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Text of Bob Palmer's April 27 address to employees
(Following is an edited text of Bob Palmer's quarterly address to employees,
aired over the Digital Video Network on April 27. The address was videotaped
several days earlier from the Mill's Doriot Auditorium. In addition to the
following address, Bob answered questions from the audience and from employees
from Europe and GIA.)
Thank you. Well, welcome. And thank you for joining me in our ongoing
series of televised employee communications. In this period of rapid change
your understanding of our situation and your commitment are critical to
Digital's success. I believe you add more value when you have some rough
idea of what's going on.
My goal today is to put our recent changes into perspective for you and to
share my honest optimism about our prospects for the future. We're making
very good progress in the transformation of our company. While this kind of
a comprehensive change doesn't happen overnight, we're well on our way to
making a turnaround in the enterprise. Our customers are finding it easier
to do business with Digital, although we have a lot of opportunity in that
regard. We're making good progress in our financial goals as well. I won't
be satisfied, obviously, until we're solidly profitable and stay profitable.
In the meantime, it's encouraging to see that the things we're doing are
having the desired effect and that we're sharply reducing our losses. If we
maintain the focus that we've had on reducing our costs and we begin to
emphasize more additional revenue, it's quite clear that we're going to be
profitable in the near future. The issue will be to remain profitable once
we achieve profitability.
I want to talk a little bit about our Q3 financial results. Digital's
financial health is preserved. We're quite strong as far as our balance
sheet is concerned. You probably know that our restructuring has reduced
our costs substantially. Last October, we were losing about $3 million a
day, which is a large by any standards. But we've now reduced that, in the
quarter just ended, to about $300,000 a day, a factor of 10 in six months.
This was more than the analysts expected we would be able to do, and in that
regard it's very positive, and of course that resulted in some positive
impact in our share price.
For the first time in six quarters we generated positive cash flow. That's
even after all of our investments and the downsizing. We have a lot of
cash on hand, about $1.5 billion. We had the lowest capital spending that
we've had since 1984; just over $100 million during the quarter.
One of the battles that we had for the last six or seven years in this
company was how to get control of our engineering spending, and it was
thought that here at Digital engineering spending could only increase; and
indeed, that's been the case for most years of our history. I'm pleased to
report that through our efforts we were able to reduce engineering spending
quarter over quarter by 19%. We've gotten out more products than ever
before in our history, and better products. So, reducing spending doesn't
mean reducing product for your customer; it means doing it more efficiently,
eliminating redundant platforms, providing what customers really want to buy
more efficiently. That's what we've been able to accomplish.
In the SG&A area, or the general overheard area, we were able to reduce our
spending by about 8%, which is not near good enough. Worldwide employment
now is below 100,000 for the first time in a long time, and that of course
helps us be more cost effective.
This is a slide that shows Digital's net operating revenue on the top line,
and the scale for that is on the left side of this chart. The other chart
on there is the one that's preciptously headed downward. It represents our
earnings per share. What you see is that this has been a sustained decline
in our profitability. This didn't happen overnight, nor is it going to turn
around overnight. Typically companies that have been in this shape, if they
do turn it around, take four or five years to do so.
The fact that we're recovering already is quite a surprise to many of the
analysts and people that follow our company. And more importantly, it's very
reassuring to our customers that our company is returning to financial
health. Customers want us to be profitable, and we are doing so.
Now, you'll see this little dash line here. This is the analyst's forecast
of where we will go in the fourth quarter, and it's a reasonable forecast,
although I don't make predictions about when we'll return to profitability
because it's not smart. I have a real concern. Q1 is a weak quarter for us.
It's weak largely because because so much of our business is in Europe, and
Europe slows down a lot in the summer months, due to the vacations. We
really have to put a full court press on Q4 and Q1 revenue. Q1 is the one
I'm the most worried about. During the quarter we doubled our PC business,
and our service revenues increased. We're doing quite well.
This is a slide that describes what's been going on in the industry in which
we compete. It shows a bifurcation, if you will, of customer needs. On the
left side are commodity type products and base systems. And the attributes
of that particular type of a market or demand are volume, very competitive
costs, features in terms of performance, price performance, things of that
nature. It's more the traditional box business.
On the other side are the business units. The customer business units
represent value from the point of view of solving a customer's problem. This
is a relatively new business for Digital. We've been in it the last few
years, and we're doing very, very well there. In total, our service revenue
during the quarter was up about 12%. Product revenue was essentially flat if
you back out the effects of currency. Our quarter was better than most
analysts expected, and it was significantly better than our largest
competitor, IBM. IBM's product revenue was off 19%, and overall the revenue
was down 13%. Their losses were far in excess of Digital's, and on a per
share basis more than twice as large as Digital's. So, even though we have
similar problems, we started addressing our problems sooner and the results
are showing up sooner.
What we've tried to do is recognize the way the market's going -- bifurcating
between traditional products and new services -- and to organize Digital to
reflect the market. Sometimes our own organization internally seems
complicated. The objective here is to make sure that we're organized to be
effective for customers, not to be more convenient for the management. In
fact, the more we get used to our new organization, the more convenient it
becomes. As I go around talking to customers, I ask the customers what
problems they have. They present to us our successes and our shortcomings.
I'm always asking if this new organization better address the problems that
these customers are talking about. And I have to say that in the six months
I've been visiting customers with this organization in mind, it is clearly
superior to the current organization in meeting customer requirements.
This particular slide shows the business units that we have at the present
time. These are supported by the functions that you see below. Worldwide sales
and marketing, for example. Professional service, engineering, manufacturing
logistics, that is, a supply chain, the various corporate functions and our
IM&T function. That's the foundation on which all of the business units will
operate. Even so, the business units are the way we're going to run the
company, and we've been quite clear about that.
Last October, I made a number of commitments about what I was going to do as
chief executive officer of this enterprise. It was very important to me to be
quite specific. The issue was to say what you're going to do and do it,
because our company does not enjoy a reputation of credibility in the
marketplace. We've been quite unpredictable. We have a history of saying
one thing, doing something else. Those days are over. When we say we're
going to do something, for the most part, that's what we're going to do.
If there's new data, we might change the outcome. So, you can always be
flexible.
One commitment I made was to bring some new talent into our company. Digital
had grown rather insular. All of the top management of this company had been
here for a very long time. They had the same background, the same point of
view. You couldn't have a very rich discussion at the senior level with
everybody sharing the same point of view. One other person and I were the
only "outsiders." I've been here seven years, and am still considered
something of an outsider.
I made a commitment to bring in new talent, and we've done so. You saw in the
last DVN the pictures of the various business unit managers, many of whom are
new to our company, with very impressive credentials. Most recently, we've
added two new talents to our company. Gresh Brebach will be running our
professional services organization. Gresh comes to us with a very
distinguished career. His background is in engineering. He has an engineering
degree and an MBA from the University of Illinois. He went to work for
Andersen. He rose to the very top of the United States services activity at
Andersen. He had 320 partners and 6,000 technical employees reporting to him.
He then started his own firm, which was quite successful. It was bought out by
McKinsey & Company, where he was a director. McKinsey and Andersen Consulting,
are among the very top companies, and he was a top executive in that company.
We were fortunate to be able to persuade him to come to work for Digital. He
could see the opportunity that we have in this market to be the best in
professional services.
I have very little aspiration to be less than the best -- just zero. I think
we ought to be the best, we have the resources to be the best. We needed
some talent to shore up the talent that we already have.
In addition, we recently announced probably the most difficult position that
I had to fill, which was that of Worldwide Sales and Marketing. Digital had
been criticized, and rightly so, over the years for a lack of ability to
market our products. I think in a sense we were so much driven by our
engineering culture. I'm from engineering myself, and I identify with that.
Even so, we're not very good at marketing the products, and explaining what
our products do in a way that customers can relate to. Very often we descend
into "engineering-speak," when what they want to hear is "business-speak."
They want to understand how what we provide is going to help their enterprise
be more profitable. We're not too good at that.
In this case we were fortunate to recruit Ed Lucente. Ed comes to us from
30 years of experience at IBM. He also has a background in engineering. He
graduated from Carnegie-Mellon University, where he is a lifetime trustee.
His 30 years of experience is in all phases of IBM's business, including
product planning, quality, and running operations. At one time he ran all
of the Far Eastern operations of their company, which includes manufacturing,
engineering and sales and service in the Far East. He also ran the sales and
service organization in the United States. At one time, he was responsible
for 110,000 employees. More recently, he worked for three years as executive
vice president at Northern Telecom. So he has a very good appreciation for
not only the data processing side of the businsess and services that
companies like IBM, Digital and Hewlett Packard provide to customers, but he
also has experience as a customer in an important industry for us,
telecommunications. Ed is a tremendous find for us. Both of these individuals
have been very highly written up in the press, and we've been very favorably
reviewed for having been able to attract them.
Again, what attracted Ed to Digital? Opportunity. People see that we have
the talent, we have the technology, we have the financial strength. We've
been lacking a little bit of focus here, and that's what we're bringing to
the new business model.
The business plan in process for Digital is a little more structured this
year than previously. That is, we thought it might be a good idea to start
Fiscal '94 with a budget in place. The budget is going to be done by
business units and territories. We have nine business units, and we have
thirteen territories. This is a flexible deal, by the way. All of this work
is a dynamic business. It's a dynamic environment that we're in and this is
a dynamic organization. Some people try to describe a company like a
machine, with an engine and wheels and this and that. It's not a very good
analogy. A corporation is more like a living organism. It's something that
lives and develops and grows. If you're successful, it's healthy and
expanding, and that's what we want to be. There's going to be a lot of
change. The business units fund all of the spending. That means that every
activity at Digital has to add value to our customers as interpreted by the
business units. If we can't figure out how to add that value, then we have
to stop doing it.
We also are developing all the business plans by functional management and
to have checks and balances. You have to have balance in an organization
or an organism, and we have balance here. The idea is to have balance
between people that have sales and service responsibility, systems
integration responsibility, engineering, marketing, business units.
Decisions and funding are made by the business units. But you need balance.
So I respect the skills in all of the functions in Digital, and I know from
experience in my own career you're not successful unless every member of the
team is able to continue to develop and grow. Our objective here is to
ensure that we have balance between the various functions of the business
units, that we work together as a team for the success of our customers.
And in that regard we're going to be successful, and we will grow.
Now, the issue is there's a little bit of accountability at Digital, and that
means we know what people have signed up for. I've seen the first pass [of
the budget], and it was closer than previous budgets that I had to deal with as
vice president of manufacturing that came along midway through the year in
progress. So, it was already closer. It's good teamwork. We still have some
gaps to close, and I'm happy to say that current plans show a little bit of
growth. I'd like to see more. They show a profit; I'd like to see more. And
we're going to be working on that.
We're going to put in front of our Board of Directors on June 17 for the
first time since I've been in the company a business plan that ties out. A
business plan where people have made commitments on what they're going to
deliver to our customers, and what revenue and profit they're going to
deliver to Digital, and where they have agreement from the sales and service
organizations that deliver those solutions and product to those numbers.
That's going to be an interesting exercise. We're not going to waffle on it.
And in addition to that, for the first time ever, we're going to have a
strategic intent for each of the business units. There'll at least be a few
paragraphs there about the strategy of that business unit to be successful in
their marketplace. That way we can test future investments against the
strategy, and we have some idea whether or not this investment supports the
strategy.
In the past we had so many good ideas, and we supported them all. Even so,
that's not the way to have focus and to maximize the leverage on your
investments. And we frittered away a lot of money by trying to do too many
things that didn't really fit a strategic intent. The focus of all of this
work clearly is on the customer.
Let me describe a little bit for you what's going on in the computer industry
again. If you think about it, up and through the early '80s, there was an
opportunity for every company, including Digital, to add specific value by
doing some little thing better than anybody else. In our case we did a lot
better, and particularly the architecture of the VAX was an outstanding step
forward in 32 bit computing. Almost in and of itself, despite all of our
other ineptness, that made us very successful. In the current environment,
and the environment going forward, all hardware products are becoming
interfaced by standard interconnects. All software products are becoming
interfaced by standard protocols. What this means is that if you think
about a value chain in computing, every little component in there could be
plugged out, and a new one plugged in from your competitor. This means that
the probability of you having the best of everything all the time is near
zero. And fundamentally it means how are you going to make any money in
this environment? That's what Digital's struggling with, and IBM and
others. It's not going to be easy because you no longer have one dynamite
product that pays for all of your other weaker product. That means that
there must be some other way to add value.
Well, there is, and fortunately Digital is positioned better than any other
company to do that. And that is in analyzing a customer's business problem,
in integrating all of their operating systems and hardware and software
products, and in implementing that solution more effectively than our
competition. That's why you see so much emphasis on customer-focused
business units. That's really about applications, it's about solutions.
And those applications and solutions ultimately run, for the most part, on
Digital hardware and software products.
But you don't start your sales that way. The way we start our sales today,
with Fortune 1000 kinds of companies, is by going in and talking about what
business issue are they are trying to solve? What problem do they have?
And not surprisingly, their problems are very similar to our own problems.
That's why our experience with our own company and supply chain re-engineering
is very popular with our customer base, because not only can we talk about
it at a theoretical level, but we're doing it. We're doing it here, and
we've made huge successes. As you know, in 18 months we took out $700
million of unnecessary spending, and improved our performance to customer
needs. This is what our customers need to do. An enabler for that is
information technology: provide the solution, sell them the technology
underlying that. That's the way that would go. Our objective is to be the
very best in class with our own supply chain effort by the end of Fiscal '95;
to be the company that other people look to for success. Our organizational
changes are part of our efforts, and there are many others.
You know that we are moving out of the Mill over the next couple of years.
We're consolidating the square feet that we have. The Mill represents 1.1
million square feet of very inefficient space for our purposes. We have
also 15 million additional square feet worldwide that we need to move out
of. First we moved out of all of the leased space we could, now we need to
move out of our owned facilities and change those facilities -- tremendous
change in our asset position. We're working on that. We need to continue
to downsize our organization to an appropriate size for the revenues that
we enjoy. To me personally that is the least attractive part of my job, and
I'd like to get that behind us. I'd particularly like to get it behind us
in the current quarter. The reason is that it is no longer sustainable for
us to provide the very generous transition packages that we have provided
in the past. You may have noticed that our largest competitor, IBM, has
announced that they're going to a new program starting in July with a
maximum of 26 weeks of severance. How likely do you think it is that I can
face my shareholders and tell them that we're doing better than IBM by
far so we can afford to do more. I can't do that. I'm not going to do that.
Therefore if there is any probability that people in your organization will
not be with us past this fiscal year, you need to do everything that you
can as a manager to move that action forward and get it in this quarter.
You owe it to your employees to let them leave the company with the best
possible transition package that we can afford.
At this moment, and for that matter throughout this entire year, we've been
borrowing money. Every bit of the $750 million of the first billion that
we borrowed has been used for transition. I'm responsible. This is not my
money, it belongs to our shareholders. I'm borrowing money to give to
employees that are leaving our enterprise. This is a balancing act between
what's the right thing to do for employees that are no longer able to
contribute to the enterprise, and the shareholders' value, shareholders'
money. Now that balance is a little bit out of balance today. We're going
to have to bring that back in balance in the future. That's why I'm so
intent on trying to get all this downsizing behind us.
In any event we're continuing to work on the supply chain activity. The
results of all of this activity are to make it easier for us to do business.
We're focusing on being a partner with our customers. We're getting
organized by business units so that customers have a very short line of
sight to the management of this company. Customer issues can be surfaced
easily. The whole focus is how do we make it better for customers. In
addition to that we're bringing out new products, all based on our Alpha
products. Fundamentally we thought that something simple would be helpful.
Why don't we just go for number one in performance and number one in price
performance. So, the objective is to be the best, the most competitive,
offer the most value for customers, and to regain leadership and to start
growing market share. So, be competitive.
We just announced the world's fastest work station. In this particular case
it runs on a 200 megahertz Alpha chip. It exceeds 100 integer spec marks
and 163 floating point spec marks, easily beats all of our competition.
It's our objective to stay ahead of our competition on all of that.
Here's a little graph that shows our product family versus those of our
competitors. We used to enjoy pretty good market share here, but the last
three or four years every year we've lost market share because our products
were not competitive enough, nor were they marketed very effectively, and we
did not have the operating system that customers wanted to buy, which is UNIX,
for the workstation market. Today we have a leadership unified UNIX, the
only 64 bit UNIX that is incorporating most of the standards that have just
recently been touted by COSE. Digital is ahead of that group by almost a
year in terms of unified UNIX. We have performance superiority at every
price span, and it's our intent to stay there. We're working, as you know
on CMOS 5. By the time they get their new chips out that begin to give
them similar performance, we'll be out with the next generation. So, we're
six or eight months, maybe a year ahead of most competition as far as
silicon's concerned, and systems. And if we run real hard, invest
intelligently, work real diligently, we can sustain it. Otherwise we won't.
But even so we have that as an advantage. Our real value added, as I said,
needs to be in providing real solutions.
In terms of operating systems, I mentioned UNIX, that's what customers want
to buy. We finally figured that out and got fully behind it and we're
investing heavily to have the most impressive UNIX. They also want to buy
NT, the new operating system from Microsoft. This chart shows that Digital
will be unique among the large computer vendors in that we will support
equally all of these operating systems. This is not a religious issue.
It depends on what problem the customer is trying to solve. In situations
today, where the customer is moving around billions of dollars of currency,
if I'm asked to guarantee the integrity of that system, quite clearly I
want VMS. I know it works, I know we don't lose a few billion dollars in
the ether. UNIX is coming. A lot of features are being added to UNIX.
And for many applications UNIX is a superior solution, or at least it's a
solution on which the application rides that the customer wants to buy.
We need to have the best. In the case of NT, many of the commercial
applications appear to be going to migrate to NT; if they do they're going
to run better on our platforms than anyone else's. But obviously the
advantage that we have in supporting all of these technologies is that when
a customer engages with Digital, we can sell them the best solution. And
we can ensure better than any competition that all of this stuff actually
works together, and that is our value added.
Now, in addition to this we've started a new brand campaign, and you're
going to see some ads shortly. The focus of this ad campaign is a slightly
different logo. You probably can't tell too much about this logo. It has
to do with the size of the boxes and the size of the letters so it's easier
to see at a distance. We're also going to freshen up the color a little bit.
And this is the result of some data-driven analysis. Over time we'll get
new business cards that have a slightly different color, which is sort of
like a burgundy. We also think about, what do you think about when you
think about Digital Equipment? What is it we're trying to do? I've been
trying to tell you that this morning. What we're trying to do is be
that company whose people -- the most important thing about a company --
are dedicated to the customers' success through innovation. We're an
innovative company. We're going to continue to invest heavily in
engineering. We're going to dis-invest in stuff that doesn't differentiate
us, and we've been doing that. We're going to invest in the things that
provide tools and capabilities so that we can be the best in providing
customer solutions through innovation and through the excellence of our
people. That's what we're going to do.
Now by now hopefully you can see that I am quite honestly optimistic about
our prospects. I feel better about the company today than I have since I got
this opportunity. It's a privilege that I take very seriously and I'm quite
pleased with the progress that we're making and the teamwork that I'm
seeing among all of the people at Digital pulling together to try and bring
success to our customers, and therefore through our enterprise.
Consolidation and cost savings will be ongoing. As I mentioned, I hope to
get the major downsizing behind us. That doesn't mean there won't be a
continued, ongoing upgrading of the work force. That will always be the
case: bringing in new talent. People who are poor performers will need
to find other companies to work for. This is a competitive environment.
Each of us as an employee needs to ask what value we are delivering to the
enterprise. We need to keep our skills up-to-date. We need to make sure
that for the competition we have the best people: the most up-to-date,
enthusiastic, and intent on solving customer problems -- doing what's
necessary so the customer is successful. Then we'll be able to maintain a
large partnership with these customers. And the fact that at any particular
time some other box might be faster or some other application might be a
little better won't be that critical.
As the chief executive of this company I know from personal experience what
I'm looking for when I talk to one of our vendors our partners. We're
looking for a relationship where we have trust, where there's confidence
that the company that you're dealing with is going to treat you fairly,
where for the most part they have leadership technology and products,
recognizing that it's impossible to always be the leader in everything.
Where you're absolutely, unequivocally sure about the integrity of that
company and its people. The most important thing about a company is the
values of that company. For this company we have an exceptionally fine
heritage of focus on values that matter. We value and respect individuals.
We value and respect the diversity of our work force and of our customer
base. We look to leverage that diversity for our competitive advantage.
We value competence. We value innovation. And we value teamwork. And as I
said, above all, we value integrity.
So, thank you, it's been a pleasure talking with you. I'd like to say that
we're going to continue to have a lot of hard work. It's fun, it's exciting,
it's challenging, we are turning this place around, and that's very exciting
and rewarding. I think that we're all privileged to have the opportunity
to be part of Digital Equipment at this time. It's a privilege that I take
very personally. I'm privileged to represent you to our customers.
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