Tandem Has A Fail-safe Plan For Growth
Jim Treybig only knots his tie tightly when he meets bankers, representatives of the financial community, and customers. Usually his tie is loose and his sleeves are rolled up, and most employees at Tandem Computers call him Jimmy.
Today, though, the knot is right up to his shirt collar. His jacket is on, and his manner is formal. Tandem's 40-year-old president is talking to a group of European airline executives about a $500,000 sale that in two or three years could grow into $8 million worth of business.
Salespeople in the field have already convinced the three visitors that the young company's fail-safe computer system can satisfy their technical requirements. What these potential customers have come thousands of miles to Tandem's Cupertino, Calif., headquarters to assess is whether the relatively small, fast-growing company will meet the needs of the future -- servicing, expanding, updating, staying at the forefront of new technology -- or whether it will succumb to the problems of fast growth that tripped up other high fliers in the past.
The visitor who speaks first is older than Treybig and nervous.His hands shake as he says, slowly and carefully, that the large company he represents is seeking more than a system that will satisfy its needs today. Like most potential first-time buyers, it has used IBM equipment almost exclusively for all of its data processing in the past. Although Tandem's system offers clear price performance advantages for users that demand fail-safe systems -- dual processors that will work together, or in the event of component failure, take over the job on their own -- the sale won't be made until the potential customer is convinced that he has found a partner who will be almost equally fail-safe.
Treybig is well prepared to argue that Tandem will. With fiscal 1980 sales nearly $109 million and pretax profits of $21 million, it is easier for the Houstonborn entrepreneur to be convincing than it was seven years ago. Then, all he had to sell were the resumes of Tandem's founders, a product concept, and a vision of an untapped (and untested) market. Tandem aims to be a billion-dollar company by 1985, and Treybig and his team have come within a million dollars of all but the first year's annual revenue projections in the original five-year plan.
At the prospect's request, Treybig discusses Tandem's technological preparations for the future. He mentions satellite communication link replacing telephone land lines, large-scale integration ("In 10 years, a computer the size of ours will be on one chip"), the emergence of video in data processing, and electronic mail. He says that trends in computer design toward redundancy and modularity favor Tandem's kind of system. He adds that the changes Tandem is working on are both the evolutionary kind that are compatible with the existing Tandem system and have been going on all along and the revolutionary kind that are more like starting over. He sums up by saying that technology changes so rapidly that no one can predict specific developments farther out than a couple of years, but that Tandem plans to be at the forefront of whatever comes up. Expenditures in 1980 for research and development were up 89% over 1979, he adds. Tandem grew 95%.
"Revenues grew by 95%?" asks the leader, raising his eyebrows.
"Yes," Treybig says and pauses. "Earnings grew 117%."
The potential customers sit back a little and smile.In his flat Texas drawl Treybig reels off the kind of numbers that most business people only dream of. A quarter-by-quarter increase in sales and income since the first profitable quarter that ended June 30, 1977. A growth rate that even without acquisitions ranks it fourth on the 1981 INC. 100.Pretax profitability of 19.3%, almost twice the American Electronics Association surveyed median. Almost no debt. A 68% increase in the number of employees over the last year, from 828 to 1,387. (By the end of March 1981, the number was up to 1,890.)
The growth, Treybig points out, is impressive but not unique. Data General, Digital Equipment, and Prime Computer, the minicomputer stars of the '60s and early '70s, grew just as quickly -- in fact, their growth curves provided the model for Tandem's. But Tandem plans to be more than just another fast-growing, highly profitable computer company. It aims to be a billion-dollar company that stays entrepreneurial and a fun place to work.
"There's no fundamental reason a company can't be good at a billion," insists Treybig. "You can keep that small company feeling for longer than anyone thinks, but for sure you won't keep it if you think you can't keep it past a certain size. When you say you can't, you never pioneer. You never find out the limit."
It's more than a personal preference for working in an informal and unstructured environment that makes Treybig and the other managers want to keep the excitement alive. They's convinced that maintaining the sense of purpose, challenge, and excitement typically thought characteristic of a start-up or a small company is one of the most important, and usually overlooked, keys to a fast-growing company's continued vitality, creativity, and success.
There's nothing magical about this idea, insists Treybig. "It's hard work, and as the company grows larger, it gets harder. You have to demand and reward creativity. You have to preach it, you have to stress it. If every manager you have doesn't believe in it, you won't have it."
The other thing you have to do, he points out, is make sure that everyone understands the direction the company is moving in, and the goals. "Why do we talk about the billion dollars?" says Treybig. "It doesn't really matter whether Tandem is a billion-dollar company in 1985 or 1986. But we want everyone to understand the challenges."
Treybig knew he wanted to start a company in 1973 when he left his job as a marketing manager in the computer and peripheral equipment division at Hewlett-Packard to join the San Francisco venture capital firm of Kleiner & Perkins. Since his background included a degree in electrical engineering from Rice University, a couple of years of selling at Texas Instruments, an M.B.A. from Stanford, and five years at H-P, computers were an obvious choice. But at the time it seemed as if most of the significant niches in the computer industry had been filled.
Over a year or so, Treybig considered several high-technology ideas. The one that seemed most likely to support the kind of company he had in mind was computer-related. He figured if a company could produce a system that wouldn't fail or destroy data and that didn't cost more than existing alternatives, then it could sell "a whole lot." He started collecting notes on companies he'd heard about that were hooking computers together to produce a custom-designed fail-safe system. He identified a possible multi-industry market for fail-safe equipment of about $200 million -- and more importantly, it seemed to be growing fast.
In 1974, the stock market was low, capital gains taxes were high, and venture capital money was very scarce. Seed money was even scarcer. But Thomas Perkins and Eugene Kleiner were an unusual pair of venture capitalists. Both helped found companies of their own (University Labs, which later merged with Spectra-Physics, and Fairchild Semiconductor, respectively), and they encouraged Treybig to keep working. Two of the first people he talked to were old Hewlett-Packard associates, Michael Green and James Katzman. Green had designed the minicomputer industry's first time-sharing system for the H-P 2000 in 1968, and Katzman had designed the H-P 3000.
Green and Katzman liked the sound of the technical challenge and the idea of a new business adventure. Katzman had already left Hewlett-Packard to work at Amdahl Corp., and Green was tired of reorganizations and canceled projects at Hewlett-Packard. Though Treybig's concept of the system was a little sketchy, "something you could draw on the blackboard in about 10 seconds," says Green, he was attracted by Treybig's enthusiasm and the sense that he seemed to know what he was talking about.
At the same time Perkins was working at University Labs, he was also the general manager of the computer division and the director of corporate development at Hewlett-Packard. There he'd had the chance to observe Treybig, Green, and Katzman at work. He liked what he had seen enough to decide in mid-1974 to put up $50,000 to recruit Green and Katzman to start working on the definition of a system that could fit the market application that Treybig perceived.
Over three or four months, Treybig, Green, Katzman, Perkins, and another Kleiner & Perkins partner, John Loustanou, had an opportunity fairly rare in start-ups -- to think out the company's development in detail before starting."We worked out all aspects in advance -- people, finance, manufacturing, everything," says Treybig. "We could afford to do it because we weren't starving to death. One reason we have been able to grow so fast and not have problems was that we thought through most potential problems before we started."
They worked together exceedingly well. "We didn't have to discover each other," says Perkins. "We had all worked together. There were no problems about who was boss, no politicking, no three vice-presidents who wanted to be president. Many of the troubles that can plague a new venture weren't there."
From the beginning Tandem's strategy was clear and, Treybig claims, simple. The goal was to produce a price-competitive computer system that didn't fail, that didn't destroy data, that could be expanded from the power of a minicomputer to that of the biggest mainframe, and also networked with as many as 255 systems in other locations, without changing software or hardware. The challenge was to do it technically, and to grow fast enough to be able to fend off competitors and provide opportunities for the talented and aggressive people they expected the venture to attract.
At the end of four months, progress seemed good, and the group was ready to go out after more money.
"Who needs another minicomputer company?" was the reaction of most potential investors Kleiner and Perkins approached. Treybig and the rest of the team had never started a company before, and no one was sure that the technical problems of building a fail-safe, modularly expandable computer could be solved.
But Perkins and Kleiner never doubted the plan or the management, and they decided the odds on the technical risk were good enough to put in an additional million of their own -- a sizable investment for an $8-million fund. And John Loustanou decided to join the Tandem team as chief financial officer.
A year later, with a formal plan, 10 employees, and a much more detailed design of the new system, the venture had built up enough momentum to raise another million from outside investors, though neither the market nor the capital gains tax rates had improved. One of the investors and now a member of the board, Franklin "Pitch" Johnson of Asset Management Co., a Palo Alto, Calif., venture capital firm, points out that the track records of Perkins's and Kleiner's other ventures added to the attraction of the deal. Johnson, whose company's initial $60,000 investment has increased in value more than 5,000%, has yet to sell a share.
Tandem delivered its first system in May 1976, to Citibank, and except for a brief hiccup in the last quarter of 1976, when the company had no orders in October, November, or the first half of December, growth seemed steady and almost uneventful. Though the first year's business was about half of what had been expected, after that revenues and income caught up to the original projections, sales of $7.7 million in '77, $24.3 million in '78, $56 million in '79 and $109 million in 1980. Expenses came in as projected, and partially because of the support of Kleiner & Perkins, cash crises never materialized. Tandem was one of six small companies to have an initial public offering in December 1977, raising almost $9 million for about 21% of the company. A total of 770,000 shares were sold at $11.50 per share. The stock price is now in the 80s, with almost 12 million shares outstanding.
Today Tandem occupies 302,000 square feet in three connected cement-and-glass buildings next to a shopping center in Cupertino. Floor-to-ceiling windows in the cafeteria look out on the company pool and volleyball courts. In Silicon Valley, the company is recognized as a leader not only in growth, but in attracting and keeping talented people. Turnover is low, about 8%, less than a fourth of the American Electronics Association median. And productivity is high, sales of $98,400 per employee in fiscal year 1980, about twice the AEA median.
The door to Treybig's office is usually open, and his calendar for the days he spends at Tandem is mostly blank. He likes to reserve his time for thinking about company strategy, for drop-ins -- managers who would like his help selling the company to a prospective customer or employee, employees who have a problem their manager can't solve -- and for projects like putting "everything you need to know about running a company" and Tandem's five-year plan on one piece of paper.
Treybig is probably the only chief executive who has distilled his wisdom on everything from hiring to asset management on a flow chart. On a three-by-two-foot piece of paper, in type about half the size of the letters on this page, he has codified 100 management concepts into little homilies like, "Fund growth with equity, use debt for insurance," and "Never compromise on quality (in hiring), the major stress of being a manager is people problems." And then he's connected these little sayings with an intricate pattern of lines, so that anyone who looks at the chart (with a magnifying glass) can see how something like asset management affects employee wealth and benefits.
"A company is just a bunch of loops," says Treybig. "You can't have good employee benefits if you don't have money. This chart shows how everything ties together and is important." Every employee at Tandem gets a copy.
"Why do we put it all on one sheet of paper?" he asks. "Because it's interesting. Asset management is damn boring. But it's important. So you want everyone to understand why it's important, what they do that impacts it, how asset management impacts other things. It's kind of like a big M.B.A."
Treybig doesn't show the chart to customers, of course. He wouldn't want them to know Tandem's five-year plan. In fact, any employee who gives that "big M.B.A." to any outsider except his or her "spouse, spouse equivalent, or loved one" gets fired. (No one at Tandem has been fired for this infraction so far.) But even in a sales presentation he makes a point of talking about the importance of every employee understanding the company's direction. "You truly can't manage 100% growth in the classical sense," he says. "There's less emphasis on management and more on information, on systems of providing information so people can work independently. You have to work to delegate as much responsibility as fast as you can. You want everyone to understand the fundamentals. You've got to concentrate on everyone understanding how to make the right decisions overall."
Treybig takes this opportunity to point out that one of the keys to Tandem's information system has been its own product -- an on-line data processing system that ties together the company's 63 locations with a network of computers around the world.Information on inventory, orders, costs, hiring, and payroll is entered into the system and can be monitored by management the same day. "We know immediately if there's a problem," says Treybig. "And we pick up the phone. You can afford to make a lot of mistakes if you know about them the minute you make them. The problem is when you make a mistake and don't know about it for a long time."
Another major factor is a flat management structure. Treybig walks to the blackboard and draws three little circles in a line. "This is me," he says, pointing the chalk at the little circle in the middle. "And these are Robert Marshall and Michael Green, our senior vice-presidents." And then he draws 13 little circles in a row underneath them. Tandem's vice-presidents. "A hundred-million-dollar company doesn't need 13 vice-presidents," he says. "But a billion-dollar company does. By the time Tandem reaches a billion, these people will be too busy to get to know each other. But they're working together now, building an understanding for the future. So when they's scattered all over, they'll have the cohesiveness to make decisions quickly." He tosses the chalk into the tray and sits down.
"What about competitors?" the potential customer wants to know. Though none of the established computer companies has announced definite plans to enter a market long perceived as a narrow, specialized niche, several start-ups aim to produce fail-safe systems. One of those companies, August Systems of Salem, Oreg., sees its prospective market -- industrial process control applications for power stations and oil refineries -- as outside of Tandem's interests, but the other two, Stratus Computer of Natick, Mass., and Synapse Computer of Menlo Park, Calif., probably will compete more directly. August delivered its first system this April, Stratus expects to have a product by the beginning of 1982, and Synapse is planning its first delivery for sometime in the next two years. Treybig claims he doesn't even know their names.
"Our concern is within ourselves," he says. "To keep working hard, to keep earning, to keep wanting a better product. We have a seven-year head start. The challenge is not to worry about other people, but to worry about yourself."
"What makes a company good?" Treybig asks. "It's having the right product and market, the right direction, the right business strategy. If you have the right business strategy you can make a lot more mistakes than if you have the wrong one. Another thing that makes a company good is having frantastic people. If you have the right business plan, you can attract better people. The other thing you need is money. Without money, eventually you lose good people. Those three things were right at Tandem. We had the right business product/market concept. We started with outstanding people, which allowed us to hire more. Then we were able to do what we said we'd do, and that let us get more money and better people and keep growing in the right direction."
Tandem Corp.: 18,659% growth without acquisitions
1976 1977 1978 1979 1980
Revenues ($000) 581 7,692 24,305 55,974 108,989
Net income (loss) per common share (2.17) **.03 **.30 .59 1.06
R & D expenses ($000) 979 1,094 2,169 4,654 8,786
Current assets ($000) 2,616 4,665 19,500 39,328 81,663
Current liabilities ($000) 388 2,319 5,798 12,232 20,431
Working capital ($000) 2,228 2,346 13,702 27,096 61,232
Current ratio 6.7 2.0 3.4 3.2 4.0
Long-term debt * ($000) 313 316 715 1,144 1,651
Return on equity (%) N/A ** 6.2 ** 23.6 20.9 21.0
Number of employees 71 137 446 828 1,387
Number of processors shipped 12 81 257 646 1,299
* capitalized lease obligations
** before extraordinary credits