Information Processing

DEC's Comeback is Still a Work in Progress

CEO Palmer is cutting costs and launching products, but slowly

Gary McWilliams in Boston
Business Week

January 18, 1993

When Robert B. Palmer was picked as Digital Equipment Corp.'s new CEO last July, he knew he was taking on one of the toughest jobs in business today. Having spent five years in DEC's manufacturing organization, he was only too aware of the company's problems to expect a quick turnaround. So he didn't promise too much. In October, Palmer told stockholders that after $ 3.4 billion in losses over the past two years, DEC's turnaround would be ''self-evident'' within a year. And, he said, he would overhaul DEC's hidebound management. The good news for Palmer: The dramatic collapse of IBM's 1992 turnaround plan -- resulting in a $ 6 billion write-down and a new round of cutbacks (page 3022) -- has shifted the spotlight from DEC. With investors, computer buyers, and industry-watchers obsessing over Big Blue, hardly anybody has noticed how slowly DEC's turnaround is progressing.

Palmer got off to a promising start. In July, DEC's board ousted founder Kenneth H. Olsen, giving 52-year-old Palmer a clear mandate to undertake the massive restructuring Olsen had resisted. Palmer immediately confirmed plans to eliminate 25,000 jobs -- including some in DEC's bloated and inbred executive ranks. Then, he said he would recruit fresh blood to help run some of the nine major business units he set up. Many Wall Street analysts cheered, and some even issued ''buy'' recommendations for DEC stock.

Now, they're back to slashing earnings estimates. They foresee breakeven in the fourth quarter, not the third, and predict a loss of as much as $ 350 million for the year ending June 30. ''DEC is still being itself,'' says Laura C. Conigliaro of Prudential Securities Inc. Adds Howard L. Niden, a Price Waterhouse consultant who advises DEC customers: ''They haven't made the commitment they need to get rid of the old baggage.''

Call it the Big Blue blues: Like IBM's John F. Akers, Palmer finds himself at the head of a huge organization that -- despite good intentions -- just can't change fast enough. What made both DEC and IBM so powerful in minicomputers and mainframes -- heavy research spending, lavish product-development groups, huge marketing teams -- is unaffordable overhead in a business that is driven by low-margin microcomputers. Dismantling the old organizations and getting thousands of employees to learn new ways of thinking are painfully slow processes.


So, despite Palmer's desire for outside managers, all but two of the nine business units he created are headed by DEC veterans. Palmer, who joined DEC from chipmaker Mostek in 1985, still wants outsiders, but it's proving difficult to attract them because of DEC's uncertain prospects and its reputation for being hard on outsiders. And his proposal to put the salaried sales force on commission, as virtually every competitor does, has been delayed six months as sales managers wrestle over budgets and quotas. This ''is not good,'' says Prudential's Conigliaro. It even looks as if completing DEC's new management team and divvying up work among the nine business units -- organized according to types of customers and products -- will take at least six more months.

While Palmer struggles with internal problems, DEC is losing ground in the market. Market researcher InfoCorp estimates that DEC fell from second to third last year, behind IBM and Hewlett-Packard Co., in its core market -- so-called midrange computers, priced from $ 25,000 to $ 700,000. InfoCorp even lowered DEC's market shares for prior years.

Still, Palmer, who was unavailable to speak with BUSINESS WEEK, has made some impressive gains. He axed a dozen vice-presidents and replaced some key executives, including Donald P. Zereski, the former head of U. S. sales. And he pointedly made the new business-unit managers report directly to him, setting the stage for Chief Operating Officer John F. Smith to retire on Jan. 31. Dartmouth College management professor John K. Shank gives Palmer credit for attacking bloat and bureaucracy: ''DEC recognizes what has gone in the past will not work. It has changed management and reorganized. Those are things IBM didn't have the guts to do.''

Palmer has also been much more aggressive than his predecessor in attacking costs. In the past two quarters, he cut a total of 13,000 jobs, and by June, analysts expect the payroll to carry as few as 85,000 people, reflecting 15,000 more layoffs. A string of plant closings eventually will pare some 10 million square feet of excess office and manufacturing space, reversing a giddy mid-1980s building spree. In all, analysts expect Palmer's layoffs will cut more than $ 1 billion from annual salary expenses.


Most important for DEC's future, Palmer has successfully launched the Alpha AXP family of computers, based on a RISC (reduced-instruction set computing) chip he oversaw as head of semiconductor manufacturing. These computers will eventually replace DEC's hugely successful but fading VAX line. Already, DEC has snared an Air Force contract for up to 2,500 Alpha AXP workstations. But it has yet to find a partner to help design future Alpha processors. And Alpha faces stiff competition from workstation market leaders Sun Microsystems Inc. and Hewlett-Packard, which countered with new, ultrafast RISC systems on the same day that DEC launched the Alpha AXPs.

Even as Palmer rebuilds around Alpha, analysts say, he has to start making deeper cuts in the old organization and the old DEC product line. So far,the only product group that has fallen under the ax has been personal-computer software. A likely future candidate: ''fail-safe'' VAXft minis and a line of network servers.

As IBM's example teaches, the longer Palmer waits, the more painful the cuts will have to be. His first six months on the job have taught Palmer another lesson: Big bureaucracies always take longer to turn around than you think.


-- Shipped first Alpha AXP computer on schedule
-- Trimmed executive bloat
-- Reorganized company into nine business units, focusing on specific industries and product markets
-- Closed plants in Boston, Burlington (Vt.), Puerto Rico, Springfield (Mass.) CHALLENGES
-- Slash employment by 15,000 by June
-- Cut unprofitable products, such as VAXft line
-- Hire outsiders to add management depth
-- Institute sales commissions while maintaining good relations with customers
-- Sign up partners to design Alpha microchips

Copyright 1993 McGraw-Hill, Inc.