This Time, Dec Cuts DeeperGary Mcwilliams
For weeks, Digital Equipment Corp. Vice-President Enrico Pesatori has been holed up in his Maynard (Mass.) office. His unenviable task: shaping the battered computer maker's future. Thrust into the job after DEC's surprise $183 million loss in the quarter ended Apr. 2, Pesatori now is polishing a plan for a reorganization that may represent the best hope for salvaging the once mighty giant.
By July 15, say current and former executives, Pesatori will outline a dramatic $1 billion restructuring that cuts 20,000 jobs, shutters additional factories, and focuses the company on five key groups. Also in the works: sales of significant assets. The new DEC will emerge as a Procter & Gamble-like array of units--each with its own engineering, manufacturing, and marketing.
RESTIVE BOARD. The plan amounts to no less than radical surgery on an organization already unhinged by years of layoffs, frequent reorganizations, and plummeting morale. And it represents what could be Chief Executive Robert B. Palmer's last chance to extend his 20-month-old tenure in the face of a restive board of directors. DEC, with $13 billion in sales, has lost $4 billion in the past four years. Analysts expect an additional $100 million operating loss for the fourth fiscal quarter ending July 2--before the restructuring charge.
The worry, says PaineWebber Inc. analyst Stephen K. Smith, is that DEC won't do enough to cut costs. After spending $3 billion since 1990 on restructurings that have failed to reverse its losses, the company's cash has dropped to below $1 billion--forcing it to consider the sale of major lines. "If DEC can sell one asset for $600 million, it takes away the fear of further balance-sheet erosion," says Smith. A DEC spokesman declined to comment on the company's restructuring.
Pesatori, who arrived at DEC in February, 1993, after heading Groupe Bull's Zenith Data Systems personal-computer unit, likely will slash sales employment and adopt the low-overhead structure of the PC industry. According to executives briefed on his plans, the company will begin fiscal 1995 with fewer than 2,000 direct salespeople in the U.S.--a third fewer than a year ago. The remaining reps will call only on big customers. Smaller buyers will be assigned to independent distributors.
The plan entrenches DEC as a hardware maker, removing the company from costly misadventures in applications software and management consulting. Existing software products--such as health-care applications, databases, and networking programs--will be sold in the next few months, say executives close to the restructuring.
In addition, those sources say, DEC will de-emphasize manufacturing, turning more to independent contractors to make its computers. DEC will shutter additional manufacturing plants and shift underutilized capacity for its Alpha microprocessor to Advanced Micro Devices Inc., which already has plans to use DEC's South Queensferry (Scotland) plant to build PC chips. An AMD spokesman says that the company has no new agreements with DEC.
In one fell swoop, DEC will become a confederation of five discrete businesses--computer systems, networking, disk storage, peripherals, and service. The businesses each will sell products under their own brand names. Peter Raulerson, president of consultants ParaTechnology Inc., says the move is overdue: "The marketplace clearly wants to buy disks, network products, and computers from specialists. Digital now understands this."
The job of making Pesatori's plan work now falls to CEO Palmer. Since April's stunning loss, he has been actively shopping DEC's noncore businesses. On the block: everything from its suburban Boston fiber-optic data network to a $195 million management-consulting operation. Already, such tire-kickers as consultant Computer Sciences Corp. have looked over the $330 million data-center outsourcing operation, according to executives close to the companies. CSC won't comment.
A DIPLOMAT. Later, DEC also may sell one or more of its chipmaking factories, among other big assets. But those more substantial sales, much needed to supply the cash that will fund layoffs and plant closings, may take time. DEC is fearful of repeating past restructurings that scared off business. "Part of it is, there can't be too much disruption," says an executive involved in the current overhaul. "They don't want to do anything that will disturb the customers."
For Pesatori, 53, smoothing ruffled feathers seems second nature. He made DEC's PC business profitable by rapidly wooing distributors and keeping corporate involvement to a minimum. Described as diplomatic and charming by co-workers, Pesatori also is "decisive and tenacious," says a former employee. As part of the restructuring, he will take over DEC's core computer operations. And if everything works, he may just save his boss's job.
ANOTHER NEW DEC TAKES SHAPE
Probable elements of Digital Equipment's latest restructuring
DEC will reorganize around products, attempting to de-
velop Procter & Gamble-like brand identities for key lines. New divisional structures will hand most decision-making to division managers.
On the block: Manufacturing plants, a data-storage unit, DEC's internal fiber-optic network, and a consulting business. The sales are needed to offset $1 billion in charges for layoffs and plant closings.
DEC's sales force will be thinned by 30%, with most small and midsize customers shifted to independent distributors. Remaining reps will get commissions calculated on profits, not sales.