Can we take that model further? How do you instill such a sense of mission in sailors or employees?
I’ll tell you a little story about Digital that illustrates this.
Digital Equipment started with $70,000. The nice thing about 70,000 dollars is that you can watch each one of them. We had a twenty-person committee and I was chairman, the only one with the P&L statement in mind since everybody else was full of ideas for spending money—wonderful ideas like printing matchbook covers for marketing—really intelligent things. I kept saying no. They got very frustrated with me, went to the board of directors and said, “Ken is a dictator,” which was true, because if we had enacted all the proposals to spend money, there wouldn’t have been anything left.
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Our other problem was that the employees weren’t very smart.
They couldn’t understand anything. By the time we were a $14 million company we got into trouble. I went to Boston to speak with General Doriot [of the venture capital firm American Research] and told him something had to be done because we didn’t have things under control. I thought that we could sell ourselves to Singer. He wasn’t terribly sympathetic nor was the board terribly sympathetic because we were very profitable and growing fast. Then the profits deteriorated. I announced that we were a new company as of that day—we were now following [former CEO of General Motors] Al Sloan’s model. Sloan broke his company into business units and said that management’s job was to leave them alone. I declared that we were, as of then, organized into five business units. It went over like a lead balloon. Several people quit—no exaggeration. One very competent fellow said, “I’m 33 years old. I’m not going to take orders from a 30 year old.” Not one person in the company liked it. They went home and told their wives that they had been demoted, which is impossible because mathematically not everyone could be demoted.
The board of directors was dead set against it. One director, the one who introduced me to Al Sloan, said he would sue the company for fraud. General Doriot said, “Ken, I’ll support you. Anything you do.
But remember, no one ever succeeded at doing this.”
I religiously followed Sloan. To this day I don’t think Digital’s board of directors understood the model. They’d say, “Ken’s a little funny. Real managers make all the decisions.”
The loneliness of my position cannot be exaggerated. But miracles happen. If you look at Digital’s growth and profitability after that decision there’s a distinct discontinuity: our growth accelerated—an absolute miracle. All of a sudden I was no longer the terrible dictator because I was now in a position to criticize the managers. Those same people who had been so dumb became geniuses. The people who before were frustratingly dumb, made the basis of Digital’s success. Do you see the secret there? The genius on my part—I have to tell you this because you wouldn’t notice it—was to follow Al Sloan religiously: Leave People Alone. I’m sure that when General Doriot said past attempts at such a business model never worked, it was because top management couldn’t leave people alone.
Nobody at the top is smart enough to know everything. Nobody is so competent they can do everything for everybody. The problem is that very few people realize they can’t do everything and can’t make all the decisions. Very few board members understand this because to
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them, the ideal manager dresses well, speaks well and makes decisive decisions. They love that. You see it on television all the time.
So your management secret was really just borrowed from Sloan?
Jack Welch of GE says he got the idea from one of my speeches. I’m not sure that’s true. Hewlett-Packard is doing quite well following this model now. Some say they got the idea from me. Of course I say no. It was Al Sloan.
It’s interesting that during this organizational change—a critical juncture in Digital’s history—your employees thought the company was a failure.
No. They weren’t even conscious enough of the sum of it all.
But weren’t they unhappy with the state of affairs?
They weren’t that unhappy. They had a lot of freedom and had nothing to compare themselves to. It was just clear to me that we were in trouble. The strength of the new system was in making the P&L
statement near and dear to the people making decisions.
The only word I can use to describe the budgeting process is
“travail.” We made money hand over fist because managers had power and responsibility for a budget and plan that worked. This is what made Digital. The one weakness was that the employees did very well and after a while the success went to their heads. That’s when the whole system fell apart. The system depended on the struggle and the travail. General Doriot used to say, “When you say your prayers at night, pray for inventory.”
Pray for inventory in what sense?
Just inventory, because it’s a big deal if you have too much or too little. I said, “When you say your prayers at night, pray for your P&L
statement.” That’s a secret of success. When you’re making too much money, you get careless. That’s when the business falls apart.
When do you think this took hold at Digital?
In the late seventies.
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And prior to the seventies?
Prior to that, in general, things went very well. Our way of business worked because business unit managers had very close contact with their sales people—it was clear to the business unit managers how things were sold.
Something else emerged from running the company this way.
Because of the pressure for economy, employees built a common set of products. Most companies have different products in different parts of the world even though they don’t have different business units. Since our employees were all interested in economy there was a common set of products. This meant a lot of meetings and a lot of discussion. Critics thought that all the time Digital employees spent talking was a terrible waste. While talking was sometimes frustrating, the result was a common set of products.
When I tell people, “Say your prayers at night, pray for your P&L
statement,” I also say, “If you pray for your spreadsheet, it won’t answer you.” Spreadsheets just devastate people.
The introduction of spreadsheets was considered a great new tool for business management. Why are they harmful?
Because people started believing them. All the numbers in business are garbage.
Why is that?
People believe that the computer must be right. At Digital I never looked at the financial statements.
Let’s get back to the comment you made about success getting to peoples’ heads and destroying the company.
Athletes, actors, politicians, even preachers. They can’t survive success.
How can you avoid the trap?
I failed at it, failed badly at it. I believe, however, that the solution lies in the accounting system. If we had the discipline of thoroughly maintaining our accounting, we would have known how well or how
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poorly we were doing. Even the board of directors got careless because there was so much profit. In the late 70s and early 80s the success had gone to peoples’ heads and I couldn’t straighten it out.
We had no new products for five years. The company spent five years introducing controls and red tape to protect us from making defective products, and nothing came out. I’d ask, “Why don’t you make a new product?” The response was, “It takes two years to get it all worked out. Why start today?” With no new products eventually things collapsed. The profits disappeared.
An interesting thing happened. All the vice-presidents quit. They say I fired them, but they quit. And the Boston Globe proclaimed that it was The End of Digital. Interestingly, not one of those vice-presidents succeeded on his own. They did very well at Digital be
cause of the supportive environment.
Several of them did try to start their own companies.
A number of them did. They thought themselves the greatest managers on the earth. They thought that their presence at Digital made the company a success—and that their presence at their new companies would make them successes. Management at Digital had this attitude that the company was successful just because they were there. And I wasn’t able to control that attitude.
The message is that part of doing things the business unit way is to not look for credit for yourself. When I was a little kid I learned the fable of a turtle who talked two ducks into holding a stick between their mouths while he held it in the middle—off they flew.
One bird said, “This is clever, I wonder who thought of it?” The turtle couldn’t resist saying, “It was mine” and down he went. Part of the secret is to avoid showing the world how smart you are.
So your secret is to downplay your successes?
It’s more than that. You’ve got to make sure that people take responsibility for their jobs. The accounting system helps them take that responsibility.
How did Digital’s culture reinforce the sense of responsibility?
I can’t describe it. I’ll just talk about it. It was very much a team spirit, a family spirit, an overwhelmingly strong one. As far as I’m concerned
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it’s very important that a company have a trusting spirit of teamwork—
love is almost the word. For example, a hurricane once hit our Puerto Rico facility. A whole bunch of Digital people helped. We flew a DC-3
down there every day and people here sent baskets of apples.
Once somebody at Digital got seriously ill and died three months later of cancer. People wouldn’t even ask—they would just take time off from work and visit him in the hospital. That’s a family feeling.
You just know it’s the right thing to do.
Then when everybody [including Olsen] was fired, what fascinat-ed The New York Times was that former Digital employees stayed in touch with each other. Today there are alumni groups all over the world.
How do you instill that sense of community?
I don’t know, but it was all over the world. In Japan there were two thousand people. It was almost like a religious revival. They were that much of a family.
It’s interesting. When we trusted people in the organization, we rarely had dishonesty. We had complete trust. It was a beautiful feeling that you took for granted—you just trusted everybody. That doesn’t mean we didn’t have some really miserable people at times.
How do you deal with the miserable people?
I never did figure that out either.
Balancing work and family pressures always seems to be a big issue for entrepreneurs. You’ve worked in the industry for over thirty years. How do you balance your home life with your work life?
You definitely have to work at it. One bit of advice I give people is, if you’re going to learn to be a manager, take responsibility in your church or town activities. This actually relates to the story of how I got into business. I was an engineer at MIT and had all the things I ever wanted to do. I went to an old church in Boston, and in those days it seemed that only old people went there—I was thirty years old in a church full of old people. They asked me to run the Sunday school. Immediately I went to Dixon library and checked out all of the books on business management. It was my first exposure to the academic approach to management. That is what introduced me to
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business. What I did in Sunday school to make it a success, and what I did as a sailor, and what I did at MIT was to make the environment interesting for people.
How did you make business interesting?
Before MIT I spent a year at IBM. I designed the circuits for a computer we made but I never told anybody I did it. Just introducing them made everybody very excited. At Digital I would often do things without telling anybody and got people jazzed up. I didn’t need the credit and it made things exciting. That aspect of leadership really helps a business. People who are successful usually have ways of exciting people.
Getting back to the question of balancing private life, how did you manage to spend enough time with your family?
I just made it a point to. I backed-off from a number of different activities. I was on a number of company boards and I backed-off on those.
I’ve always made it a point to be with the family. I’d often get my work done by getting up early before anybody else. I still get up before anybody else. I hate to be cheated from that time. The secret is to do the work when it’s quiet and you’re alone, sometimes at three in the morning. That way no one thinks you’re cheating on family time.
Could we talk about another interesting aspect of Digital—your decision to use noncommissioned sales people?
You could say that what is commonly believed is almost always wrong. No one on the board of directors ever understood the idea behind noncommissioned sales people. They didn’t understand anything.
It all depends on how you think of a salesperson. If you think he’s a professional and you want him to act like a professional, you treat him like a professional: “Your job is to sell. Your satisfaction comes from doing your professional job.” The problem was that management couldn’t leave the noncommissioned plan alone and snuck in a commission plan. It took a very thick manual to explain the plan.
In effect, the message to the salesman was, “Memorize the manual and focus more on knowing the rules than on the products you’re selling.” You can see the harm in that. Management just couldn’t leave their cotton-picking hands off the sales plan. Like the income
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tax system, it got more and more complicated.
People always approached me and said, “I’ve got a product that doesn’t sell. Let’s temporarily have a commission plan for it.” I said no. “You’ll always make dogs for products. By putting a commission on the dogs you end up selling the dogs and not the products customers really want.”
Everything gets messed up by paying commissions on the dogs.
The same thing is true with piecework. I have a friend who was a wood-cutter. He made a lot of money. I called him and said, “I’m giving a speech on commission plans and piecework. Piecework pay must really work in the woods because you simply get paid for the amount of wood you cut.” He exploded. He told me that after getting paid for piecework, loggers at one company were running in the woods and driving machines faster in order to get paid more. Finally the logging company paying piece rates had to fire the whole crew because the accident rate was so high the company couldn’t pay for the insurance.
People have this naïve, stupid idea that everybody is motivated by money—it’s common knowledge. When I left Digital the company of course went whole-hog into commissions. They never figured it out.
The sales manual, I understand, was real thick. It’s too complicated.
The common belief about commission plans is, “Boy, what a chance we have to manipulate people!” Trying to manipulate people is the wrong attitude. The results are just terrible.
So when you created a noncommissioned plan, your objective was to motivate people by...
—Just saying, “You’re a professional and we expect you to act like a professional.”
And the means for instilling this motivation?
No, no, no. You’re talking like a manipulator again.
But you did want people to be proud of their professional work.
Yes.
What do you think motivates employees?
There are always a certain number of people who are motivated by power, jealousy, and vindictiveness. In my last years at Digital I didn’t
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do a good job of getting rid of that influence. Most people really want to be proud of
their work. And if you encourage pride in one’s work you will end up with people who are proud of their work. When you go to work every day it’s terribly important to get the satisfaction that you’re doing something useful or successful. In general, people are more satisfied if they’re expected to be honest than if they’re expected to be dishonest—you end up with a different class of people. Most people want to work for positive reasons, not for some arbitrary commission plan.
Could you talk about your later years at Digital and the difficulties you experienced?
I have to be careful because I don’t want to publicly criticize the people there. Remember that our primary goal at Digital wasn’t to have the fastest computer. We never had the fastest computer—almost never—because our commitment to customers was that future computers would run the same software the previous one did. This gave us an enormous customer following. But it also meant we couldn’t use the latest fads.
The goal was to protect customers’ investments.
Right. We also built a large service organization. Our training group was bigger than most universities—it was huge. If you think of that training group as a marketing tool can you imagine customers spending a week paying university-level prices to be lectured about your products for a week or two? You couldn’t beat that as marketing.
Customers swarmed in. To the stock market and the board of directors this just looked like a wasted effort on Digital’s part. The analysts and the board said that the goal should be to have the fewest people per dollar of sales. Apple was probably the best in the industry on that basis. Apple did no manufacturing, no selling, no servicing, and had no customer contact.
We did an enormous amount of consulting at good rates; it was very profitable—there was no inventory or other costs. Customers loved it. And the sales people were there to be helpful to the customer. At almost every large customer account, we had an office right in the heart of the company and had access to everybody because we were a key part of their organization. We had an office at Ford Motor
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Company—we owned Ford Motor Company. The same was true of Bell Labs because they trusted us. To those with business school backgrounds, our business model was too complicated. A good business model was defined as selling a product, getting rid of it, and just focusing on making the next product. The whole industry was run that way. So you can see why the board of directors said, “Digital has 110,000 people for only a $14 billion business. Get rid of the people, about half of them.”
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