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COMMENTARY: HOW TO GET DEC BACK ON TRACK

It's bad news, once again, at Digital Equipment Corp. The company is awash in red ink, posting on Oct. 22 a loss of $65.9 million for the quarter ended on Sept. 28. Revenues declined 11%, to $2.91 billion. The loss was a shocker: three times what Wall Street had expected. DEC's stock ended the day at 29, down 5 3/8, and nearly 50-points below this year's high of 75 5/8, on Feb. 8. For all the restructurings, layoffs, executive exits, and product initiatives, DEC still is flailing about, unable to formulate a cohesive strategy and deliver results.

Clearly, there are no easy fixes for what ails Digital. But customers, employees, and investors are getting whiplash from the constant changes of plan. Two years ago, CEO Robert B. Palmer cut back the direct sales force in the name of cost-cutting. After customers complained of being ignored, Palmer this summer reversed course, more than doubling the number of customers Digital will call on directly, from fewer than 1,000 to more than 2,500. The disruption was severe: Palmer blamed most of Digital's quarterly earnings drop on the strategy overhaul.

DEC should set a course and stick to it. Here are some suggestions:

-- Go back to Palmer's plan for a pared-down sales force, and hand off the sales responsibility to more third-party resellers. As IBM, Hewlett-Packard, and others have figured out, these outside sales companies can deliver a lot of products and services at a lower cost per sale to more customers. These DEC rivals have made the switch without neglecting customers, and DEC should study how they did it. Using resellers would help cut costs, a critical need. DEC has revenue per employee of just $246,000, compared with an average of $372,000 for IBM, Hewlett-Packard, and Sun Microsystems.

-- Get out of personal computers. It's a $2 billion business that lost $200 million in the fiscal year that ended on June 30. Focus instead on selling Intel-based PC servers, where margins are higher.

Digital doesn't have to make or sell every computer product. Customers want technology that will make them more productive or solve a particular business problem. High-end services are more remunerative than making hardware, anyway. So are good software technologies. Digital's profitable Internet-security products, which meet a critical need for companies setting up Intranets, should become the core of the company's Intranet offering.

-- Recruit new management and freshen up the board. DEC badly needs new blood throughout the company. Calling for help from outsiders is all too often a knee-jerk response to strategic blunders, but Digital has been in decline for years. And its board has been little more than a passive witness. Meanwhile, two directors have served since the 1950s, and six of the nine outside directors are over 69 years old. It's time for more turnover.

There's plenty for activist board members to do. A top priority should be bolstering top management. Current directors have allowed Palmer to push aside several possible heirs apparent, including former Vice-President for Sales and Marketing Edward E. Lucente and Vice-President Enrico Pesatori. Each had problems. But Pesatori was never even replaced. Rather, Palmer has taken on his duties, managing the day-to-day operations of the Computer Systems Div., which brings in nearly half of Digital's revenues. Palmer now functions as chairman, CEO, president, and general manager. That's too many roles for one executive to handle at any company, let alone a struggling one.

The CEO has promised that DEC will be profitable in the current quarter. He's running out of time to deliver on his promises.

By Paul C. Judge and Ira Sager


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Updated June 14, 1997 by bwwebmaster
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