EMC: Turmoil at the Top?

Tensions may flare between a former CEO and his successor

Asked by a reporter to grade their chief executive, most corporate chairmen would be generous with their marks. Not Michael C. Ruettgers, executive chairman of data-storage giant EMC Corp. (EMC ) In a January interview, Ruettgers gave CEO Joseph M. Tucci A's in innovation and strategic management, but F's in stock-price performance and financial management because the company lost $508 million in 2001. Ruettgers added that he was disappointed Tucci has attracted so little outside talent during his year at the helm. "The ability to recruit senior guys is one of the things you expect senior people to be able to do," says Ruettgers, who was CEO at EMC for nine years before giving up the job in January, 2001.

So much for grade inflation. The tough performance review is just one of several signs that suggest tensions are brewing between the former EMC CEO and his successor. In an October conference call, Ruettgers did some subtle finger-pointing at Tucci as he discussed his disappointment with the company's execution. At the same time, some former execs say, Tucci has wanted to move faster to cut costs, make acquisitions, and introduce new software but Ruettgers and EMC have slowed the pace of change. And Ruettgers, who had planned to be less active in daily affairs, has continued to attend weekly meetings to review operations. This has analysts and insiders speculating that Tucci could soon take the fall for EMC's poor performance. "In that culture, someone must fail," says a former EMC executive. "There will be a scapegoat."

Publicly, Ruettgers and Tucci deny there's any rift. "I'd love to have him stay around and help us get the stock price back up," says Ruettgers, 59, of Tucci. Ruettgers also amended the failing grades after EMC's public-relations team got involved. He says he meant the F's as an assessment of the company's performance, not Tucci's. As for Tucci, the 54-year-old calls Ruettgers one of the world's "truly tremendous individuals. He's a great friend and a great mentor. It would be easy to step on each other, and it just miraculously doesn't happen here." EMC's other board members declined to comment.

The last thing EMC needs is the distraction of executive infighting. One of the highest-flying companies of the 1990s, it started to struggle in late 2000 and stumbled badly last year. EMC's revenues for 2001 dropped 20%, to $7.1 billion, far short of its publicly stated goal of $12 billion. Its half-billion-dollar loss contrasted with a $1.8 billion profit in 2000. And its stock has plummeted 91% from its March, 2000, peak, to $12.

A major factor was the swoon in the storage market. After growing steadily in the 1990s, the market slumped to $25.5 billion in 2001, down from $31.2 billion the year before. EMC lost market share as thrifty corporate buyers turned to lower-cost alternatives. Its slice of the total disk storage systems business dropped to 15.6% in 2001, vs. 18.8% in 2000, according to researcher International Data Corp. That helped Compaq Computer Corp. (CPQ ) snatch the title of storage king by boosting its market share to 18.2% in 2001, from 17.8%. "The near term will be a struggle as spending comes back gradually and EMC fends off competitors," says analyst Steven M. Milunovich of Merrill Lynch & Co.

Tucci has laid out an aggressive plan to remake EMC, but it's not clear if he'll be able to implement it as fast as he'd like. While EMC in the past has focused on storage hardware, he wants to move quickly into selling higher-margin storage software and services. He figures that will help boost gross margins--which fell from a high of 60% in 2000 to 30% last fall--to the high 40s when the economy recovers. But if the new offerings are to contribute half of overall revenues anytime soon, as Tucci desires, EMC will have to make acquisitions, analysts say. Tucci is eager to use EMC's $5 billion in cash and investments to cut deals quickly, but Ruettgers and the board favor proceeding more slowly. "We want to make sure who we pick up is a good fit, and we want to plan for how we execute," says Ruettgers.

EMC was close to a deal last year. About six months ago, the company was negotiating with Legato Systems Inc., a provider of storage software and services, says analyst Steve Duplessie of research firm The Enterprise Storage Group Inc. The deal was scuttled when EMC's stock price slid and Legato's rose. "Suddenly, it was a lot of money," says Duplessie. EMC declined to comment on any possible acquisitions. Legato did not return calls seeking comment.

Tucci's bigger problem is that he needs to revamp much of what Ruettgers did as chief executive. For starters, he wants to lower costs by selling more storage gear through services partners and resellers, rather than depending so much on a costly direct-sales force to expand EMC's reach. He also wants to tone down the hyperaggressive culture that developed during Ruettgers CEO tenure, which has alienated some customers and made it tough to lure outside talent. Some inside and outside the company think Tucci is stuck in an untenable position: He's responsible for the performance of the company, but he lacks free rein to make changes as quickly as he'd like because he needs to consult with Ruettgers on key decisions. "Trying to change without that mantle of power is impossible over there," says one former employee. Adds another former employee: "The company still abhors external talent."

Friction in the executive suite would hardly be a surprise. Corporate history is littered with cases in which top executives who stick around to mentor their successors end up driving them out the door instead. At Xerox Corp., G. Richard Thoman had been in the chief executive post only 13 months when Chairman Paul A. Allaire, Thoman's predecessor as CEO, told him the board was about to announce his resignation. "I don't think a new CEO needs a babysitter," says Rosabeth Moss Kanter, a professor of business administration at Harvard Business School. "It inhibits the new CEO in charting his or her own course."

The personal and management styles of Tucci, a salesman, and Ruettgers, who started at EMC as an operations expert, couldn't be more different. Tucci likes to build one-on-one relationships, while Ruettgers is more aloof. Tucci seems to be more willing than Ruettgers to make tough decisions quickly. Bill Scannell, EMC's senior vice-president for global sales, says Tucci gives him an answer immediately when he asks for advice. Ruettgers tends to chew on things awhile. And Tucci praises and thanks his troops regularly, while Ruettgers once told a former executive that saying thank-you is a sign of weakness. A spokesman for Ruettgers says he routinely thanks employees.

Tucci seems to have the skills to lead EMC through its transformation. The former CEO of Wang Laboratories Corp. knows what it's like to drive through 90-degree turns at 100 miles an hour without spinning out. He did it at Wang--pulling the once high-flying hardware company out of bankruptcy, turning it into a services outfit, and selling it for $2 billion in 1999. "Speed is very important to Joe," says Franklyn A. Caine, who was chief financial officer under Tucci at Wang and is now CFO at Raytheon Corp. "We were playing beat-the-clock because the market was changing so quickly."

EMC is under the same kind of pressure. Take the storage-software market. Customers are clamoring for "open" software, which can be used to manage storage gear from all competitors, not just a single supplier. Tech analysts say EMC leads in the race to introduce such software with its Automated Information Storage, or AutoIS initiative, but rivals are coming on strong. "The faster they can deliver, the better," says one major EMC customer who plans to purchase the software as soon as it becomes available. "They gotta be fast. Everyone is in the same game, trying to do the same thing now."

Problem is, Tucci is in a race with weights on both legs. When he tried to push the AutoIS effort in 2000, EMC's chief engineer, hardware guru Moshe Yanai, stalled. Yanai didn't agree with the open-software strategy and since the software team reported to him, he could hold up the initiative. It took more than a year for Tucci to move Yanai aside, into a technical advisory position, and to shift the initiative into high gear.

Why? Ruettgers and EMC co-founder Dick Egan urged him not to move any faster. "The engineering team is a great organization, intensely loyal to Moshe. They cautioned [Joe] to go slow on that," says a former EMC employee. Asked why it took so long, Ruettgers replies: "Gone are the days when everyone shows up with an indentured-servitude certificate when they come to work." EMC did not make Yanai available for an interview.

Tucci also cut costs more slowly than he would have liked. Early on, he wanted to pare back EMC's practice of testing every new, high-end storage box for 28 days because he thought it was unnecessarily excessive. But Ruettgers was a strong supporter of the testing process. So Tucci had to make sure quality would not suffer before making the move. Tucci studied the issue for six months until June--then he cut the testing time and the cost in half. "Ruettgers should have been less stubborn about keeping all those costs in the product," says a Wall Street analyst who requested anonymity.

Other signs of possible friction between the two are subtle. Consider the company's October earnings announcement. Ruettgers spoke first about the impact of the economy and of the September 11 terrorist attacks on business. Then he said: "We've been slower to react to market changes than Joe and I would've liked. Joe will discuss this." Some listeners thought Ruettgers was pushing Tucci into traffic. "That was a shot at Tucci, but he tempered it by saying `we,"' says one analyst. Ruettgers says that was not his intention. He was simply introducing Tucci so he could discuss an area he's responsible for. An EMC spokesman says Tucci didn't perceive the comment as an offense.

Friends and former colleagues say Tucci knows he can't turn around the company on his own. He has tried to make the most of internal talent, promoting two young company veterans to executive vice-president slots in November. Still, the top executives are not very seasoned as managers. And the only person Tucci brought with him when he joined the company as president in January, 2000, was his secretary of 12 years, Pam Buote.

Recruiting from the outside is tough because of EMC's culture. Any prospective hire that does a little homework will find that several senior executives who joined EMC in the late '90s from companies like IBM, AT&T, and Xerox are already gone. Some bolted within two years, even leaving lucrative options behind. "No one wants to join," says a former EMCer. "Their culture is a liability. They get aggressive on everything."

So far, Tucci is a rare survivor. The ever-calm CEO says he's not worried about getting the ax. "I'm not even scared a little bit. If you're afraid of failure, then you're a candy-assed coward and you shouldn't be here anyway." Tucci believes he'll be judged on what he does over the next two years, not the hand he was dealt. But in an era when CEOs change nearly as often as Vegas blackjack dealers, he may be asked to fold his hand before he gets a chance to call for new cards.

By Faith Keenan in Hopkinton, Mass.

    Before it's here, it's on the Bloomberg Terminal.