"The best assumption to have is that any commonly held belief is wrong." —Ken Olsen, Digital Equipment

Fortune magazine hailed him as America's most successful entrepreneur. His unauthorized biographers call him "The Ultimate Entrepreneur." His company experienced 25-40 percent growth for seventeen straight years. At its peak, Digital Equipment Corporation-known as DEC by outsiders-em-ployed 120,000 and claimed annual revenues in excess of $14 billion. For 35 years Ken Olsen, founder, president, and pater familias piloted his company from a modest start in a small Massachusetts town in 1957 to a formidable, if bloated, leviathan at the time of his departure in 1992.

For all the attention that CEOs of companies one-fourth Digital's size manage to attract, Olsen should be as familiar to America as any of the great industrialists this nation has seen.

However, a certain modesty and aversion of publicity make it difficult for all but his closest colleagues to know him.

Olsen received his M.S. in electrical engineering from MIT in 1952. After working in MIT's Lincoln Laboratory on a joint development project with IBM, Olsen saw that an opportunity existed to create a computer radically different from the closed architecture Big Blue locked its customers into. In 1957 he and colleague Harlan Anderson approached Georges Doriot, the godfather of the venture capital industry, for $70,000 to start a company.

Digital's first computer was the PDP-1. Though it fueled the company enough to achieve critical mass, subsequent computers like the PDP 4 and 6 failed. It was a backbreaking effort to deliver the PDP 8, but Digital successfully ushered in the state-of-the-art in interactive computing the notion that users needed to access a computer using their own terminal and keyboard in order to perform their work, rather than submitting requests to lab-coated managers in imposing data processing centers packed with IBM equipment.

By the mid-seventies, over 70 competitors crowded the minicomputer market that DEC had spawned. The firm's technology lead had steadily withered and IBM had awakened to the minicomputer market opportunity and developed a system of its own. Even Data General, the company founded by the departed Digital lieutenant, Ed De Castro, had racked up some successes. Once again though, Digital reestablished dominance with a next generation computer, VAX. VAX carried the company for another decade and fulfilled prophesies of computer ubiquity-for companies, at least.

For most entrepreneurs, the calls to step aside and let professional management guide the startup venture come relatively early. Olsen survived these challenges even during the company crises of the mid-70s and 80s and propelled his company to greater heights. By 1992, however, DEC's financial outlook was bleak; the company had made several aborted attempts to enter the PC market. Olsen's disdain for this emergent industry was well documented by the press. More than once, when asked about the next wave in computers, Olsen responded with "There is no reason for any individuals to have a computer in their home." This assessment of the new market for years was held up as emblematic of corporate arrogance and ineptitude.

Nonetheless, Olsen's legacy of achievement marks him as a truly successful, if somewhat contrarian, entrepreneur of the modern computer industry—a giant to be reckoned with.

A company of firsts, DEC implemented various unorthodox business practices, including paying its sales people on the basis of a strict salary instead of leveraged incentive plans popularized by IBM. At the height of the company's success, DEC's unique approach to business was hailed as revolutionarily effective. As the company plunged, pundits and employees complained about overlapping tasks, committee-managed inefficiency, and chaos.

From a cultural perspective, DEC mirrored Olsen's temperament—unique and unpredictable. Digital was the countercultural antidote to IBM—a title Apple would inherit in the 80s—yet it was decidedly un-flashy and almost entirely avoided TV and radio advertising. In short, most important aspects of the DEC gestalt inevitably trace back to Olsen himself.

We met with this publicity-shy bear of a man at the offices of his newest venture, Advanced Modular Solutions, in bucolic Boxborough, Massachusetts.

Interview Transcript

You are one of the most successful entrepreneurs of your era. What are some of your keys to success?

I was asked to give several speeches on entrepreneurship to various groups this Fall. One point I made is that business schools' goal today is to teach people to become entrepreneurs. I think this is a serious mistake because once someone becomes accustomed to being his own boss, it's very hard, maybe impossible, for him to later work as a team member. People who want to be boss right from b-school are skipping the beneficial activities of working for somebody else—not very likely the best thing to do.

My recommendation is to first work for somebody else and learn how to be a team member, which sounds kind of obvious, but in this modern world being a team member is very odd. Then go and learn to be a leader. If you never learn to be a leader don't try to run a business. Television business schools don't train people to lead. They teach that the boss must be decisive, even if he knows nothing.

Someone who teaches at West Point and Harvard compared the two educational systems in an article. He wrote that one is always questioning issues and never cooperates—Harvard. The other is disciplined and military. He didn't come to the obvious conclusion that Harvard's way is better. You really need both. Whether it's Harvard, or MIT, or Stanford. You're kind of useless in business with just an academic background. You're also useless if you spend too much time in the military. You really ought to have backgrounds in both. There is a lot to learn in the military about leadership that the academic world completely misses. The image of the military may be of top-down management, but that's not how it works.

I was a sailor. A ship is a good model for a business. A captain determines the direction of the ship, but the ship is made up of many divisions and groups. Each one is quite independent and knows what its particular task is. And the attitude is beautiful, shared, and universal. The attitude is that the ship may not accomplish its mission, and the group may get killed, but one thing is for sure: it isn't going to be our group's fault. People don't sit there worrying about the captain and the direction of the ship.

So it's a deep sense of accountability that maintains high performance?

It's more than accountability. The group members simply know how to do their task well even if nobody else on the ship knows what that particular task is. Business needs such a model, too. The manager who says, "I make all the decisions"—is a fool. He's a fool.

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.

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 them, the ideal manager dresses we, 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.

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 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 because 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 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 fascinated 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 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 non-commissioned 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 non-commissioned 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 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 puting 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 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 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."

That's what they told you to do?

Yes. Cut the workforce in half-outsource, get rid of them all. This fit in with the stockholder value that Wall Street wanted.

Let's switch gears and talk about your longevity as a CEO. What motivates you to continue working and to even start another company after such a long tenure at Digital?

It's a little complicated. The satisfaction comes not from others seeing or understanding one's work. It's in yourself. It's the satisfaction of seeing the results, even though no one else knows of your achievement.

It's commonly said that Ken Olsen lost it, that he didn't know the mainframe was dead and that the PC would take over the mainframe.

They still say that even though the world has now determined the mainframe will be here forever.

I'd like to answer the accusations, which are foolish. Aside from that, the big motivation is seeing something accomplished. I still spend a lot of time designing equipment. I can do things that almost nobody else can do. I have some background in toolmaking, a little in physics, a little in chemistry, and other things. I enjoy putting that all together. I can stay up all night working on it.

Why does that motivate you?

As you get older and you pass the normal retirement age, can you think of anything better than having an exciting job? Sitting down and watching television or playing golf rates much lower on the list of accomplishments.

You mentioned that the press said you had stayed too long as Digital's CEO. When should a manager or an entrepreneur leave his or her company or job?

That depends on a lot of things—when he gets tired, when the job is no fun, or when he really has lost it. I was on a mission then to show the world how business computing could be done. People within Digital were just too embarrassed to have an old man doing that. The greatest dishonesty was that they destroyed VAX. So few people understand the significance of business computing. Mainframe computing runs reliably every day—no one watches it. It is by far the least expensive form of computing. PCs are the most expensive.

The stupidity of computer science is such that if you go to any computer science school and ask, "What's the answer to the problem with computing today?" They say, "The answer is to have faster net-works, taster PCs, and big databases where you can mine all that information—and then make graphs."

It sounds beautiful. Many companies today are in trouble because of that kind of thinking. It was these kinds of ideas which five or six years ago tagged me as being too old for the business. Everybody knew that PCs were going to take over the world yet it's clearer than ever that the last thing you want is a PC running anything important. Five or six years ago PCs were much better than they are today.

Like other successful companies, Digital had defectors who left to start their own companies. One of the best known was Ed De Castro and his company, Data General. How do you minimize such defections?

I'm friends with De Castro now. It's been a long time—you don't hold hurts. This sort of thing will always happen. The miracle was that we decided not to sue them, to not make an issue out of it, and very rarely comment on them in public. In retrospect this was marvelous wisdom. Suing them would have dragged on for years. It destroys your heart. Jealousy does terrible things to people—the yellow-eyed monster that eats one's heart out. Vindictiveness and the pursuit of revenge, just because someone wronged you, is destructive. The wisdom was in not pursuing the issue and controlling the urge for vindication.

That takes incredible restraint.

And it's logical. Jealousy and vindictiveness are not the best inclinations to have because the task is to win business by doing a better job than anybody else. This is what you should spend your energy on.

Some people thought, "If that's Ken's attitude, let's take advantage of him." So once in a while we did nail somebody in court. It was usually people who sued for trivial things like a real estate activity and figured that Ken could be taken advantage of. But we didn't do that in the situation you mentioned. It would have dragged on forever.

So what you're saying is you can't keep people from taking company knowledge to start their own companies.

No, you can't. You must know that it's a part of business. Certain things can't be helped, and you live with them. You get mad for a while but it's not a very useful emotion.

Ed came to see me not long ago. There is no point in even remembering the incident anymore. He has a jet airplane and invited me to go flying with him. It's so much better that way. It's so much better not to hate people. Those who do often end up suffering quite a bit.

You've had a long career. Any regrets?

Oh yes. As you can guess, I think a lot about what I should have done at Digital during my last ten years there. It's been fun, satisfying, and exciting, but I'm usually more conscious of my weaknesses and mistakes than I am of my successes. In many ways that's healthy-if you're blind to your weaknesses you get in trouble. I don't think about any of the successes at Digital. I look forward to doing something new each day.

You only learn if you're conscious of the need to learn. If you conclude you're great, that's the end.

Did that sense ever take hold in you? Is that a regret?

No. I have a scientific and Christian background. The tradition of science is that you should think clearly enough such that you don't think you're great. Also, despite how things are presented today, traditional Christian background says that you really have no reason for pride. St. Paul said almost sarcastically, "What have you got that you weren't given? And if so, why are you so proud?"

Whatever you think you're good at is just at the surface of it all. There's nothing you're so good at that you really understand completely. When you get your degree in computer science or your degree in business they tell you, "Now you know it all. You don't ever need to open another book." I'm sure they do this because I've seen the results of people whose attitude is that they know it all. That attitude is so contrary to science and traditional Christian views it is obviously unwise.

Some people don't understand this: designing a financial system, designing an organization, designing a circuit or a computer diagram are almost the same thing—they generate the same satisfaction. The satisfaction is the same but there is much reason to be humble because there's so much one doesn't yet know.

Success in business is so fragile—human beings are involved, and the market is involved. People who follow somebody else's wisdom without thinking about it will miss these things. Being critical and analyzing issues ahead of time is satisfying. You must have humility if you're trying to figure things out differently from everybody else. But most people don't think at all. They fall in love with phrases. The best assumption to have is that any commonly held belief is wrong.

For more, order a copy of In the Company of Giants: Candid Conversations with the Visionaries of the Digital World.

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See Also

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