How Dec's `Minicompanies' Led To Major Losses

Just 14 months ago, Robert B. Palmer was pulling raves for pursuing one of the computer industry's most daring strategies. The 53-year-old chief executive at Digital Equipment Corp. launched a remake of the troubled company with a radical reorganization. He divided the $14 billion Goliath into autonomous minicompanies organized by customer type, the better to anticipate buyer needs. "This is not a temporary change," Palmer pledged at the time.

Or so he thought, until a $72 million loss for the quarter ended Jan. 1 junked his restructuring. The red ink having destroyed DEC's hopes for turning a profit for the fiscal year ending July 2, DEC's board decided to abandon the CEO's new structure in favor of a conventional organization in which the company is built around product groups.

"UNHAPPY." The retrenchment is a clear repudiation of Palmer's strategy. Board members, who ousted DEC founder Kenneth H. Olsen two years ago, insist they're sticking with Palmer, who landed DEC's top job in October, 1992. "The board has a lot of confidence in Bob and the team he put together," says Vernon R. Alden, an outside director.

But if DEC doesn't regain profitability soon, Wall Street analysts contend, Palmer's job could be in jeopardy. "The board's real unhappy," says Salomon Brothers Inc. analyst John B. Jones Jr. The pressure is building fast: Investors have been dumping DEC's stock, which has hovered at 31 since the loss was announced on Jan. 19--20% below its price when Palmer took over. And some big shareholders think getting DEC back on track will take some time. "I'm pessimistic," says Robert Spremulli, investment officer at major shareholder TIAA/CREF, a teachers' retirement fund. "The long-term dynamics are poor."

As Palmer has faltered, his No.2, Edward E. Lucente, worldwide sales and marketing vice-president, has become stronger. Indeed, reports--denied by DEC--are circulating inside the company and on Wall Street that Lucente soon will be named chief operating officer and president, becoming Palmer's designated heir. Lucente's responsibilities already nearly correspond to such a position. Under the reorganization, the former IBM sales executive, who joined DEC a year ago, now is responsible for units that account for 80% of DEC's product revenues. Neither Palmer nor Lucente would comment. But CFO William M. Steul downplays the move, calling it "fine-tuning."

How will the reorganized DEC work? Instead of selling packages of computers, software, and services through units organized by customer type, DEC now will be divided into units that sell specific product lines, such as workstations, servers, and software. The problem with the old approach, to be scuttled on Apr. 1: It combined low-margin products and high-margin services, undermining sales of each, says Dekkers Davidson, a partner at consultants Mercer Management Consulting Inc.

MORE FALLOUT. Indeed, Palmer's business strategy ran smack into a major shift in the computer industry. The rise of standard hardware and software let customers cheaply knit together systems from various vendors. Palmer thought he could buck the trend by getting closer to customers and convincing them to buy complete systems. But DEC wound up winning fewer and fewer contracts. "DEC's business focus is not in sync with how people are buying today," says Irv Shapiro, president of Metamor Technologies Ltd., a consulting and software-development company.

Palmer's minicompanies faltered almost from the start. Most of the key executives involved grew up in DEC's engineering departments without significant sales experience. "Unfortunately, many of the people knew nothing about the industries they were put in charge of," says a senior DEC manager. DEC's product sales steadily worsened as the plan went into effect last July (chart).

The `urning point came in September, when sales of DEC computers priced above $200,000 fell sharply. Palmer then went before the company in a video broadcast, appealing for a sales focus on moving high-price Alpha AXP computers as well as consulting and service contracts. Soon thereafter, Palmer expanded Lucente's duties, and Lucente tried to whip up sales with aggressive pricing of key Alpha AXP computers.

Both efforts came too late. Jones estimates that only $10 million of some $120 million in Alpha AXP sales for fiscal second quarter, ended Jan. 1, were high-margin "server" machines. The vast majority were low-price workstations. So there's more fallout to come. Even if Palmer meets his goal of cutting employment to 85,000 by July, from 92,300 now, declining revenues could force more restructuring, Wall Street analysts say. And Jones figures DEC will lose $75 million more in the quarter ending Mar. 26.

The bottom line? Palmer, who a year ago pledged to save DEC's 90,000 jobs, now must wonder if he can keep his own.

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