Emc: High Tech Star
Michael C. Ruettgers has many fine qualities. Subtlety is not one of them. He proved that his first day on the job at EMC Corp. It was 1988, and the data storage company was reeling from quality control problems that caused its products to crash without warning. Ruettgers had been brought in to fix the mess. Calling a morning meeting that first day, he took out a pile of airsickness bags from his briefcase and placed one in front of each seat around the conference table. As the group filed in, the sturdy six-footer stood with his arms folded. Then, raising one of the paper bags in his hand, he delivered his opening remarks: "The quality of our products makes me want to puke."
Hardly the way to make friends if you're the new guy. But Ruettgers (pronounced rut-gers), always blunt and quick off the mark, has never worried much about what others think. His temperament seems pure New England Yankee, though he grew up in five countries around the globe. Flinty and straight-talking, the reserved executive is no motivational speaker. Yet he has managed to reenergize EMC engineers and marketers alike. In the process, Ruettgers has taken Hopkinton (Mass.)-based EMC on a wild and hugely successful ride.
Ruettgers has not only saved EMC from extinction, in little more than a decade he has transformed a sputtering technology has-been into one of the hottest growth stories of the hot-growth 1990s.
When Ruettgers become CEO in 1992, profits were just $30 million; they should top $1 billion in 1999. Meanwhile, he has tripled margins, to more than 20%, while boosting sales from $386 million in 1992 to an expected $5.3 billion this year. That sizzling record was enough to earn EMC the No. 8 spot on the Business Week 50--our exclusive three-year ranking of the top performers among the 500 companies in the Standard & Poor's index--as well as No. 9 on our Info Tech 100, the best IT companies of 1998.
Investors have noticed. Over the past year, EMC shares returned 167%, to 98. That topped the performance of such high-tech stalwarts as Microsoft, Intel, Cisco, and even the almighty Dell. A dollar invested in EMC a decade ago would today be worth a spectacular $36,196. Among the S&P 500 companies, only shares of Dell Computer Corp. have performed better during that time. Even with its lofty trailing price-earnings ratio of 67, EMC continues to be one of the Street's favorite picks. One key reason: Even in a computer industry downturn, EMC sales tend to be resilient because storage demand continues to grow as corporations generate more and more data on existing computer networks. That's why investors believe EMC should weather the current tech sell-off better than most. "EMC is the next technology franchise along with Microsoft, Intel, and Cisco," says Merrill Lynch & Co. analyst Steven P. Milunovich.
The next Cisco? It wasn't so long ago that eyes glazed over at the mention of something so arcane as computer networking equipment. But look how Cisco Systems Inc. soared. Similarly, EMC's computer storage equipment--big, refrigerator-size boxes that can store the equivalent of 100 million tax returns--hardly gets the blood rushing. But it should. Just as speedy and reliable networking opened the floodgates to cyberspace and E-commerce, ever more turbocharged storage is a key building block of the Internet.
KEY PLAYER. With each online mouse click, either a fresh bit of data is created or already-stored data is retrieved from all those Web sites, filled with data-rich photos, stock graphs, and music videos. And the thousands of new Web pages created each day need a safe, stable place to hang out. Increasingly, that place is inside one of EMC's big boxes. In the past year, EMC has snagged such new customers as Web portal Excite, and Amazon.com.
All that's on top of the heavy demand for industrial-strength storage already in use by scores of big corporations, including MCI WorldCom, Delta Air Lines, and Visa International. What's driving the growth is a crushing imperative for corporations to milk every bit of information they can for competitive advantage. That has turned the once prosaic storage industry into a key strategic player of the Information Age. And no one is better positioned to capitalize on it than market leader EMC. With its 35% market share, it boasts as customers the world's top 20 telecom outfits, 90% of the world's major airlines, and the 25 largest U.S. banks. Thanks to demand growing at 80% a year, the industry should zoom from $10 billion in sales in 1998 to more than $35 billion by 2001, according to International Data Corp.
How Mike Ruettgers came to dominate this mushrooming industry and position EMC to exploit the data explosion is a tale of Darwinian survival if ever there was one. In the high-tech sweepstakes of the 1990s, scores of companies have been born, then failed--or thrived only to be bought by others. Ruettgers has avoided both fates and built a powerhouse in the process.
HUGE PAYOFFS. Ruettgers has succeeded by creating a culture as hard-driving, buttoned-down, and blue-suited as IBM ever was in its glory days--one worlds apart from the studied casual culture of Silicon Valley. Yet he has managed to move in trailblazing directions that at times seemed downright crazy to even his own top executives. Twice in four years, he looked past profitable markets, seeing huge payoffs in untested new markets before anyone else. And both times, Ruettgers hit it just right, propelling EMC to tremendous growth. Says John F. Cunningham, an EMC director: "The major thing he brought the company is that he's a very strategic thinker."
That's a quality Ruettgers insists hasn't come naturally to him. Instead, his ability to think three chess moves ahead has developed slowly over time. The oldest of four children, he grew up seeing the world. His father, a U.S. Air Force officer, moved the family around the globe with each new posting. By the time Mike was 17, he had lived in three continents. The constant moving, he now thinks, forced him to learn how to live without getting too attached to places and friends. That has helped foster the studied, analytic detachment that allows Ruettgers to make clean breaks and move in new directions.
There were other lessons as well. In 1956, when Mike was 14 and the family was living in England, his dad whipped into shape one particularly shoddy squadron, then flew to Washington to receive an award from the Joint Chiefs of Staff. "Watching him go through that, I realized how good it feels to be part of a winning team," Ruettgers says.
But Ruettgers still had a lot of growing up to do when he went off to study engineering at his father's alma mater, the University of California at Los Angeles. Whereas his dad was a football hero, Ruettgers frittered away his time playing cards or driving to the beach in his red Triumph to meet girls. Ruettgers soon dropped out and lost his Navy scholarship. It was a low point. "I had to come out the other side to develop some judgment and focus," he now says.
Ruettgers redeemed himself at a small, all-male Catholic college, St. Martin's, in Olympia, Wash., a place he now refers to as "the penalty box." Living at home with his family, he improved his grades, and in his junior year he transferred to Idaho State University. Ruettgers studied hard and started devouring The Wall Street Journal, promising himself that he would someday become a CEO. A B+ student, Ruettgers was not a star. But he scored well on tests, and when a recruiter from Harvard business school stopped by, Ruettgers applied and was soon accepted.
Harvard classmates needled him as an "Okie from Muskogee," where he was born. Ruettgers, lanky and often in cowboy boots, did stick out as a bit of a country boy. Still, "he was extremely thorough by inclination," says classmate Benjamin H. Griswold, now senior chairman of BT Alex. Brown.
Ruettgers landed at Raytheon Co. in 1968 and worked on developing the complex Patriot missile. He rose to general manager of the computer services organization by 1978 and eventually oversaw the sale of that business for $10 million, four times what his boss recommended. But Ruettgers quit when he was told that he would never reach the top without an engineering degree. His next stop, in 1981, was Keane Inc., which advised companies on building big software applications. Ruettgers' work caught the eye of John F. Keane, the chairman and president. "Most people in technology have either an entrepreneurial creative flair or a process orientation," he says. "You don't see them that often in the same person--but Mike has both."
By 1987, Ruettgers grabbed the chance to become chief operating officer of Technology Financial Services, a small Boston tech consultancy. Although not a huge success, TFS went from losing money to a modest profit under Ruettgers. Geoffrey Wollacott, who ran computer information systems practice at TFS, says he got an early taste of the Ruettgers management style: "He's a man of few words, but he can shoot you a glance that can stop you dead."
After just 18 months with TFS, Ruettgers was on his way to Austin to run Datapoint Corp., an electronics company acquired by corporate raider Asher B. Edelman. But EMC founder and Chairman Richard J. Egan, a TFS director who had been impressed with how Ruettgers handled a consulting job for EMC, had another idea. "My trump card was that I knew Mike's wife, Maureen, didn't want to leave Massachusetts," says Egan. He played his card, and Ruettgers arrived back in Boston with his airsickness bags in hand.
And that was just the start. Four months into Ruettgers' new job as head of operations and customer service, EMC's product quality problem erupted into a full-blown crisis. Every piece of equipment the company sold was crashing because EMC engineers failed to detect faulty disk drives supplied by NEC Corp. Ruettgers made a series of marathon swings across the country to meet personally with customers. In Denver and Salt Lake City, he came face to face with the scope of the catastrophe when managers broke down in tears because their computer operations were a shambles. "Nothing can really prepare you for that," Ruettgers says.
POTENT MIX. Rushing back to headquarters 40 miles outside Boston, Ruettgers conferred with Egan, then offered to replace the faulty parts or buy whole new systems. "Some months we were shipping more IBM systems than our own," Ruettgers says. In less than a year, EMC burned through $100 million. To fix EMC's products, Ruettgers hired engineering specialists who tore apart the drives to locate the flaw. He also organized new quality controls, scrutinizing and testing every batch of parts and every finished system that moved through the company. To stay afloat, senior managers took a 20% pay cut. "We were technically bankrupt," Ruettgers says.
Throughout the ordeal, Ruettgers kept a cool head. He pumped up the sales troops with a potent mix of encouragement and fear. His young, mostly male marketing staff, recruited from local schools such as Boston College and Northeastern University, leans toward former hockey and football players--"a bunch of ex-athletes running through walls at 100 miles per hour," as Harold R. Dixon, vice-president for North American sales puts it. And Ruettgers knew just how to get them fired up. Soon after EMC posted its fifth quarterly loss, Ruettgers walked into a sales meeting. He picked up a marker and wrote "0-5" on a whiteboard. Two silent minutes dragged by. The ex-jocks started to fidget and grow warm under their starched white collars. Finally, Ruettgers spoke. "That's not the BC football record," he said. "That's your record over five quarters."
But even then, Ruettgers was looking beyond the quality problem. He reasoned that EMC had a shot at developing world-class products and growing large by focusing on a single, big rival. His game plan was to deliver a superfast storage system that companies could use for ready access to their most important information. He had been servicing customers that used IBM mainframes since graduating from business school. Ruettgers came to realize that most companies use only about 20% of their stored data for most of their daily operations. Getting at that key data faster would be worth a lot, he reasoned.
PRICE POWER. In 1990, with the quality issue resolved and Ruettgers by then EMC's president, he acted with lightning speed. He ordered the cancellation of nine major product lines, comprising 80% of revenues, in order to attack IBM with all EMC had. The nixed products provided storage for minicomputers made by Digital Equipment, Wang, Unisys, and others that were then booming.
It was a gutsy move. EMC had barely $10 million for research and development, against IBM's vast resources. EMC managers lined up outside Ruettgers' office to challenge the wisdom of taking on Big Blue. "I thought I had a very viable business," says David A. Donatelli, who ran EMC's storage product line for Hewlett-Packard Co. computers. "I told Mike, `You are taking away my kid, it can grow."' One by one, Donatelli's counterparts made similar arguments to Ruettgers. All to no avail.
The transition took six months, but Ruettgers was proven right--IBM mainframe customers switched over to EMC so swiftly that revenues didn't even hiccup. The big advance: a way to replace the giant memory devices then commonly used with a host of inexpensive disk drives linked together. And hungry for business, Ruettgers undercut rivals' prices.
Delta and Electronic Data Systems Corp. were among the first big companies to switch. Delta went so far as to waive a freeze on capital expenditures so that it could chuck its old IBM and Hitachi Ltd. gear to buy $8 million worth of EMC machines. EMC's units were "faster, more reliable, and about 30% cheaper than our other stuff," says John King, at the time a Delta information technology vice-president and now president of consulting company Transform IT. The EDS contract was an even bigger win, taking an entire quarter to fill. From $9 million in 1990, net profits hit $30 million by 1992.
Three years after setting its sights on Big Blue, EMC had toppled IBM as the leading supplier of storage for IBM's own mainframes. In 1992, Dick Egan, EMC's founder and chairman, realized it was time to hand over the CEO's job. Although the company had started out as a family business--even today, four Egan family members remain on the eight-person board--he realized EMC's future lay in Ruettgers' hands.
Ruettgers promptly bet the business again. This time, the gambit was based on innovative but unproven software for connecting different types of computers to a single storage system. It was another remarkable display of Ruettgers' knack for anticipating the industry's direction and getting there first--in this case, fully two years ahead of the competition. It's what one EMC executive calls Ruettgers' "ability to see in 3-D and color."
How did he figure it out? By sitting in Moline, Ill., listening to the tales of woe of a data center manager for Deere & Co. Like most corporations, John Deere had invested millions in computer networks. Problem was, the new servers weren't as reliable as mainframes and crashed more often. Even worse, users were generating tons of important business information that now lay scattered around the company on a bunch of incompatible machines. "I could see how bitter he was about the situation," Ruettgers recalls. "And it was like a light bulb went on: What about a single storage system that could hold data from lots of different computers?"
BASHING BIG BLUE. It seemed so obvious. But again, EMC's senior management was skeptical. Says board member Cunningham: "There was major concern that the margins in this new business would be substantially lower." What's more, EMC had trounced IBM in record time in mainframe storage. Now, Ruettgers was saying that fight was over and they had to scramble after an untested market. "We were printing money and we could see growth of 20% for another two years," recalls Dixon. "Why the hell would we want to redeploy in a market that's not even shaped yet?"
Ruettgers, though, had made up his mind. When Dixon and others still tried to dig in their heels, Ruettgers clamped his mouth shut so tightly that his lips turned white. "`Thanks for your opinion,"' Dixon recalls him saying. "`This is not a democracy. Get your guys in line and let's go do it."'
By Thanksgiving, just 10 months after Ruettgers visited Deere, EMC was nearly ready to launch its Symmetrix "open storage" systems. Thanks to the new software, Symmetrix could pluck data stored earlier from different types of computers and send the information back to the proper user without mix-up. Calling a meeting, Ruettgers scribbled the figure $200 million on a whiteboard, announcing it as the revenue target for the product's first year. With few executives convinced of any market at all, EMC's vice-president of marketing, Harold P. Ano, turned to his neighbor and whispered: "He's nuts."
Early results were not encouraging. At the end of March, 1995, EMC's sales staff hadn't really gotten behind the push, and Symmetrix sales were 50% behind target. To make matters worse, Ruettgers had told the outside world of his $200 million target. Now, he had to shift EMC into overdrive or risk losing confidence. One evening he ordered huge crates of the unsold equipment into the offices of his sales managers. Climbing over the big boxes to get to their desks, staffers found a Ruettgers note demanding that the crates stay put until sales were on track. "I wanted them to know this was not business as usual," he says.
It took three months to clear the offices. But Ruettgers was right again. The system was so versatile that EMC was able to charge a stiff premium. Sales hit the $200 million mark as planned, then soared to $800 million in 1996. By 1998, open storage contributed more than half of EMC's $4 billion in revenues.
Now, EMC is roaring. But Ruettgers isn't standing still. For nearly the past three years, his team of engineers has been working feverishly to position the company for the vast storage needs of the E-commerce age. Currently, E-commerce-related business accounts for only a fraction of total sales. But the company expects it to become a major driver of growth. Already, customers like Charles Schwab & Co. and Cisco rely on EMC to store much of the data for millions of dollars of E-commerce transactions daily. EMC is also luring a new breed of customers, companies like Excite and Amazon.com, too small to fit the typical EMC customer profile in every respect except one--the massive storage requirements of their online businesses.
But even before the full punch of the E-commerce business kicks in, Ruettgers has already raised EMC's bar again. The market opportunity he sees this time: providing entire networks of storage that will enable companies to provide a "data tone" so that employees can plug computers into wall jacks that would allow them to begin feeding and retrieving stored data (box) from anywhere over a wide area. That's common for PCs but technically difficult for big computers.
EMC's new push may prove its hardest. Until now, the sales staff--pumped up by stock options, commissions, and bonuses that can nudge annual paychecks over $1 million--merely had to peddle big boxes. Now, they have to consult closely with corporate information officers on specific software needs, a transition other hardware manufacturers such as IBM have earlier negotiated with great difficulty. It's a huge learning curve, and not everyone has been able to cut it--EMC's sales force attrition rate has soared to 25% from the industry average of 15%. But software sales, now the primary engine boosting margins, are fast approaching $500 million and should top $650 million by yearend.
Ruettgers, understandably, is pleased, though he rarely shows his emotion at work. Even at home, he doesn't boast much about his triumphs. And he still takes calls at 2 a.m. to calm anxious customers when EMC equipment occasionally goes on the blink. He and his wife, Maureen, have lived in a New England farmhouse in suburban Boston for 18 years. A restored barn out back serves as garage, Ruettgers' study, and an expansive play area with pool and ping-pong tables. A golfer and hunter, Ruettgers sometimes cooks up his quarry of quail or pheasant into a savory coq au vin. The family still gets together for weekend dinners. Polly, 24, lives in New York and works for the Metropolitan Museum of Art, while son Chris, 22, is a senior at Holy Cross College. Abigail, 18, lives at home.
The biggest occasion for a celebration? Four times a year, Ruettgers glides home to Maureen and the kids for one of their family dinners like a proud kid with a report card crammed with A's. His report card, though, is EMC's quarterly numbers. "He comes back from the quarterly earnings announcements almost giddy," says Chris. "He is deeply vested in that company." And it shows. He brought EMC back from the brink, built a powerful high-tech franchise, and created one of the most successful business cultures of the 1990s. And, oh yes, there's that 36,196% stock appreciation. That puts Ruettgers' own holdings of EMC stock and options at an estimated $178 million. Who wouldn't be giddy?