| Text of Bob Palmer's Q4 Employee Forum address on DVN
(Following is the text of President and CEO Bob Palmer's Q4
Employee Forum address to employees. A transcript of the question
and answer session will be posted in LIVE WIRE tomorrow.)
Good morning and welcome. Thank you all for coming this morning.
I usually enjoy these opportunities to get together and talk with
you and hear directly from you about your ideas and concerns. I admit,
however, that this Employee Forum might be a bit more difficult than
usual -- given the disappointing financial news from the third quarter,
our shared disappointment and frustration, and of course the additional
steps that will be necessary to return to profitability.
Difficult as it may be, this is a very good method. It's only
one of our methods, but a very good one, for keeping two-way
communications open and ongoing. And I'm committed to carrying out my
responsibility in that area. That's why I'm here.
I am expecting that those of you in the audience will feel the
same responsibility today, and that everyone in Digital will recognize
the urgency of engaging in constructive problem-solving and two-way
communication as we move forward into Q4 and beyond.
One of the important pieces of feedback we received after the
last Employee Forum was that there was a need for more field-related
material and sales-related questions and answers. We listened to that
concern, and that's why we're holding this Employee Forum at the U.S.
Sales and Marketing Headquarters in Merrimack, New Hampshire.
As we get going here, I want to cover one major organizational
change first. Then I will discuss the third quarter results in some
detail, including the good news. I'll also outline some general
changes that are planned as part of our continued turnaround strategy
and, in the process of all of these topics, touch on many issues, I'm
sure, that affect us as employees of Digital. Following that, I'll
take your questions.
Organizational change
With respect to the organizational change, you all know that I
have asked Enrico Pesatori to assume the responsibilities of our
Systems Business Unit, including the worldwide sales and marketing
organization. This is in addition to his duties as vice president and
general manager of the Personal Computer Business Unit. He has
succeeded Ed Lucente, who resigned from Digital to become
executive-in-residence at Carnegie-Mellon University's Graduate School
of Industrial Administration.
Enrico has worked very successfully to make Digital an emerging
market leader in the worldwide PC sector of our industry. In just over
a year, he has put in place an effective business model and has made
extraordinary progress in developing a successful operation across all
of its areas: direct sales, marketing, channels, engineering and
manufacturing.
His leadership capabilities, his understanding of marketplace
realities, his international experience, and his strategic channels
vision add up to a level of general management skill that makes him
highly qualified for this new responsibility.
Enrico has made an excellent start. He is meeting with each of
the business managers, the SBU product segment managers and Area and
Territory managers to better understand ways to reduce our costs, grow
our business and remove barriers to our performance.
The Senior Management Team and I look forward to working with him
as he takes on these expanded responsibilities, and I urge all of you
to support him as he helps move us forward.
'Real progress' on many fronts
We have all had some time now to digest the news of the third
quarter results. Financially, as we know, the news was not good.
Digital reported a net loss of $183 million on a revenue decline of six
percent, which broke our hard-earned five-quarter string of improved
year-over-year quarterly results.
I've said this to the press, to analysts, to all of you already:
these results are unacceptable to me. And many of you have told me
that they're unacceptable to you as well.
Because of the real progress we have made together on so many
fronts, the results come as an equally real slap in the face. If I
were sitting in the audience with you today, I would be wondering,
"What exactly is the 'real progress' that he's talking about?"
Here's some evidence:
o After two quarters of double-digit declines, product revenues
are essentially flat worldwide and order rates are up 8
percent.
o We saw 5 percent growth in U.S. product revenue from the
historically higher-revenue second quarter to the
traditionally lower-revenue third quarter this fiscal year.
And growth in U.S. order rates are in the double digits for
the first time since FY88.
o The PC business continues to boom, with a doubling in revenues
year over year, and more than a doubling in units sold.
o Storage and some of our components businesses are growing in
the double digits.
o And in areas where the results are not as strong, such as the
Systems Business Unit, customer acceptance of our new products
has been exceptional.
Alpha AXP is a clear case in point. The demand for Alpha AXP
workstations is growing, and it continues to exceed our expectations.
In fact, we nearly doubled Alpha workstation revenues in Q3 over the
second quarter.
Alpha now represents 27 percent of systems sales -- almost 50
percent if you exclude PCs. And our total revenue from all Alpha
business grew 66 percent over the second quarter. If we had not been
supply constrained, we probably would have doubled the overall Alpha
business.
We have more than 5,000 applications on Alpha AXP shipping today
-- about 2,300 on OpenVMS and 2,300 on OSF/1 UNIX, and about 400 on
Windows NT. This gives us the critical mass of applications-- the
right applications -- that we believe we need to compete successfully.
For example, in electronic design automation, we have the top
three UNIX applications ported to Alpha AXP: Cadence's Allegro,
Mentor's Boardstation, and Viewlogic's Powerview. In mechanical design
drafting, we have the top PC CAD application for Windows NT, Autodesk's
AutoCAD Version 13. We also have the largest database package ported
to OSF/1 and OpenVMS, Oracle's ORACLE 7, and the number-one mechanical
engineering analysis package for both operating systems as well --
SDRC's I-DEAS.
Other areas of progress
The April 12 announcement of the Alpha AXP-based Digital 2100
Server is yet another indication of our exceptionally strong
competitive positioning for the future.
The 2100 Server has been extremely well-received by customers and
analysts. With it, we offer best-in-class price performance,
best-in-class warranty, and best-in-class scalability for symmetric
multiprocessing.
Here are just a few abbreviated but representative quotes
praising what we have to offer with this new system. [Slide:
Our audiences immediately recognized the 2100 Server for what it
is: an instant industry leader, providing commercial users with large
systems features and small system advantages, and technical users with
supercomputing performance at workstation prices.
In short, we have the evidence that all of these accomplishments
with Alpha are real and significant: the revenue and unit growth, the
positive response we see in industry surveys that measure customer
interest and demand, and important wins in head-to-head competition.
There are other key areas where we can point to real progress as
well, and a strong position in and an investment in future successes:
o We've announced four wins in competitions for trials with
telecommunications providers around the world for video
server platforms. In fact, we've won more trials than any
other vendor worldwide, in competition. And we've been told
that we've won several others that are not yet announced. This
is an area of high growth potential, and we are poised for a
leadership position.
o And we've finally established credibility in the UNIX
marketplace, after years of struggle and confusion.
I was fortunate to deliver the CEO address in March at UniForum
'94 in San Francisco, and I was overwhelmed by the positive response to
our messages calling for strong industry standards in support of true open
computing, and to the increased visibility and marketplace acceptance
of Digital's OSF/1 UNIX, which has a higher compliance rate with
Spec1170 than any other vendor's UNIX.
After years of floundering, we have fixed our UNIX capability
problems and have made excellent progress on our UNIX and open systems
reputation as well. Both steps are absolutely critical to our
flexibility as a truly customer-focused business.
o And Digital has been recognized by the readers of "InfoWorld"
magazine as offering the best client/server technical support
in the industry. Which means that we are rated the best
service company for designing, installing and maintaining
client/server networks for global organizations.
By these and many more measurements, we are succeeding in
transforming Digital into the leading provider of open client/server
computing that we set out to be -- through our technologies, our
products and our services that are unparalleled in the industry.
What went wrong in Q3?
So the big question is, in light of all of these positive things,
what went wrong in Q3? Or, more specifically, how do we explain the
third quarter financial results? Why did they come as a surprise?
And what steps are we taking to reduce the chances of being taken by
surprise in the future?
First, let me talk about the financial results themselves.
With our product mix continuing to shift to low-end products,
with aggressive pricing actions on some of our products in the quarter,
we experienced a gross margin decline of nearly 10 points, year over
year. For some specific products, demand actually exceeded forecasts
by such an amount that we did not have sufficient ability to ship --
and we missed revenue opportunities.
We also experienced unacceptable levels of discounting and
allowancing in some product areas. This represents a lack of
discipline in pricing during the quarter.
In addition, our service revenues overall declined nearly 11
percent compared with the third quarter last year. Declines were felt
in both Multivendor Customer Services and Digital Consulting. Now,
eight points of that decline were currency related; three points
represented an actual decline in the business.
On the positive side, Multivendor Customer Services is making
great strides in growing the non-traditional multivendor offering side
of its business with multimillion dollar wins throughout the world --
like Telefonica in Spain, Mercury in the United Kingdom, Intel and
Applied Materials in the U.S., National Semiconductor and British
Telecom in Asia, to name just a few of these.
But our increasing product reliability, which is certainly good
news for our customers, and the erosion of our traditional systems
installed base, plus really fierce competition from third-party
providers, has put pressure on both service revenues and profit
margins. And in both Digital Consulting and MCS, new business did not
close at the rate that had been predicted, which was a major contributor
to the shortfall in the services area.
Two other things, briefly, regarding revenue: One, in geographic
terms, European revenue continued to decline compared with last year,
but at a slower rate than we experienced in the first half of this fiscal
year. And two, we did experience some revenue declines due to adverse
effects of foreign currency fluctuations, but less so than in the first
half of the fiscal year.
So why did the third quarter earnings results come as a surprise
to us?
The situation resulted from a number of specific problems, many
of which were not individual systems problems, but problems related to
how systems worked -- or, more appropriately, did not work -- together.
This caused us to be significantly off the mark.
Let's take as an example our Q3 workstation business. We
initially had a product forecast of about 15,000 units. In January, the
forecast of what the field thought they could sell increased to about
19,000 units. And by the time the quarter closed, we had orders for
21,000 units.
Now, on the one hand, this is a nice problem to have. On the
other hand, we could not ship that many. Why? Partly because the
increases in forecast came at a faster rate than we could secure the
necessary materials, and partly because the mix of orders was not what
we expected. We had the wrong types of graphic boards for some of
the workstation orders we received.
This, by the way, is a compounding problem. As soon as the field
understands that there is a supply constraint, they don't put as much
effort into selling those specific products. Unconstrained, we might
have sold significantly more workstations above the number of orders we
actually received. And this, then, has a cascading effect into other
businesses.
For example, every workstation that is not shipped but already
has a disk in it represents a disk that did not get shipped to somebody
else. And every workstation that did not ship is a service revenue
opportunity that did not get closed by MCS. This compounds itself
through other systems in the company. The result gets to be
significantly larger than you might first expect because of this
cascading interrelationship throughout the system.
This is just one example of the kind of mystery, if you will,
that you have to unravel for each of the areas of impact so that you
can understand the situation, and what steps you have to take to
avoid similar situations in the future.
Additional areas cause concerns as well. We experienced more
order skew and pipeline problems on other products in addition to
workstations. For example, more than 30 percent of the disks that
shipped this quarter did not turn into revenue, but instead ended up in
our pipeline.
Price allowance levels at the end of the quarter were higher than
anticipated, which has a direct dollar-for-dollar impact on profits.
Every time you discount away a dollar, it is a dollar that comes
directly out of profit.
There was more pricing pressure than anticipated on Digital
Consulting and MCS contracts, especially in the renewal and new
business areas. Part of the pricing pressure came from an accelerated
shift of contracts to "per event" consulting as customers become more
comfortable with the reliability of our products. And we incorrectly
predicted how much of that would occur.
In Digital Consulting specifically there are a whole set of
issues, each of them essentially insignificant by itself. But when
taken together, the result was a significant negative revenue impact
for Digital.
Taken together, these and other issues resulted in a complete
surprise to Digital's management. And as a result, it was a surprise
to Wall Street. We were embarrassed with respect to our investors.
We've been paying the price in shaken customer confidence, shareholder
confidence and employee confidence -- and a falling stock price.
We also disappointed our bond rating agencies, who downgraded our
debt based on the disappointing results. And we've taken the
predictable battering from analysts and members of the press. In fact,
one of us has a brand-new and personal appreciation for what it feels
like to undergo a public lynching, complete with pictures. Not a very
flattering picture, either, of most of these things I've seen.
On a serious note, this is frustrating to all of us. Although I
might be the one that's most visibly criticized, I recognize that each
of you, too, has had to live with the consequences and tough questions
from customers, your families, from neighbors about the results. We
must and we will do everything possible to make sure that we do not
experience this again.
Revenue growth and cost structure
We have all worked very hard, and we have a great deal to look
back on with a sense of accomplishment. It's easy to forget that,
with all of the negatives swirling around us. Our successes in PCs, in
workstations, in servers -- all of this is great. And by introducing
leadership products and finally achieving a competitive position in
UNIX, we have gained the flexibility we need to meet customer
requirements as we move forward.
I continue to have great confidence in our people, our products
and our services. But unfortunately, this is not good enough. We need
to focus on two things: revenue growth and achieving a competitive
cost structure.
I met with our Global Customer Advisory Board a few weeks ago.
This is made up of chief information officers from about a dozen global
customers. They had absolutely no concerns about our products. Not
one issue about Digital's products was raised. Their concerns were
about account management, logistics, manufacturing, delivery,
consistency, simplicity. Business things. A whole set of unrelated
things so far as quality or performance of our products is concerned.
Basically, this means that we have an opportunity for revenue
growth if we remove the barriers between us and selling our products
and services.
To use an engineering term, we have "existence proof" that we can
do this. If you look at PCs, workstations, storage, components and
peripherals, we've been doing well. We also have a good foundation for
solving some of the more pressing problems that concern our customers
because of the work that has already been done in the Customer Value
Chain. We are at the point of piloting several of the Customer Value
Chain initiatives, and we are looking at how best to accelerate their
implementation and transfer this work into our operations as soon as
possible.
So I believe that we do have the opportunity to start seeing some
significant revenue growth. That's good news.
However, even with plans for significant revenue growth, we
cannot afford to sustain the size of our employee population. We need
to size ourselves to get to a competitive level. That does not mean
figuring out how to chop 20 percent out of everything, and then hoping
that the systems will hold together with twine and baling wire.
We must downsize our employee population in the context of the
second major phase of our recovery plan, which is to focus our
investments in the segments of the business where we know we can
prosper, and to disinvest elsewhere.
We will ensure progress in that by giving business unit
management even greater direct ownership and greater responsibility and
accountability for their resources. My objective is to have each
business unit own and control the essential resources necessary for its
success, so that a real P&L by business unit exists and accountability
is clear.
This way of moving forward aligns very much with the slide [about
horizontal disaggregation] that I showed you during our last Employee
Forum DVN.
The horizontal disaggregation of the marketplace is demanding a
strong focus on those market segments in which a company chooses to
compete. Since each of our businesses operates on a different model in
a different market segment, each one has a different benchmark for
competitive success. If you add up the benchmark levels of employees
for each of those competitors in related market segments, you cannot
justify a company of 85,000 people with our level of revenue.
One commonly used productivity measurement in our industry and
other industries, frankly, is revenue per employee. Although we've
analyzed this and other data for many competitors, I thought I'd talk
today about two that are most like us: fully integrated, worldwide
companies.
This slide shows where we compare to IBM and Hewlett-Packard in
revenue per employee. I'm going to call your attention back here to
1987. You can see that we were at the same point as Hewlett-Packard.
But you can see that at that time, Hewlett-Packard began working on
growing their productivity, and as a matter of fact, this was
accomplished by increasing the revenue, primarily.
I saw a quote from Lew Platt yesterday, who's the president of
Hewlett-Packard. He said since 1989 they essentially had added no new
people. You can also see that Digital, during this period of time, did
not do anything, for four years at least, to improve its productivity.
Then you begin to see, in 1990, a slight increase in the slope of
this line. This is when we began to reorganize and downsize worldwide
manufacturing. And finally, in 1992, you see the curve again begins to
slope upward with a change in management.
We started too late in getting serious about this. And you can
see that the slope of that line implies that we're falling further
behind. We've reached a point of revenue per employee where these two
competitors were five or six years ago. Look where they were. Five or
six years ago, they were back here, which is where we are today. So we
have a lot of work to do.
By the way, these competitors are not among the leaders in this
metric. But they're most like us in that they're fully integrated
competitors.
If you look at the implications of achieving a competitive
position at our current revenue levels, the metric of revenue per
employee suggests a company of 65,000 people -- or fewer. Today, as
you know, we have about 85,000 regular employees. We must achieve a
competitive cost structure as rapidly as possible. And even if we are
fortunate to achieve a reasonable growth in revenues, we cannot escape
the fact that significant additional downsizing is unavoidable.
Failure to act promptly will result in a greater loss of employment.
In fact, the entire enterprise could be at risk.
Greater autonomy, more discipline
You will continue to see greater autonomy among the business
units, as they compete vigorously in their respective markets.
You will undoubtedly see a continuation toward a more directive,
top-down management style and less of a traditional Digital matrix
style as we get the company in order. Why? Because we need to be more
disciplined in making decisions, especially on how to eliminate work
when we downsize, and we need to be disciplined in executing plans once
we make a decision.
Before I take your questions, I want to read directly to you from
a letter that I've just sent to our Digital senior management. I won't
read the whole thing, but a few paragraphs:
"Let me clear up any doubt that may exist. I intend for
Digital's operations to be profitable by the end of this calendar year
at the latest. Shareholders demand, the Board of Directors expects it,
and I expect us to deliver it.
"I do not underestimate the challenge that achieving
profitability presents, but as a goal, it has this one advantage: It
is very easy to understand, and it is not unrealistic.
"Other companies, when faced with as daunting a task, have
frequently been plagued by substandard technology. Our technology is
leadership. Other companies have sometimes been paralyzed by
burdensome debt. This company has been more prudent.
"Our problems have to do with a cost structure that is too
expensive, systems that are inadequate to the task at hand, sales and
distribution channels that are not competitive, and investment models
that are totally unaffordable.
"It took many years for these problems to develop, but it is up
to us to solve them, and quickly. This will mean sharply reducing our
population and limiting or giving up participation in markets that are
promising but not essential to our success. It will also mean a new
sense of urgency, suspending endless debates, acting as a team instead
of as individual players, and eliminating the confusion that frequently
accompanies us in the marketplace.
"Each of you has a substantial responsibility for timely
implementation of decisions that affect Digital's future. We must
aggressively and immediately cut costs in every part of our business.
Waiting will not make action any easier. Act now.
"I'm holding you accountable for pulling together and working
with me to put this great company back on the right track. Our
customers, our shareholders, our employees and our partners are
counting on us as never before."
|
| Worldwide News LIVE WIRE
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Q&A from Employee Forum DVN broadcast (05-May) Date: 05-May-1994
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Q&A from Employee Forum DVN broadcast
(Following is an edited transcript of the question and answer
session that followed President and CEO Bob Palmer's Q4 Employee Forum
address on DVN today.
(To order copies of this video through the Information Repository,
type VTX IR at the system prompt. Choose Option 2, New/Revised [90
days], then select VI for a listing of new videos.)
Bob, I recently completed the second employee survey on VTX.
Can you share with us any information from the first survey,
and specifically the questions and responses that were directed
towards the Senior Leadership Team?
The importance of this survey, let me say again, is for two-way
communications to occur and to have a forum [so] that we can understand
how people are feeling about things and what is of most interest to our
employees. I have not seen the results of the survey. I saw the result
of a preliminary part of it and there are many things in there that were
not a surprise to me, but it was good to see the data. We're spending
some serious money here. This is not going to be one of these things
that goes in some drawer somewhere. It's intended to be utilized by me
to understand not only what's on everybody's mind on a worldwide basis,
but also it's kind of interesting.
Morale in different parts of the company is quite different. You can go
to some places, and you might think that morale throughout the world or
something is poor. It's not. I travel a lot, and within those groups
that are succeeding, not surprisingly, morale is high and on an upswing.
So it's an important measurement tool.
My objective is to make sure that, as we go forward, the senior leadership
of the company, the people that report to me and report to them, get
measured not only on the numbers, but also on the health and morale
within their organizations. And to do that, I need some objective way
to measure. And so that was the intent of this employee survey. It will
be going on in the future. We want to at least get annually, maybe
semiannually. But with some affordable rate to understand, are we
making progress in addressing employee concerns. As far as specific
questions and concerns, since I haven't studied it, I can't respond to
that at this time. But there will be a response.
Hello, Bob. I'm a customer support consultant in the health
care channel space. And I recently had a very disturbing
question. I think we need to prepare a package of standard
responses for people who have direct customer contact. One
of customers, an end-user of a reseller, was asked by a
potential customer who was going to buy a five-year warranty,
what would happen if Digital went bankrupt. I was in a rather
unusual position, because usually it's bankruptcy on the other
end that we're discussing.
It's important to be armed with the facts, so that's a very good question.
Digital is not going bankrupt. You know, if Digital did go bankrupt,
what happen would happen to the speaker is quite clear. But we are not
going bankrupt.
In fact, the company is quite strong financially. We have about $1.2
billion in cash as I recall. We have long-term debt of a million dollars.
And even if you count the preferred stock that we just marketed -- that's
about $400 million, a little less -- so it's $1.4 billion in long-term
debt. And $1 billion cash on hand.
But in any event, the company in terms of the way that you measure
companies, say debt to total capitalization, is about 20%, which is quite
conservative as industrial enterprises go. Now, we were a lot healthier,
and certainly if we don't start generating some profits here, and focus
on cash management, we could get into a cash bind. There's no question
about that. So you have to pay attention to cash, because if you run out
of cash, that's how you go bankrupt. But we do pay attention to it. We
have an excellent Treasury function. The company's financial condition
at this moment is still strong.
But that's why it's important to act with urgency. And that's also a
major criterion. As I looked at different businesses that we're in,
one of the things I look at is, is this a business that throws off cash,
is kind of neutral to cash, or generates cash? And it's quite clear to
me that we cannot stay in all of the businesses that we're in today.
So arm yourself arm yourself with information that's available at Digital
today and other sources, about the company's true financial condition.
Our competitors will try to exploit this weakness. They'll look at
this $183 million loss that we had in the quarter, and they say, "See,
they're going out of business." Well, two years ago, in that same
quarter, the loss was $100 million worse than that. We're not going out
of business. We're not going to go out of business. But we do need to
get to profitable as soon as possible. We need to get profitable in Q4
if at all possible. I'm not making a forecast. As one of my colleagues
liked to say, "The revenue is a probability; cost is a certainty."
We can work on the cost side to enable us to be profitable in Q4, and I
need everybody's help in achieving that objective. It's terribly
important for building confidence in our customer base. But the company
is not at risk for the foreseeable future of going bankrupt. It's up to
us to manage it, so that we begin to rebuild the balance sheet.
I think that we need a package of consistent responses
for everyone that is in the field. I'm concerned,
particularly the retail space, that this will impact fourth
quarter sales.
Again, the competitors will try to exploit that. There is information
available. I'm going to send a letter myself by Monday to our customers.
It will be something that we compose to address that. And it will be
widely distributed. I've already done so to our shareholders, and as
you can see, I just recently sent a little wakeup call to senior
management in terms of urgency. But I will send something out to address
that concern.
I started to go off on a tangent there, and I'm back to remembering what
it was. And that was, when we talk about the population side, when we
talk about what we're going to do there, we clearly have to get down to
a level that is competitive. That doesn't necessarily mean that 25,000
or 30,000 people will be terminated. It means that there are some
pieces of our business that I will try to separate from Digital and sell.
Or set up as some kind of stand-alone enterprise. That's not to say
there won't be some people that will be terminated, because look at the
numbers.
So it'll be a combination of attrition -- continuing to weed out weaker
performers. Elimination of redundant levels of management. We've been
saying that for a long time. We've taken out a few, not near enough.
It's amazing how resistant management layers are to change. Not only
in our company, but other companies. But now is the time. I need
the support of our management team worldwide to address these issues.
I work in the Worldwide Development and Learning
organization. I'd like to go to your point about the
letter you wrote to your direct reports concerning
accountability. What are you doing specifically to hold
your managers accountable, so we can get the company back
on track?
What it is is that you talk about how you measure performance of your
direct reports. And there are several different elements to that. One
is, I have a clear commitment from each report as to what he or she is
going to accomplish during the fiscal year. And you make some
allowances, at least in my management style, for permutations and changes
that occur in the world once your plans are set, because it's never as
you forecast it. But if you consistently miss the numbers, you have to
find new employment. So you have to hold people accountable. Now,
that accountability has to go throughout the entire company, to everyone
in this audience, and everyone in my worldwide audience. Your objectives
need to be clear enough that you can be measured. If they're not, your
management owes it to you to make it clear. And you need to meet your
commitments. Because we can't afford it any other way.
There was a time in Digital when the margins were so high the products
practically sold themselves, is the rumor. I suspect Sales doesn't
share that rumor. That we worked very hard to sell our products. But
it was a lot easier. I think everybody would admit that. The margins
were a lot fatter, accountability was so diffuse, you really couldn't
hold anybody accountable. Because I know whenever I ask somebody, who is
responsible, they'd give you that salute: "It's somebody else -- not me."
"Not me."
Those days are over; we can't afford that. So people have to be held
accountable and responsible, but they have to have clearer understanding
of how they're going to be measured. And that comes back to, again, this
business I talked about with the employee survey. You're not only
measuring management on numbers, but also on leadership. Put some morale
in that organization. How's it improving? How does it compare to
other organizations? And it doesn't happen in five minutes.
We're about changing a culture here. [There are] many good things about
Digital's culture. I've been here nine years now, almost long enough to
say I'm a real employee. I am a real employee. I love this company.
But some of the things that we've kind of grown accustomed to, we have
to expunge from our society, and get a little more focused and more
accountable. And we've been at it about 18 months. It's not a surprise
to me that we haven't yet gotten there. But I'm quite tenacious, and we
will get there.
Bob, how long do you think it will be before our sales
people have the information necessary to articulate
our product strategy to our customers?
I hope that the sales people have some of that information today. But
if you mean where it becomes clear enough that you can be more productive,
I think that's an ongoing effort. I'm very optimistic, though, frankly,
about the Systems Business Unit, with the new leadership of Enrico
Pesatori. I've noticed, if you look at the PC catalog of today, you can
actually understand this thing. I'm told that you can order products
from it, and really understand what you're going to get, and it's clear.
I'm hoping that we'll get the same kind of clarity.
You know, while I'm thinking about it -- and you didn't ask this question
yet, but I hope you weren't planning to, because then you'll be
disappointed. But I want to answer it anyway. I have been repeatedly
quoted out of context when I say that our sales force is the least
productive in the world in the business, or something like that. It
comes out that way. I did say that at DECUS last year, or something
approximately like that.
I said that we have perhaps the least productive sales force in the
computer industry. And I said the reason is because management -- that
means me -- and sales management, business unit management, has not
provided our sales force with clarity around the products and services.
With a manageable set of products and configurations and tools, so that
you know when stuff is going to be delivered and have some confidence
that, if you commit, it really will be delivered on that day. So that
you have some way to configure a system and know that these components
actually work together. And so you know what's optimum and what isn't
for a customer's problem.
This is a shared responsibility between obviously our worldwide sales
professionals, and management to fix this stuff. We've been working on
it. It's getting a little better. It's clearly not good enough. It's
not good enough because, if you compare the sales for an individual in
our sales organization with that of our competitors, just for example
H-P or IBM, we are substantially below what is necessary to be competitive.
It's a shared responsibility. We have to work on it together.
Bob, I'd like to just ask a follow-up question if I might.
I think that many of us in the corporation believe that
there is a further rationalization of our products that
needs to go on, in order to determine what a profitable
cost structure can be for us to be successful. And I
suspect, at least from where I sit, it's very difficult to
be able to articulate what our product strategy is going
to be to our customers, and build the confidence of our
customers that what their decisions are, are not going to
subsequently be something we decide to divest from. So very
specifically, if I might, how long do you think it will be
until we have rationalized our products within an affordable
cost structure?
I think that's a very good question. I think that we will have made the
majority of the decisions around that subject by June of this year. Which
is a very short timetable, which shows you that there's a lot of work
going on right now at headquarters in looking at these things. Not
everyone will agree with the decisions. In fact, our habit of trying to
get everyone to agree of course prevents decisions. The issue is to
simplify the product line and the number of businesses that we're in, so
we can focus. There will be some product lines, I suspect.
By the way, the fact that the decisions are made doesn't necessarily
mean that they are announced. I'll talk about that. Let's just say you
were making a decision to divest yourself of one piece of your business.
In order to get a reasonable price and to find a reasonable home for that
business and the employees who are part of it, you need to be able to
negotiate with people who want to buy it or might want to buy it. That
is not very well done in the public eye. You know, if you want to do the
best job for your employees, your customers, you have to do that relatively
quietly. That will be an interesting challenge in this company.
In any event, the decisions need to be made for the most part by June.
They need to be made then. And changes need to happen. On the other
hand, the strategy of the company, to be a leader in open client/server
computing, means that we will have at least some things you're confident
of. We have two platforms, an Intel architecture-based platform, of PCs
all the way up to servers, and a similar Alpha-based systems platform.
We have three operating systems on those platforms, and we have a
multitude of tools that are necessary in order for applications to be
integrated into those platforms. We will continue to be strong in
networking, servers, workstations. These things you know.
In the services area, you know that Digital will continue to have a
leadership of the vendor customer services capability. You know that in
the consulting area, we've been working on it. But as you get further
and further away from the core business, it becomes a little less certain.
And so I understand what you're saying. And that's why it's urgent and
important that we make these decisions in the near term.
I don't know if that's an adequate answer, but since I don't know the
result of the debates, I can't give you much more detail than that.
I think that you've certainly been very direct with
us, in a way that I'm certainly a lot clearer, and I
hope others are, too.
I hope my management team is clearer. Because that's the debate we have
to have. And it's awkward. Because unfortunately, many businesses that
we're in today, that we may not be in in the future, are good businesses.
One of the criteria I said had to do with cash. The other criteria will
have to do with focus. We are a defocused company. We are very defocused.
And we have been for 18 months. Even though I said in my first speech
that one of our intents was to focus more on our customers, and get more
focused on our products and services. We have work to do there yet.
We've got to get more focused. And we've tried to focus now on this
concept of open client/server computing, and we're making good progress
there. And we're going to stay focused on that. Other questions?
Yes, Bob. I'd like to talk about the subject of
downsizing. I think some major damage has been done to
the corporation on the past downsizing that has taken
place. Not the fact that the downsizing took place, but
how it took place. It seems me that the downsizing took
place simply by the numbers, and not the ability to match
the skills of the people to the job that needs to be done.
And I'd like to have your comments on that.
Inevitably that's the case in any downsizing. I've been unfortunate in
my career. I've worked in a number of companies where this was necessary.
And I would say that it's been relatively well managed in this company
in an objective point of view, given the sheer numbers that have been
involved, and unfortunately how many more we've got to do. The feeling
I'm sure [is] out there is that, whatever job grade you're in, that must
be the one that's under the most pressure. In point of fact, more vice
presidents have been let go than any other category. Maybe we had too
many, but in any event, that's been the category most heavily hit in
terms of percentages. Throughout the layers [of the company], it's
roughly the same. This doesn't get at your skills question. I
understand the difference. But it says that that's one thing. We do
get the data, we look. And we look by a number of different sorts and
categories that have to do with gender and race and various other things.
The skill set one is harder. Because what naturally happens is, you try
to identify those skills as people who actually make up a company, and
people have a tendency to protect their friends and want to keep their
friends in the company. And sometimes that discrimination of skills
needed gets lost. It's obviously the way to do it. One way I can do
something about that. See, I see very few of these things, unfortunately,
when you're in corporate. You can be sure that the downsizing is
occurring in all geographies in which we do business. There's no way
that you have line-of-sight visibility. But what I can do is to continue
to hold management responsible and accountable for the results. And
intelligent managers will realize that, in order for them to succeed,
they have to retain the necessary skills and the right mix of skills
within their unit. And that's what we're trying to drive for. The other
way you can work on that is with the Human Resource organization, to
ensure that the right questions get answered throughout all of this
process. But it's not easy. It's messy, and you inevitably make mistakes.
My understanding is that the U.S. PSC managers recently
had to re-apply for their jobs. Why wouldn't that be a
good idea, and it'll impact me, for all employees at
Digital to do that?
In a sense, that is a way to do downsizing, if you talk about re-applying
for your jobs. You have a couple of ways -- many ways I suppose -- that
you can approach it. What would be going on right now, in order to get
at, for example, the Systems Business Unit structure that we need
going forward.
How would you suppose a person like Enrico Pesatori might approach that
problem? Well, one way he might approach it is, instead of saying the
Systems Business Unit is what's left over after we take out PCs and discs
and semiconductors and whatever, he might say, "I'm just going to stand
back a minute and think, if I were building a Systems Business Unit from
scratch, what are the talents and skills that I need and can afford in a
competitive business model, in that business unit?" You look at the
resources we have in Digital, [and] you draw mostly from that pool.
Usually you'd find there's some skill or capability you don't have. You
might go outside our company and get that skill or capability. You'd
put together a business unit that had an affordable structure.
When I say business unit, I don't mean just here in Maynard, or in New
Hampshire. I'm talking about, as it extends throughout the world, that
piece of engineering, manufacturing, logistics, sales, marketing. The
extended business unit. And you'd figure out what can you afford, what
do you need, what are the skills. And there will be a lot left over.
That is the right way to approach it. It's the right way relative to
your question about skills. There's two issues there. That's how I
would approach it if I were doing it.
But then the other piece is, once you've decided and got that model, and
it's clear, how do you ensure that that is what gets executed? Because
that's the other side of your question. It may surprise you that
occasionally we get the right direction from management headquarters.
But how that gets interpreted and molded as it rolls out in the greater
community that's Digital is a different matter. And we have got to...
implement the decisions that are made. Not the decision they wish were
made, or some variation that appeals to them, but what decision was made.
And that's after suitable debate that we do have, in order to make sure
all points of view are heard. Then we have to move out with alacrity,
instead of the pace at which we've been doing it today. Thank you.
Good morning, Bob. We've spent a few moments here talking
about some difficult times, some public financial problems.
We've talked about basically some negative information.
We've talked about downsizing. You're talking about
focusing on revenue growth, and achieving profitability.
That adds a lot of stress to day-to-day work, dealing with
your friends and family, and so forth. So my question is,
as president, and more importantly as leaders of this
company, what do you recommend for employees to deal with
stress in their day-to-day lives? And personally, how do
you deal with it?
I have a lot of stress in this job. And the stress is internal stress.
I had some questions I'll get to in a minute that were submitted written.
But one of them had to do with my fear of...being replaced as the leader
of the company. That's not something I lose a lot of sleep about,
relative to the Board, or external people. My stress is internal, around
doing the best possible job for the employees of this company. That's
where my loyalties lie. That's how you feel.
I realize that I have to do the best job possible for our customers,
because after all, all of us are employed by customers. As I said in my
last DVN, it's only the customer that can protect your job. We have to
have a customer satisfied out there to pay our expenses. And so I'm
certainly cognizant to some extent of our need to be responsive to
customers. And shareholders. Actually I'm employed by the shareholders,
as represented by the Board. And I do think about it. I take my Board's
inputs very seriously.
But what I feel, and what stress there is, is around representing you
as the employees. Because that's a very emotional thing. And you feel
that very deeply. I worry about making the decisions that minimize the
pain on getting to where we have to go. As I've said many times, I've
tried to focus on the objective here, to save as many jobs as possible
-- not to let people go. To save as many as possible.
You know, 18 months ago, we thought and we tried very hard to save 85,000
or 90,000 jobs. I've said that on previous occasions. I remember it
well. That was the objective. We tried to stay in most of the
businesses we were in. Get more focused. And we were doing reasonably
well for a while. Unfortunately, competitive pressures, other internal
errors on our part... You can see those [profit] margins coming down.
At the same level of margin, we would have been quite profitable. We've
got our costs in line roughly if we hadn't had 10 points in product
margin decline. But we did have. Or if we'd had the revenue growth for
this year, our ratios would look a lot better. Our plan was to grow
revenue this year. We didn't execute. That results in having to change
gears. And so that puts a lot of stress on you.
Each person must have some way of dealing with his or her stress. Me
personally, I do a lot of running. It's a thing I've been doing for 20
years now. I run on a very regular basis, and when I'm running, I think
about the issues that I'm faced with. And I think about the importance
of these problems, and how I'm going to get through that. My real
concern is around the job function I have. The privilege of leading
our employees, and to make sure that I do the best possible job that I can.
For each employee, I'd suggest that it's a similar thing. You need to be
focused on how you can add the maximum value to the enterprise. As you
go through the downsizings that we have to do and the restructuring,
inevitably, there will be some sort made of the skills and talents.
And assuming that the skills and talents are needed, your best chance of
staying with the enterprise is to be one of the top performers. Whether
you're in sales, or engineering, or wherever. The focus [is] on doing
your job well. And working together, because I don't think there's a
chance of this company succeeding like we want to succeed without
teamwork. It's one of our core values. It's working together. It's
not working your own personal initiative, but working with others so
that Digital can be more successful. You have a much higher probability
of surviving that stress.
Another thing is to recognize that you as an individual have value. You
have a value also because you're an employee of this enterprise. But
your real value is in who you are. What your character is. What skills
you can bring to whatever enterprise. So I would recommend that you don't
ever see yourself as "only" an employee of this company or some company.
You have to see yourself as an individual that has value.
Anyway, these are some of the things that I think about in times of
stress. And certainly this is a stressful time, and will continue to
be, until we get our cost structure in line and get going again. I
don't know if that adequately answers your question; it's a partial
answer because it's a complicated subject.
A fairly significant competitive threat is being mounted
by IBM and others, in the form of PowerPC and (inaudible).
As near as I can tell, this threat is a paper tiger at
this point. What are we doing strategically to counter
this threat before it becomes much more significant?
In the case of PowerPC, there are a lot of opinions out there. My
personal opinion is that it will be successful because of the Apple
Macintosh conversion of that product line. An opportunity that Digital,
unfortunately, did not choose to elect. But from where we are today, I
don't think it will have a lot of success outside that capability. It's
quite clear -- I mean to just stand back and think about it -- in terms
of client/server computing, the client has largely been decided. You
know, this is an Intel-based architecture, whether it comes from Intel
or A&B or whomever. PCs of one kind or another outsell workstations by
an order of magnitude, and it's just -- clear.
In the workstation arena, RISC processors are clearly the winner, and it
seems to me, there, performance counts. In terms of performance, in
workstations and servers, clearly Alpha is the architecture. There no
longer is any debate about really who has the leading architecture and
performance. We need more volume, and I have several initiatives under
way to reduce the cost of our semiconductor capability to the corporation,
so we can stay on that leadership curve, in terms of performance.
This battle won't be settled for a while. It will go on for several
years, between the different RISC architectures: the [inaudible]
architecture, the Power PC that you mentioned, Alpha, PA RISC from
Hewlett-Packard, or whatever. But my belief is right now, it would seem
logical that, other than Intel architecture, the architecture likely to
survive is that which has the most applications, which has the highest
performance. We don't win yet in the applications space. We do win in
the highest performance space. We need to capture more applications.
And we're working on that. It'll be a tough battle among all these
different architectures. What is quite clear is that the marketplace
will not support that many different architectures. You cannot afford
to keep those architectures going.
I have a question about our information infrastructure.
Specifically, when is Digital going to have an integrated,
automated business infrastructure, to support our business?
Why don't we do for ourselves what we do for our customers?
That is an extraordinarily difficult problem for this company. And a
very urgent one. In fact, it's hard to think of anything that needs
more attention, really, than that problem. Because that problem results
in our inability to get you timely information in the sales and marketing
arena -- to be able to quote with confidence with customers. It also
prevents, coupled with poor forecasting, manufacturing from having the
right materials on hand to build the products as the orders come in. And
all kinds of things. Finally, when we actually do satisfy the customer,
we don't necessarily collect as quickly as we should, because we don't
have all of the invoicing systems that we'd like to have, properly
optimized.
How did we get like that? Well, again, all of these problems like that
have the same root cause. It was this idea that everybody everywhere
was free to do their own thing. It was a very interesting part of our
culture. And you find it over and over again. What you find in this
case is that in every territory, practically, there are multiple systems,
software systems for getting this data and addressing logistics on these
issues. I forget how many there were, but it seemed like 1,600 different
systems to try and run a business. Impossible. So we've been working on
that, and the value chain work. Bob McNulty, as chief information officer,
is responsible for the architectures and the implementations of the
physical infrastructure.
But what's really broken are the business processes. And that's where
the value chain work is important. And now, we've got to get that work
into the line organizations, and begin testing it and implementing it.
The question is when. Clearly, we needed it last quarter. It would have
helped us a lot. Clearly, we need it immediately. My expectation is,
we're about a year away from having a substantially different system on
a worldwide basis. We will have tests going on right now. Rolling out
in the U.K., for example, there'll be some tests going on right now.
Things will begin to improve spottily. But before it's worldwide, we're
probably a year away.
At the end of the last question, I never did say what we're going to do
about combatting that [architecture] issue. As I think about it, Intel
is going to combat the issue of PowerPC very aggressively. We'll leave
that chore up to Intel, who's going to spend about $150 million in
advertising alone, to attack that product. I think it's going to be an
uphill battle for PowerPC, to come back to that other question.
I think we've run out of time. You don't mind if I answer a few of these
questions.
It says, "There's rumors circulating about the Board of Directors making
changes to the management team. How did the Board react to the Q3 loss,
and is your job as president on the line?"
The job of president of any enterprise of this size, at least in America,
is on the line every day, and it should be. There shouldn't be any more
immunity for the chief executive than anyone else on doing his job or her
job effectively. What your Board of Directors' responsibility is, is to
judge that executive's performance, in light of all of the problems, all
of the inherited difficulties, all the marketplace issues, and then make
a continuing assessment. There is no employment contract here. There is
nothing of that nature. And so I leave that to my Board of Directors, to
continually assess my performance, just like I assess the performance of
my direct reports.
You may not know it, but the Board cannot really interfere with any other
management. They only address their attention to the chief executive.
It's the chief executive's responsibility to deal with all other
management issues in the company. They did not react favorably to that
loss, but they're supportive.
I recently presented several hours [on] Phase II of our reconstruction
of Digital, our transformation, how it goes on, what we're going to do
in the next couple of years. It doesn't mean we're going to wait two
years to get profitable. We're going to get profitable as quickly as
possible, and we're going to start making the decisions about businesses
that I've talked about this morning, right now. For the next couple of
years, for all of this construction to be finished and behind us. Laid
it all out for them. They gave me their strong personal and collective
support.
I feel like I've had tremendous support from the Board of Directors.
You've got to remember, in the news media, their job is to sell print.
So they're going to sell "Business Week," or "The Wall Street Journal,"
or whatever. And typically what's interesting to read is gossip and dirt.
So typically, these articles are a little bit more negative than they
actually would be factual. But in any event, you've just got to steel
yourself through that. You get used to the bulletholes, and keep your
objectives clear.
"Are you planning to sell parts of Digital's business?" I've mentioned
that already, that the answer is "yes." It wouldn't be my first choice,
but again, we tried our first choice, it wasn't good enough, and now we
have to go to the other phase.
"Given the stock price, is Digital a takeover candidate?" I would think
so. I mean, any of the companies are takeover candidates. However,
high-technology takeovers are not the norm, because they are
extraordinarily difficult to manage. And fundamentally, I think Digital's
best defense against a takeover is to begin to perform. We need to have
growth in earnings. It's far more important to have earnings than to
have a particular revenue size. You know, being a $14 billion or $13.5
billion company in revenue [and] losing money, is not as attractive as
a $10 billion company making money. I'm not saying we're going to be a
$10 billion company, but I would rather be, and making money, than $13.5
and losing.
We've talked about this one... It's an amusing question. It says, "It
seems like every time something bad happens..." -- which by the way is
apparently frequently...-- "...we promote more vice presidents, and lay
off more regular employees. Would you comment on that perception?"
I did comment on it. It is a perception. The facts are quite otherwise.
But perception is important.
I'm open to additional questions, even though I think the DVN is over.
...Let me get to this one first.
Thank you very much. Constantly, I run into customers
who have problems and concerns about our Rainbow computers.
We have disappointed a lot of customers with the Rainbow,
and today they are quite reserved in going to AXP [machines].
But it is my duty to make sure they buy the AXP, which has
been happening. As you know, the business where I am, the
Personal Computer business, has been growing in double digits.
[Yesterday I spoke to] a customer who wants to buy 300 units
of PCs yearly. But he wants us to publicly address the issue
of how we could leave Rainbow customers out in the cold.
Well, the Rainbow was a lot longer than two years ago. I want to say
1984, '85 timeframe -- before I came to the company. This was a result
of applying a minicomputer mentality to a personal computer design.
It's quite expected, because we were a minicomputer company. It turned
out to be quite unsuccessful, even though the product was very well-
designed from a reliability point of view. It was a solid product. On
the hand, it was not necessarily priced and did not necessarily run the
software that customers wanted.
Those days are well behind Digital. In fact, the whole mentality of our
company now needs to be PC-centric. The way you design a product, time to
market of the product, the way you manage its end-of-life -- more and
more the whole Systems Business Unit issue. It's not an accident that
the leader of our PC organization who was successful in not only meeting
his numbers but exceeding his commitments, was promoted to take on
that responsibility, and to bring that PC-centric way of approaching a
problem to that business unit. This is what we have to do.
Relative to the customers, now, we've got enough PCs out there. Our
reputation is quite solid.
Last evening I was going over some notes and thoughts about today, and
what I might say. I was reading an analyst report that literally came
out yesterday [which] somebody had faxed to me, by Stephen Smith. Part
of this called my attention to something which I hadn't had a chance to
read yet. It says, "A recent survey from the April 25 edition of
'Computerworld' magazine indicates that Digital's customers appear to
have more positive feelings toward the company than last year." And in
parentheses it says, "In stark contrast to Wall Street." It says, "On
average, Digital's customers appear to be not only more willing to
buy Digital's products than they were a year ago, but also have more
confidence in Digital's future." And then he shows some data here,
that talks about "People that are more willing to buy" was 27 percent,
"Less willing," was 17. Another group, "More confident," 38 percent,
"Less confident," 18 percent. So we're beginning to change the
perceptions out there. And even though we're in the thick of the
battle and sometimes it doesn't feel too good, customers have a better
perception of our prospects and our future than some of us might have.
As I said, I have a lot of confidence in you. A lot of confidence in
our people worldwide, confidence in our products and services. We need
to get our cost structures in line, get more focused, a little more
urgent, execute. We have the technology and the people and the things
we need to be successful.
I think I have to draw this DVN to a close now. I'm keeping a lot of
people waiting. Again, I want to thank you very much for coming.
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