Hit by Hard Times, Digital Equipment Braces for More Cutbacks in ’91 : Technology: A slump in minicomputer sales has hurt the $13-billion-a-year firm. It may eliminate thousands of jobs.

A 150-year-old former woolen mill in this sleepy Massachusetts town seems an unlikely home for the world’s second-largest computer company.

But then, Digital Equipment Corp. is not your typical $13-billion-a-year corporation.

Unlike many major companies, Digital has never felt the need for a flashy headquarters. It also has never laid off an employee, even in the depths of a computer industry slump in the early 1980s.

Now that corporate benevolence is being tested as Digital girds itself for the double whammy of a computer industry downturn and a possible recession.

The hard times already have hit the “mill,” as employees call the red brick complex, 30 miles west of Boston, which once turned out Army blankets.

Earlier this year, Digital reported its first-ever loss, a $256-million deficit for the quarter ended June 30. For the fiscal year ended that day, its profit dropped to $74.4 million from $1.07 billion a year earlier. To blame was a $550-million charge against earnings that Digital took to pay for a plan aimed at reducing staff through voluntary severance offers.

Digital’s stock price also has suffered, falling from an all-time high of $199.50 in 1987 to the range of $57 a share.

The company announced several waves of cutbacks, including plant closings and elimination of 9,000 employees through the end of next June by voluntary means.

Some industry analysts predict even more cuts--including layoffs. John Logan of the Boston high-tech research firm Aberdeen Group believes that Digital will fire at least 10,000 of its 123,000 employees in early 1991. Other analysts peg the number at 20,000.

Analysts blame Digital’s problems chiefly on a bloated payroll. Logan said workers at a Phoenix assembly plant were put to work painting walls after demand for the products they made dried up. Digital recently said it would close the plant.

“They can lay off 15% of their organization and still not cut into the meat,” Logan said.

He said Digital has the lowest revenue per employee of any computer maker--about $104,000 last fiscal year, compared to $164,000 at International Business Machines Corp. in 1989.

But layoffs would not come without a price, particularly to Kenneth Olsen, Digital’s 64-year-old co-founder and president.

“It’s a personal tragedy of Ken Olsen to have layoffs,” Logan said. He added that worker morale has been hurt as employees wait for the expected pink slips.

Not that Digital’s predicament is unique. Many other computer companies have been eliminating workers as demand slows. Troubled Unisys Corp. has endured several rounds of layoffs, and industry leader IBM has been scaling back through voluntary means.

Like other computer makers along Massachusetts’ Route 128 technology belt, Digital has been hurt by a slowdown in sales of minicomputers, machines designed for more than one user that are smaller than mainframes but larger than desktop models.

As personal computers and the slightly larger models called workstations have grown more powerful, they have chipped away the market for minicomputers--Digital’s traditional strength.

But Olsen blames his company’s problems on the economy, not a minicomputer slump.

“For the last few years, people have not, in this country, been investing in the future,” he said recently in his modest office, where vacuum tubes and computer parts line the exposed brick walls.

Digital was geared up for a certain level of sales, he said. When that revenue failed to materialize, profit sagged as excess overhead took its toll.

“We have a religious belief that as we make more computation available for less money, the demand will grow even faster. So in the last few years--more than ever in the past--we have been increasing the (computing) capacity we offer and at lower price.”

The formula failed as the economy slowed. “But we believe it’s a short-term thing,” he said.

Digital also was hurt as customers waited for promised new models before placing orders. Among the newer machines are Digital’s first mainframe computers, which the company announced in October, 1989, in a bid to compete more directly with IBM.

However, shipment of the VAX 9000 models was delayed several times. In the most recent acknowledgement of problems, Digital said last week that it would swap some of the circuits in the 100 or so mainframes it has delivered to prevent a problem that caused some of the machines to crash.

Digital’s cutbacks, profit declines and problems with the mainframes don’t take away from the fact that the company has been a singular American success story, industry watchers say.

Analyst Peter Schay of the research firm Gartner Group Inc. in Stamford, Conn., calls Digital “arguably the most successful start-up of the postwar period in any industry.”

Olsen was a young Massachusetts Institute of Technology graduate when he co-founded the company in 1957, with the help of venture capital.

Digital’s first breakthrough product was the PDP-1, which in effect was the first personal computer. Introduced in 1960, it used a video screen and a keyboard to enter information directly into the computer--a major advance in an era when programs were entered using punch cards, and users sometimes had to wait hours or days until a program was processed.

Digital continually upgraded the PDP line. But its next breakthrough was the VAX line, introduced in 1977. All VAX models can be hooked together easily and use the same software--in contrast to IBM’s computer lines.

In a long-running ad campaign, Digital has pounded home the message that “Digital has it now”--a dig at IBM’s unfulfilled promise of being able to link all its machines seamlessly in a network.

The VAX line has been enormously popular, helping Digital’s profit grow nearly fourfold from 1984 to 1988, while revenue doubled.

The company’s good fortune began to wane after the October, 1987, stock market crash, as the slowing economy hit all computer makers. About the same time, the minicomputer slump set in, some customers began to perceive Digital’s product line as tired, and competitors introduced machines that provided stronger competition, analysts say.

Also, Digital was hurt by growing interest in “open” computer systems--in which machines from any maker can be connected and use the same software, analysts say.

In 1988, Digital announced products that provide these features by masking the differences between computer brands. It since has become a leader in computer “integration,” or making different brands work together.

Digital announced in October that it plans to make its VAX line compatible with software written for the Unix operating system, which is becoming an industry standard. An operating system is the base layer of software that controls a computer’s internal functions.

In the past two years, Digital has taken other steps to address the open-systems movement. It introduced a workstation line that uses the Unix operating system rather than the VAX one. It also began offering IBM-compatible personal computers made for it by Tandy Corp., addressing its lack of home-grown personal computers.

And in October, Digital announced new small computers that also use Intel Corp. microprocessors, which are the “brains” of IBM and IBM-compatible personal computers. These machines, which Digital makes itself, are aimed at small- and medium-sized businesses.

“DEC today is a very different company than it was 2 1/2 years ago, from a product point of view,” Schay said.

He also said Digital’s profit slump shouldn’t overshadow the fact that the company is financially strong, with low debt and a large cash reserve.

Olsen emphasized the same point.

“Our profit is down, but we’re not troubled in the traditional sense,” he said.

“We’ve gone through many recessions,” he added. “We’ll do better when our customers are successful.”