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Bob Palmer
An interview by Eric Nee
[Image] After three and a half years of something akin to hell, Robert
Palmer looks as relaxed and fit as he did when he took over as CEO
of Digital Equipment Corp. in 1992. And well he should, because Palmer has
turned Digital around. The company, at one time in danger of becoming the
next Wang, has posted six straight quarters of profitability. More
important, Digital's revenues are growing once again. Palmer has hitched
his wagon to Microsoft, betting Digital's future on Windows NT, a move that
could be his smartest. When I caught up with Palmer he was in Bellevue,
Wash., having just completed his latest press conference with Bill Gates.
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Upside: What kind of role has the Internet assumed at Digital?
Bob Palmer: A much more prominent role. There is the need to connect people
to information and to other people and to connect disparate systems and
software environments. Digital has software to help people do that. But
with the explosion that is going on in the Internet, we have brought in
Ilene Lang [vice president, Internet software business unit] to lead the
program with some new talent plus some talent from our research labs. A
large part of what Ilene and her team are working on has to do with the
Internet and intranet. Really, it's more intranet software--tunneling
software, security products, collaborative software, search engines. Our
Alta Vista [search engine] has been a phenomenal success for Digital in
terms of awareness of what our Alpha platforms can do and what it means to
have 64-bit addressability. It's easily the fastest search engine on the
Internet. Last time I looked, 23 million Web pages have been indexed.
Eleven billion words have been indexed. With Alta Vista and the external
Net, sitting at my laptop at my desk, I can access any information that I
want. We're going to make a product so that we can index all the data in
our own databases, given a different level of security that people would
have.
So Alta Vista software will be an offering from Digital that companies can
use for their own intranets?
It seemed to us a logical application for the product, in which case we'd
begin to get revenue and profit for the engineering we've invested. On the
Internet it's free, but it's been excellent marketing and advertising.
Do you feel that Digital has done as good a job as it could in taking
advantage of Alta Vista?
Six million hits a day. You can't buy that kind of advertising. People that
use it like it. So that is a nonhype style of marketing and that's what I
prefer. Maybe it's an East Coast/West Coast thing. I'm not taking anything
away from Scott McNealy, [CEO of Sun Microsystems Inc.]. He's done an
outstanding job of marketing his company and their products. They've been a
very innovative company; they're agile and a good competitor. But we're
more conservative. So I'll tell you to try my Alta Vista search engine. I
don't have to sell it; you go try it.
Do you think that style is more appropriate for the business community,
where you focus?
It's a matter of personal style and preference. Digital is not as reticent
as we were in the past to talk about what we actually can do. But I prefer
to talk about the capabilities of our products and not the deficiencies of
our competitors.
What else are you doing on the Internet?
Our history with the Internet goes back to the platform that ARPAnet was
put up on, and we were very much involved with the research community at
MIT when Ken [Olsen] was running the company. And it's really in our roots
as far as internetworking is concerned. More recently, we were the first
Fortune 500 company to have a World Wide Web page. And we were the first
company to put up a catalog of all our products and services that you could
buy interactively over the Net.
We were the first company to put up Alpha servers so that you could
download your software over the network and test the server. We had to be
careful because our Alpha servers are very powerful, and the federal
government said if we allowed people to access those servers from
international communities, that would be a violation of export controls.
But the Internet is a tremendous, extraordinary paradigm shift, and Digital
has the opportunity to be a leader there.
When you first entered into an alliance with Microsoft, the Internet wasn't
as prominent as it is today. As you are well aware, there is a battle
raging within the Internet community between at least a couple of
camps--the Microsoft camp and the Netscape camp. How would you align
yourselves?
We were one of the first companies, if not the first systems company, to
sign up with Netscape for their browser. We think it's a good company, a
very innovative company. We're much more tightly aligned, obviously, with
Microsoft in that we've made a unique strategic alignment with them. The
demand out there is so great that there is plenty of opportunity for more
than one browser, more than one service, more than one capability. On the
other hand, from the business community point of view, Microsoft has really
an almost unassailable position on the desktop. The majority of users are
going to access the Internet from their desktop appliance or their laptop,
so as Microsoft integrates browser capability and other functionality into
their operating system and you get it for free, it's kind of hard not to
use it.
How do Digital's Internet products and strategies fit with what Microsoft's
doing?
We will have some complementary products. We will probably have some
products that conflict in the marketplace from time to time. The
marketplace sorts it out and decides which products they like. But for the
most part, we're collaborative with Microsoft. Much of our emphasis the
last three years has been on developing strategic partnerships with a few
key companies. For Digital they're special relationships with companies
like Microsoft, Oracle, MCI and a few others.
But with Oracle and Microsoft, again there is kind of a looming struggle
between those companies with regard to the Internet. Are you finding that
the Internet is making it easier or more difficult to maintain a balance in
your relations with both of them?
I don't think it's a factor. The relationships with Microsoft and Oracle
make sense to the extent that it's in their best interest for Digital to be
successful. What I try to do in working on an alliance with any company is
to craft something so that it's in the other party's best interest for me
to win in my marketplace. We're not competing with them. Once we got rid of
[Digital's relational] database and had Oracle pick that up and support our
customers, we're no longer competing, so now we can get into a position
where we can really collaborate.
The "alliance for enterprise computing" with Microsoft is exactly the same.
There's no need for me to look at the contract that Bill and I signed. I
don't remember the details and it's not necessary. Everything that I'm
trying to drive in my company is to help make Microsoft succeed with
Windows NT, which helps Digital succeed with our Alpha platforms, our Intel
platforms and our services. And because it's a very symbiotic relationship,
conflict doesn't enter into it, at least not so far.
There's a story in The Wall Street Journal that implied that you struck a
deal with Microsoft--you guys wouldn't pursue any legal action against
Microsoft for possible infringement with NT of Digital's patents, and in
return they would enter into this alliance. Was there any formal deal
struck between you two in that regard?
Part of the agreement is to completely cross-license the intellectual
properties of the two companies. Because if you're trying, for example, to
integrate Digital's cluster technology into the Windows NT operating system
and its capabilities, engineers need to be able to talk freely without
worrying about this intellectual property issue. But it is a unique
relationship. Microsoft has relationships with many systems companies and
Digital has relationships with other software companies, but there is none
that are this expansive or this critical. We've never had any acrimony with
Microsoft that I'm aware of. Not before signing or since signing.
What was the reason they were willing to sign?
This was a jointly arrived at document agreement. The main value exists
because it is good for Microsoft and it's good for Digital. People talk
about Bill Gates and I think it's mostly envy of his success. In my
experience with Bill, he's always been very straightforward, very clear,
and he's trying to get the very best deal for his company and I'm trying to
get the best deal for my company, which is as it should be.
I'll ask about it one more time. Going into the negotiations, was it on
your mind that Microsoft had done something in designing NT that would have
violated some of your patents?
I think it's well known that the team that designed Windows NT had been
responsible, in large part, for developing VMS, which of course is a well
respected and premier operating system. Architects tend to approach
problems in a similar way. Windows NT and VMS have a lot of similarities,
and that is really positive in trying to make the Windows NT/Open VMS
affinity program work. So it's a fact that there is a lot of similarity in
the architectures, but whether or not that had anything to do with
intellectual property or a potential infringement is certainly moot at this
point. We've already signed a cross-license [agreement].
Why did you decide to bet so much of your company's future on NT?
Because that's where the world is going. If you looked at Digital in the
1980s, we were very successful with a business model that was focused on
vertical integration. But the world changed with the advent of significant
capability in single-chip microprocessors, enabling the PC revolution. With
the emergence of open systems and Digital's reluctance to change, we lost
an enormous amount of time and ground in a strategic sense, and our company
suffered egregious losses as a result.
I came on in October of 1992 as CEO at the same time the company was in
dire straits. A number of analysts were questioning whether the company
would even survive. One of the things that you had to do was to get the
costs in line with the revenues, but that's just a small piece of the job.
Unless you want to spiral down and disappear, the other piece of the job is
to look at the real competencies you have and figure out where the market
is going, because you've already lost where it is.
If we hadn't already been losers in the commercial 32-bit Unix [market], if
we hadn't already been losers in PCs, we wouldn't be needing to look at
where things were going with the same urgency. We decided [there was] no
point in going back and trying to win on 32-bit Unix, but it was clear that
there was an opportunity to be the leader in 64-bit Unix. So even as we
were losing money, even as I was downsizing, we were investing about $100
million a year to engineer, from the ground up, a 64-bit Unix. We stuck
with it, and now we have the leadership position in very large memory
databases that run on 64-bit Unix.
Now come back to NT. When we had this de-layering of the computer business,
so that you now have different purveyors of the CPUs, hardware, storage,
the I/O, the databases, the networking products, the complexity went up
orders of magnitude. It was one thing when you bought it all from IBM, or
you bought it all from Digital or HP. Now the customer has unprecedented
freedom to pick and choose among all the different offerings, but the
penalty for that is that this stuff doesn't work together. Microsoft said,
"I'll give you an alternative. I've got a ubiquitous operating system, with
tremendous capability, with an unprecedented number of applications, and
it's cheap." We could see that, so we said, "We need to align with
Microsoft." There are a lot of people in the industry who criticize me
about that, but [Microsoft is] winning. Why do you want to align with the
guys who are losing? Why not link up with a company that is providing what
the customers want to buy, as reflected in their growth and their profit
and their success?
In the next three or four years, more and more of the market worldwide is
going to move to Microsoft Windows NT, Microsoft Exchange and other
products like Microsoft Back Office, and Digital is going to be the
best-positioned systems company to help them with the installation, the
support, the hardware platforms and the integration in their environments.
Instead of competing with the Unix vendors, like Sun, you're now competing
with PC vendors like Compaq.
You're exactly right. Once you recognize that the business environment has
changed to an open environment, proprietary is no longer going to win. And
you can't be a little of both, in my view. At least not at the size company
we are. We need to make a total commitment to the transitions. A lot of
very good people who are no longer working at Digital just couldn't get
their mind around a new business model. They had been so successful, so
long, with a proprietary model. What changed wasn't Digital; it was the
external environment. And if you intend to survive as a organism and your
external environment changes, you'd better change. It's Darwinian out
there.
Personally, I like it. I like competition. I like change so that you don't
get stale. I maintain that there is very little that's happened in
technology in the last 15 to 20 years that wasn't clearly predictable
relative to being driven by semiconductor technology, telecommunications
improvements in bandwidth, this sort of thing. The only surprise I can
actually think of has been the Internet. Maybe George Gilder had made a
prediction, but most of us were caught by surprise. And yet, look what a
great opportunity it is. The smart companies will be agile enough to take
advantage of that.
What's been the most difficult part of changing Digital to operate in this
new environment?
Getting management to think in a different way, and getting different
behavior in the company relative to the creation of new products, new
services, customer focus vs just being technology focused. We were always
technology focused and we're very good at it. But we used to do engineering
for engineering's sake. We'd have three or four different groups in
engineering attacking the same market opportunity and squandering large
sums of somebody else's money. Namely, the shareholders. That's not my
model. My model is put a good team together and let them go out there and
compete, but you can't afford multiple approaches to these markets.
[Another thing] I always found a little hard to accept at Digital was the
lack of accountability. The company managed everything by consensus and
fundamentally, no one was really accountable.
Do you feel that Digital is where you want it to be?
Oh no, not at all. The company has made great strides. We have outstanding
people in this company. I'm very proud of the employees of Digital. I am
responsible for taking the necessary steps to execute the plans and get the
revenues in line with the costs, and there will be more of that going
forward. It's funny, there are still a large number of employees in the
company and writers who seem to think that you should be able to get things
static and just let them stay that way. That's odd because there is nothing
in human experience that's like that. When we become totally without
change, that's defined as dead.
Why did you decide to keep chip development going, when that is sort of
your old model?
We have an obligation to those customers who have invested in our products.
The CISC architecture, notwithstanding the improvements in semiconductor
technology, was running out of steam. We needed a new architecture so that
VMS customers could migrate to a much higher performance platform.
Fortunately, the architects on this product made a very, very key
decision--to design the new architecture to be operating
system-independent. So there's no backward compatibility and therefore no
baggage. That's why Alpha has been unprecedented in maintaining its
performance lead over any other architecture. By making that choice they
made the problem of software more difficult, and that's why it took us a
while to get VMS to run on Alpha with all the same functionality that we
have on VAX.
Most of my competitors in the systems business--HP, Sun, IBM--they're
telling their customers that as they go to 64 bits, they're going to have
to migrate all their applications. In the case of some competitors, they
are going to migrate twice in the next five years. It's a very painful
requirement for the customer. With Digital, once you migrate to the Alpha
platform, there are no more migrations. There's no more necessity to change
operating system or architecture.
You're also on the Intel platform.
Half our platforms move on Intel architecture. Intel is a fine company--a
major supplier and customer of Digital's. But they've got a lot of
challenges, because Intel is saying that they are going to push the
envelope of performance, keep up with engines like Alpha, but at the same
time they're going to be backward compatible with two totally different
architectures, HP and the x86 architecture. This is a very complicated
challenge.
What about the issue of manufacturing?
Oh, there's no question that I need a partner to help defray the cost, and
all that means is that Digital does not yet enjoy competitive profit
margins. Having a semiconductor facility that's only partially loaded is
clearly a charge every quarter to the bottom line. If you can't load it
fully, you can't get competitive profit margins, and so the opportunity for
Digital is to find a way to fully utilize that process capability.
You were looking at a deal with Cirrus.
We had a deal with Cirrus, but they got into some financial difficulties
and it wasn't in either company's best interest to pursue that deal. But it
was disappointing because we had worked with them for almost a year to get
to that point.
It would have been easier a few years ago. People are now anticipating an
overcapacity of fab.
No, it's quite the reverse. A few years ago it was harder to find people
who wanted to sign up to the Alpha architecture because it didn't have any
applications. Because you have applications running on Alpha--more than
7,000--now you can have partners that might be interested in not only
taking some of your capacity, but also taking a license to manufacture the
Alpha architecture.
You're actually losing some of your Alpha customers, aren't you? Isn't Cray
likely to--
[Cray CEO] Phil Samper just left the company, but he told me when they did
the deal that they have to have the Alpha processor to get the performance
out of [their supercomputer].
You don't see that changing now that Silicon Graphics has bought Cray?
I don't see that changing. If anything, I have an opportunity to talk to my
friend Ed McCracken about how he's now got three different architectures.
He's got UltraSparc on the low end of Cray's line, he's got Alpha on the
high end and he's got his own Mips architecture. I think there is clearly a
way to coalesce all those architectures around Alpha.
See, the thing that Intel did that helped Digital recently is, by bringing
out the Pentium Pro with surprisingly high performance, all the other RISC
architectures have to rethink their strategy. There is not any other RISC
architecture out there that has comparable performance to the Pentium Pro
except Alpha, which has 50 percent more performance.
Another alternative would be to say, We can't compete with this juggernaut
Intel and we might as well port to their platform.
That's Digital's strategy as well. We are porting all our applications, for
the first approximation anyway, to the Intel architecture. What it gives
Digital is by far the broadest platform performance to offer to our
customers. We have even a broader range of performance than IBM, which is
five times bigger.
Looking out in the long run, where do you see NT going relative to Unix,
and where do you see the Intel platform going relative to other chip
architectures?
We believe that by the end of the decade, most large companies will have
multioperating-system environments. They will have Unix from some company
or another, hopefully ours; Windows NT; and probably proprietary operating
systems as well--MVS, VMS, Apple Mac. We think that the proportion will be
something like 40 percent Unix, 40 percent Windows NT, and the balance
divided among proprietary operating systems, which will be diminishing. We
think going into the next century, it's likely that Unix will continue to
give up ground to Windows NT.
Except at the very high end, or what?
It will take time, but eventually I think all of the capabilities that we
expect from Unix will be available from Windows NT in some future
implementations. Digital is going to be in large part responsible for
helping Microsoft achieve that objective. Eventually Microsoft, in my view,
will have everything from portable devices, which they have today, all the
way up to the very largest, mission-critical database engines and
application servers.
What about on the chip architecture side?
On the chip architecture side it's clear to me that Intel doesn't have any
significant competitor. Digital is a competitor, but only in the very
highest-performance niches. And therefore it's important that Digital have
a two-platform strategy. The exact proportion of our revenue that comes
from one or the other is not around religion, it's around the marketplace.
The marketplace will decide how much of each architecture is most
appropriate for the problem that they are trying to solve. Our objective is
to provide the best performance and the best price-performance for the
problem the customer is trying to solve. We innovated that by bringing out
the first workstations, for example, that are Windows NT. You can start out
with a Pentium. You can then migrate to a Pentium Pro and, if you want, you
can migrate to Alpha, and all you have to change is the daughter card. You
don't have to have a forklift to upgrade your system. It's just a smooth
integration as you move up.
I think about an analogy with car companies like BMW. They're a
well-engineered car, doing great, very profitable company. They're not even
remotely as big as the General Motors, the Toyotas. But they have
excellence of engineering. And that's what Digital aspires to, excellence
of engineering, and service and support for the customer. If you look at
BMW, they have four-cylinder, six-cylinder, eight-cylinder, 12-cylinder
engines. They've got platforms appropriate to each one of those engines.
Digital has a comparable lineup. Sometimes the engines are Intel
architecture and sometimes they're Alpha architecture.
The Alpha products have done pretty well in the server space, but in
workstations they aren't doing quite as well and you're losing market
share.
The reason is because in the workstation area most of the applications have
already been written for competitive platforms. As I mentioned, in the
1980s we were obstinate about Unix and the customers' desire for Unix, and
ultimately the applications were put up on Sun platforms, HP platforms,
even IBM, not Digital. So it takes a long time to overcome that, because
unless there is some overwhelming reason for a customer to change, then why
change? If you're getting good support from your supplier, and all of our
competitors are competent companies, why make a change?
On the server side, they made the change because we invented an entirely
new class of server. So it made it easier for us to gain market share on
servers. Now we recently won, with Hughes as the prime [contractor], a
37,000-workstation opportunity with the U.S. Air Force. We're also
optimistic about our chances with a couple of other large bids, but it's
taken us some time to get all of the applications that the engineers want
to use on our platform. So that's been a handicap.
If you compare Alpha to [HP's] PA-RISC or VAX architecture, or virtually
any new architecture, at year one, year two, year three after introduction,
Alpha is by far more successful than any of the others. When we introduced
the VAX in '78, which was our first 32-bit machine, it took four years for
the cumulative revenues for VAX and VMS to reach a billion. In four years
Alpha revenues, including services, are more than $7 billion.
Where would we have been without Alpha? How would we have managed to come
back to a leadership position having lost so much time? This is like a race
where everybody is running hard. We took a five- or six-year hiatus sitting
on the sidelines. And the industry was moving, and we weren't moving. Then
we woke up and said, "Gee, it might be a good idea if we started running."
It's not that easy to catch up with other companies that have been doing
the right strategy all along and running hard. And yet we've managed to
close the gap in many cases and in some cases get out ahead of the pack.
I'm very proud of our team.
How is NT on Alpha going on the desktop?
That's going very well because virtually all of the people who have Unix
applications are moving their applications over to NT. If you want to get
the real performance on the desktop, being able to buy into the NT
workstations from Digital is a great value proposition. If you don't need
the performance, you buy the Pentium machine. I would say that the
workstation guys need to look to the low end of their product line, because
it is quite clear that Windows NT is going to cannibalize the low end of
the line and over time continue to move up in that line.
Who do you think is the most vulnerable?
The people who are most successful in the lower end. And you know who they
are. One of the things that is worth noting, and we'll see how this works
out in the next four or five years, is very often companies get in trouble
because they are so successful. The reason Digital got in so much trouble
and found it so difficult to change was because we were so successful with
a particular model. There are companies today that have a particular
model--maybe all they do is Unix. The world's changing. It will be
interesting to see how they fare in the future.
Why have HP and Digital, two older companies from the minicomputer world,
both gone with Unix but also with the Microsoft-based platform, whereas the
newer guys that helped redefine the world, Silicon Graphics and Sun, in
particular, are refusing to look at this next platform?
I don't know. Those would be questions to ask the CEOs of those companies,
but I think that HP's great success relates to intelligent strategy that
was put in place in the early to mid-1980s and executed well for the rest
of the decade. If you look at the leadership, like Lew Platt and his
predecessor John Young, these are very capable executives. They are
supported by a very capable culture and management team, and they picked a
good strategy and stuck with it. And their strategy was much more in tune
with where the world was going.
Some people have suggested that Sun and SGI might be the last of the
minicomputer companies, even though they don't like to think of themselves
in that way.
That would be unfair to both executives that lead those companies. I have a
high regard for McNealy and McCracken and their strategies. I think that
it's clear that Scott McNealy is in the process of redefining Sun and doing
so successfully. It's also clear that the same could be said of Ed
McCracken. His acquisition of Cray is bold, but it plays to where they are
trying to go--the highest niche of technical computing.
After all these years, what is it about Digital that you can't get your PC
business to function competitively?
We've only been a significant player in PCs for three years. We're up about
a factor of 10 since I've become CEO in terms of revenue on PCs, but we
don't have it quite right yet in terms of the execution side. It's
undeniable that every quarter prices are going to be adjusted in the PC
business, just like the semiconductor business. So what? You need to be
able to execute efficiently enough that those things don't turn out to
impact your bottom line. We just haven't done an appropriate job. That
being said, very few companies have. There are only a few [PC] companies
that have consistently made money.
You've gone through, since you've been there, three different people
heading up the unit.
That's correct. We've got a new leader, Bruce Claflin [vice president, PC
business unit], who you couldn't blame any of the current situation on,
since he only took responsibility for the operation in January. And I feel
badly for Bruce. He's an excellent executive. He's got a lot of talent and
I'm very high on his capabilities, but he sort of stepped into the boat
right on the gunwale. The thing shifted out from under him even as he was
coming on board.
You decided to get out of the consumer side of the business.
Yes, that's the side of the business that has a different business model
that few companies have demonstrated any ability to make money in. Why did
you think you could play in there to begin with?
I never thought we could, actually. This was an issue about the way I
choose to run things. There has to be some latitude within each business
unit. I don't have any delusions about my own intellectual capacity, and
you have to be willing to give other people a chance. So I said, "I don't
think this is likely to be successful, but I'm willing to try it." We tried
it and we saw that we had a great capacity for losing money there and
decided not to do it. In fact, Claflin, as he assessed the situation, felt
that it wasn't appropriate for Digital. Our business model is really
directed at the business customer.
Why do you think that HP is able to successfully compete in that area?
HP is one of the few companies that has a legitimate reason to be there.
Not only have they been better at execution, but their printer business is
enormously successful and it gives them tremendous leverage with the
channel. So they already have all the distribution infrastructure for the
printer business. Very, very profitable. Now they're going to layer on top
of that their PC business. And I bet their incremental SG&A [expense] to do
that is very small. Relative to Compaq, IBM, Digital and other competitors,
they have several points of advantage in terms of the cost structure.
Can you compete in the PC world by just playing in the business market?
The business market is huge. We're moving a million units a year now, but
we have negligible market share. Plenty of opportunity for us to grow our
business within the business community.
Do you have a choice about being in the PC business at all?
It's possible that you don't have to be in this segment or that segment,
but as I have said many times, I don't see how you can have a Windows NT
strategy and not have the Intel architecture. The majority of platforms
worldwide are going to be Intel platforms.
You could just be on Alpha.
That is just going to be a small part of the total. I think that's not
offering our customers the best value proposition. It's not religion here.
It's about, How do you make the best value proposition to your customer?
It's clear that as a percent of units, the Intel architecture is going to
dominate. You have to be there, and for the business customer, where you're
providing a more complex solution, there's more opportunity to be
profitable because there is more chance for Digital to add value to the
customer, like on NT clusters, server architectures, storage architectures
that support the servers. There is more chance for us to take value and be
paid for it. The Windows NT workstation is an area where Digital can excel
because you have these interchangeable engines. It would be smart for us to
focus on areas where we can differentiate ourselves.
Does that mean not playing in the $1,800 desktop PC part of the business?
I wouldn't say that. What I'm waiting for is for Bruce Claflin to come back
to Enrico Pesatori, who runs the computer systems division, and the two of
them to come to me with a better strategy and a plan to execute more
smartly.
Let me ask about the turnaround itself and how you orchestrated that. There
was a point about a year after you took over where it seemed that people
were thinking, Wow, this was a pretty quick turnaround. And then you went
through a period where there was again a whole spate of problems.
It's important to understand the magnitude of the challenge. If you do some
research on Fortune 100 companies that got in trouble, you don't find any
company that had to restructure a bigger percentage of its assets than
Digital. You may find one other company that had to reduce the population
by as drastic a number as Digital.
We essentially got our financial turnaround completed in somewhat under
three years. But my first attempt to change the company wasn't drastic
enough. It was more incremental. It felt pretty drastic at the time, since
we let go 20,000 people. And we changed almost all the senior management.
Today there are only four officers, I believe, who were officers in 1992.
The major mistake we made is we kept trying to do too many things. It was a
full line of capabilities and we did it all ourselves. We didn't partner
with anybody.
Do you think that you could have done all the restructuring at the
beginning?
No. Even if I had been smart enough, I couldn't have. I would submit that
there's not anybody out there who could have done it all at one time
because we didn't have the talent. The company was very insular. All of the
management had grown up in a very different business model. Almost all of
them [were] from New England. Actually, I was the only foreigner. Coming
from Texas, that qualifies as a foreigner in Massachusetts. It was amazing
that they actually tapped me to be the leader.
It's interesting that they did pick the one person outside the culture.
I'd been there long enough to know the company. Bringing in an outsider
would have been a disaster, because the company is so complicated, you
needed to have some understanding of the company. I'd already demonstrated,
in running manufacturing, that I was able to cut costs. When they gave me
that job, most of my friends shook my hand and said, "You'll be gone soon."
I said, "Why?" And they said, "Ken would never let you downsize
manufacturing." And I said, "I'm not going to ask him." It was clear to me
where Ken's heart was. He couldn't deal with that part of it. And yet it
had to be done. So I didn't ask him. I took on the responsibility and I
took accountability for that outcome and we reduced our plants from 35 to
10.
So, I'd already demonstrated the ability to separate what needs to be done
from how hard it is. For me that is one of the most important things that
you can ever learn as a manager, or a leader. Otherwise, you always talk
yourself into some incrementalism that you think you can actually live
through, but it's not good enough. You don't get there. We took out two and
a half billion dollars of expenses in three years and we maintained a
strong balance sheet by selling off businesses that weren't competitive or
particularly strategic to Digital.
It would have been hard to change the culture, make the investments in new
technology, position ourselves the way we have, sell off the businesses, do
all of those things much quicker than we did. I have been most criticized
internally for going too fast, not going too slow. It was so hard for
people to accept the change, even though they knew it was necessary. It's
an art as much as a science. How much change can the organism sustain in
order to adapt to the new environment without damaging it irreparably?
That's quite a trick. Fortunately, I've had excellent talent to help in
this turnaround, and I should be very clear that in my view at least,
nobody does it by themselves, and certainly not me.
Now my objective is to grow the business, achieve competitive levels of
profitability and, as we do so, to share some of the success and add more
benefits and better wages for all employees. That's how I'd like to be
remembered, not just as someone who can cut costs. It is my belief that the
CEO, more than any other person, owns the strategy. If you don't get the
right strategy, years later the enterprise suffers. Like Apple Computer--a
good example of having made a few seemingly innocuous decisions that had an
outcome that was not positive. The outcome could have been much different.
What do you think those decisions were?
It's quite well recorded in the industry that the decision to not license
the operating system and to keep everything proprietary to Apple, to not
permit the emergence of a clone industry, had one outcome that was very
different from the outcome that might have happened. I can say that without
criticizing the predecessors at Apple any more than our own company,
because it's the same decision that we took. In 1986, there was quite an
active debate within Digital to license VMS widely and to offer the
MicroVAX chips widely as a standard. And my belief is that had that
decision been taken, the world would have been a very different place and
Digital would have been a far more successful company.
You could have been some combination of Microsoft and Intel.
We could have been because VMS was years ahead of anything else on the
marketplace, and had it not been proprietary, [customers] would have gone
to VMS and taken advantage of it widely. And the MicroVAX chip was a very
big success even for Digital, but it would have been far bigger if we'd
licensed it to the industry. There were proponents of that strategy within
Digital, but it wasn't the one that was adopted, so years later you see the
outcome. Your strategic errors catch up with you.
I think Apple was very similar.
It's very similar, so I don't feel like it's speaking unfairly to just note
it. A lot of this stuff is clear in 20/20 hindsight, yet it was not clear
at the time. I'm not in any way criticizing the executives who made the
decisions. You're not going to always make the right decision. In this
turnaround I've made some real bonehead decisions. I've made a few good
ones. But the important thing is to recognize when you've made a decision
that isn't working out. Admit it, fix it and move on. The admit it part is
hard for a lot of CEOs, but it's not hard for me. I don't feel the need to
be infallible. It was clear that the first model we had was not working.
The empirical evidence--diminishing sales, lack of profitability, confusion
in the channels, confusion with your partners, a lack of execution and
accountability internally--when you start seeing those attributes you say,
"This isn't working." The overall functional matrix structure at Digital
wasn't ever going to work. I had to get rid of most of that.
Digital's financial performance is still not as good as it could be.
Our debt-to-debt plus equity [ratio] is about 22.5 percent. It's in the top
10 among Fortune 100 companies.
But it was about 3 percent when you took over.
It's not relevant. We didn't have any debt. I think 20 to 25 percent is a
very reasonable number.
Maybe you had too little debt.
In fact, we did have too little debt, but I'm thankful that we did. Ken
left me an absolutely pristine balance sheet. If we hadn't had, we would
not have survived. We couldn't go to the equity market to raise cash--in
four years we lost the cumulative profits of the previous 33 [years] of the
company's history. We were losing at a rate of around $3 million a day. Who
would have lent you the money under those circumstances? So we had to
figure out pretty quick what businesses we could afford to shed and we had
to sell them for at least one times sales. And we managed to pull that off.
We sold more than a billion dollars worth of revenue, and we brought into
the company more than a billion in cash. And we used that cash to cushion
the transition of our employees who had to be let go.
Do you feel that as a company one can say, at this point, Digital is out of
the woods?
You can say that we are a normal company. You can expect the company to
have normal ups and downs in terms of meeting analysts' expectations, but
unless something very dramatic happens in the marketplace that nobody
forecasts, we should be able to run in the black. We'll be able to grow the
business from this point and I think the danger that the company was in in
1992 is behind us.
We've made the right investments over the last three and a half years.
We've achieved significant success, coming from a nearly out-of-business
state, and I think we're very, very well positioned going forward. Our
balance sheet is strong; we've got plenty of cash on hand. We're profitable
five quarters in a row now, and seven quarters of year-over-year better
performance. And our stock price reflects it. Even though we had a
significant sell-off in the last few weeks due to the PC problems, our
stock is about 70 percent higher than it was one year ago.
We've got the talent and the strategy necessary to deal with any reasonable
changes in the marketplace. The objective here for us is continuous
improvement until we achieve leadership levels of profitability. Today the
leaders in our business are people like HP, with 6 or 7 percent profit
after tax. We aspire to achieve that level of profitability. I've got a lot
of things to fix before we do so, but in the meantime, we can offer our
customers absolute leadership in price-performance. The majority of the
financial turnaround is behind us.
Eric Nee is the editor-in-chief of Upside.
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