Volume 9, 9__________________________________________________________ October/November, 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 firstname.lastname@example.org
Introduction To Digital’s Business Unit Structure by Ken Olsen, president
Ken Explains Business Unit ‘Architecture’ To Officers
Management System - Providing Business Units With The Information They Need To Make Decisions by Lyn Benton, Assistant Corporate Controller
The Role Of Application Business Units by Peter Smith, vice president, Product and Industry Marketing
Application Business Units Organized As ‘Clusters’
Defining The Job Of An Abu ‘Cluster Manager’ by Bill Steul, vice president, Service Cluster
Insurance - An Example Of An Application Business Unit by Sandy Thomas, Vice President, Insurance Business Unit
Renewed Emphasis On CSOs by Win Hindle, senior vice president
Managing CSO Relationships In The U.S. by Jay Atlas, Vice President, U.S. Channel Sales
Managing Large Global Accounts Jack MacKeen, Vice President, International Accounts Marketing
Cost Effectiveness In Corporate Administration by Doug Hammond, manager, Corporate Administration
Update On Business In Eastern Europe
Bob Hughes Named Vice President, U.S. Sales
Changes In Educational Services
Far East Region Now Known As Digital Asia
Digital always has been committed to taking good care of its customers. We want customers to buy only what is best and to make sure that what they buy satisfies their need. We spend time with them before their needs are defined. We help them develop the system, and then put it together and make it work for them.
Through most of our history, the costs involved in taking care of the customer, no matter where the customer is located around the world, have been covered by the price we charge for the hardware and software, leaving enough for us to be quite profitable. In recent years, we have added continually to the wide variety of services we provide to help the customer, but each one has raised our costs. At the same time, other companies are selling many hardware and software packages without such services. We are now in a position where we have to price our equipment in line with those who give little or no services with their products, while still trying to maintain our tradition of taking care of the customer’s needs.
We are not changing our worldwide organization in order to accomplish this. Instead, we are breaking the company into budget units, or independent business units, each of which has responsibility to ensure that the customer is willing to pay for all the costs and investments we incur, either in the initial price or as a separate charge. For those customers who want nothing more than hardware or software, we can sell at a price that is competitive with anyone.
For budgeting purposes, we have divided the company into three groups. The Product and Service Creation Units are responsible for generating, engineering, developing, and manufacturing hardware, software and service products at competitive prices, with all the Digital quality and testing, while being sure that the customer is willing to pay for any extra cost incurred.
The second group is Application Business Units (ABUs). This group is responsible for delivering the complete hardware and software solution to the customer. They market and present the application on the basis that it is something useful to the customer and something for which the customer is willing to pay.
The third group is the selling group, called Account Units. This group is responsible for the plan and actual results of selling all products and services directly to their customers. They must provide an effective contribution to Digital’s performance by making an agreed upon profit.
In summary, the cost of product development and manufacturing, plus the cost of integration, applications, and marketing, plus the cost of selling, when subtracted from the price we charge the customer, has to leave a profit that is very satisfactory to stock holders. The relationship or sum of these various business units creates value that far exceeds the individual contribution of any single one of them.
We deal with a wide range of customers and applications around the world. We sell a broad line of computer equipment — from terminals and personal computers to mainframes. We integrate these into systems that range from a small office network to a worldwide, enterprise-wide system. We sell hardware at competitive wholesale prices. And we also sell complete systems of any size, guaranteeing their results, and even operating them for customers.
While we use the best management systems to meet these complex requirements, we still base our business on trust, integrity, and the entrepreneurship of each of the many parts that make up the company.
To satisfy customer needs, we continually strive to give more freedom to those groups that need the freedom to be creative and entrepreneurial. At the same time, we strive to maintain the discipline to make simple and complex systems go together quickly and work reliably, and to supply all the help, services and management reporting necessary for each entrepreneurial group to manage well and to be creative.
Seventy years ago, when Alfred Sloan set out to reorganize General Motors, and at the same time changed DuPont, he said that each business unit manager should have complete freedom to run his or her unit in an optimum way, with no interference from headquarters. He also said that headquarters should make sure that all units work together and succeed in their goals. Years later he said he realized that these two statements were still very true and very important, but were also in conflict with each other.
This is why we cannot manage by computer. It takes human beings with goodwill, skill, and
plete freedom, and yet maintaining the discipline and standards necessary for the many parts to work well together to enhance the system or network.
Ken Olsen, president, discussed strategic business units and their roles at the quarterly Officers’ Luncheon, held in Maynard, Mass., on Oct. 3. The following article summarizes his remarks.
"We have set out to do what probably no one else has ever tried before — to run a company as large as we are, with an enormous and diverse set of products and customers, all as one company. That’s not an easy task," admitted Ken.
"We’re not going to break the company up into divisions, which is the normal way. Rather, we’re going to break up into business units and treat each as if it were a separate business.
"In simple terms, our goal is to have all the advantages of a small company, along with all the advantages of a large one.
"Our cost problems are not in manufacturing products or engineering them," he noted. "We can compete with anyone in those realms. It is the other costs we incur that are hurting us — the costs that come from well-intentioned people doing good things that the customer is not willing to pay for.
"In the past, people would do ‘wonderful’ things for the product groups. They would plan and spend money, and the accounting system would dump all the charges on the product groups. Now, you should act as if a product group were running a separate company in Vermont, and it is only going to pay for the services that it orders.
"Another problem we face is that in supplying large complex systems, and by doing extra applications and giving discounts and free service, we sometimes lose our shirt on big projects. If today we charged for the services we gave to the customer, we’d be very profitable," Ken added.
"Customers want complex and even simple systems integrated. They want all the service. They want us to install the system, teach their people, show them how it works and, sometimes, even manage it for them. We should charge them for some of the things we do that we have not charged for in the past.
"In our new architecture, we break the company into three obvious pieces. The first piece generates products. This includes the engineering and manufacturing of hardware, software, and services. (Services also generate products, although they have not always thought of their work that way.) These product and service creation groups set internal transfer prices, which are the prices at which they would sell these products to customers if there were no selling cost. That is also the competitive, benchmark price of that product. The quality of their work depends on the difference between the cost and the price and also the amount sold.
"The second piece of the company takes products and applications from inside and outside the company and integrates them into systems for the customer," he continued. "For instance, Bill Steul does this for Banking. These ‘integrators’ will set a sales price, which includes a cost for selling.
"The selling is done by account teams with almost no overhead.
"There is a myth that is prevalent in many places in the company. It says, if you are the boss, all the budgets under you are summed up and that is your budget, and that determines what size building and staff you deserve. This is how some regional managers got such elaborate buildings — to match their ’billion-dollar budgets.’
"Now, the budget of a regional or district manager is going to be based on how much real help he or she provides to the account teams. The account team lays out a plan; and when it’s approved, it is their plan and their budget for that account for the whole world. The Raytheon account receives its own budget, rather than having to negotiate with Munich to get part of the Munich budget. There is no Munich budget. The regional and district managers do not run the budgets of the accounts in their territory. The budgets belong to the accounts.
"This approach has interesting implications for Services. Since Services generate products, they should deliver these products in the same form that our other product creation groups do. This means that if Diane is selling to Raytheon in Munich, she sells everything — the hardware, the software, the services, and the enterprise integration. Customer Services and EIS don’t need to have district managers in Munich to negotiate with the customer.
"Often the question comes up: ‘How do we run like one big company and like dozens of separate small companies at the same time?’ It is hard for one accounting system to provide both views," Ken admitted. "We will have one system to report our quarterly and annual financial results to shareholders and to pay taxes. That accounting is complex, with 50 states and dozens of countries, and we have to follow all of their complicated rules very carefully. But in addition to that, we need another accounting system to help us run the business efficiently.
"With this new, additional reporting system, we will deliver one standard report every week to every business unit," he promised. "It won’t show everything, but it will give them much of the information they need for making decisions. And we will ask every business unit to report to the Executive Committee once a month.
"We also promise that, with all haste, we will have a computer system which will allow any manager to request any data in any format, sorted any way he or she wants, and have it come up on his or her terminal. We have the technology to do this, and now it is a priority to make it happen.
"With this frequent and systematic approach, the Executive Committee will have the information that it needs to balance our investments and plan for our future," he concluded.
The new system for reporting internal business information — how financial information is gathered, arranged and distributed to managers in support of business decisions — is based on "business units." This reporting of business unit performance is designed to encourage entrepreneurial decision-making, through an improved understanding of each business unit’s value-added and profit contribution, as well as its return on assets and the expenses associated with its direct activities.
In the past, all expenses, regardless of their source, were allocated to the groups that created the products and were part of the performance they were measured on, even though they may have had little control over many of those items. The new management reporting for these groups reflects their particular value-added, matching their activities and excluding those that are performed in other business units. This approach provides direct accountability for performance and should be more useful in making individual business unit decisions.
The three kinds of business units are Product and Service Creation Units, Application Business Units and Account Units.
This way of looking at the company’s performance gives sharp focus to discrete segments of the company’s business. It also makes it possible to aggregate the numbers in various ways that provide useful perspectives of the company’s overall activities. From an organ-
izational point of view, individual business units may be totally unique, with greatly differing scopes and responsibilities; and the organizational units need not coincide with the logical entities used for reporting purposes. For instance, Customer Services includes people who create service products, and also other people who work as members of account teams and deliver these products directly to customers. But for management reporting purposes, the "creation" role is viewed as one business unit - a Product and Service Creation Unit — and the work with accounts is seen in the plans and results of Account Units.
Business units each have a plan which is expected to support the company’s primary goal of customer satisfaction and our drive toward excellent financial results. When expressed in quantitative terms, the company’s goals are 22% return on equity (ROE) and 16% return on assets (ROA). The business manager will be able to present enough information to the Executive Committee and/or the Board of Directors for determination of its value to the company goals. All business units are responsible for achieving their approved business plan commitments.
For this internal financial reporting, it is not necessary or even desirable to use the same kinds of profit and loss (P&L) statements as are used in external reporting of quarterly results. Rather, it is important to focus on those elements which will help managers plan and improve performance in those parts of the business that they can directly control or closely influence. Hence, the line items on the P&Ls for each of the three different categories of business units differ from one another, reflecting their different activities.
The main role of a Product and Service Creation Unit is to develop and produce competitive products that satisfy customer needs. Products could be hardware, software, and/or services. These products are sold to the Account Units using a transfer price, which is based on a competitive-level price for a comparable product in the marketplace. The actual price the company receives from the customer is recognized in the Account Unit.
The Product and Service Creation Units are responsible for:
o best-in-class product and service development, manufacturing and service delivery; o engineering, manufacturing and service competitiveness; and
o profitability on their direct added value (not including selling- or marketing-related expenses).
The costs incurred by the Product and Service Creation Units are the direct costs required to develop and produce the products, the associated base-product marketing costs required to communicate the performance and benefits of the products to the Account Units, and product-specialist costs required to support the products within the Account Units.
Application Business Units (ABUs) are designed to add value to Digital’s base products and services in a way that allows market share growth and makes the selling process easier for account managers. A key role of the ABUs will be to connect directly to account managers to make the full range of Digital products, applications and services easy to sell, and to make it easy to price for the added value of the ABUs.
During the 1980s, we empowered the field by focusing on geographies as the basic sales unit. And we empowered our engineering groups through the creation of product business units. And while this helped fuel much of our success during the 1980s, the gap between internal product and application development and field implementation became unacceptably wide.
ABUs focus on satisfying customers in defined groups of accounts, whether those customers are in a vertical market, like the insurance industry, or a class of users, like office workers. They all have global responsibility for their market segments, and they should: o provide the business solutions that meet our customers, needs;
o generate demand for Digital’s products and services;
o focus the company outwardly on efforts to increase profitability and marketshare in targeted markets; and
o support the account management structure and account planning process of the sales force to ensure that the strategic investments the company is making (in applications, products, services, and partnerships) serve their needs.
They must provide the most competitive application solutions. To do this successfully, ABUs understand what kind of solutions the customers in their markets need, deliver a breadth of needed high quality solutions, price and position them competitively, and ensure ease of integration to match customer needs and buying preferences.
At the same time, they must create customer demand, using the whole range of marketing programs to focus on their particular key industries or market segments. They are Digital’s vanguard in positioning Digital publicly, and in supporting the field in positioning Digital products, services and application solutions.
A major responsibility of the ABUs is to make Digital products, services and applications easy to sell and easy to buy. This means working to ensure that the sales force has all of the tools and training it needs to sell effectively amidst tough competition. It also means seeing that the sales force has sufficient support resources with the right knowledge and expertise. Finally, it means that the product, services and applications themselves are priced competitively and packaged in a way that makes it easy for the customers to purchase and the sales force and partners to sell.
Our customers’ needs are changing. Customers no longer focus on information technology primarily as a cost reduction measure. They want solutions to their industry-specific business problems, and computer hardware is no longer synonymous with solutions. Today, customers want solutions that increase their competitiveness and provide a platform for growth, not simply a point solution to a specific problem.
Changes in technology are altering customer perceptions. Hardware has become less expensive while performance has increased dramatically. Emerging standards have reduced the ability of customers to see a clear and distinct differentiation between competing vendors’ hardware. The key differentiator is the ability to supply applications and services that solve business problems and integrate solutions across an enterprise.
These trends are pushing Digital to have a greater business focus on applications and services. The intensity of competition within the industry is increasing. And, with a greater demand for business solutions by customers and the continuing commoditization of hardware, the balance among hardware and software and services is shifting. Customers are coming to expect price competitive, interoperable hardware and much higher levels of customer service and support than ever before.
ABUs enable us to focus on similar customers to better understand and meet their needs.
Meeting customer demands for industry-specific solutions to their business problems, whether the solution is a point application or a major systems and support integration effort, means concentrating and investing in the best solutions and solutions partners for specific markets segments or groups of customers.
We also need to have the account managers and marketing more closely allied if we are going to succeed in profitably increasing market share by successfully providing business solutions.
The most effective delivery mechanisms for solutions will vary by defined groups of customers and by geography. ABUs must develop worldwide strategies, in conjunction with the field, to ensure that each group of customers and each geography is having solutions delivered in the most cost-effective and efficient manner. The ABUs also will manage relationships with key solutions partners, support these relationships with a broad spectrum of programs, and ensure that account managers can access all available channels worldwide. They must cooperate with the geographies to optimize terms and conditions, discounts by groups of customers, and uplift in the countries to develop their market-specific worldwide distribution plan.
In addition, there are a number of activities for which ABUs are responsible in conjunction with other groups in the company. For example, insofar as the ABUs are responsible for ease of selling, they must work very closely with the account teams, as well as with the product and service business units. Only all three, working together can, for example, ensure that the sales force is well-trained on products, services and applications.
The ABUs and the Account Units share two measurements in common: revenue and sales yield. Common measurements are designed to ensure that the coordination and synergy necessary to achieve the company’s overall plan takes place.
Digital puts the success of the customer at the center of the universe, with Account Managers and Partners as the direct contacts in meeting their needs. In this model, ABUs, Product and Service Creation Units and Account Business Units each have a unique value in meeting customer needs. In addition, each group, working together adds a joint value.
Application Business Units (ABUs) are organized in four "clusters," based on the similarity of customer needs, plus two additional business units — General Systems Business and Telecommunications. The clusters are Service Industry, managed by Bill Steul; Manufacturing Applications, managed by Peter Smith (acting); Public Sector Applications, managed by Harvey Weiss; and Cross-Industry Applications, managed by Henry Ancona.
The Service Industry Cluster includes seven ABUs:
o Banking, managed by Norm Goldberg;
o Insurance, Sandy Thomas;
o Media, Bob Farquhar;
o Utilities, Bill Steul (acting);
o Retail, Bill Steul (acting);
o Travel, Bill Steul (acting); and
o Professional Services, Bill Steul (acting).
"Where an existing industry group like Insurance has close ties to U.S. Sales, we’ll use that as a base," explains Pete Smith, vice president, Product and Industry Marketing.
"And we’ll provide the group with product, application and system engineering support as necessary - and help them expand and implement their successful field programs on a worldwide basis.
For those product groups like CIM and the Engineering Systems Group that are strong on the product side, we’ll do our best to make sure that they have strong connections to the field worldwide."
In the Manufacturing Cluster, ABUs have been organized around application segments, and are focused on meeting the needs of functional managers in:
o manufacturing — CIM Marketing and Product Development (CMPD), managed by Dave Copeland;
o engineering - Engineering Systems Group (ESG), Dave Copeland (acting);
o sales and distribution - Sales and Distribution Systems (SDS), Eli Lipcon; and o research and development Industrial Research/Lab, Robert Home.
The Industrial Research/Lab Applications Business Unit is built on a segment of the Laboratory Data Products (LDP) group. The expertise in the LDP group will focus more specifically by industry and functional expertise. Industrial Research Applications will focus primarily on research and development in the process industries.
The Public Sector Applications Cluster includes:
o Education, managed by Bob Trocchi;
o Health Care, Willow Shire;
o Science, Willow Shire;
o State and Local Government, Bob Trocchi; and
o Govemment/Systems, Harvey Weiss (acting).
The Govemment/Systems Group focuses on the U.S. Federal Government.
An additional business unit, General Systems Business, managed by Gary Eichhom, has been created to focus on the the small business market, with its distinct need for low cost of sales, complete application specific solutions, value-added service and unique distribution requirements.
Also, Telecommunications, managed by Ernst Wellhoener, headquartered in Valbonne, France, has responsibility for the worldwide telecommunications industry.
Finally, there are key classes of users that are vital, but cut across all the vertical lines of business and focus on market segments. For example, office systems are a set of
key applications and platforms directed at a class of users, and pervade all the vertical ABUs, whether Service or Manufacturing Industries, or in the Public Sector. The business units which deal with these "horizontal" needs are grouped in the Cross-Industry Applications Cluster.
These horizontal ABUs include:
o Office (OIS), managed by Gene Hodges;
o Electronic Publishing (EPS), Howard Woolf;
o Production Systems, Bob Weiner;
o Finance and Administrative Business Systems (FABS), Mike Carabetta; and
o Computer-Aided Software Engineering (CASE), Marion Dancy.
It is the job of the horizontal application groups to cooperate and develop mutual plans so that our office systems strategy, for example, is embedded in the plans of every ABU, and account managers and partners are successful in these key segments.
ABUs were created to answer both the external "pull" to more effectively provide business solutions as well as the internal "push" to create a closer connection between strategic investment and field implementation.
A "cluster manager" is a coach for a group of related Application Business Units (ABUs). We use the word "coach" to emphasize that we don’t want to over-manage. The coach is a change agent, able to provide an environment for the ABUs to do their jobs. In the words of Elizabeth Dole, the U.S. Secretary of Labor, "We motivate people to excel when we empower them to seize opportunity."
The Executive Committee has empowered the ABUs and will act as the review and approval body for their plans. The coaches are on the sidelines making sure that we prepare good quality plans, and get the approval we need to go after the markets for which we’re responsible. They also make sure we have strong links with other parts of the company.
We estimate that as cluster coaches we will spend about half of our time worrying about corporate issues. Most of the rest of the time will be spent worrying about our own product and industry marketing structure, trying to create the environment for the ABUs to succeed. We will also spend some time coaching the individual ABUs.
As cluster coaches, we should foster collaborative as opposed to "win/lose" behavior among ourselves and in our dealings with other parts of the company. We should focus on corporate issues and Digital’s overall good. We should clearly articulate direction and provide clarity around roles and responsibility. We should lead major changes for the company in such areas as pricing, sales and sales support models, and finding ways to better succeed in Enterprise Integration Service (EIS) business from an applications point of view. We should empower ABUs and functional groups to implement our strategies. We should help eliminate red tape and push back on unhelpful structure, process and committees.
We will put a lot of attention and energy into clarifying and communicating the corporate mission, strategy and messages. We also will let the Executive Committee know the markets where we want to be, the products we want to be strategic, the application areas and channels where we want to invest, and how to balance all of those investments.
We expect to spend a lot of time looking at corporate issues that cut across all of our businesses, such as pricing strategy, worldwide simplification of our terms and conditions, channels strategy and models for selling and supporting our customers in the Field. These are areas in which the cluster managers will work together as a team with Peter Smith’s staff.
Over the next few months we need to develop the model for empowering the ABUs and helping them to be successful. That will include the long-term and short-term planning process and measurements. It will also include the cross-functional planning and commitment process, including geographic links, Digital Customer Centers (DCCs) and sales support, training for the Field organization and methods for getting information about market requirements to Central Engineering. We’ll also work as a group on the development of our people and on the organizational development process, including our Marketing Development Program and the Marketing Career Advisory Board.
When working with the ABUs, our main concern will be to help them develop, get approved, and successfully implement quality plans. Can we make a convincing argument for the investments we want to make? Can we get the business for which we’ve committed? Do we have adequate investments? Do we have the right people skills? Do we have the right level of resources? Do we have a management review process that allows us to measure where we are against the plan and to take corrective action as we go along? We also need to be able to share knowledge, expertise, and services among the ABUs. We need to find ways to share and benefit from all the expertise we’ve developed over the last few years in product and industry marketing.
To sum it up, cluster managers will know they are successful if all of their ABUs meet or exceed their revenue and profit contribution plans and build for the future, while supporting the overall corporate direction.
The mission of an ABU is to support all Digital and CSO (Complementary Solution Organization) products and services worldwide by providing business solutions for customers, creating demand for industry applications and solutions, and growing a profitable market share. In its own market, each ABU leverages Digital’s key technologies, services and cross-industry applications by bringing together the functions of sales, marketing and engineering across geographies.
Although each Application Business Unit (ABU) is different, Insurance is an example of how ABUs operate — particularly those that are venturing into new markets.
An ABU also adds unique value by investing to build unique products and solutions specific to its industry. In the Insurance industry, an example is EDGE, an imaging system that we are developing jointly with Phoenix Mutual Life Insurance Company, which ultimately will have broad applications for other insurance companies as well. An ABU also works with CSOs, Digital Customer Center (DCCs) and Enterprise Integration Services (EIS) systems engineers to develop and deliver "augmented products," such as our Insurance Professional Work System (IPW). The IPW was developed based on two customer projects and provides an applications platform that incorporates emerging technologies, such as Artificial Intelligence (AT), voice and image to support a variety of products for customers in the insurance industry.
On a worldwide basis, Insurance represents a $15 billion market for computers and related software, operating systems and layered products. About half of that is in the United States. If you add third-party applications, services, and the insurance companies’ own in-house groups, the total market is probably two to three times that size.
In 1985, our market share in Insurance was very small, but this industry was looking for an alternative to IBM. The industry’s business architecture and IBM’s computing architecture were not well suited to one another. Digital responded by increasing its field focus, primarily around the district in Hartford, Conn., and soon achieved some significant wins, including our first million-dollar account — The Aetna — followed by the Hartford Insurance Group. Today we have a series of other significant accounts that serve as beachheads for this business, primarily in Paris, London and Toronto.
A group of senior executive customers known as our U.S. Advisory Board help us understand how they use our products to solve specific business problems. They don’t expect us to be industry experts, but they do want us to know where we have a competitive advantage in the use of these products. They help guide us in the right direction which helps us price for value and at the same time make adequate profits in areas where we can be unique and grow.
Our products fit very well with the architecture of their business, which is information- intensive, complex, and highly distributed with branch and regional networks. They need to get at customer information, be able to underwrite policies and pay claims instantaneously. They need to provide high service at low cost, and must be able to differentiate their products. They need to support their professionals with new kinds of expanded applications, which are easy to use, and also incorporate all the multi-vendor capability they already have in place - both on the desktop and in the data center. At the same time, they must integrate emerging technologies that hold promise for this industry, such as imaging and expert systems. They need to access and manipulate very large databases - what we call "liberating the data from the mainframe". And they must do complex analyses about complex service offerings for very large employee benefit, commercial property and casualty accounts.
This is a very large opportunity, but we’re not the only ones who have seen it. The competition is IBM. They dominate this industry, and they seek to secure their position through Office Vision, SAA and $120 million equity positions in software vendors. If we don’t sustain our position in this industry, and continue to invest in our products and form alliances with other companies that can help us, we’ll lose our beachhead. And that could hurt us in commercial applications that are important to us in our traditional manufacturing, engineering and scientific accounts.
Emerging technologies fit well with Digital’s hardware and layered products for this industry. Image and work-flow management systems (EDGE) probably represent our biggest opportunity to show the difference and value of Digital products and services to insurance customers. We need to invest there, and are doing this now. And in fact the EDGE systems engineering team is now part of the Insurance ABU and is charged with the goal of installing this system in insurance accounts in FY91. This could become the cornerstone of our Insurance business and of several other businesses as well.
In this new structure, we work with account sales, the DCC and EIS teams worldwide. This means working with them to create a joint plan that maximizes and balances the resources, so that we deliver the most effective solutions using our products and services. For instance, the Insurance Professional Worksystems (IPW) shown at DECWORLD and DECville demonstrate the use of Digital products in an integrated applications platform.
Many customer solutions are possible if project delivery capabilities are in place. We must build our project delivery capability with EIS and service alliance partners before our systems integration business can become a significant part of our revenue. We’ll increase our services revenues by driving the solution business with services, as opposed to adding them on after the equipment is sold.
ABUs are also responsible for making business decisions that grow the profits and increase the market share for their piece of the company’s business. They are accountable for the
Profit and Loss (P&L) statement in a way that adds real value to the way we operate in any given industry. The new P&L format for management reporting shows important characteristics of the market and points to what we can and should do to be successful. This new approach to each industry puts us in a position to plan and be accountable for growth in a comprehensive and integrated way.
The business unit structure should give Digital sharper focus on individual markets and greater flexibility and responsiveness when dealing with business partners of all kinds - now known collectively as Complementary Solution Organizations (CSOs).
In recent years, our relationships with CSOs have become increasingly complex and important to the company’s success. This development has paralleled our evolution from being simply a hardware vendor to becoming a provider of complete, networked solutions.
For the last three years we have tried to rebuild our emphasis on all the indirect channels. We have recognized that even though we want to do business directly in the large end-user space, we were missing a good bit of the market by not allowing more of our distribution to occur through indirect channels. We also have established a variety of new relationships with software providers to encourage them to write their software for use on our platforms.
Today, we have a multitude of different kinds of relationships, and can adapt to a variety of business needs. Our business unit structure should now enable us to take full advantage of these opportunities.
For instance, Gary Eichhom’s General Systems Business is a natural progression from what we have done before. Small business marketing will be done through CSOs known as "Value- Added Resellers" (VARs). These companies take possession of hardware and software from Digital, add their own software, and resell the system to end users.
In the U.S., we manage our indirect sales relationships through our Channel Sales organization, under Jay Atlas. He manages a separate sales force that focuses on "channel accounts." He is responsible for implementing our CSO programs.
The selection of most of the CSOs is done by the Application Business Units (ABUs) since they are familiar with the software customers need. They designate which companies have the expertise that we want to include Digital platforms and negotiate our agreements with those companies. Then it is up to Jay’s sales force to maintain that relationship.
To give visibility to the importance of CSOs, Jay holds a major conference once a year at which senior executives of our CSOs gather. They hear about new products and programs, and have an opportunity to discuss their concerns about relationships with Digital.
Business units will have a much stronger say in setting the company’s strategy. Each will define how it approaches its set of customers and will be able to maintain those relationships. In some cases, ABUs will package everything together and give the customer one price for everything. In other cases, they may want to keep the hardware and the services separate. We are leaving it up to each ABU to define the way of doing business in their marketplace.
We don’t have all the expertise needed to do everything. We need to affiliate with the people who have that expertise and can add value to what we can provide. It’s that expertise that we’re looking for in CSOs.
Our earliest business partners were what we call Original Equipment Manufacturers or "OEMs." They would take our hardware products and incorporate them in their end-user system which they would then resell to the end user. Such relationships date back to Digital’s beginnings. One of our first OEM customers of the PDP-1 computer was International Telephone and Telegraph Company (ITT). They used our PDP-1 computer in the message switching systems they sold.
These OEMs were "technical." They had the ability to take our products, do the interfacing to their equipment and do the necessary software. They could build our products into theirs without a great deal of assistance from us because they had engineers who were as good in work with our systems as we were.
That business grew very well during the early growth phases of Digital, and for a long time 35-40% of our revenue came from Technical OEMs.
In the early 1970s, we added a new kind of business partner, which we called Commercial OEM, or "COEM." These companies were not hardware proficient. Generally, they took our systems, added commercial software and resold those systems to end user customers. That business also grew rapidly and was quite successful.
About 10 years ago, out of the COEM business grew the "Digital Authorized Distributor Program," in which we allowed certain qualified COEMs to use the name "Digital" when selling to their end users. This was the first step in developing closer business relationships with various classes of customers. It came about in response to the fact that some of our COEMs ran into financial problems and went bankrupt, leaving their end-user customers very dissatisfied with Digital. So we created a much more disciplined program for COEMs to earn the name of "Digital Authorized Distributor." We were protecting end users by screening these companies and determining which ones we believed were reliable.
Meanwhile, our Component Group adopted a similar approach. They were selling peripherals, such as terminals and board-level PDP-11 and PDP-8 products, to customers who resembled technical OEMs in some ways, but who distributed our products rather than building them into products of their own. To better manage this piece of the business, they started an "Authorized Terminal Distributor" program as another form of indirect distribution of Digital’s products.
In the early 1980s, when we changed from a product line structure to a structure that gave more responsibility to the geographic units, we began focusing more effort on distributing to end users. That was also the period when we settled on the VAX family as being our mainstream set of products. With the VAX family, we felt we could develop enough software and get enough software partners that we could do more of our business directly with end users. During that period we built a strong account management focus on large end users and lost some of the emphasis we had had on indirect distribution channels.
It was at that time that we started our Cooperative Marketing Program (CMP), which continues to be a very important adjunct of Digital’s marketing. The focus here is mainly software. Sales people from a CMP go together with Digital sales people to the end-user customer and present a combination of Digital’s base platform and software from this CMP that will solve the customer’s business need. Through this program, we built marketing relationships with organizations that had expertise in various industries and applications and software.
Five years ago we established a program whereby we would sell directly to the very large companies and would channel our business to smaller companies indirectly through our business partners.
Today, we use the term "CSO" to cover all the relationships that we have with OEMs, CMPs, authorized distributors — anybody who distributes Digital’s products, or who provides software for our platforms or cooperates with Digital in a marketing sense.
In the U.S., the channels sales organization is responsible for management of Digital’s third parties, which we call "Complementary Solution Organizations" (CSOs). We have a direct sales force of approximately 700 people, organized by accounts and focused on these kinds of customers. Our job is to ensure that from their vantage point, Digital is the best partner they can possibly have. We also are responsible for generating profitable revenue as part of the overall U.S. plan.
Our relationships with CSOs not only produce revenue directly, but also leverage other sales. For instance, the fact that certain software is available on Digital platforms can be important to end user sales. While channel sales typically comprise about 25-30% of total U.S. sales, we estimate that leveraged sales represent another 25-30%. In other words, our CSOs impact about 50-60% of our U.S. sales performance. There is no doubt these relationships are critical to the company’s business today and in the future.
The marketing component of our Channel Sales organization focuses on providing programs to develop and optimize our relationships with CSOs. These include communication and training programs to keep CSOs current, lead-generation programs to promote business, and programs to recruit new third parties with key applications or in new markets that are important to Digital.
Application Business Units (ABUs) tend to concentrate on strategic applications that will be critical to our success in penetrating the largest customers in new and growing markets. We focus on all third-party relationships — those in support of the ABU’s as well as third parties who provide other complementary applications.
Often the "glue" linking the efforts of the ABUs and Channel Sales is the Digital Customer Center (DCC), where many CSO applications are available for customers. The DCCs are connected with particular ABUs, such as Telecommunications and Discrete Manufacturing.
We have an account manager for each CSO. He or she is responsible for making sure we have an account plan that describes the total relationship between Digital and that CSO. This is equally true with our corporate accounts, which have very broad relationships with Digital, often including some reseller or other CSO business. Examples include Schlum- berger, General Electric, and McDonnell Douglas. In those cases, we have a manager for the CSO relationship on the Corporate account team. The corporate account plan includes all of the third-party relationships, activities and programs that we are executing with that partner.
We focus our support efforts on the account manager because we recognize the uniqueness of every single account and the need to have a plan with each of them to maximize their relationship with Digital. The primary job of the district manager is to provide coaching
and counseling to account managers on how to manage and develop relationships with third parties.
Most of our CSOs offer the same applications on platforms offered by our competitors. They often sell on IBM, Hewlett-Packard, SUN and others, as well as Digital. One of our tasks is to get their attention, based on our relationship with them as a product, technology service and program provider. All sales managers focus on these areas to be the partner.
Nearly 2,000 of the 3,000 third parties with which we have relationships provide only software. They may not purchase products from Digital, but we support these accounts similarly to how we manage CSO resellers. The largest have dedicated account managers, and the smaller ones have shared account management. We measure the success of these account managers through an algorithm that tracks leveraged sales. Every time a CSO sells a software application on a Digital platform through its software license we have a way to determine how much hardware was leveraged.
One of the keys in developing CSO account plan is "joint planning" - a set of workshops and brainstorming sessions where we sit down with our CSO for one or two days and bring in experts from various parts of Digital, as required, to make sure that we create a detailed plan with the account. The resulting account plan is a dynamic, constantly updated document, which serves as the road map for Digital and the CSO. It represents a joint commitment to the marketplace and working together.
Ten years ago, our relationship with third parties was "laissez-faire." Through terms, conditions and discounts, we gave OEMs products that they could take to market. Our job was to give them the best platforms, the best products, the best operating system. Then we just wished them good luck, and they were on their own.
Now with our joint planning activities, we are moving toward closer partnerships. We’re recognizing that CSOs are critical to our success, and that we need to make serious commitments to one another.
If we want to have the best partners that the marketplace can offer, we must make sure we’re the best partner for them. In the nineties, this will mean a global view of markets, relationships and co-planning. We have to make sure we are not taking the shortterm, transaction view of our dealings with CSOs, but are really taking a longer-term view of relationship and commitment.
In the future, a CSO will not be able to be an equal partner to five or six different vendors. They are going to focus on one or two, and whether they choose us will be a function of how we behave today. It’s important for us, in all of our interactions, to behave as the best partner — in the Field, in our planning and in our ABUs. We have to view this not as a marriage of convenience, but rather a marriage of commitment.
International Accounts Marketing is chartered to bridge the three geographies to work account management issues, business practices and support tools. Our job is to make Digital appear consistent to our global accounts.
We are using 16 end-user accounts as a pilot. When we solve the problems for those accounts, we will have, in large measure, solved the problems for all the accounts with which we do business on an international basis.
Today, account managers are trying to develop their account plans worldwide. As they deal with the headquarters of a General Electric or a Schlumberger, they are trying to understand all of the customer’s issues on a global scale, so they can be Digital’s window into the account for all of its transnational concerns both as an end user and a CSO (Complementary Solution Organization). When European, Japanese, Australian or Canadian companies have U.S. subsidiaries, Digital sales and service people in the U.S. not only need to deal with their piece of the business, but also must supply information on that account to other account team members worldwide. In other words, U.S. sales is more than just U.S. It is account management for whatever its accounts need worldwide, and likewise in any geography. Everyone must put energy into helping Digital win worldwide business. To help in this effort, for the past year we have been working on such issues as worldwide warranty, worldwide pricing and consistent metrics for sales people and international sales credits.
With international sales credits, the sales team gets credit regardless of where a particular piece of business was supported or occurred. This is necessary to make sure our sales people do not artificially impose our internal metrics on customers — forcing them to place their orders in one country as opposed to another, rather than supporting the customer in the way the customer wants to be supported. For example, we cannot afford to have competition between Digital Germany and Digital Canada over who is going to get credit for a global order. In the past, when we got into situations like that, we have either given money in internal price competition or left the door open for a competitor. Now, we have smoothed the procedures and structure so that the sales team gets credit regardless of where the order was placed and where the sales resources were deployed.
The pricing issue is very sensitive, because there is an enormous profit impact to the company if that is not managed well. Customers want stability and predictability as they lay out projects that take a year to sell and two years to implement. We have worked out mechanisms that will allow us to work with them individually, to tailor a product (hardware, software and service) pricing mechanism to respond to their needs.
We need to help our account managers understand that different prices in different countries is a legitimate business practice across the world. Consider, for instance, that the cost of capital in the U.K. is 18%, and in Switzerland is 6%. That means there is a different cost of doing business in those countries, which is reflected in the cost of our operations there and has to be reflected in the price of our products.
Today, the company is more aware of global issues. We are serious now about breaking down "stovepipes," working collaboratively and sharing systems. Digital worldwide is embracing account management and presenting integrated behavior in front of the customer. But, as we move ahead, we still have a lot of our cultural and historical leftovers. Each area, each geography, each function has a lot of investment in various information systems and tools. At the seams and intersections between these organizations and systems, there is enormous opportunity for gains in productivity from bringing them closer together.
For example, sales people in Europe use an electronic tool known as ASSIST, while those in the U.S. use the Account Manager’s Workbench. And sales people in the U.K. have a different Account Manager’s Workbench. GIA is piloting use of the ASSIST system from Europe. Also, the Customer Services organization has a system called ATLAS. Every geography has different terminology, different definitions, different management structures — because these were developed as solutions to local problems. In other words, there are several separate and different systems that need to be pulled together to support global account planning and management.
In the product space, we need to find ways to better deal with the global demands of our customers. The technical language around the world is English. But now as Digital’s products move into the infrastructure on which companies run their business, we meet new and interesting requirements. For example, Digital engineers in Japan developed a Japanese language (Kanji) version of VMS software. But while this was designed and is supported on a local, country-level, we are now getting requests for it from around the world.
At DECWORLD ’90 in Boston, Mass., we handled about 100 inquiries from companies who want to get Japanese VMS software supported outside of Japan. These companies are going to do business in Japan or are already there and want support of Japanese VMS software in Texas or California or New York. In other words, we now have to be able to support Japanese VMS software outside of the place where it was developed. And, in general, we have to be able to support different language versions of VMS software at the corporate level, so that we have support for it across the world, as opposed to its being a local option. Unless we start with that as the design goal, it gets expensive to tack on such capabilities afterwards.
Meanwhile, at the request of the U.S., Europe and GIA channel managers, we also started a worldwide CSO pilot which is aimed at these same issues of dealing consistently with international customers. Europe, working with Pete Smith’s Product/Industry Marketing Group, had already started a smaller pilot, to determine the companies with which we should we engage strategically as marketing partners and embed in our global strategy. We merged with that pilot and are now working to include these CSOs in our account planning processes as we do business with end-user accounts.
There are 12 companies in the CSO pilot; and working with them, we have identified the 10 key problem areas that these companies wanted to see addressed in terms of working with us worldwide. These issues are all variations on the same theme — how do we work with Digital?
This CSO activity is particularly important because more and more we present ourselves to end-user customers with one or more CSOs, in a complex, team-selling situation. In many cases, Digital takes on the prime responsibility for a joint effort, or agrees to work in full collaboration with the CSOs. In any case, we have to be very clear about the value that each party delivers so we can be consistent and clear in front of the customer.
Basically, Digital is moving up the value-added chain and many of the issues we now struggle with have to do with "softer" values. We’re a full range vendor of products from desktop to data center. We offer true multi-vendor networks. And we have applications that run on multiple platforms. Those are all magnificent accomplishments, but they are all "palpable" products - "hard" kinds of values. Now we need to make progress in the area of "soft" values, such as consulting, service, environment, information management, expert systems, manufacturing knowledge - all of which can be important in our partnerships with CSOs.
For instance, as a company, we have solved many manufacturing problems with which our customers are just beginning to struggle. We can and should charge for the help which we provide them in these areas.
Basically, whenever we tackle a difficult internal problem, our solution can become a "product." Our tendency is to give that knowledge away instead of packaging it and teaching our sales people how to sell it. We’ve got a long way to go in terms of discipline and training our sales people in how to recognize these opportunities and pricing them appropriately.
For the last three years, Corporate Administration has been making steady productivity gains and cost reductions through consolidation and by sharing resources and expertise. These structural cost improvements were accelerated in Q4 of FY90, when a voluntary transition program enabled us to quickly implement consolidations that had already been planned.
The following are examples of these important changes:
Security. In directly managing 10 million square feet of space in the Maynard/Marlboro/- Merrimack Area, Corporate Administration provides Security services, along with a number of other services. Security services include both day-to-day immediate local work at every site and "one-place" work such as designing and servicing the security system and providing security training programs. Previously, each of three major geographic organizations delivered this work for its own geography. The consolidation of these central security services into only one organization, covering all of New England, resulted in saving $300,000 per year.
Property Development. Two years ago, Corporate Administration initiated a project with U.S. Area Administration to analyze and subsequently consolidate the work of their respective property development groups, which include real estate acquisition, design, and development. The Corporate Administration group was located in Maynard, while the U.S. Area organization had numerous property development groups scattered throughout the U.S. An intensive study resulted in the consolidation of all property development groups into three centers in the U.S., at a yearly savings of over $3 million, to serve the entire country.
Facilities Operations. Corporate Administration consolidated 11 facilities organizations into five during Q4 of FY90. The facilities cluster group servicing the Maynard Mill complex combined with Parker Street facilities cluster operations; five clusters in the Greater Marlboro area combined into three; and multiple management structures were brought together. Some services changed, work was merged, redundancies disappeared, and a level of management was eliminated. The total set of consolidations, across 10 million square feet of facilities, effects a savings of over $4 million per year for the company.
Geographic Shared Services. The "sharing" concept grew over the past several years, as independent facilities searched for ways to maintain or improve services, while reducing cost. Corporate Administration’s geographic shared services model evolved, not only from added new space, but also from internal initiatives by Digital organizations seeking to reduce their occupancy costs by embracing the model and saving hundreds of thousands of dollars annually.
Service Contracts. Consolidating service contracts has also reduced cost. Selectively reducing the number of such contractors makes it easier and less costly to manage such vendored services.
Common Systems. Another important cost initiative is the design and implementation of "common systems," replacing multiple and duplicate systems that evolved over the years at different sites. One example, now being implemented, is the creation of one ordering and stocking system for stationery supplies, replacing multiple more costly systems.
Utilization. Better utilization of the company’s space has enormous cost reduction potential. Focused efforts to improve utilization and reduce space invites creative thinking about workplace configurations and more effective use of Digital’s own networking capabilities. At the end of FY90, the company occupied approximately 44 million square feet of space throughout the world, at a cost of about $1 billion per year. In New England alone, with 18 million square feet representing 40% of the company’s worldwide total, Digital has internal agreements and commitments to vacate 34 buildings representing 1.8 million square feet; these reductions are well under way and will be completed by the end of Q3. In most cases, these are leased buildings, and vacating employees are moving to owned, longer-term Digital facilities in the immediate area. These facility consolidations should save the company $40 million per year. Add to this another one million square feet of space, not yet identified, which is targeted for reduction by FY92, and you have another $30 million in potential savings.
MS02. As one important example of improved space utilization, consolidation, and cost savings, the MS02 facility was approved three years ago for construction. Corporate Administration is now completing the construction and fitup of this new 285,000 square
foot building on the Powder Mill Road site in Maynard, Mass., for occupancy this winter. This one new owned building will eliminate six leased facilities and result in savings of $2 million a year in facilities and occupancy costs for the company.
Employee Involvement. Many cost saving ideas have come from employees. For example, an employee at the Mill observed that the "popcorn" packaging material the Receiving department discarded after opening packages was the very same material the company purchased for use by the Shipping department. The employee actually changed the process, insured that the previously discarded "popcorn" was moved from Receiving to Shipping, thus enabling Digital to recycle the material and save money. This one idea saved the company nearly $25,000 in one quarter alone.
Administration’s Quality Program is at the heart of much of this work. That Quality Program, built on the foundation of the organization’s goals of customer satisfaction, employee satisfaction and cost effectiveness, aims at continuous improvement through employee involvement. These goals and the quality program they support have served the company well over the past several years. They should continue to provide a basic framework for future changes that will enable employees in Corporate Administration to achieve excellence in their work and to continue to contribute to the competitive advantage of Digital.
Digital is taking an aggressive posture in Central and Eastern Europe. The first visible step was the opening of Digital Equipment (Hungary) in April 1990, which today is already providing services to customers. Now Digital is speeding to implement its direct presence in other countries of Central Europe and is evaluating an active relationship with the USSR.
Alberto Fresco, vice president Eastern Europe and Countrygroup 2, has been designated to lead this effort to open the market for Digital in all Central European countries and the USSR, together with the Countrygroup 2 Team.
In this approach, the Country Development Group, headed by Yves Sarrazin, reporting to Alberto, will keep and strengthen its operational role and remains responsible for implementing new subsidiaries, conducting the operations and providing the adequate support to optimize local results. In addition, a dedicated European Liaison Office has been established at Corporate, headed by Bruce Anderson, to facilitate and manage the many linkages and support available in the corporate groups.
Bob Hughes has been named vice president of U.S. Sales, reporting to Dave Grainger, vice president, U.S. Sales and Services. Bob’s responsibilities will encompass the entire end-user sector.
National Account and Regional Account Sales vice presidents will work for Bob. He will also take the lead in the management of the Sales function -- sales training, sales support, and sales productivity tools and programs. In this latter respect, Bob will work closely with the Volume and Government Sales sector managers to ensure the integration of the Sales function with such areas as Sales Training, Sales Support, Sales Productivity and Programs. He will continue to be a member of the U.S. Management Committee (USMC).
"Over the past year in the U.S. Field, we have built an organization in which accounts form the basis for our business planning, budgeting, investment, and return," Dave explains. "This focus on accounts and account management has been executed across the U.S., with corporate and national accounts managed within our account sales organization, and all other accounts managed within districts and regions.
"One of Bob’s most important priorities will be the ongoing emphasis on account management and account profitability. Towards this end, we will continue to build account focus within units and districts wherever possible. Account managers will continue to have the responsibility for budgeting and allocation of Sales and Sales Support resources. Units and districts will maintain their responsibility for the support and execution of account plans and for the development of new business."
Pat Cataldo, vice president, Educational Services and Jerry Montague, EIS vice president, GIA, recently announced the appointment of Gen Narui as director of Training and Education for the General International Area. In this position, Gen is responsible for strategies and support programs for employee and customer training, as well as for ensuring that training is integrated as a key component of Digital’s Enterprise Integration Services offerings.
Prior to this assignment, Gen was the director of Marketing for Nihon Digital, based in the Tokyo. From 1983 to 1988, he was the Japan Educational Services manager responsible for customer and employee training business. Since joining Digital in 1969, Gen has held a variety of other senior level management positions.
Other recent changes in the Educational Services organization include:
Roger Blomgren has been named U. S. Area Customer Education and Training manager for Educational Services. Roger has been with Digital for 11 years and was previously GIA Area Education and Training manager.
Barbara Bums has been appointed Office Applications Training manager. She reports jointly to Pat Cataldo and to Tom Richardson, Information Systems and Applications Market Development Programs Group manager. Since joining Digital in 1979, Barbara has held several positions in product marketing, sales programs, product management and human resource management. Most recently, she was Sales and Marketing Programs manager for the Aftermarket Software Business.
Paul Ciardullo has been named Corporate Customer Services Training manager. He has been with Digital for more than 23 years, most recently as District Customer Services’ manager in Connecticut.
Jim Malanson has assumed additional responsibilities as Corporate Operations and Marketing manager for Educational Services. Jim’s 21 years in Educational Services at Digital have included Field, Headquarters and International assignments. Most recently, he was Canadian Educational Services manager and Corporate Headquarters Operations manager for Educational Services.
Tim Walsh has been named Acting Corporate Sales and Sales Support Training manager. Tim has been with Digital for 16 years and previously served as Corporate Marketing manager for Educational Services.
Bobby Choonavala, Managing Director for Digital Equipment Asia, has announced that India and Pakistan have been added to the former Far East region, which will now be known as the Asia region. In terms of sales, Digital Asia has become the third largest region in GIA, after Japan and Canada.
"Our fiscal year 1990 ended June 30 recorded a 24 per cent growth rate, compared with about 15 per cent for the computer market," said Bobby. This made the Asia region the fastest-growing region for Digital.
He added that India represents a billion-dollar computer market to Digital, with a growth rate exceeding 30 per cent a year. Plans are under way to start business in Burma, Sri Lanka, Nepal and Bangladesh through the appointment of distributors.
One significant multi-million-dollar contract secured during the year was to provide VAX machines to automate securities trading for the Securities Exchange of Thailand and the brokers through the Chicago-based Midwest Stock Exchange.
To cope with business expansion, Digital Asia will hire an additional 400 marketing/sales- /support professionals by the end of the fiscal year, or an increase of more than 20 per cent. With these extra staff and the employees in the five manufacturing plants in Hong Kong, China, Taiwan, Singapore and India, the number of Digital employees in the region will exceed 6,000.
Digital Asia is drawing up plans to organize a DECworld show late next year to demonstrate how Digital’s leading-edge technologies solve business problems.
announced the setting up of two Asian Customer Centers — one
in Hong Kong and another in Singapore. The customer center in
Singapore will focus on telecommunications and financial
services industries, network technologies, office and imaging
applications. The customer center in Hong Kong will specialize
in the government, education and manufacturing markets,
commercial and electronic publishing applications as well as
database and transaction processing technologies.
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