| Title: | The Digital way of working |
| Moderator: | QUARK::LIONEL ON |
| Created: | Fri Feb 14 1986 |
| Last Modified: | Fri Jun 06 1997 |
| Last Successful Update: | Fri Jun 06 1997 |
| Number of topics: | 5321 |
| Total number of notes: | 139771 |
From LIVE WIRE:
Text of Bob Palmer's remarks at Q4 'Employee Forum'
(Following is the text of President and Chief Executive Officer
Bob Palmer's remarks at the Q4 "Employee Forum," which was broadcast
over the Digital Video Network this week.
(The program opens with a brief video clip about the Personal
Computer Business Unit, at whose headquarters the "Employee Forum" was
taped. Bernhard Auer, vice president and general manager, Personal
Computer Business Unit, opened the telecast.)
My name is Bernhard Auer. I am very honored, and we are very
pleased, that this quarter's "Employee Forum" DVN is originating from
here in Acton, Massachusetts, the location of the PC Business Unit's
worldwide headquarters. As you saw in the video, we are a fast-paced
crowd. We have to be, since our industry is a very fast-paced
industry. Digital's success is clearly not just happening. It did not
fall from the sky. It is the result of hard work, dedicated work,
energetic work of all our people. And it is teamwork.
Now, on behalf of all employees worldwide, I would like to
welcome our president and CEO, Bob Palmer.
(Applause)
Thank you, Bernhard, and thank you for allowing me to host the
"Employee Forum" DVN from the PCBU headquarters here in Acton. It's a real
pleasure to be here this morning.
This first slide talks about a question that was in the local
newspaper here, the "Boston Globe," and it said, "Is Digital Back?"
There were a number of articles in the local newspapers about our
quarterly performance. So today, I'm going to explore an answer to
that question, probably from about four perspectives.
First, from the financial perspective, of course. I'll talk a
little about our products and services, talk about our business
strategies very briefly, and where we are in that. And I'll talk a
little bit about customer and employee satisfaction.
For the financials, you probably read by now that we had a very
strong quarter. That added to the proof points that we're on the right
path to returning the company to a competitive level of profitability
and growth. Our net income was $74 million dollars or 44 cents per
common share. If you think about it, that's $257 million dollars
better than the same quarter just one year ago. The total operating
revenues were up some 6 percent to three and a half billion dollars --
from $3.3 billion in the corresponding quarter a year ago. Our product
revenues were up 12 percent, the fourth consecutive quarter of year-
over-year product revenue growth.
This chart -- you see it from time to time -- refers to [revenue
growth] on a quarter-by-quarter, year-over-year basis. You can see
that starting in FY '94, we began to see a resurgence in our product
growth by a segment. We saw that our services growth also began to
recover from a long decline. New services, like our Multivendor
Customer Services, were growing fast enough in the last quarter to
offset those declines. So we've seen strong growth in our product
orders for the fifth consecutive quarter, on a year-over-year basis.
We've been continuing to work on the operating expenses. Our
operating expenses were approximately $1 billion dollars during the
quarter, which is down 19 percent from the $1.3 billion dollars that we
had the previous year, same quarter.
And perhaps most importantly -- or at least among the most
important, certainly -- was that for the first time in five quarters we
generated positive cash from operations. Three hundred and
twenty-three million dollars. It's been a long time since we were able
to generate cash from operations. We were able to stabilize our gross
margins at just over 32 percent, after a continuous decline in gross
margin for the last six years. So that's a major accomplishment with
stabilizing the gross margins. This particular quarter, Q4, of course
we're working very hard to not only stabilize margins but to increase
them.
And after all that, the balance sheet continued to strengthen.
We ended the quarter with $1.47 billion dollars on hand in cash, which
is $333 million, or a third of a billion dollars more cash than we had
at the end of the previous quarter.
So the company is very healthy from a balance sheet perspective.
We returned to profitability for the second consecutive quarter. We've
had growth in our products and services. On the product side, if you
adjust for the fact that we've sold some of our businesses, the actual
growth would have been on the order of 20 percent. Actually, a little
over 20 percent on a year-over-year basis.
Media, analyst reactions
I thought it might be good to cover what some of the media and
analysts were saying about the quarter. I've got some quotes here.
The first one says, "Further evidence that the computer maker's
turnaround is well under way." This was in the "Wall Street Journal'
on April 20, after our announcement.
Another says, "Analysts expect profits to continue." Certainly
we expect that. I know you're working hard to make sure that's the
case. That was from the "New York Times."
Another one was that "They were in a position to say with some
pride that they have weathered the worst of a terrible storm...". It
certainly has been difficult, and that's been recognized by Tom Wilmott
of the Aberdeen Group, which is an industry focus group.
Another, from Jim Johnson at Standish Group, is saying that "The
patient is a lot healthier than six months ago." A tremendous amount
of improvement in just the last nine months or so, since we started on
our new business model.
Another one from Steve Milunovich, who's an excellent analyst at
Morgan-Stanley. He's been following us for I've forgotten how many
years. But it's the first time he's said anything positive about us.
He's been very negative on the company. He said, "They've certainly
come a long way in the last 12 months." And he says he's beginning to
change his perception of Digital's future.
And George Elling, who's also at Merrill Lynch, and [has] been
negative on the company, is saying, "When people are shopping for a
turnaround story, Digital is the name that comes to mind."
You may have also seen in the latest "Business Week." It said,
"The Turnaround Story for the Third Quarter: Digital Equipment
Corporation." So we're getting a lot of recognition from analysts and
from shareholders, from people that follow the company.
Perhaps one real measure of that recognition, where people vote
with their money, is to look at what we've added in terms of market
capitalization to the company since just last June [and] July. The
stock hit a low of $18 dollars in the quarter, which when you multiply
by the number of shares we have outstanding, reduces our market
capitalization to under $3 billion dollars. We've added about $4
billion dollars' worth of market value to the company, which closed
yesterday at 46. If you look at that times the number of shares, it's
about $4 billion dollars of market value from all the hard work of our
employees worldwide. [We're] beginning to persuade the analysts and
the financial community that this company is returning to a profitable,
growing environment.
So that's the financials. We're getting back on track in most of
them. Now there's a few with room for improvement. I may or may not
talk about them today. But we're working on them.
Products and services
What about products and services? Well, as you saw in the graph,
the demand for the products and services is coming from the trough and
beginning to improve rather dramatically. This company is
exceptionally well-positioned. But well-positioned as fundamentally a
two-platform company.
There are two architectures here that complement each other. The
Intel architecture -- which has won almost all of the desktops, as you
know, worldwide, and is what our PCBU is all about. All the way from
the mobile and portable computing to department-level dual and quad
processor servers. That's the Intel architecture, and Digital has the
complete line, and the leadership line, of such products. And then the
Alpha architecture, which is the highest performance architecture in
the industry, and has been since we introduced it. So it's two
architectures, very complementary.
Since I'm here at the PCBU headquarters, I think I'll start by
talking a little about the accomplishments of this unit. During the
third quarter, the PCBU introduced 10 new Pentium based models in the
Celebris family, and eight new Pentium based models in the Starion
consumer desktop line.
The Venturis line, which is the highest volume desktop line in
the PC Business Unit, has had a record-setting development time of only
22 weeks by the engineering team. The benchmark in the industry is
about 28 weeks. We had very early market acceptance. We've shipped
more than 100,000 units in the first three months. On stage up here,
among other products, is the newest model of our Venturis line, which
was announced on May 1.
The PCBU accomplished a very difficult challenge during the
quarter, which was to achieve profitability. This is profitability on
a fully loaded basis. All the accounting things are clean. The PCBU
achieved profit [when] you count all of the puts and takes and
allocations and that sort of thing. That surprised me, really. Going
into the end of the quarter, I thought we were going to miss. So
Bernhard, you guys did an excellent job, the whole team, worldwide --
pulling that out and achieving that profitability. It's a major
accomplishment.
We really ought to feel good about it. And I'm glad you do,
because there are many people in this Darwinian marketplace of PCs that
have been in the business in a professional way much longer than we
have, that did not make a profit in the last quarter. Several come to
mind, but I won't dwell on it. But we're doing well, and we're
improving.
Now, to talk about the Alpha platform accomplishments. Our Alpha
platform revenues were up over 66 percent on a year-over-year basis,
and continue to grow like crazy. On April 11, we announced that we had
shipped our 100,000th Alpha system. If you add up the revenue on
products and services from Alpha-based systems since we introduced the
product, we've now shipped more than $3 billion dollars' worth of
revenue.
If you expect to continue -- which we do -- along the lines that
we're forecasting, we should have shipped more than four and a half
billion dollars' worth of Alpha products and services before our larger
competitors ship even their first 64-bit systems. So we are way out in
front in the transition from 32-bit computing to 64-bit computing in
the Alpha class machines.
Across the entire product line, our products and services today
are stronger than they've ever been. We've been recognized externally
for these achievements. We're going to see a series of slides here,
talking about some awards that we received.
We took six out of 10 of what are called the AIM Technology Hot
Iron Awards for Price, Performance and Service, Workstations and PC
Products. Won six out of ten. This is all competitors. [Out of] all
of the competitors in the industry, Digital wins 60 percent of the
awards.
The Alpha Server 2100 was named the best server by the readers
and editors of "Datamation" magazine. "Service News," another
magazine, gave its prestigious Innovations in Service Award to Digital
for its PC Utility product, which is our complete customer desktop
personal service around managing personal computers.
We've started receiving all kinds of accolades and recognition
for our newest products, which were the Turbolaser products that we
announced on April 11. We're going to show you some very brief video
that occurred during the show of that announcement. But you won't get
the full impact of it, I can assure you, as you would [have] sitting
there.
This was really quite an outstanding introduction. It was a lot
of lasers and sound effects and all that, that you got some flavor
of... It was a very different product announcement from Digital
Equipment. Somebody had noted -- it's something I read afterward --
that anybody who was at the announcement can no longer say that Digital
doesn't know how to market.
'Killer app' for Alpha platform
We got a lot of attention there. I talked about this a little
bit at my last DVN. I talked about coming forward with, finally, an
application -- a commercial application that was really significant,
that really for the first time exploited the capability of 64-bit
addressing. That's what this particular announcement was all about,
with our partner, Oracle.
Oracle had developed a very large memory database that takes
advantage of 64-bit addressing. And we of course have developed a 64-
bit Digital UNIX and a 64-bit Alpha platform for it to run on. Nobody
else has this product. They're not likely to have it for at least a
year, maybe longer.
Now, very large memory capability allows you to do things like
data warehousing and transaction processing that are really orders of
magnitude faster, and at much less expense than was ever before
possible -- or is possible from any competing systems. So this
partnership between Oracle and Digital, using very large memory, is
going to create new markets for us, and create a lot of excitement. It
has already.
I'll share with you a little bit what some of the analysts are
saying about the new Turbolaser announcement. Terry Shannon at
Illuminata says, "This is the crown jewel in the Alpha program." Barry
Willman, who's a very knowledgeable analyst at Goldman-Sachs says,
"This presents a very competitive product to the marketplace." Another
quote is, "This is going to be a major turning point," talking about
the turning point not only at Digital but also in the industry.
Another says, "This is way beyond the mainframe." On a performance
basis, on those applications that are database intensive, this provides
much greater performance than a mainframe at much lower cost.
There's a quote from Larry Ellison, who is the chief executive
officer of Oracle, who participated in the announcement. He says,
"These machines are extraordinarily fast. It's the biggest change in
terms of performance that we have ever seen." -- speaking of Oracle.
"We think they're going to usher in a fundamental change in the
industry."
I'll give you a quick look at a couple of clips from that
announcement. First is Pauline Nist, and then we'll see Larry Ellison.
(Nist on tape)
Our 32-bit database query should be done by now. The database
query we just ran is an example of the kind of analysis that an
insurance company might do to develop a new product.
Let's say that the company wants to evaluate a new homeowner's
policy. How many households would be prospects for the product? Can
we make money selling it? We have here a database of 12 and a half
million names from all over the country, which we queried based on four
criteria: age, household size, geographic location, and whether their
home was built within the last two years. The result of the search on
each of the criteria is displayed on the screen, using SAS. Out of the
12 billion names, we found over 2,000 that fit the criteria.
With 32-bit processing, the query took 11 minutes and 57 seconds.
Now let's put the power of 64 bits to work. We'll run the exact same
query, only this time entirely in memory. I'll start the search.
There. Now we'll see how long this one takes.
As I was saying before we stopped, the Alpha Servers give you the
most power you can get for your money. Putting a whole new class of
power in your reach. You can imagine the kind of competitive advantage
it can help you achieve. [Buzzing sound] It's done already?
[laughter] That was just 17 seconds, versus almost 12 minutes with
32-bit addressing. That's what, a 50-time performance improvement,
directly attributed to caching more data in memory. (End of Nist
tape.)
That's just one example, and there are many, many others, that
are really too numerous to go through all of them today in this talk.
We also have a clip of how Larry Ellison summarized the Turbolaser
benefits.
(Ellison on tape)
So now, by going to 64-bit architectures, we outperform
mainframes by going to groups of machines or clusters, managing a
single database. We're also more reliable than mainframes for the
first time. This is a huge change for the industry.
Someone said, "Well, wait a second, does this mean I have to buy
a couple of machines to replace my mainframe? I know these things are
inexpensive, but now I have to buy at least two of them to get the same
kind of reliability or better reliability than a mainframe?" Well,
don't worry. These are expensive "refrigerators." These are a million
dollars apiece. But that compares pretty favorably with your $20
million dollar price tag on a mainframe. So buy two....
[laughter
Or three...
[laughter]
Use them in a cluster to access your database. Not only do you
get still better performance; you get a system with no single point of
failure. And it still costs you dramatically less than the price of a
mainframe computer. So all of a sudden, with Digital's announcement
today, you get machines that are not only easier to program than
mainframes, that are not only cheaper to buy than mainframes. They're
also faster, dramatically faster, and much more reliable. (End of
Ellison tape.)
This had a tremendous impact on the audience because Larry
obviously doesn't work for Digital. Or maybe it wasn't obvious, but
Larry works for Oracle. And yet he's talking about his product running
on our platform. In fact, he said a number of things during the
presentation that, when he first saw the numbers, he thought a mistake
had been made. He went down to the labs himself to see how the tests
were really run. He also stated at the end of the presentation, which
was very impactful to the audience -- [a] sold out, standing room-only
audience in New York City -- that he planned to move all of Oracle's
financial information, the way they run their entire worldwide
business, and move all of the decision support database activity, to
Turbolasers.
But thinking about what he was saying, it's not just the
mainframe alternative. I think one of the most important things is
that, when you're talking about $20 million dollar machines with a very
high cost of ownership on an annual basis, clearly only a few companies
can afford that kind of investment to do data warehousing and to do the
kinds of applications that we're talking about here.
When you're talking about a million dollars, two million dollars,
now you've opened that market up dramatically to a different class of
company. A much smaller company that can begin to take advantage of
these very sophisticated techniques for market segmentation and
decision support. So it's creating an entirely new market and makes
available to a different class of company that capability that
previously was only available to those companies that have the really
fat IT budgets. For those companies, it gives them an opportunity on
database applications to greatly reduce their investment.
I spoke with a customer at this particular show who had never
bought from Digital Equipment. They had been, in fact, totally an IBM
shop. A big health care company. They're planning to completely
redeploy their information technology systems to client/server.
Prior to this announcement, the chief information officer told me
they were planning to go with Hewlett-Packard. But once they saw what
the Turbolaser could do, and they got a couple of early machines to
test, they made a decision to go totally with Digital. And they bought
several such machines just for the initial phase of the rollout. This
is the kind of opportunity we have. For the next year [to] 18 months,
we won't have a competitor in this application. We intend to make the
most of that.
[1m Business strategies [m
Shifting a little bit away from products and services. We made
this tremendous reorganization of the company last July and announced
the elimination of our big functions and the matrixes that went along
with that. We talked about organizing by specific business unit. Each
business unit and the leader of that business unit had the opportunity
to develop a business model appropriate to the business -- a strategy
appropriate to the business -- like the PC Business Unit has developed
and is executing. And these strategies are complementary to each other
in the business units. Sometimes there are some rough edges where
there are some minor conflicts.
The strategy for each business unit is the responsibility of that
business unit. The strategy for the corporation overall clearly is my
responsibility and my direct reports', the division vice presidents and
the support people of the president's office, you might say. We have
to see that the strategy for Digital Equipment Corp. is really more
than just the sum of the individual strategies. That is, if you think
about it from the customer's perspective -- which is the best way to
think about things -- we bring more than just the collection of
activities by business unit. We bring a complete portfolio of
capabilities -- of service, of software, of products, of support --
that very few of our competitors can bring on a worldwide basis. Our
strategy, looking forward, has to build on that.
What we've been doing...is trying to assess what are Digital's
clear technical capabilities? What are our product capabilities, our
service skills, our software skills? What's in our portfolio, you
might say? And [we're] looking forward in the industry for the next
four or five years. We're not going to go into the next century and
all of that. We're not talking about blue sky here. We're talking
about close in and practical. What's happening in the information
technology industry, and how is that likely to provide opportunities to
this company? Which of those opportunities do we most want to go
after? That's an activity that has been going on for some time, but
[it is] more focused lately. It involves technical people and business
people from throughout the company. A large number of people, in a
very structured process. It's being assisted by Bain & Company, which
is a consulting firm.
The issue there is to work on a strategy that makes sense for the
entire corporation [and] takes advantage of our capabilities. As that
gets further refined, we'll be talking about that in subsequent DVNs
and other communication vehicles. But you can be sure that it builds
primarily on our strength around distributed client/server networking.
Certainly that's changing, as we move to wireless networks and mobile
computing.
And it [the strategy] looks to, where can we add value there or
take advantage of that? On the software side, it looks to, what
software should we provide to enable customers to really deploy and
successfully manage distributed computing networks and client/server
three-tier architectures.
Now, if you talk about each of the business units, and coming
back to their strategies, I just wanted to hit a few highlights that
were achieved during the quarter. This a rather broad brush that I'm
going to be using this morning. I'll start with CSD (Computer Systems
Division).
The progress that CSD has accomplished is just outstanding.
Really unprecedented, in my experience, in terms of reducing the
expenses and implementing an entirely new business model, the SBU
(Systems Business Unit) and the ABU (Accounts Business Unit), on the
fly, and moving well on their way to achieving a very aggressive goal,
which was to achieve a profitable business in the Computer Systems
Division, as we exit the fiscal year, for the Systems Business Unit.
How are we going to do that? We started last year with huge
losses, and in one year's time, to achieve a break-even run rate in the
SBU and the ABU. We're making tremendous progress on it, and a large
part of that $257 million dollar improvement that I talked about was
because of that success.
The success of the PCBU: again, you grew 60 percent. Year over
year, on a quarterly basis, it's about three times the growth weight of
the market. Our products are continuing to receive rave reviews,
particularly the notebook products, and the fact that you're able to
refresh all of the products continuously as you see up here.
I see some new products that I just was exposed to this week that
we're not announcing today. They're really incredibly exciting
products. I'm very proud of what you've been able to accomplish here.
Look at Storage: Our Storage group exceeded their plan in both
revenues and profits, and they're growing at about four times the
market rate.
The Network Products Business again was also above plan, in terms
of revenues and profits. And you see, Network Products is beginning to
get recognized again by the external media or public relations.
Digital had been out of view for some years. Now we're beginning to
get recognition for the fact that we're the only vendor of any size
that has competitive products in all three areas of network products --
in switches, in routers, and in hubs. We're getting very positive
response to the fact that our intelligent network products, which
combine all of the functionality of those three formerly discrete
capabilities into single products, are leadership products with the
highest performance. We've also got a new architecture that's being
rolled out right now in Netware Products, called the enVISN
architecture, and it's getting accolades as well.
Multivendor Customer Services continued to be the strongest
business unit in terms of both profits and cash flow. That business
unit represents about 28 percent of the revenues of the company, and is
the strongest contributor by far in terms of profitability. The
challenge for us is to continue to grow the profitability of all the
other business units, as MCS looks for new services to grow their
business, to offset the decline in traditional maintenance services.
Which are not required to the same extent that they once were, because
of the greater reliability of our products as we go forward.
Digital Semiconductor was also above plan, with a large
sequential improvement in their margins, and they executed a number of
important strategies to keep us in absolute leadership in terms of
price/performance. You may have seen some stuff in the news about
various competitors announcing that next year, they're going to have a
chip or two chips that are more powerful than Alpha. Of course,
they're talking about something they're going to have a year from now
if they're lucky. They haven't even shipped these products from design
yet. But a year from now, if they're lucky, [they'll compete] against
products that Digital is shipping today in systems. By the time they
have those products a year from now in the chip form, we'll be shipping
even higher performance integrated circuits and systems based on them.
I'm very comfortable we'll be able to stay ahead in terms of
performance and price/performance on our Alpha products.
Our Advanced Technology Group continued to have wins in the
interactive video space. You may have seen that we won a rather large,
multiyear contract with Ameritech to provide their platform for video
on demand and interactive services. It's about $40 million dollars, a
very large contract. We've won more than half of all of the contracts
that have been let on that type of product, on video on demand
products, on a worldwide basis. More than half. And Oracle's won
about half of the remainder. So between the two companies, we're
winning almost all of the competitions.
These are really excellent accomplishments. When you think about
it, those are by business units and products. If you think about it by
geography, every geography met their objectives. And in many cases,
most cases, while they were undergoing significant restructurings of
the business, and dealing with all the local issues and local laws,
that in some cases make it very difficult to restructure operations.
Even in the face of all of that, they achieved the objectives on a
geographic basis.
[1m Customer, employee satisfaction [m
Now the issue about business units in geographies, I should
mention again, is we have to maintain a balance. We do business in
local countries, according to local customs and laws. We run the
company by business unit, and we look at our customers on a global
basis. And you have to keep these things in balance. It's not all one
or all of the other.
Again, not an exhaustive list, but about all I have time to cover
this morning. Because I want to take an opportunity to talk to your
questions. We have made a lot of progress. And you've got to feel
very good about the progress that you have made and will continue to
make. We've talked about strategies for the corporation. I think one
of the important things that's going to be happening on May 8 at DECUS,
is we'll be talking to our primarily OpenVMS customers, which are the
people that usually show up at DECUS, about more detail on the software
strategy, around operating systems.
We're making it a lot clearer, what we suggest as a migration
path for those who want to migrate. Or tools and methods that enable
them to hang on to legacy applications on OpenVMS, new opportunities
for OPENVMS, and new capabilities for OpenVMS, that we're adding and
engineering into it. As well as how VMS will interoperate with UNIX
more effectively, and how it will be essentially seamless with Windows
NT. We'll be talking in great detail about that part of our software
strategy on May 8. So that's a big piece of the strategy. And more and
more of that will roll out.
Strategy is very complex. It's a dynamic thing. It's not one of
these things you finish, and then that's it. It's constantly changing,
because the environment that you're competing in is changing. So you
keep working on refining that.
Finally, I want to talk about our customer and employee
satisfaction. We made a lot of progress in terms of the financial and
strategic turnaround of the company. We're not a turned-around
enterprise. I'm not saying that we have turned around, but we've had
some proof points in two consecutive quarters of profit, and increasing
profit at that, that say, "We're on the right track. We're doing the
right things to return the company to a competitive level of
profitability." But you never really get there unless your customer
satisfaction is among the leaders, and the employee satisfaction is
among the leaders.
Now, we're behind in both of those areas, and that shouldn't be
any surprise. With all of the transition that we've had to go through
the last few years, it's not a surprise that the morale in the company
is not where we want it to be, but it's clearly improving.
We did a worldwide survey on employee input and employee morale.
We have that data. My challenge to the business units and the
geographies is to use that data to address the most pressing employee
concerns. You may have some questions about that later.
The issue is, this is a multiyear program. We've got to work on
it together to improve the environment for employees, so it's a fun
place, a lot of positives, and we enjoy coming to work and
contributing. You have an environment where you can grow personally as
much as you're capable of growing and can contribute. You certainly
have had that in the PCBU here. We've had it in other pockets
throughout the company, but it's not uniform. So the objective is to
get all of the company feeling positive and growing again, so far as
employee morale is concerned.
With respect to customers, again, it's not surprising that when
you go through one of those downturns, it takes time to rebuild
customer confidence. The most important thing we can do is to continue
to be profitable, so that customers don't worry about our profitability
and they're able to evaluate our products and services on their own
merits. If we continue that, there's no question that customer
satisfaction will improve.
Another area we've got to focus on [is] being more predictable,
particularly on our product deliveries to the customers. Our
predictability in that area needs a lot of improvement. We've got
people working on it, but that's an area of focus for us.
As we continue to return to profitability, the challenge for
management is also to develop more sharing of compensation and benefits
with employees. We're dedicated to doing that. We first have to be
profitable, and we need to be solidly profitable. We've begun to
address the compensation issues. We haven't solved them all, by any
means. It'll be some time before we completely revise our benefits and
compensation programs, so that we're very competitive. But that is our
objective, and it has to be done as we can afford it. But we're making
great progress on it.
I think I'll close here pretty quickly so that you can ask some
questions. But I think it's worthwhile [to] take a minute, feel good
about what we've accomplished. We've accomplished an enormous amount
working together in a very short time. The last nine months have been
spectacular, as we saw that analysts have noted. We've got a lot more
work to do. And as I said in the last DVN, this is not the time to be
complacent. We can't say, "Gee, happy times are here again. Let's
start spending," and all of that. We've got to be focused on the same
things we were focused on before. That is, continuing to control our
costs, and getting those costs down so that we can be profitable, not
only in Q4 -- which would give us a profitable year for the first year
since FY '90. If we have reasonable profitability and make our goals
in Q4, we'll have a profitable fiscal year.
That's very important in terms of our customer satisfaction and
their perception of Digital. We've got to get those costs in line,
because Q1 for Digital is seasonally a very difficult quarter, with a
significant decline in revenues. The cost structure has got to be in
place so that we can be profitable in Q1. So we've got to do that. We
have to focus, as I said, on customer and employee satisfaction. We've
got to continue the focus on cash generation. We have more opportunity
there, particularly in accounts receivable and inventories.
[There's] a lot more we can do there to generate more cash for
investment, so that we can grow our businesses more rapidly. This
business -- the PC Business Unit -- could grow more rapidly if we had
more free cash to invest. We don't. And so it's got to grow at the
rate that's affordable. That would be true of several of our business
units, actually. We need to get that cash so we can invest for
profitable growth. So stay focused on cash. Stay focused on customer
satisfaction. Continue to work hard together. There's no question
we'll continue this turnaround and be successful.
| T.R | Title | User | Personal Name | Date | Lines |
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| 3856.1 | Q & A session | MLNAD0::ANTONANGELI | The Customer is always left! | Fri May 05 1995 12:55 | 449 |
From LIVE WIRE:
Q&A from Q4 Employee Forum DVN
(Following is the transcript of the question-and-answer session
that followed President and Chief Executive Officer Bob Palmer's
remarks at the Q4 "Employee Forum," which was broadcast over the
Digital Video Network)
As I came in the door, somebody was telling me that there is a
rumor going around that we intended to sell the PC Business Unit. This
is an absurdity. I don't know where these rumors come from. I don't
know if you heard that rumor. Maybe I'm starting a rumor.
(laughter)
This is complete, total and utter nonsense. You know, we have
invested heavily in this business unit. It is the cornerstone, one of
the key of two platforms. A major platform of our strategy. That's
just nonsense. So when you hear that, please just put that in the
shredder. Don't think about it. And in fact, most of the rumors you
hear deserve the same treatment: into the shredder. Ask your
management. If there's something really going on, they will know about
it. Other questions?
Q: Now that we're seeing big measurable signs of the
company's turnaround, what plans do you and your staff
have for re-establishing Digital as one of the best
companies to work for?
A: All employees have a stake in that. All of us. It's management's
responsibility to create an environment where you enjoy coming to
work, and where you can see personal development as well as the
company's development. That's the kind of environment we want at
this company.
We had that at one time at Digital, where it was tremendous fun to
come to work, and everybody felt good. And we got a little
complacent. The world changed, and we didn't want to change. We
didn't want to deal with the changes. The longer we put that off,
the more painful it was for all of those who had to deal with it
later. We are dealing with it. We are going to continue to deal
with it. And we're going to return to an environment -- not the
same kind -- but with the same attributes, the same value system
that I always talk about. The same things that make us what we are,
who we are as a company, in terms of our values and our behaviors,
but also that continues to share with employees the benefits of
your hard work.
At this point in turning around the company, basically it's keeping
your jobs, having some modest improvement in personal compensation.
And as we do better, better improvement in compensation -- again,
with an emphasis on paying for performance. You'll see in the
management ranks in particular much more variable compensation that
depends on Digital performance, as well as business unit-specific
performance, as a component of total compensation.
Other areas that I'm particularly concerned about have to do with
the long-term benefits, like the retirement programs that we have
throughout the world, and other employee benefits that we are
analyzing to see what is our competitive position. What are some
opportunities we would have, as we gain more profit, to share that
with employees? So the issue is clearly on my mind: creating the
right environment.
But it's up to all of us. You can't wait, as an employee. I mean,
you have to act and behave in order to bring about change in the
way that you think is appropriate and consistent with the value
systems. And that's your management's responsibility. But this is
a major effort in terms of the company, and something we're focused
on.
Q: The Internet arena is very hot. And yet we don't seem
to read a lot about Digital in it, in terms of joint
ventures, programs and so on. Can you give us some
idea of where we are and where we're going?
A: Digital is actually taking advantage of the Internet to sell our
own products. You probably know we have a Web server that allows
customers and potential customers to log onto. There's over 6,000
pages of information about our products and services available
through that server. I believe we have on the average about
150,000 such inquiries on a weekly basis that come in to take a
look at what's going on. Maybe even more frequent than that.
So that's one use.
You also probably know that Digital was the first company to
provide customers the opportunity to actually test their software
on our Alpha platforms over the Internet, through a server. So
that's very impressive. A lot of people have looked at how their
software would actually perform on our products.
We developed a security system and a server that has a firewall for
customers. We sell that as a service and a product to customers.
It's been relatively successful, but I think we could do better.
So we have an Internet Business Group in the Advanced Technology
Group that is looking for opportunities not only to be involved in
Internet, but to make money, which is a different issue. I think
that over time, you'll see Digital be more aggressive in that
space. I'd like to be more aggressive [there]. But we are taking
advantage of it.
Q: We seem to have made a decision to split our business
strategically between the two architectures, Intel and
Alpha, as opposed to the way people use our systems.
I'm really curious as to why we may have done that,
instead of looking at clients as a business unit, and
servers as a business unit, regardless of
architecture.
A: I think that's a good question. There are any number of ways that
you could slice and dice the company, and that would certainly be
one. The issue really had to do with -- at the place that we were
in our development -- my desire to keep in particular the PCBU
entirely separate from the rest of the company. It's very
separate, so that you could develop the business practices
appropriate to the PC industry, which were quite different than
[those of] the minicomputer industry. My fear was that, if we had
gone to that particular partitioning, you would have had the PC
desktop client environment caught up with the more traditional
minicomputer way of doing everything, which in general is much
slower than the PC market will permit.
Now as we go forward, clearly what we're trying to do is take more
and more of the attributes of the PC marketplace, which is the bulk
of the computing marketplace today. And take those same techniques
and urgency into our more traditional minicomputer way of designing
and developing.
But there are also very different attributes. The customers who
are buying for enterprise-level computing are looking for features
that are not today available in PC-based platforms either on the
service side. Over time, they will be. And over time, the
operating systems that are popular on PCs and servers will have
those attributes. But not right away.
So it seemed like, for the place where we were in our history, and
the marketplace, and where things were in their development, this
was the best way to partition the company. But there are many
other ways we could look at it.
My objective...lest you be confused about any of these remarks, is
for at least fiscal 96, I'm not planning any major changes. I
think it's important that we try to have some stability in the
business units. We'll learn some stuff in the next year. We'll
find some things that are not working terribly well about the
current organizational structure. We'll see some opportunities to
make it better. But we need some stability and some time before we
start futzing around with organizational changes. Clearly, though,
as we address our customers -- and that's talking about the overall
corporate proposition -- we address our customers in terms of our
total portfolio of services, software and products.
Q: If a customer wants to order PCBU parts, they have to
place an order to the PCBU and likewise to the SBU.
Is this inconsistent with our wanting to present one
face?
A: Well, not really. Typically, the customer in the example you
mentioned is dealing with a partner. The majority now of our SBU
and PC products move through partners. That's a major
accomplishment, by the way, that I didn't mention in my prepared
remarks. In FY '93, only one-third of our products moved through
indirect channels. In in the quarter just ended, 60 percent of the
products. So 33 percent in '93, 45 percent last year. Sixty
percent in the quarter just ended. Which was part of our CSD
strategy and our corporate strategy. They're executing that very
well.
So the issue is that the partner or, in the case of the ABU
accounts, Digital's direct sales force, provides access to all of
Digital's products and services. Most often, there's a lot of
overlap in these partners in terms of the different business units.
Not always, but most often. This is not terribly different,
though, than the really large competitors in the business. Most of
our competitors -- in order to get some autonomy and understand
where they're earning money, and where they need to invest -- they
also have a business unit structure. Not all of them, but most of
them. That requires some differentiation. So it's always a matter
of balance. It's never a perfect world.
The issue for us, as Digital, is to have a consistent way of
behaving. A consistent way of dealing with our partners in terms
of terms and conditions. And something that's consistent and
appropriate to the particular business. That is, the terms and
conditions for the PC Business Unit are slightly different than for
the systems business. But only slightly. So the issue is to try
and be easier to work with. We have a lot of opportunity to
improve that. And I think, in FY '96, we'll see us as a management
team working to make it easier for our partners to do business with
us. Other questions?
Q: You mentioned when you started that there's no plan to
sell off the PC Business Unit. But are you still
entertaining ideas on selling off other parts of
Digital? Or are we pretty stable where we stand?
A: I think that we'll continue to evaluate pieces of the company.
That's a very good question. Something I didn't talk about in my
prepared remarks [was] where did the money come from for all of
this restructuring? Where did we get the money? Well, to a large
extent, we generated the cash. But you know we didn't generate it
from operations until the quarter just ended. We generated the
cash by divesting ourselves of pieces of our business, or of
facilities, that were really not strategic to the company going
forward. So part of it had to do with understanding what is our
strategy going forward, at least at a high level? And then looking
at all of the investments that we'd previously made, many in excess
of what the market would support, and finding a way to dispose of
those in a profitable way.
Really amazing. You know, since we started this restructuring,
we've raised in cash approximately $1 billion dollars. Billion
dollars. A thousand million dollars that we've used in the
restructuring. We'll continue to look at facilities, business
segments perhaps, that are not strategic to the vision that we have
of adding value to our customers going forward. That is not the
case of the PC Business Unit and most of the other business units.
But within the business units, there might be a segment that we
think we could sell to a partner or someone else. They could focus
on that. It would be more productive for Digital's management to
focus on other areas.
In addition to raising cash, it's also about management's span of
control. We want to spend our management attention units on those
pieces of the business that have the most opportunity in the
future. So we want to be looking to the future. And again, that's
what the PCBU is all about.
If you look in each of the business units, they're looking at their
portfolio in segments of business, and saying, which ones are the
most strategic? Which ones have the best opportunity for
profitable growth? How would we fuel that growth? Maybe there's
pieces we can divest of, to raise cash to invest in the growing
ones. And that's one advantage of having the business unit
structure. You get it down into hopefully manageable pieces.
So that will be done mostly by business unit. Of course, I have to
approve anything that's of any significant size. At this moment I
don't think of anything standing here that's a major divestment
that's under way. We're continuing to work on getting a partner for
investing in our semiconductor manufacturing facility, and that
seems to be going pretty well. It's very complicated. But we seem
to be going well. I'm thinking that by the end of the calendar
year, certainly we should be able to announce a partnership to
fully utilize our semiconductor manufacturing capability here in
Massachusetts. But I can't recall any other major ones. Other
questions?
Q: You discussed our PC and Alpha program. Could you
touch on what the communication strategy is for the
company? One of the advantages is how these machines
communicate with each other...and you also touched on
the Ameritech deal, which I assume involves telephony.
A: Yes, it does. Yes, I'll talk about that briefly. We can see,
going forward, that the information technology industry, as is
broadly defined by computing and communications, is coming
together. And we talk about this convergence. We talk about the
opportunities that you can read about every day in the paper or
magazines, about this alliance or that alliance between a telecom
company, a computer company, maybe an entertainment company, as
people try to figure out what the role is.
Digital is entering into a number of minor alliances -- no major
big deals at this point -- mostly trying to make sure that we are
positioned for whomever wins in these alliances to buy our
platforms and services. And by services, I mean everything from
how do you get content into a digitized format, for transmission
over an Internet or cable or whatever, but digital format. We've
created some centers to enable that, like the Media Center in New
York City. And there will be others [to] help customers get the
content in the right format, to the platforms that enable you to at
a very low cost access video streams of data. And that takes
advantage of all of our competencies, in terms of systems
engineering, architecture, Alpha architecture, very high
performance -- in other words, CPUs -- storage arrays, and a very
open and disciplined storage hierarchy that makes it cost-effective
to implement this server technology. Which is why really we've
been winning most of those. This is a key part of our future
development.
There's no question that there is a huge market. We're continuing
to look for opportunities there. I'm very optimistic about that
particular future. I don't know if that's a complete answer. It
really isn't, because the complete answer is a multiple hours
answer. But that gives you some overview, perhaps.
We're very well positioned there. And we are winning in the
marketplace in competition with everybody, as far as these video on
demand servers. It's not just movies on demand, but much more
expansive than that. You saw we won some ad insertion capabilities
for immediate revenue, where cable television operators can use
Digital servers to insert ads in a fraction of the time for their
local audience, and at a fraction of the cost of previous
technologies and methods. That results in an immediate revenue and
profit for Digital. So we're not only looking for the future out
there somewhere over the ubiquitous communications environment or
society -- which is going to happen, and we're going to participate
in it. We're not only looking at that. We're looking at, right
now, what problems can this technology solve for businesses today.
Q: I think in the current environment I absolutely
agree. We want to do what we can to improve customer
satisfaction. I mean, we think that's our central
issue, and we really believe in it a lot. With the
distributed business units, it's kind of a challenge
getting the right information at the right time to
MCS. What can we do to help improve that customer
satisfaction? Because right now, we know that's what
we really need to aim for to make sure the customers
will buy again.
A: I think that's a very good question. I think that it illustrates
one of the glaring weaknesses of our company. Notwithstanding that
we are a computer company, we did not invest in the information
technology infrastructure to really support what's necessary in the
environment we're competing in. We are investing today, as most of
you know, in not only our own infrastructure and deploying a
client/server architecture by the business units, but also in the
software packages provided by SAP, tailored for the individual
business units, as appropriate to their business. Not every
business unit needs the full capabilities available in the SAP
offering.
On the other hand, other business units need capabilities that
aren't available, for example, Multivendor Customer Services. We
haven't been able to find a package available, [and] readily
customizable that really deals with the complexity of the
Multivendor Customer Services business. So this is a major focus
for John Rando and his team.
The answer to your question is, the only way we can do it is by
working across the business units. The leaders of the business
units have to work together to identify the most important issues
and work on those first. It's not going to be quick. Implementing
these kinds of technologies is very expensive. It takes time. And
it is essential. So we're allocating a large investment, and
upgrading our systems on a worldwide basis to support the business
unit structure.
The other thing is to provide flexibility. Because as I mentioned
before, we will undoubtedly find things we want to change as the
marketplace changes or as we get smarter. We need our information
technology systems to support those changes easily. Not the way
they're organized today, which was built up over decades really,
and [which was] very geographically focused. We could get
information locally by geography. But we really couldn't get
information cut the way we want to cut it, by customer on a global
basis, or by products and services. Couldn't get it. We're just
working to get that implemented. This will be a major improvement
in terms of our customer satisfaction.
On the other hand, in the short term, just being able to say to a
customer that we're going to deliver on this date -- and then doing
it -- would be a big improvement. A big improvement. That
shouldn't require tremendous improvements in terms of information
systems. They'll help. But part of this just has to do with
discipline and commitment to our customers. I see that I have used
the available time here. There might be time for one more question
if there's one out there.
Q: As a business unit that purchases other Digital
products from other business units, we get into
situations at times where the inter-business price is
not as competitive and we're robbing Peter to pay
Paul. Is there going to be any revamping of the
inter-business price structure?
A: "Yes" is the answer to that. The issue that you're talking about
is one that exists in all large companies. I've worked for
several, and in all large companies, as they deal amongst
themselves, they almost inevitably find that somehow they're not
getting the best possible price on whatever it is. In many cases,
this is a perception. I don't know, it seems to be human nature.
But in some cases, it's real. It's demonstrably real, because you
can get from a bona fide supplier with a comparable product or
service a better quote. The issue there, then, is for the business
units to work with their suppliers and their customers -- just like
you would with any other customer. And when the customer says,
"Gee, I've got this thing here, I'd like to keep doing business
with you, but you need to be more competitive," then on the supply
side, you've got to be. There's no alternative. For the company
to be competitive in the model that I have, going forward, you
can't have one business unit greatly subsidizing another.
Now, this fiscal year, as we were moving to implement this new
structure, we have some cases where we didn't get it quite right --
in fact, in many cases -- and the intra-company transfer prices
were not quite right. They're not competitive, in other words,
with the external market. What we do in terms of reward and
recognition is, we solve that at the corporate level, with our
teams of accountants, to try to make the puts and takes so that I
know, as the chief executive officer, which business units are
really performing well and how to make allowances for some of those
issues you're raising.
As we go into the budgeting for 1996, you'll see a lot of changes
in the business rules among business units, all of them directed
toward that question. That is, to ensure that no business unit is
inadvertently subsidizing some other business unit through transfer
pricing. That's what we're trying to accomplish.
For that matter, the overall mentality of the company should be to
have a minimum of allocations, period. A minimum of allocations
over the transom that you can't do anything about. Bernhard needs
to be focused on those things he can do something about, with his
management team and all of the employees in the PC Business Unit.
All of the time that he wastes dealing on issues that really he
can't do anything about, that just come in over the transom as
allocations, are a waste of valuable time. So I and other
managers, all of the operating community of the company, are
dedicated to work with Finance to eliminate those allocations.
One of the things that happens in this process, by the way, is as
you start getting these charges, now we begin to question, what is
this? See, in the past, if you weren't measured on it, and you got
a charge, hey, no problem. You weren't measured anyway. Now we're
measured on everything -- the profit, the revenue, particularly the
cash and assets employed. We're rewarded on the basis of how well
we manage those things by business unit.
So you start looking and say, "Gee, what's this line item?" And
somebody explains what it is. You think, "Yeah, maybe I don't need
that, or if I do need it, can I get that cheaper?" So we look for
opportunities to outsource some of those services, or to buy the
products out if we can't get a good price inside. Initially, you
go to your supplier, and you try to work with them like you would
with any supplier, and you hope that they'll work with you. If
they don't work with you at some point, the business unit is faced
with, "I'm either going to go on having this handicap, or I'm going
to find another solution." And again, being very careful what I'm
saying here -- after you've worked with your supplier, if you can't
come to a resolution, then each business unit has to have the
opportunity to go find the other solution. Because otherwise, we
just kind of all fail together, which is what we were doing.
What we're going to be doing is winning together. You have to win
by business unit. You have to have the autonomy and the freedom to
be competitive. So cost subsidies and all of that have to be
expunged. It's a good question. A long answer, but it's a very
important question.
Thank you very much for coming today and doing these questions and
answers. It's been a pleasure to talk with you today, and again,
to congratulate you on what you've accomplished on a worldwide
basis, to all of our employees. You ought to feel great about it.
But it's not a time to be complacent. We've got to continue to
focus on the things I talked about. We want to complete this very
profitable turnaround for our company, and a resumption of
leadership in the industry, which I'm more convinced than ever that
we are going to do.
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