Ruining a Good Company

ENT, March 18, 1998 by Greg Scott

The consensus in the industry seems to be that Compaq cares most about Digital's service organization and migrating Digital's installed base of UNIX and OpenVMS customers to Windows NT. For Digital's Intel products, all the folks in that department should get their resumes out on the street because they'll be the first layoff casualties. Whoops, forgive me for being impolite. I meant to say involuntary separations. For Alpha, OpenVMS, UNIX and StorageWorks, who knows?

What happened? How did the high-flying computer company that everyone was touting as the best alternative to IBM a few years ago become another also-ran? Somebody ought to write a book about that one: It's a long, sad, disgusting story.

Conventional wisdom says Digital failed to see the possibilities in the PC revolution and the world passed it by. That's true, but it's not the whole story. For a deeper answer, look at the leadership: Bob Palmer and his board of directors.

One of the marks of good leadership is staying in touch with what's going on in the world, on both a formal and an informal basis. This means meeting with and listening to lots of customers, employees, other stakeholders and analysts. While I was at Digital, I never saw Palmer address anyone without a carefully prepared script, and I never saw him stand in front of a group and inspire confidence.

Once in 1993, a group of Digital's biggest customers in the Boston area wanted to meet with Digital decision-makers and express their concerns about OpenVMS. Did Palmer show up? Did any of his top lieutenants? No. Instead, they sent one of my buddies, a project manager in the OpenVMS group.

Another time, a major sales situation came up here in Minnesota. The deal was for lots of workstations, big servers and millions of dollars with an influential customer new to Digital. The local sales team went through 18 vice presidents before they could find somebody with a title to meet with these people. Digital lost that one to Sun.

Why did Digital sink? Fundamentally, because the people at the top were and still are more concerned about their status with each other than with their customers and the outside world. And this attitude filters through the whole company. That's the reason why Digital missed the PC revolution, why Alpha never took off, why Digital's sales channels are such a mess, and why Digital is so frustrating to deal with.

But wait. This gets better. Check out Digital's 10-K statement for fiscal year 1997. Especially look at exhibit 10(f), which describes Digital's 1995 equity plan. Section 7 is the most interesting. Essentially, in the event of any change in control of the corporation, Digital's board can cash out or do anything it pleases with everyone's stock options.

Forget about grand strategies. Who personally makes money on this deal? First, a few numbers. Digital's stock price before the deal was about $41 per share. Digital's stock price after the deal went public jumped to about $58 per share.

Take a look at Digital's proxy statement, dated September 18, 1997. Buried in the middle is a table comparing the 5-year return on Digital's stock with the S&P Computer Systems Index and the S&P 500 Stock Index. $100 of Digital stock in 1992 would be worth about $104 in 1997. That same $100 invested in a fund that exactly tracked the S&P Computer Systems Index would be worth $214, and one that tracked the S&P 500 Index would be worth $241. Forget about morality and treating employees fairly. Digital's stockholders got shafted.

How did Digital's board of directors reward Palmer and crew for this miserable performance? In addition to his $901,000 salary, $100,000 bonus, and other stock the board gave him, Palmer has options to buy 185,000 shares at $46.49, and 185,000 more shares at $37.75. Other vice presidents and board members also have nice nest eggs. Since the market price is now almost $60, and the board can elect to cash them in at their discretion, you do the arithmetic.

OK, so Palmer gets rich. Nobody said the world was fair. Meanwhile, for the rest of us, maybe the deal works. Maybe Compaq will invest in Digital's nifty technology, put together a sales channel that makes sense, and help really bring NT into the enterprise. --Greg Scott, Microsoft Certified Systems Engineer (MCSE), is president of Scott Consulting Corp. (Eagan, Minn.). Contact him at gregscott@scottconsulting.com.