The Hand That Shakes Digital Up

Company News

By Glenn Rifkin
The New York Times

BOSTON, May 14, 1992 -- At the Digital Equipment Corporation, the financially troubled computer maker, power struggles have long been a way of life. But if the clash involved Kenneth H. Olsen, Digital's founder and president, the outcome was always a foregone conclusion.

Last year, John Rose, a 16-year Digital veteran who spent several years leading the company's catch-up efforts in the personal computer market, was stunned to discover that Mr. Olsen had created a competing group that was pursuing a vastly different strategy for the company.

In fact, the group was proposing that a personal computer designed and built in Taiwan would become Digital's predominant personal computing product. Mr. Rose tried to start discussions about what the right approach for the company might be, but he was rebuffed by Mr. Olsen.

"I never got to go before the executive committee," said Mr. Rose, who left Digital in March.

The episode was quintessential Digital under Mr. Olsen, who has a penchant for squaring off competing activities to spur innovation. "If you don't have competition pressuring you, you just won't move," Mr. Olsen said.

For decades, that strategy has worked. But after a total of $400 million in losses over the last nine months -- the worst financial performance by the company in its 35-year history -- the spotlight is casting the Olsen style in a different light.

Among the more puzzling developments were two major restructurings in three months. Now many people are questioning whether the 66-year-old Mr. Olsen knows what is needed and whether he is an obstacle rather than a catalyst for yet another recovery at the company.

Mr. Olsen, intent on bringing Digital out of its malaise, is angry, at his management as well as the press and stock analysts, for quizzing him on what is going on. He is reportedly delivering long, angry sermons at executive committee meetings and threatening to sell Digital to General Electric if things do not get better.

Widespread, Complex Problems

Many Digital executives say the company's problems are widespread and complex. The company has solid products but is paralyzed by a lack of a clear strategic direction and strong management. Morale is low, with impending personnel cuts: 10,000 jobs have already been eliminated and up to 15,000 more will go starting July 1.

On top of that, many customers have become confused by too many products and shifting messages from the company about its commitment to important strategies and products.

"In the 1980's Digital had a clear message," said Stephen Smith, a computer industry analyst at Paine Webber in New York. "These days they are throwing a lot of balls in the air and seeing if they can catch one. They've gone from one architecture to multiple architectures, from a single operating system to multiple operating systems. They seem rudderless right now, and customers are very confused."

The company's board, which has never openly opposed Mr. Olsen, is concerned over the financial situation and is paying close attention. Within the last few weeks, John F. Smith, Digital's senior vice president of operations, presented a new cost-cutting plan to the board.

In addition, the company has been without a chief financial officer for several months since James Osterhoff left in frustration last year. One internal candidate said the board had pushed for an outside replacement. Mr. Smith said such a replacement would be named in a few weeks. So far, the company has narrowed the field to two outside candidates.

Loss of Talented People

Mr. Olsen's autocratic style has caused dozens of talented people to leave the company over the years, but as revenue and profits grew, outsiders did not much care.

But some Digital managers say his intimate scrutiny keeps the senior management focused on internal politics rather than on the competition, which is grabbing chunks of Digital's markets in work stations and mid-range systems.

In a recent interview, Mr. Olsen said that two years ago he recognized that the company was too caught up building computers and not solving needs of customers.

The poor economy and a misplaced focus on what the customer really wants are to blame for Digital's falling revenues, he said. "We were selling computers, while the customers wanted solutions to business problems," he said. "You can see at DECworld that we've addressed that."

At DEC World, the company's impressive three-week exhibition of its wares that is winding up Friday in downtown Boston, is a showcase of the company's innovative technology and solid product line.

To outsiders, Mr. Olsen gives his usual assurance that all is well within Digital. The former research engineer at the Massachusetts Institute of Technology, who co-founded Digital with $70,000 in borrowed cash, has displayed an uncanny knack for pulling Digital out of wrenching dilemmas in the past while single-handedly guiding the company to become a $14 billion international giant, the nation's No. 2 computer company. More than once, Mr. Olsen has withstood calls for his resignation only to emerge stronger than ever.

Drop in Business Brings Big Loss

"Business doesn't have to drop very much in order cause a big loss," Mr. Olsen said. "This is something people -- often analysts of all people -- don't fully understand. If you make 10 percent profit and your business drops 10 percent, you've wiped the whole thing out."

To return to profitability, Mr. Olsen is pushing for change. Digital is whittling away at its number of product offerings, trying to make selling easier for its sales force and simpler for its customers. Also, portions of Digital's sales force will soon be receiving some commissions as an incentive, a dramatic change from the company's longstanding policy of paying salespeople straight salaries.

But is it enough to get Digital back on track? Mr. Olsen says organizational shake-ups are good for the company, but insiders point dejectedly to a growing list of recent high-level Digital departures, especially William D. Strecker, former vice president of engineering and leading player in shaping product strategy. In the most recent reshuffling -- the company's second in three months -- Mr. Strecker lost another power struggle with Mr. Olsen.

Though he remains at Digital in the new post of chief of technology, Mr. Strecker is no longer leading the company's technical development. Mr. Olsen said this was good time for Mr. Strecker, who is 48 years old, to take some time off and figure out what he wanted to do. Mr. Strecker declined to comment on the matter.

Mr. Strecker is understood to have opposed Digital's move into mainframe computing three years ago, which Mr. Olsen championed. Digital's VAX9000 mainframe reportedly cost more than $1 billion to build, arrived late to the market and has been a financial disaster for the company.

Mr. Strecker reportedly pushed hard for Digital to form an alliance with Apple Computer last year, but Mr. Olsen opposed such a move. Apple eventually made an agreement with International Business Machines Corporation instead. Mr. Strecker, believing Digital needed a key alliance with a major player in desktop computing, then pushed hard for the agreement recently completed with Microsoft Corporation.

Digital insiders say Mr. Olsen strongly opposed that alliance, too, but that Mr. Strecker refused to back down. The alliance was officially signed in April, with Mr. Olsen happily introducing Microsoft's chairman, Bill Gates, to the crowd at Digital's DEC World exhibition two weeks ago. The hard push toward Microsoft cost Mr. Strecker his engineering job, his associates say. "The Microsoft deal was the straw that broke the camel's back," said one executive.

Digital's problems appear to be as complex and confusing as its legendary matrix organization, in which layers of management disseminate mountains of data seeking consensus within Digital. All of this takes time and can be derailed by a word from Mr. Olsen.

To Mr. Olsen, "I have a simple set of management rules."

"I set up everything so that it runs automatically without me," he said. "When things run ideally, I have nothing to do. And then in those areas which aren't working well or need changes, I am not at all embarrassed to get involved in great detail, extreme detail when that is what is necessary to solve a particular problem."

He insists that the huge jobs cuts resulted from more efficient methods of building and servicing products and had nothing to do with the recession. "These are not jobs that will ever come back," he said.

Mr. Olsen refuses to make company policy based on newspaper articles or consultants' opinions. "I always have a model of the company or portion of the company I'm working on and am clearly going in a direction," he said. "It always takes longer than I expect, because changing people takes longer than I think it would."

Mr. Olsen said those within the company who were disgruntled were only those like Mr. Rose who left after the showdown on Digital's personal computer strategy. "When you get into trouble is when people want to hang on to the way we used to do things," he said. He said that one failure at Digital was not moving managers around enough to learn how to be senior executives.

Mr. Olsen insisted that he was not possessive about Digital. "It's a professional job," he said. "It's never been my company. From the start, we said we will only run it as long as we're the best."

Most Digital employees remain intensely loyal to Mr. Olsen. William Johnson, vice president of marketing, said that although there had been delays in the introduction of products, particularly one that links computer systems, he did not blame Mr. Olsen.

"We were a year and a half late offering a TCPIP product," Mr. Johnson said. "That wasn't Ken's fault. That's what he pays me for. When I look at our senior staff, it's very formidable, but I can't think of anybody, inside or outside, who could take over who is as dynamic as Ken is."

Mr. Olsen said he had no intention of turning over the reins to anyone else. Critics say he has effectively blocked any rising stars within Digital from gaining broad enough management skills to replace him.

Whether Mr. Olsen is able to lead Digital out of its current morass remains to be seen. Critics say it will be a difficult task. Mr. Olsen remains upbeat. "We've lived through many recessions," he said. "This is just one more."

GRAPHIC: Photo: Kenneth H. Olsen, founder of the Digital Equipment Corporation, has run the company since 1957. (Joe Wrinn for The New York Times) (pg. D1)

Graphs: "System Error" shows amount of Digital's sales from 1989-'92; and earnings from '91-'92. (Source: Datastream) (pg. D4)