment and downsizing. And the effect of these signs of turbulence can be dispiriting even to loyal and hard-working people.
But this turbulence is a challenge to make us better. We are being asked to reach deep inside and find ourselves. We are being asked to create ourselves anew, to transform to meet the present. This transformation may seem sudden; but, in fact, we’ve been implementing transition programs in the U.S. since 1983. Constrained by our sincere concern for our people, we have moved carefully, considering each decision. We looked at mounting cost pressures and our imbalanced workforce, and considered many approaches.
We saw there were more people in certain areas than there were positions. We saw that future work would be different. When the work changed, certain jobs went away. For example, Customer Services has changed dramatically. Systems are now a thousand times more reliable, and they virtually tell us how to fix them. The result is that the work of Customer Service engineers is different. It requires fewer people with different levels of skill. Likewise, Manufacturing no longer requires the same number of assemblers, because Engineering designed out the need for assembly in the manufacturing process. Meanwhile, market realities forced us to recognize that our workforce needs had changed. We had to find options to provide people with choices for doing meaningful work.
Our challenge is to balance business success with our values. When we don’t spend the time with our newer employees to help them assimilate our values, we fail them. When people don’t have meaningful work, we fail them. When we can’t give people the chance to work to their potential, we fail them. In such conditions, our values demand that we, whenever possible, offer people a choice. That choice has become known as "transition."
The transition process deals with the issues of changed work in a changed marketplace. Our core values always guide us in our decisions and actions.
None of us wants the company to be engaged in transition, but we are. The primary thrust has been redeployment within Digital — reskilling and retraining where necessary. In every case, we are trying to do the right things.
Some people in the U.S. who have been offered our Transition Financial Support Option have volunteered to take it. Others will follow.
We expect that by the time the current phase of transition ends on July 2 of this year, over 2500 employees in the U.S. will have made the choice to take the Transition Financial Support Option.
Decisions are being made on a business-by-business basis. Future plans will be based on business conditions and directed by departmental human resource plans.
Change is constant. To change in a way that’s best for everyone, we need to plan better. We need to think about the human resources of the company in a different way. We need to be clearer on where we see the business going and plan ways to get there by maximizing the potential of our workforce. In other words, we have to find ways to help people maximize themselves.
That takes real leadership. You have to show the overall picture so people can see how their pieces fit in. If they understand, most of the time, people can and will do the right thing.
Historically, we have grown fast and made large profits. Planning to meet future business needs was a luxury we couldn’t afford. There was too much work for everyone to do each day. We couldn’t spare any of them for formal development. So we added more and more people to solve the problem. We believed we would continue to grow so fast that there would always be meaningful work for every employee we had and could possibly hire. Obviously that is not true today.
Management needs to change the way it thinks about people and costs. And employees need to change the way they think about work. All this has to happen without losing our values and sense of principles.
These changes are already happening. Many employees have been flexible in taking on new assignments. Career Opportunity Days in the U.S. Field have helped place over 700 people from other areas in sales and sales support roles. About 4000 employees in Manufacturing have been retrained and redeployed. And several hundred employees have changed jobs through a new emphasis on integrated services under the Enterprise Integration Services (EIS) organization.
Personnel is working to create an infrastructure for Human Resource Planning. This will help us do a quality job of staffing and skill mix in the future.
Managers must take the tools and processes that are developed and work with us to ensure that the right people with the right skills at the right time are available to do the work. We need to anticipate our people needs with sufficient lead time to meet them.
In our business, this is no small task. We’re all going to need to work together and communicate with greater clarity and a common vision. Our task is to balance the needs of the individual and the business through the creation of hiring plans, placement plans, job rotation, training plans, and transition programs, where appropriate.
The Human Resources Plan must encompass both short-term and long-term personnel needs for each organization. Managers know their business needs better than anyone else. They should lead their organizations as if they were running a business, projecting the human resources necessary to meet business needs. Planning strategies for skills development, and driving the changes to keep Digital a competitive leader in the industry.
Done perfectly, a human resources plan eliminates the need for downsizing. It is fully synchronized with the business.
Effective human resources management will help Digital attract and retain the best people. Rapid changes in many areas will require employees to learn continually. Continuous learning will only intensify in the 1990s. Employees will need more ability to define problems, quickly sift and assimilate relevant data, conceptualize and reorganize the information, make deductive and inductive leaps with it, ask hard questions about it, discuss findings with colleagues, work collaboratively to find solutions, and then convince others. And they’ll have to be able to think "globally," with a greater understanding of other languages and cultures.
Performance evaluations and development will help individuals gain new skills and levels of knowledge. Effective human resources management supports people and encourages them to do their best work. The way to make human resource programs successful, both from a business perspective and an employee relations point of view, is through communications.
Employees have to be comfortable enough to talk to any individual within the organization who can resolve problems or answer concerns.
One avenue for communication is through the Personnel representatives. Digital is committed to the concept of Personnel as an employee representative, not a management mouthpiece.
A program that Personnel can use for self-empowerment is the Open Door Policy. The heart of this practice is to allow employees to take issues to people other than their managers, at various levels of the organization, so issues can be resolved satisfactorily.
As we enter the 1990s, it has become necessary to reframe the Open Door Policy to ensure that Digital’s values are still being adhered to during a time of organizational and business change. Fear of retaliation — subtle or overt — must not exist. We want employees to take advantage of opportunities for improved communication.
The revised Open Door policy calls for a designated resource in each major organization. This "resource" is there to make sure employees’ issues are addressed and that there’s not retaliation against employees. A Corporate Open Door resource will continue to be available when issues can’t be resolved at the organizational level. We are committed to making sure every issue comes to closure.
Digital’s ability to meet its long-term business goals and to maintain a competitive edge in attracting and keeping qualified people in an increasingly diverse workforce, depends on our ability to improve the work environment and opportunities for growth.
More than ever before, the Digital of today and tomorrow must be a living expression of the values that shaped the beginning and growth of our enterprise. We must daily serve our customers and other people who depend on us. We must serve our organization as if it were our own. Unless each one of us takes responsibility, takes pride, takes ownership, takes this company seriously, it will not flower and will not be what it can be.
Our greatest enemy is mediocrity.
There is no strength in numbers, if those numbers consist of people who aren’t really there. Half a commitment plus another half a commitment doesn’t add up to a whole. And if you multiply that by thousands, it still doesn’t add up to a whole.
To go forward, we need people of courage, with generosity of spirit, brilliance, compassion, insight, humanity and humility. One fully committed person plus another fully committed person adds up to more than two. And if you multiply that by thousands, you begin to glimpse the great force for change within this company.
Our values are not these words we say. Our values are what lies behind and speaks through the actions we take. Digital is founded on values, and its future lies in the fullest re-expression of those values in the hot forge of the present.
"Doing the right thing" has to be given meaning each moment, by each one of us, in our thoughts and our acts. In this lies our future.
Digital has a profit problem. Our profit has been deteriorating now for a number of quarters. In other words, our costs have been rising faster than our revenues. When profit deteriorates, stockholder’s equity deteriorates, and so does their confidence in the company. We haven’t experienced that very often in the history of our company.
If you look at quarter-to-quarter growth, it is clear that our cost growth is dropping rapidly. That’s good news. But the revenue line is also dropping. In other words, we’re not generating as much revenue on a percentage basis as we did the previous year. That’s the profit problem: our costs are overriding our return on revenue. That’s what we have to turn around.
When the outside world looks at us, they consider profit, of course; but they also look at our balance sheet, where there’s some good news.
Net inventory turns continue to climb. In the past five or six years, inventory turns have more than doubled, putting about $1.3 billion on the balance sheet. That’s an indication that hard work pays off.
We also have less capital spending this year than we did last year. That’s good news.
With all our problems, we’re still generating cash, which adds to a very strong balance sheet and contributes significantly to why we still have a AAA credit rating.
Accounts receivable, measured in "days sales outstanding," is another important part of the balance sheet. It tells us what bills haven’t been paid by our customers, and is an area where we need to improve. The days sales outstanding in FY90 was worse than in FY89. One day of receivables outstanding is worth $60 million. In other words, for every day we improve our receivables, we can put $60 million on the plus side of our balance sheet.
We have a very strong balance sheet, but we have to keep working on the opportunities for improvement.
Costs remain a problem. We can think of these costs in two categories: people-related and non-people-related costs. By people-related costs, we mean salaries and fringe benefits, which for Digital amount to $5.5 billion a year. That figure also includes $750 million we spend each year on agencies, contract workers and temporary people.
Over the last few months, you’ve heard a lot about this piece of spending and what we’re doing about it, particularly with our transition program.
People costs are very difficult to work. These are gut-wrenching issues for the people involved and for the managers who have to deal with them. But, nevertheless, they must be faced.
This is my third major transition program since I’ve been in the company. You didn’t hear much about previous transitions. That’s because, in the past, transition programs were mainly centered in Manufacturing, and were mainly due to changes in technology - labor going into silicon, and freeing up people to do other things. Also, in the past, the environment was different. The industry was booming. Companies were starting up all around us. Jobs were plentiful. People had plenty of places to go, and most of the people could easily learn the new skills required in other areas of the company. For the most part, that is not the case today.
Today, the work is changing, and some jobs are being eliminated, never to return again. That’s an issue we all must face, just as we have in the past with the change in technology. Jobs will be restructured; duplication will be eliminated; some jobs will no longer be needed. That’s what we have to understand and be committed to resolve on behalf of the company.
Non-people-related costs add up to roughly $4.5 billion. We can deal with these costs without the gut-wrenching feelings we experience with people costs. Of course, these do affect people, but they don’t necessarily require the elimination of positions.
If we could eliminate ten to fifteen percent of those non-people-related costs, this could represent a savings of $450 to $675 million a year. If you can imagine how many positions you would have to eliminate to save that same amount of money, you’ll get an idea of how very important this area is. These costs include what we spend on materials that do not go into products; for instance, what we spend on pencils, papers, chairs and desks. It also includes telecommunications and discretionary spending, which means travel and meetings. There is a tremendous opportunity for us to save significant costs as we work these issues.
I want you to carry away two very simple messages from this speech.
First, we are not making enough profit to keep us in the forefront of the industry and for our customers to continue to have confidence in us as a growing company. We need very significant improvement so we can increase our profit and invest in our future.
While we’re eliminating some jobs, never to return, at the same time we have to hire people for other jobs that are being created. And we may not be able to reskill people to take those new jobs.
We’re not going to be able to fix this problem fast enough. That means we’re going to be adding expenses as we invest.
Since we’re here for the long pull, we’re going to invest where we need to. But when you add the need for more profit, and the need for more investment, that puts additional pressure on cost.
Second, remember that we’ve been here before. Because cutting costs is so difficult, it is easy to rationalize that if we get more revenue, we’ll be able to absorb some of those costs. But that usually doesn’t happen.
Of course, we’re going to work hard on revenue. I think we have tremendous opportunities relative to increasing revenues. I’m not de-emphasizing revenue. But you should spend against revenue only after you get it, not before.
Finally, I’d like to give a quick sketch of our "business units" and how these pieces fit together. We start with the most important part of our company — our customers. The closest entities to our customers are our selling and support units, which are organized by geography - US, Europe, and GIA. We also have application business units, around which we will build the corporate plans that will drive the expenditures across the company. For now, these include: Services Applications, Manufacturing Applications, Public Sector, Small Business, and Telecom Applications.
We have had business segments now for over a year, and we’re in the process of changing them. The significance of the change is that these units are "application" business units. They’re focused on the customer and how the customer looks at Digital, rather than how Digital looks at itself. They’re focused on the support mechanisms in the Field, to support the customer. There will also be some cross-application groups, which will provide services to the application business units.
In addition to application business units, we have two business units in the Field — Enterprise Integration Services (EIS) and Customer Services - and five product business units, which usually consist of manufacturing and engineering entities. For now, the product business units include: Unix/RISC, VMS/VAX, Networking, Storage, and NAS/Produc- tion Systems.
Basically, the significant change from where we were a year ago is the focus on applications and on the customer.
Change in our markets and technology is now an ongoing way of life. We need to learn to not only live with it, but to manage it to our advantage.
Three years ago, at DECWORLD ’87, we were proud of the very broad range of capabilities that we had as a company, but our focus was still largely that of a mid-range vendor. Today, we have a full range of systems from desktop PCs to data center mainframes.
Three years ago, applications played across any Digital VAX system. Today, we’re further along than any vendor in delivering that same remarkable capability across multi-vendor systems.
Considering the additions of our product line, and all of our expanded software, service and solutions offerings, we have indeed been managing and driving change and, thanks to the great range of our present capabilities, we now see major opportunities for the future.
These opportunities fall into at least three categories.
Competitive, broad-based production systems allow us to build on our investments and to make major marketshare inroads with traditional mainframe suppliers. In end-user computing we can win our deserved share of the desktop. We offer very competitive workstations and servers an can enable multi-vendor desktops and applications to work together. In systems integration, in its broadest sense, we can lead in quality and integration in terms of distributed computing and applications solutions, with capabilities such as our Network Application Support (NAS).
These opportunities reflect major, growing market potential, in areas where Digital already has true leadership and unique capabilities to offer. We have a great story to tell.
One of the key ways we’ll be telling that story will be through DECWORLD ’90, which is a coordinated set of activities for customers throughout the world. It will be held in Boston in July; Canberra, Australia, in August; Cannes, France, in September; and Tokyo, Japan, in November.
DECWORLD ’90 is intended to reduce selling cycles for our sales people, as well as to increase revenues in FY91 and beyond.
Building on past DEC WORLDS, it will have the excitement and interest that our customers expect from an event, but it will offer also the benefits of a focused problem-solving educational experience.
We will tailor the DECWORLD ’90 experience for each and every customer so that they can focus on the solutions that meet their particular business problems. In fact, the entire DEC WORLD ’90 has been organized around customer requirements - in particular, the requirements of senior functional managers, as well as senior information systems managers. It will showcase our production systems, end-user systems, and systems integration capabilities.
We think of DECWORLD ’90 as the computing equivalent of Disney’s Epcot Center. For example, DECWORLD ’90 in Boston will offer ten Discovery Centers, ranging from banking to manufacturing, to federal government. These Discovery Centers will give customers an opportunity to learn through hands-on demonstrations, workshops, and interactive seminars.
The program assumes the active planning and participation of our account managers. Using the DECWORLD ’90 program guide, they’ll be able to help customers match their individual problems, as spelled out in the account plans, with our demonstrated solutions.
This year, we’re focusing as much on new customers as we are on strengthening relationships with our existing customers. This means that for many visitors, DECWORLD ’90 will be their first major contact with Digital. This important interaction is a great opportunity for us to demonstrate, in a way that directly relates to the customer’s business problems, that "Digital has it now" is as powerful a message today as it was at DECWORLD ’87.
As serious as the program is, it will also be a lot of fun. Discovery, participation, learning, innovation, interaction and excitement are all part of DECWORLD ’90.
The VAX 9000 system is the "hottest" machine, with the fastest I/O (input/output) that Digital has ever built. It has all the features that our customers expect from mainframes. For the first time, we’ve got a high-end machine that outperforms all the competition.
This system fulfills all of our performance expectations with one exception: it’s even faster than we expected. We announced it as a 30 VUPS (VAX units of performance; VAX-11/- 780 performance is one VUP) system. After Digital Review Labs ran their benchmark, their conclusion was that it’s not 30 VUPS — it’s 40.
In customer benchmarks, the VAX 9000 computer regularly beats machines from our toughest competitors in "hot boxes," supercomputers, and commercial mainframes. In fact, some customers actually asked to watch the benchmark running because they didn’t believe the superb performance we were getting.
The VAX 9000 system has plenty of raw power for both commercial and scientific applications. With this machine, we now have all the ammunition to win in commercial transaction processing and supercomputing.
Existing orders show an interesting distribution of applications, with two-thirds for commercial and transaction processing, and one-third scientific and technical.
We’ve also been making tremendous inroads against our competitors. Better than one-third of all orders for VAX 9000 systems represent new competitive wins. Some of these customers are planning to move out their existing machines to make way for the VAX 9000 system.
Our first customer shipment was installed, up and running just seven hours from delivery. For a mainframe computer, that’s phenomenal - especially for the first one.
In Q3, manufacture of complete systems got underway in Burlington, Vermont, and Galway, Ireland. In Q4, we begin shipments of VAX 9000 Model 210 systems. In Q1 FY91, we plan to ship VAX 9000 Model 410 and 420 systems, as well as VAX 9000 vector systems. Looking ahead to Q2 FY91, we plan to ship VAX 9000 Model 430s and 440s and, for the first time, ULTRIX software will be available on the VAX 9000 system.
In the coming months, ever increasing numbers of this system will be hard at work, in technical and commercial applications throughout the world. The VAX 9000 system is helping our existing customers extend their computing power and, along with the VAXft 3000 system, our software products and our services offerings, it is opening new accounts for new applications in such areas as banking, insurance, manufacturing, universities, science, and technology.
The VAXft 3000 system is important to Digital because it means new business. Half of the orders we have received thus far have been either for new applications with existing customers, or totally new business for Digital. We needed a fault tolerant machine because our customers wanted us to be a full supplier of all solutions.
The fault-tolerant market is growing rapidly. Over the last five years it has had cumulative, compounded annual growth of 24%. We should be able to capture a major percentage of this market.
We are going after new applications in four primary areas: telecommunications, financial services, government and transportation.
When you think about fault tolerance, you usually think about bank transactions, and activities of that nature. But a wide variety of other applications also require fault tolerance. For instance, CSX in Florida recently purchased a VAXft 3000 system to schedule locomotives. When computers are down, they lose about $200,000 a minute because cargo doesn’t move.
Fault tolerance is particularly important in applications where even a brief loss of computing could mean a threat to life (such as air traffic control) and where it could mean the loss of large sums of money. As a subcontractor on a major sale of air traffic control systems in Canada, Digital stands to get about $100 million in business because we now offer fault tolerance. PRC, a supplier of fire, ambulance and police services in California, selected the VAXft 3000 system as their platform for their bids that include fault tolerance, and over the next few years they will be doing about $10 million a year of business with this machine. In addition, a value-added reseller that sells to banks in Chile, Thailand and other parts of the world, has already ordered 20 VAXft 3000 systems.
The competition will say that this is a point product, that Digital is a delayed entry into this market, and, maybe, that it is too expensive. Unlike competitors such as Tandem and Stratus, Digital is a full supplier of products. We have offered a wide range of high availability solutions with VAXcluster systems since 1983. Now, the VAXft 3000 computer can be included in VAXcluster systems or can be used in stand-alone configurations. With our VAXcluster solutions, including VAX 9000 and VAX 6000 systems, customers can expand their range of performance from nine to hundreds or even thousands of transactions per second (TPS). That means we don’t have to concentrate on putting all the performance in a single box.
With the VAXft 3000 system, we don’t have to sell against fault tolerance. Now, our sales force has the opportunity to sell with fault tolerance and high availability, and capture the market that can be ours.
In addition, we have very aggressive product plans. We will vastly increase the performance of our products through clustering and higher speed processors.
Regarding price, the Aberdeen Group said that, comparing apples to apples, the VAXft 3000 system is better than what the competition offers.
Lastly, because we are a full supplier, with a large customer support force, we can provide support within two hours in the U.S. if a customer has a problem with any of these products.
Today, Digital is positioned to seize leadership in connecting and serving desktops. This is made possible by our product strengths in networking multi-vendor, desktop personal computers (PCs) and terminals, and our market strength in general-purpose networks and servers.
With over 50 million PCs at potential customer sites, we have an unparalleled opportunity to expand our business. Our success stories includes sales that start small, connecting ten desks, and grow to a hundred, a thousand and ten thousand connections, and include the large, do-it-all-at-once sales, which connect an entire enterprise.
Our message is that Digital is the vendor that can solve the customer’s problem by connecting their desktops, and by providing a unified environment, without regard to numbers of connections, or type of desktop device — whether terminal, PC, or workstation.
With the recent announcement of VMS services for MAC, we now have a single integrated solution using DEC LANworks software (the new name for our personal computing software architecture) and a VAXserver to support Macintosh, MS-DOS, and OS/2 clients on the same network.
The desktop interconnect business includes the network hardware, software, and services that our customers need to connect, manage, use and maintain their terminals, PCs and workstations in a network. These include:
o network hardware (terminal servers, DECconnect wiring, Ethernet devices, and DEC Ether- work controllers),
o network software (DEC LANworks software, formerly known as "PCSA"),
o applications (from both Digital and third parties), and
o value-added services (including consulting, installation, and training).
With this set of products and services Digital is uniquely positioned as the vendor who can solve customers’ problems by unifying and simplifying their diverse environment.
This segment of our industry has a projected growth rate of 25 % and 35 % growth compounded annually, through the mid-1990s. The total value of hardware, software, and services in the desktop interconnect business is projected to be over $22 billion worldwide by 1993.
As there is no other strong industry leader who can supply this range of products and services, Digital can become the market’s obvious vendor of choice for this business.
In addition, this business is strategically important to the company. Each desktop connection leverages up to $4,000 in revenue. This revenue comes from initial network software and hardware, applications, servers, other network components and services, plus the value of the desktop device itself. In addition, the desktop interconnect helps establish Digital’s presence in an account both at the small sites and within the workgroup and provides an annuity stream.
As an example of "do-it-all-at-once" wins, Digital recently secured a major contract with Societe Generate, France’s third largest bank. The project includes connecting over 2,000 satellite branch banks, 200 hub branches, and over 20,000 desktops.
In the category of "start small and grow" wins, Digital began with Dow Chemical three years ago, supplying PC network software to connect a few desktops in their Michigan Division. The relationship matured and resulted in enhancements to the network software and has flowered to include Dow Research, the Texas Division, and, most recently, the Louisiana Division. We have now connected nearly 5,000 PCs at Dow Chemical. Even those Dow sites that were primarily IBM-oriented have started moving to our LANworks PCSA software.
In summary, the desktop interconnect business is a significant opportunity and an exciting success story.
In response to the "Digital Quarterly Report" (DQR), a live video program broadcast the week before the State of the Company Meeting, employees submitted a number of questions. Many of these questions were answered in the State of the Company presentations and were helpful in putting those presentations together. Others were answered by Ken Olsen, president, in the morning over the Digital Video Network (DVN) and in the afternoon after the formal presentations. The following is a sampling of those questions and Ken’s answers.
A few days ago, the press reported that Hewlett-Packard would pass Digital in computer revenue in a couple of years. Why not use our cash to acquire a sizable computer business, thus pre-empting HP’s offensive?
"Where we rate in terms of size is fun to think about, but not important," answered Ken. "As for acquisitions, for years we’ve looked for ones that would make a real contribution to our business."
Ken suggested that we will need the skills of our employees if we succeed with our plan. Jack said giving a transition package to 2,000 people was "the tip of the iceberg" of the total cost opportunity. Are these views contradictory?
"No, they aren’t contradictory," Ken explained. "We need almost as many people as we have to let go. And, although we would like to use people inside, there are some whose skills we just don’t need anymore because of changes in technology.
"We said something else that also might have sounded contradictory," he added. "I said we have to grow, and Jack said we have to deal with costs. Either one of those would solve our problem. The obvious answer is that we have do both. That’s our message."
Recently, there have been price increases in VAX/VMS systems, while discounts are announced for our RISC/UNIX line of computers. Are you discouraging new customers from choosing VAX/VMS systems?
"No, our investment in VAX/VMS products is very large, and the functionality we offer is enormous," noted Ken. "Our goal with our VAX/VMS products is to provide the highest reliability and quality. That costs more. Also, UNIX products can be purchased anywhere, and the competition keeps the price low.
"In the long run, we expect to charge approximately the same for the two kinds of hardware. The software pricing will reflect the service and quality we provide, as well as the differences in our cost. That approach will enable us to compete with those vendors who have no service and just offer raw hardware, with simple functionality.
"We’re not there yet. We’ll have to evolve into it. It’s one of the things I hope to come out of our new business unit operations."
We have many great VMS software products. Would you consider porting our operating system to other processors, for instance, PS/2, RISC, etc.?
"No, it is not practical to put our operating system on their machines," said Ken. "Getting it on a VAX machine is hard enough. But, in the next year or two, we will do some very exciting, radical and fun things.
Can we expect any changes in our marketing and advertising strategy in FY91? Most of our advertising seems to be concentrated in trade and market publications, with only a small portion being placed in the major papers and magazines. Can’t we start advertising more aggressively?
"On the one hand, we are concentrating our selling to large companies," explained Ken. "Since there’s only so many of those, we advertise to that small number of people we want to hit, rather than in the general magazines. And we do quite well with the large companies. On the other hand, we have to broaden our base, which will change our advertising.
"We performed a very difficult change in the last ten years. We were a technical selling operation. Now a large percentage of our business is commercial, where we do a good job for many large customers. That’s a major accomplishment.
But our marketing hasn’t changed accordingly. We still put most of our effort into the announcement of new products. We have to be much more creative to get our key messages across.
"The key question of marketing is, what’s your message? It has to be stated simply so it can be understood by our sales force and customers. You cannot advertise complicated messages. When we’re successful, we’ll have a marketing message so simple people will understand it, and no one will notice we didn’t do flashy marketing."
At one time it was not unusual for employees to take on projects, largely in their own time, without any promise of being rewarded, if they thought the projects would benefit the company. Is this the type of entrepreneurial spirit still valued at Digital?
"An entrepreneurial attitude means being creative and taking responsibility," noted Ken. "You don’t have to invent the whole thing, but you do have to take responsibility. Somebody could be an "entrepreneur" by starting a store that was like thousands of others. He or she becomes an entrepreneur not by innovation, but by taking complete responsibility. We need that.
"The underlying question here may be — should someone invent something and try to convince the company to exploit it? On the one hand, a company can only do so many things. We’re always guilty of running off in too many directions. For us to adopt ideas, they have to fit with what we’re doing — with our skills and goals.
"On the other hand, we have to encourage rather than stifle new ideas. Life is filled with such conflicts and paradoxes that we have to learn to balance.
"The whole question of entrepreneurship and creativity within the company is difficult.
"Basically, there are two classes of ideas — followers and leaders. One class of ideas consists of a list of all the things we missed because we didn’t follow the rest of the industry. We should have seen which way the world was going and gotten in line.
"Other ideas relate to deciding where the world needs to go and showing them the way. That’s how we’ve made significant contributions to the world.
"As a company gets older, there’s more
tendency to follow. But it’s terrifying to think of the
possibility of Digital following. Rather, we have to decide
what our unique contribution is and invest our effort there."
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