Tandem Computers, Inc.

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Tandem Computers, Inc.

19333 Vallco Parkway
Cupertino, California 95014-2599
U.S.A.
(408) 285-6000
Fax: (408) 285-6635

Public Company
Incorporated: 1974
Employees: 11,167
Sales: $1.92 billion
Stock Exchanges: New York Midwest Pacific

Tandem Computers, Inc., specializes in multiple processor computer systems used by banks, commodities exchanges, telecommunications companies, and other businesses that cannot afford even brief computer failures.

Tandem was founded in November 1974 by a group of former Hewlett-Packard employees headed by James G. Treybig. Convinced that one of the greatest needs among banks and other potential customers was for computers that never failed, Treybig proposed a “fault-tolerant” computer with two or more central processors working independently; if one processor failed, its work could be transferred to the other processors and the computer would not experience downtime. Treybig tried to interest Hewlett-Packard in manufacturing this computer, but the firm declined. Consequently, he left to pursue it on his own and spent several months at Kleiner & Perkins, a San Francisco venture capital firm, plotting his strategy.

In 1974 Thomas J. Perkins, a former Hewlett-Packard executive, and Eugene Kleiner, a cofounder of Fairchild Semiconductor, invested $50,000 in Treybig’s idea, and Tandem was formed. Treybig hired Michael D. Green as Tandem’s vice president of software development and also employed James A. Katzman, who had designed one of Hewlett-Packard’s largest computers. Once Green and Katzman had developed the hardware and software combination to use for the Tandem computer, Kleiner and Perkins invested another $1 million and an additional $500,000 later in 1975. Tandem also attracted $1.5 million from other venture capital sources that year.

During this time, computer failures were a serious problem, with most large computer systems suffering hardware failures at least once a year. Tandem developed its Guardian software to “watch” the system and transfer operations if one of the processors failed. In addition, Tandem designed the “NonStop computer” so that any component could be replaced without turning off the entire system. Finally, since reliability was its biggest selling point, Tandem tested its products more extensively than most firms before shipping the first models of its NonStop computer in 1976.

Banks, stock exchanges, manufacturers, and other businesses found Tandem’s reliability indispensable. They also liked the fact that Tandem’s computers could be linked together without any software changes, enabling clients to start with a two-processor system and add more processors as their needs grew. In deciding to focus on fault-tolerant computers, the firm had found a niche in which it essentially had no rivals until the early 1980s. Sales took off and doubled every year for the first six years of Tandem’s existence. The firm went public in 1977, and sales rose from $56 million in 1979 to $312 million in 1982.

Tandem initially managed to accomodate its rapid growth by forming a unique corporate culture. By 1982 Tandem had about 3,000 employees. Tandem employees were offered flexible work hours, stock options plans, sabbaticals every four years, and promotion-from-within opportunities. The Cupertino headquarters featured a swimming pool, and many of the employees attended “beer busts” each Friday to encourage communication across departmental lines. Furthermore, many important management decisions were made by consensus, and because Treybig disapproved of long meetings like those he had attended at Hewlett-Packard, almost none were held. These policies may have helped contribute to one of the lowest turnover levels as well as one of the highest productivity rates in the computer industry. Since talented personnel were in short supply in the Silicon Valley, a low turnover rate was essential to a company’s success.

At the beginning of the 1980s a NonStop system consisted of anywhere from two to 16 processors. Each 16 bit-per-word processor could have up to two million bytes of main memory attached to it. Systems ranged in price from $120,000 for the smallest two-processor system to about $2.7 million for the largest systems using 10 to 14 processors. Tandem’s proprietary software, sold at an additional charge, was crucial to their computers’ efficiency. Guardian, the basic operating system, watched for and responded to component failures, and handled basic functions such as the scheduling of tasks and allocation of computing power. The database management system Enscribe handled files of up to four billion characters. Expand, a networking package, allowed users to interconnect Tandem computers at up to 255 separate locations. Tandem also offered two types of programming software: Encompass, designed to speed the writing of online transaction-processing applications, and En-form, an English-like language used to get information from databases. The Tandem computer also supported such high-level languages as Fortran, Cobol, and T/TAL.

Tandem’s monopoly of fault-tolerant computers was jeopardized in the 1980s. Stratus Computer developed a four-processor computer and actively challenged Tandem in 1982. Hewlett-Packard, IBM, and Digital Equipment Corporation were also developing high-reliability computers. Furthermore, the U.S. economy was in recession, and Tandem experienced its first quarter of shrinking sales in mid-1982. That year, Tandem announced sales of $336 million. However, some shipments had been recorded that were not actually completed until after midnight of the last day of the year. As a result of this and other revenue recognition issues, the firm was forced to revise its sales figures to $312 million, embarrassing the company and leading to an investigation by the Securities and Exchange Commission. The investigation produced charges of fraud, but the case was settled without penalties or fines. In the spring of 1984, the entire computer industry went into a downturn, and Tandem’s earnings fell 80 percent.

As a result of these problems, Tandem tightened its internal controls and refocused attention on strong, more centralized management. Treybig became more detail-oriented, holding top executives accountable for performance at weekly staff meetings and quarterly staff reviews. Rather than seeking consensus on every issue, Treybig began issuing orders. An audit team and a new marketing group were created, new hiring was frozen, and salary increases were stopped for six months. Treybig also cut back on overhead and research spending and moved Tandem toward data delivery as well as data processing, trying to broaden the firm’s base.

The Infosat service started in 1983 with American Satellite Co. made Tandem the first computer manufacturer to combine satellite communications with its products.

Furthermore, Tandem bought equity positions in Triplex, a factory automation firm, and Integrated Technology, Inc., a telecommunications company. In 1985 Tandem began working to increase the availability and compatibility of its computers. The firm started a strategic alliance with Altos Computer Systems, which specialized in the Unix operating system favored in many U.S. government contracts. Tandem also sought to expand its market to include retailers as well as transportation and telephone companies.

Much of this effort was an attempt to lessen the firm’s reliance on banking and financial services customers. Fifteen stock exchanges, including the New York Stock Exchange, and 30 brokerage firms worldwide used Tandem computers by mid 1986, but that market was relatively narrow and the competition was gaining. Tandem therefore broadened its product range to include workstations and mainframes. To aid in its market expansion, Tandem’s sales force was increased and the marketing department revamped.

Sales for 1985 were $624 million; by 1987, with the company temporarily back on track, sales rose to $1,035 billion. At this time Tandem had about 7,000 employees in 150 offices worldwide, but with the computer market turning increasingly toward smaller computers, sales flagged for the large machines in which Tandem still specialized. The company also had trouble completing software for its smaller computers, such as the CLX system it unveiled in 1987. Its profits fell, its stock plunged, and rumors of a takeover circulated.

During this time the computer market was changing. Increased cooperation among manufacturers produced more compatible hardware and more widely accepted standards, and Tandem’s reliance on unique software limited the company’s sales. In 1987 Tandem lost a $1 billion U.S. Army contract for a hospital information system partly because its computers did not use the popular Unix operating system. Tandem began selling other companies’ Unix systems and IBM-compatible PCs later that year. Treybig also decided to make Tandem’s computers more compatible with other manufacturers. He saw an opening in corporate computer networks, serving “live data” to financial and market analysts and others needing immediate knowledge of markets and financial information.

In June 1988 Tandem sought an immediate increase in its networking position with the purchase of Ungermann-Bass, Inc. for $271.4 million. Ungermann was a leading firm in the local area network market, and Tandem wanted that firm’s expertise to help it tie its computers to those of other manufacturers. Tandem formed other partnerships to increase its networking strength, including Sybase, Inc., which it used to link open networks with its own computers. Tandem also began working with Systems Center, Inc. on an extensive network management system for Tandem computers, and in 1991 it acquired a 7.5 percent equity stake in System Integrators, Inc.

Seeking to compete with IBM directly, Tandem worked on a line of mainframe computers designed to perform the huge number-crunching jobs that IBM mainframes had been performing on data collected by Tandem’s computers. In June 1989 Tandem announced relational database software that enabled its computers to perform mainframe-sized data analysis jobs. Partly on the strength of this software, it was awarded a four-year $50 million contract from the California Motor Vehicles Department, beating out IBM. In the fall of 1989 Tandem released the NonStop Cyclone, which sold for about one-third of an equivalent IBM system. It immediately won important customers like Humana, Inc. and Kaiser Permanente, two of the largest health maintenance organizations in the United States, and McKesson Corp., a multi-billion-dollar drug distributor. In 1990 Tandem announced that it would develop a new line of fault-tolerant Unix computers. That line, Tandem’s Integrity S2, found a market in telecommunications, where it was used by AT&T, regional Bell operating companies, and other telephone companies.

Although sales for 1990 reached $1.87 billion, profits grew only slightly from $184.3 to $188.7 million. In 1991 the sales-to-profit ratio was worse, with sales increasing slightly to $1.92 billion and profits falling to $59.1 million. Much of the world was in an economic slowdown, and many companies cut back on capital expenses like computer systems. At the same time increases in technology made possible computers with more power for less money. So though its sales were strong, Tandem’s margins and profits shrunk. To cut costs and raise profits, Tandem began reducing its work force. It also delayed salary increases for six months and ordered its U.S. employees to take three days vacation without pay in each of the first two quarters of 1992.

Nevertheless, the firm remained strong in telecommunications, partly through subsidiary Tandem Telecommunications Systems, Inc. To further bolster its telecommunications strength, Tandem bought software developer Applied Communications, Inc. in 1991. To remain competitive, Tandem began pushing RISC (reduced instruction-set computing) computers, which break down complex operations into simpler operations that can be performed quickly. RISC models were manufactured in the NonStop and Integrity lines, doubling the price-to-performance ratio while remaining compatible with previous models. Tandem marketed these models, the Cyclone/R and the CLX/R, to existing customers as well as those in new markets closed to Tandem in the past.

In April 1991 Tandem annouced its Tandem Image Processing System. Originally designed for the large trucking firm Consolidated Freightways, Inc., the system allowed receipts and other paperwork to be stored as digitized images on hard disk drives and optical disks. Tandem also released software allowing different companies to exchange business documents through electronic mail. The company’s goals in the 1990s include, in the words of Treybig and Perkins, “extending our leadership in price/performance, open networking, and continuous availability, and working ... to develop solutions optimized for our customers’ critical business requirements.”