Decline of Digital Equipment offers lessons for Microsoft

Decline of Digital Equipment offers lessons for Microsoft

Former DEC exec wonders how Microsoft can weather the storms it's created

Microsoft has piled up so many stresses on its corporate body in the last 10 months that it must beat almost insurmountable odds to remain healthy and viable, a business strategist said today.

"There's something endemic in technology companies that they are not built to last," said Peter DeLisi, founder and president of Organizational Synergies, a Fremont, Calif. strategy consulting firm. "The larger and larger they become, the more they spin out of control. In a highly empowered culture like Microsoft or DEC, the pieces are loosely held together. And in a crisis, down they go."

DeLisi was not predicting the collapse of Microsoft -- the Redmond, Wash. firm is a member of the Fortune 50, with revenues in its latest fiscal year of $78 billion -- but current and former Microsoft employees have been struck by the parallels between the company's current situation and that of DEC, or Digital Equipment Corporation, which in the late 1980s was the world's second largest computer company. By 1996, DEC had disappeared, sold at a fire sale price of $9.6 billion to Compaq.

And DeLisi knows DEC -- specifically its downfall. A 16-year-veteran of the Maynard, Mass. company, half of those as a strategy, IT and organizational culture consultant to DEC's largest enterprise customers, DeLisi wrote a seminal paper on the company's decline, "A Modern-Day Tragedy: The Digital Equipment Story," in 1998. Five year later he co-authored the book, "DEC is Dead, Long Live DEC" with Ed Schein, a former professor at the MIT Sloan School of Management and one of the world's foremost authorities in organizational behavior.

Computerworld spoke with DeLisi after seeing his paper mentioned numerous times in a semi-underground blog, "Mini-Microsoft," purportedly written by a current Microsoft employee, when the blog's author posted his or her take on Ballmer's retirement. Among the several hundred comments left by others -- most anonymously -- were dozens referencing DeLisi's description of DEC's downfall.

Those with time at Redmond saw similarities between the tale of DEC and today's Microsoft:

"I spent 12 years at Microsoft after leaving DEC in 1994," stated one anonymous commenter. "The time between DEC's first [layoffs] and its closing shop was brief. DEC in its heyday had 140K employees, large cash reserves (no debt) and was the 2nd largest computer company in the world (behind IBM).

"DEC missed early entry into the PC market and was not able to catch up; similar to Microsoft missing on mobile. Missing the market, sound familiar? [emphasis in original].

"DEC's beloved CEO and visionary, Ken Olsen, left in 1992 and was replaced by Bob Palmer who had been internally lobbying for the job for years ("managing up"). Palmer I believe is still on the board at debt-laden AMD. [Editor's note: Palmer left AMD's board this year.] CEO change, sound familiar?

"If employees think it cannot happen at Microsoft because of its large cash reserves, they are wrong."

While DeLisi was hesitant to cast Microsoft as a DEC doppelganger because he was not inside Microsoft -- as he had been at DEC two decades before -- he was confident that Microsoft had, purposefully or not, stacked the deck against itself.

Microsoft's strategy turn-about and the resulting July top-to-bottom reorganization, then the announcement six weeks later that Ballmer would depart and a new CEO found, and then 10 days after that, the acquisition of Nokia -- a move that will boost the company's head count by a third -- are an incredible number of corporate strains in quick succession. "Any one of those are by themselves major efforts to assimilate," DeLisi said. "Sometimes companies can weather some of those changes, but when they must deal with more than one major change, most cannot."

Just absorbing Nokia and its estimated 32,000 employees will be a chore that could disrupt Microsoft or otherwise end badly, said DeLisi. "The integration of Nokia is not a slam dunk," he said. "Half of all mergers and acquisitions fail outright, and in two-thirds of the cases, the companies would have been better off investing in Treasury notes. That by itself is going to be difficult to pull off."

But DeLisi focused on a different problem Microsoft faces: Its search for a new CEO. In part that was because he had identified the same event -- iconic founder and CEO Ken Olsen's departure in 1992 and the hiring of Robert Palmer as its new CEO -- as, if not a tipping point, then certainly one cause of its precipitous decline. "Bob Palmer was the wrong CEO for the times," said DeLisi.

Microsoft's board could repeat the error. If nothing else, it has a very difficult job in finding the right person to lead Microsoft through these times. "How do you hire a CEO to deal with all these kinds of changes?" DeLisi asked, only partly rhetorically. "What's the right thing to hire the CEO to do? It's not obvious."

Identifying what the CEO should have as a top priority will be tough because it's impossible to predict the future. What Microsoft's board pegs as the No. 1 job for the CEO may not, in short order, be what he or she spends considerable time doing.

DeLisi pointed to the negative comments threaded through the Mini-Microsoft blog post as an example. "It sounds like there's a lot of discontent [at Microsoft]," said DeLisi after reading the several hundred comments. "It's questionable whether or not a new CEO would recognize internal problems that would undermine strategies. Some people come in [as CEO] and just have no clue."

He also worried that Microsoft has already wrapped a strait jacket around its unnamed CEO by shifting to a "devices-and-services" strategy, kicking off one of biggest-ever reorganizations and then swallowing Nokia.

"One of two things can happen," DeLisi said. "If the CEO is brought in to implement this strategy, you lose the benefit of any insights and innovation this person brings to the table. [The new CEO] is compromised before he starts. Or you hire this person and tell them, 'You're free to go ahead and change things.' Now what they've created is unbelievable confusion. Everyone is confused about the direction, what they should be doing and the strategy.

"It was a bad decision to do what they've done," DeLisi said. Considering corners Microsoft has painted its new CEO into, the Microsoft board must have had someone in mind all along, DeLisi contended.

"I see the problems rooted in Microsoft's culture," DeLisi said, citing unintended cultural changes at DEC as the precipitating factor in its ultimate decline. "Can they take these changes? Can they hire the right leader? Those are the questions for me."

While many analysts have speculated that even if Microsoft fails in its volte-face or stumbles with its CEO choice, it could see years of impressive revenue while it also declines in importance, DeLisi drew on his experience at DEC to wonder if it would be otherwise.

In his 1998 paper, DeLisi called DEC's fall "precipitous." In the interview today, he pointed out other technology companies that went south quickly, including Sun Microsystems and Silicon Graphics.

"I think we're seeing some of that happen to Microsoft," DeLisi said.

DeLisi's paper on DEC can be downloaded from his company's website as a PDF.

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, on Google+ or subscribe to Gregg's RSS feed. His email address is

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