Digital's New Strategies Garner Mixed Reviews

After years of downsizing and management reshuffling, Digital has decided on a focus and is moving forward

What a difference a year makes. In the third quarter of 1994, which ended April 1, Digital Equipment Corp. posted a net loss of $183 million. That compares to a profit of $74 million for the comparable period this year. On July 1, Digital completed its third consecutive profitable quarter and its first annual profit since 1990. Now Digital shows signs of cranking up its top line after years of downsizing and management reshuffling.

That success has largely resulted from Digital's focus on being a product company rather than a full-fledged systems integrator. Accordingly, the company has crafted a strategy that combines both direct and indirect sales. The emphasis on indirect sales is somewhat unavoidable. After reducing its workforce from 137,000 to 63,100 - more than half - through six years of attrition and layoffs, the Maynard, Mass.-based manufacturer of servers, software and workstations has begun placing emphasis on working with distributors, value-added resellers, system integrators and others. Indirect channels represent 35- to 40 percent of Digital's sales, according to R.G. Gilbault, director of Business Development and Programs, Federal Government Region.

The renewed interest in indirect sales channels comes under the command of Robert B. Palmer, Digital's president and chief executive officer, who was hired to help the company recover from the disastrous end of founder Kenneth Olsen's tenure. For years, the rub on Digital in the federal market was that the company couldn't decide if it wanted to be a systems integrator or primarily a product supplier. Palmer, who has aggressively hired computer industry executives with sales channel experience in companies such as IBM and NEC, appears to have decided the latter. And so far, the strategy appears to be working.

Still, the changes have not come easy. Digital, which reports approximately $900 million in federal sales, still needs more contractors, distributors, system integrators, VARs, 8(a)s and other business partners. "We've learned that other organizations can provide some of the services behind a product -- such as fulfillment -- as well, if not better, than Digital," said Al Stoddard, vice president of Channel Sales for Digital.

According to Gilbault, Digital in recent years has put more emphasis on maintaining relationships with business partners with strengths in limited areas rather than total solution providers. "No one company can fulfill every requirement."

Digital has more than 1,000 channel partners participating in its new business development program, with more than 1,500 new accounts booked, and the company expects to generate 9,000 qualified partner leads this quarter. In a program that began in July, Digital outlined specific roles and responsibilities for each partner, a new accreditation process, and a competitive discount structure.

Brenton Dunlop, president of Technology Integration Service, an 8(a) contractor that functions as an integrator and reseller in Dallas, reports that three and a half years ago, when he founded his company, Digital dealt directly with him. Dunlop appreciates the chances Digital took in "extending opportunities to a small, minority-owned company." With an estimated $14 million in hardware sales and services annually, Dunlop enjoys success but concedes, "There wouldn't be a TIS without Digital."

However, because of Digital's new channel strategies, during the past year Dunlop has been forced to buy lower-end commodity products, including peripheral products through distributors such as Tech Data of Clearwater, Fla. While Dunlop reports that aggregators and distributors can offer better product availability and pricing, he would prefer to deal directly with Digital for all products. "It's to a small company's advantage to deal directly with a manufacturer," he said.

"Establishing a credit relationship is always a challenge for a small company," Dunlop said. Although he has "never defaulted on a (credit) commitment," it takes time to build credit histories with the aggregators and distributors that Digital now employs. His strong credit history with Digital has allowed Dunlop's TIS to propose total Digital solutions and win four $5 million contracts recently.

Dunlop is not the only Digital channel partner who expressed dissatisfaction with the company's recent moves. Gary Murray, president and CEO of Sylvest Management Systems in Lanham, Md., a $60 million UNIX system integrator that works with the Digital Alpha chip, reports that Digital's reorganization makes the company more difficult to deal with. He said, "When you need an answer, it's hard to know who to ask," as a result of the layoffs and reorganizations at Digital.

Meanwhile, Eric Bruce, president of TriLogic Inc. of Pittsburgh, reports that he is satisfied getting some products through distributors and others directly from Digital. Bruce's business, which functions as a distributor, systems integrator and reseller, has reported $25 million in sales last year and receives low commodity products including systems through Merisel Inc., El Segundo, Calif., and Tech Data. With overnight shipping, Bruce reports that dealing with Merisel and Tech Data alleviates potential inventory problems for him. He buys high-level network products and system products directly.

Digital's Stoddard said the company's more rigorous accreditation process for business partners helps in establishing a high level of service. Value-added resellers who deal with Digital, for example, must show that 30 percent of their business is value-added, while integrators must demonstrate that 50 percent of their business is value-added.

Stoddard said Digital tries to avoid channel conflicts by creating "a level playing field both internally and externally." Within the internal (direct) sales force, Digital management makes it clear when the company should work with a business partner.

But work remains. Digital's biggest challenge may be taking the Alpha technology, the 64-bit processor architecture, to a broader marketplace. Alpha has been less than a resounding success. "To install new technology into a base of customers, we need a loyal group of business partners to help them migrate into the new technology," said Stoddard. It remains to be seen if Palmer can follow his new-found gospel of partnering to the promised land of sustained profitability -- and top-line growth.

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