DEC Has One Little Word For 30,000 Employees: Sell

Information Processing

Its slump prompts new products and an army to field them

Leslie Helm in Boston
Business Week

August 14, 1989

In 1986, when Kenneth H. Olsen, the chief executive of Digital Equipment Corp., wanted to remind his vice-presidents what the company was all about, he summoned them to a suburban warehouse and set them off on a race to see who could unpack and assemble a DEC computer system the fastest. The uncontested winner was David W. Grainger, a 6-foot, 4-inch Canadian who was vice-president of field service.

Earlier this year, when DEC's U. S. sales faltered, Olsen skipped the games and went straight to Grainger. He created an organization that combines DEC's marketing, sales, and service units into one 30,000-employee army. And he made the 46-year-old Grainger, who is now vice-president of U. S. sales and marketing, the general. Grainger's job has quickly become the most critical one at DEC. On July 27, the company announced that U. S. revenues were flat at $5.7 billion for the year ended June 30 and blamed that for an 18% plunge in net income, to $1.07 billion--the first yearly earnings drop for the the $12.7 billion company since 1983.

DEC's comeback strategy is simple: supply Grainger's troops with a barrage of new computers and software to sell. Starting in January, DEC began a series of product announcements that will continue through the end of the year. By then, the company will have new models in every major product line. ''They are building the platform for substantial revenue growth,'' says analyst Barry Willman of Sanford C. Bernstein & Co. ''They will be in their best product position since 1985 and 1986,'' when new products fueled DEC's meteoric growth.

BIG BOY

For now, the heart of DEC's line remains its minicomputers. And although rivals such as Data General Corp. and Wang Laboratories Inc. are suffering serious sales and profit slumps, DEC's huge installed base almost guarantees it healthy minicomputer sales for some time to come. For example, the VAX/6000 series, which was beefed up with the new VAX/6400 model in July, is expected to generate revenues of more than $2 billion in fiscal 1990. Meanwhile, DEC is trying to grab more of the fast-growing workstation market. In January, it launched workstations using an industry-standard Unix operating system, or basic software, instead of DEC's proprietary VMS software. In July, it added another aggressively priced DECstation that is aimed at undercutting Sun Microsystems Inc.'s new SparcStation. The most important new product--the biggest VAX ever--is due out this fall. Code-named Aridus, it is expected to put DEC in direct competition with IBM mainframes for the first time. And it is particularly important for reviving sales in the U. S., where DEC's largest customers have been clamoring for more powerful machines. ''While the classic mainframe market is flat, it is still a huge market,'' says Grainger. ''And there is a clear demand for VAXs of that magnitude.'' Despite all the new iron, analysts don't expect a sudden turnaround. For one thing, Aridus is not expected to be shipped in volume until January. In the meantime, DEC officials have warned of continuing softness in its U. S. sales. ''DEC is in for a couple of tough quarters,'' says Shao Wang, an analyst at Smith Barney, Harris Upham & Co. DEC's recent earnings announcement and fear of a general slowdown in the U. S. economy have prompted analysts to cut estimates of the company's fiscal 1990 earnings to $9.50 per share or less--well below the $11 some analysts were predicting last winter. The stock is stuck in the mid-90s--not far from its postcrash low of 86.

SHIPPING OUT

Meanwhile, Olsen is trying to get DEC in fighting trim. He has imposed a wage freeze to cut overhead and ordered the reorganization that created Grainger's new job. When Grainger was promoted, Charles E. Shue was removed as vice-president of U. S. sales and assigned to special projects. Several DEC marketing managers who had reported to Senior Vice-President John J. Shields, once considered Olsen's heir apparent, now report to Grainger. Since taking over, Grainger has decentralized the U. S. organization, putting control of the service, sales, and marketing branch offices under a manager in each region instead of a headquarters executive. DEC should now respond faster to customers.

Grainger's most promising move is an effort to target specific industries. He has put regional managers in charge of all employees--programmers, systems engineers, and salespeople--who serve a given industry. The New York manager, for example, will supervise all marketing aimed at the financial-services business. DEC also is setting up so-called competency centers for key customer groups, an extension of the demonstration centers where customers watch DEC computers running software for specific industries. At the new centers, product engineers and support people will help tailor a system to a customer's business.

Many of these moves echo the massive ''back-to-the-field'' movement that IBM initiated in 1986. Like Big Blue, DEC is trying to slim down its overstaffed headquarters by moving workers to local sales offices, where they can produce revenue. ''We want more salespeople with less overhead,'' says Olsen. In all, some 3,000 to 4,000 employees, mostly technicians and engineers, will be retrained and shifted to the sales organization. ''We need more resources pointed at customers,'' says Grainger.

As at IBM, the undertaking is bound to be expensive--and have a slow payback. Three years after IBM shifted thousands of workers to field offices, it still is struggling to match its record 1984 earnings. In fiscal 1989, while DEC's U. S. sales remained flat, its sales and administrative overhead jumped to 29% of revenues, up from 26.7% in 1988. Analysts worry that despite its wage freeze, DEC still spends too much on overhead. Although it avoids layoffs, the company says it may take ''selective actions'' such as reassigning workers or inducing them to quit voluntarily.

The combination of the reorganization and new products could spark DEC's recovery. Industry watchers note that IBM's beefed-up field-sales organization has been instrumental in making that company's AS/400 minicomputer a big success. Assuming DEC's organization can do the same, Bernstein's Willman predicts that net income could rise by about 20% annually, starting in calendar 1990. With 70% gross margins, Aridus alone could contribute $1.4 billion in gross profits in 1991. And as more software becomes available for the new line of DEC computers that use Unix, sales of those machines should accelerate.

LOOSE TALK

While analysts debate how long it will take DEC to bounce back, they are keeping tabs on the major changes the slowdown has brought. Shields, 50, the executive who was running most of the company when things were going wrong, is no longer seen as Olsen's successor. ''Everybody is looking for scapegoats,'' says Robert Randolph, president of TFS Inc., an industry consulting firm. Adds a DEC director: ''Olsen was annoyed that everybody kept mentioning Shields.''

Now, this director says, the board is looking for another heir apparent. Although Grainger isn't yet among the names most often mentioned, he could become a contender. He's already practicing: When salespeople arrive at Brown University this summer to learn about new DEC products, Grainger is asking each of them to unpack and set up a DEC computer system.

DEC'S PROMISING NEW PRODUCTS Product Competes with Est. 1992 sales* Billions of dollars DECSTATION 3100 Sun, Hewlett-Packard workstations $2.20 VAX 6000 IBM AS/400 minicomputers $3.40 VAX 9000/ ''ARIDUS'' IBM mainframes $2.95 *Fiscal year ending 6/30 DATA: SANFORD C. BERNSTEIN & CO., INTERNATIONAL DATA CORP. ESTIMATES

Photograph: CEO OLSEN WANTS A SLEEKER COMPANY PHOTOGRAPH BY SETH RESNICK