Control Data Embarks on New Mission : Overcoming Its Own Ills Gets Priority Over Social Goals
Control Data, the big computer firm founded here in 1957, has long been a source of local pride for its pioneering role in the computer industry and its oversize social conscience.
While becoming a global, $5-billion-a-year company, Control Data has directly fostered the start-ups of more than 60 area technology firms and helped create the climate for hundreds of others. It has given the Minneapolis-St. Paul area a strong high-tech economy and flavor.
At the same time, 73-year-old founder William C. Norris is considered a corporate visionary in some circles for his efforts to make Control Data a servant to society. The company’s stated business strategy has been to develop “those markets which have evolved from society’s major unmet needs.”
This approach has steered Control Data into everything from prison projects and inner-city factories to Hawaiian “wind farms.” To many, it was a fresh corporate breeze that seemed to draw strength from the rarefied Minnesota air, which has given rise to a long maverick tradition of social and political progressivism.
“Control Data’s got a social conscience, and Minnesota’s that way,” Gov. Rudy Perpich says enthusiastically. He once was employed by Control Data and works closely with Norris on job-creation ideas. “We’ve got a lot of Scandinavians and Germans, and you know their social programs. That’s what Control Data is all about.”
Deleted From Report
Maybe so, but all mention of that high-minded credo has been quietly deleted from the company’s latest annual report.
With profits plummeting and criticism of the company mounting, Control Data has restated its official corporate mission and toned down the talk about fixing up society. A company survey last year found that perceptions like those held by the governor--and, more important, by the investment community--had given the company a slightly flaky image.
In a speech to shareholders last week that included between-the-lines admissions of management myopia and inertia in the marketplace, President Robert M. Price added: “We resent the oft-repeated implication that the profits of the company are sacrificed on the altar of do-goodism.”
The company says it remains fully committed to its social philosophy. But Control Data spokesman Richard C. Reid says, “People got to thinking we were some kind of a charitable institution.”
Charitable might be the wrong term, but of late the institution has certainly been a nonprofit one. Earnings last year plunged 81% to $31.6 million, and in the January-April quarter of this year Control Data went $9.2 million into the red. The company isn’t forecasting a quick turnaround.
With many of the firm’s disk-drive plants in the Twin Cities area, where the company employs 18,000, Control Data’s retrenchment plans and the computer industry slump have folks worried after years of high-tech growth. Technology accounts for 12% of the Twin Cities’ manufacturing employment--five times the national average.
Expects Less Support
“We had a strong rebound from the last recession because of high technology,” says Larry Wipf, head of regional economics for Norwest Corp., a Minneapolis-based bank holding company. “It’s too early to see an impact from a technology slowdown, but my guess is the Twin Cities economy won’t receive as much support from high technology as it has.”
Many computer firms are suffering these days from what is thought to be a cyclical downturn. Control Data, which makes and sells mid-size and large computers as well as costly disk and tape drives for other computer makers, has been hit by declining orders and falling prices.
But the company acknowledges that its problems go beyond the industry-wide slump. Except for bankrupt disk-drive maker Storage Technology, it is the only mainstream computer company whose unsecured debt has been downgraded by Moody’s Investment Service--and that has happened twice in six months.
“We think their earnings will be under pressure for at least the next three years,” says Fred Pastore, Moody’s associate director and assistant vice president. “I think there are fundamental problems. That’s why we downgraded them.”
Control Data’s many Wall Street critics cite a litany of past miscalculations by management, and they blame it in part on a squandering of money and executive time on Norris’ pet social projects. The company has a penchant for joint ventures that has made it a partner in about 170 widely diverse firms--some of them engaged in what are known internally as Norris’ “foo-foo” projects.
Lost Strategic Direction
“Over time, they seem to have lost their strategic direction,” says analyst Thomas Crotty of the Gartner Group in Stamford, Conn.
Critics got a chuckle out of one Control Data project that leased cars to ex-convicts; it was discontinued after the participants made off with 34 cars. Control Data has had mixed success with urban-revitalization projects, computer-based education and such offbeat ventures as a failed effort to grow hydroponic vegetables commercially.
Control Data admits that it has seen little or no financial return from such projects. But Norris is impatient with critics, and he continues to insist that his 22-year-old Plato computer-education program--in which the company has invested close to $1 billion--represents no less than “the future of the company.”
Many in Control Data consider it ironic that the company is attacked for its good deeds while other corporations are attacked for their greed. And, to the suggestion that the company’s current financial problems have anything to do with the social ventures, Norris says, “Baloney.”
The company has been shy about publicly quantifying its “social” investments, but Price said last week that about 3% of the company’s assets are “employed in so-called societal-need businesses.” That’s about $288 million.
Control Data is one of several big computer companies that have grown to middle age in the shadow of IBM. But under the strong-willed Norris, the company has always stood slightly off-center.
Challenged IBM
Complaining that IBM was burying its competitors technologically in those early days of the computer industry, Norris quit what was then Sperry-Rand to start Control Data in 1957 by selling $1-a-share stock to friends around Minneapolis. The new firm specialized in big computers for scientific use and became a major producer of mainframe computers. It bought a big finance company called Commercial Credit in 1968, then emerged from a deep industry slump to defeat IBM in a key antitrust case in 1973--a suit Norris’ lawyers had urged him not to file.
That out-of-court settlement not only brought Control Data $101 million in cash but also gave it the Service Bureau Corp., a big IBM subsidiary that firmly entrenched Control Data in what was then the fast-growing business of selling computer power to remote customers.
A one-time Nebraska farm boy, Norris also pushed his company into the production and sale of peripheral parts for big computers, mainly disk and tape drives. It was a shrewd move; its peripheral-products division came to account for one-third of the company’s revenues.
Through Control Data-controlled joint production ventures with Sperry, NCR, cross-town rival Honeywell and other firms, Control Data became the world leader in the manufacture and sale of the costly and profitable disk drives that are among the most sophisticated components of computers.
“They were doing lots of things right,” says Jack McLaughlin, a longtime disk-drive consultant in San Jose. “They were able to build a product and deliver it on time at a price that was reasonable.”
Passed by Japanese
Then a familiar thing happened. One Control Data officer, calling the company’s current difficulties a mirror of American business in the 1970s, especially the automobile industry, says: “The Japanese leapfrogged us in quality.”
McLaughlin says Control Data’s decline began around 1981 when Fujitsu Ltd. of Japan, whose disk drives had a far lower failure rate, figured out how to market its superior products in this country. Fujitsu and other big Japanese firms, with cheaper products built in the Far East, have cut into Control Data’s profits with price cuts of up to 80% on some products.
Troubles multiplied: The emergence of personal computers created a market for inexpensive, low-tech drives for floppy disks that Control Data couldn’t make cheaply enough to compete with those made in the Far East. And the plummeting cost of computer power meant that many ex-customers bought their own systems rather than rent time on Control Data’s remote mainframes. Technical errors and tardy understanding of market trends handed sales to new, aggressive competitors.
“There was certainly a lack of full understanding of market direction,” Norris says. “It was difficult to change the thinking of executives.”
In its third reorganization in two years, Control Data in January handed the disk-drive mess to the company’s trouble-shooter, Lawrence Perlman. Fresh from readying Commercial Credit for sale in a money-raising move, Perlman is now trying to slash production costs, cut employment and improve the quality of the company’s disk drives. (Last week, Security Pacific Corp. said it is negotiating with Control Data to buy Commercial Credit in a deal that analysts say could be worth as much as $800 million. A Control Data spokeswoman said the company is “talking with a number of potential purchasers.”)
Abandoned Business
Last year, the peripheral-products division abandoned an incremental but highly visible $100-million business, the production of disk drives that work in big IBM computers. Now, Perlman says, the company will withdraw from the market for the cheapest of all disk drives, the floppy-disk drives for inexpensive personal computers that are made almost exclusively in the Far East.
The bulk of Control Data’s peripheral-products business remains intact, and consultant McLaughlin says the company has already made quality improvements in its core disk-drive business for mid-size and big computers and has “kept fairly current” in technology. “To me, it appears to be a marketing problem, not a manufacturing problem or an engineering problem.”
As if there wasn’t enough to worry about, Control Data’s stock has been selling at well below its book value of $46 per share, giving rise to the possibility of a hostile takeover. Norris, a long-standing critic of such raids, has vowed a “world-class fight” against anyone who tries.
A new Minnesota anti-takeover law endorsed by Norris helps supplement many such measures enacted by Control Data. The most important stands to be the expected sale of Commercial Credit, proceeds of which would be used to buy back stock.
Analysts say Control Data’s mainframe-computer business, which generated $460 million last year, has remained a strong part of the company. In a market where IBM has 75% of the business, Control Data has created some big niches at places such as Chrysler, where 27 of the auto firm’s 30 mainframes are Control Data machines.
Stayed Competitive
“In the mainframe area, they’ve stayed pretty darned competitive,” says Robert Brauberger, a chief engineer at Chrysler.
Control Data’s Price boasted last week of the company’s decade-old investment in supercomputers, a market that has surprised many with its growth in the last two years. Supercomputers are the fastest and most powerful computers on the market and, at prices in the $10-million range, are used mostly by governments and other large institutions.
Control Data sold nine supercomputers last year, second only to the 25 sold by Cray Research, a Minneapolis firm started by Control Data expatriate Seymour Cray. Now, the two firms are in a race with the Japanese to bring the next generation of supercomputers to market.
Much like General Motors, with its Saturn small-car program, Control Data created a new supercomputer firm, ETA Systems, and transferred employees to it--an effort to “prevent the bureaucracy from gumming up the project,” one executive says. The firm hopes to bring out its next supercomputer, the ETA-10, next year.
Though the ETA project has its skeptics, Control Data insiders consider it a sign of life at the company as it tries to reconcile its size and unique philosophy with the realities of a fast-moving industry.
The company’s executives remain convinced that it is a special place, and Norris continues to proselytize. In recent years, he has begun warning about the Japanese challenge and the need for industrial cooperation. Instrumental in the founding of a 21-company technology research consortium now operating in Austin, Tex., he is now trying to get 14 Midwestern states to band together for trade with Great Britain.
Perlman, 47, a St. Paul native and Harvard-educated lawyer who jovially wears suspenders, is an embodiment of Control Data: He says that critics have exaggerated the importance of the company’s social philosophy, yet says that philosophy is the very reason he joined the company five years ago after careers at a law firm and a heart-pacemaker manufacturer.
“I thought this was a different kind of company that, under Bill Norris’ leadership, viewed corporations as having a larger purpose,” Perlman says. “I still do.”
