In April 1993 Barney Oldfield suddenly
surfaced and thus began a lengthy correspondence which ended up with his
book King of the Seven Dwarfs, published in 1996 by the IEEE Computer
It all began when Barney wrote an article
for the Annuals of Computer
History to "correct" my article -to, among other things,
to refute my statement that he had been fired. He maintains that he
resigned for "personal reasons". The book evolved as he got
deeper and deeper into the story.
I wrote him some one hundred letters during
the course of the project. About
25% of them are reproduced here. Most
of them were in response to questions from Barney and reading them may
be somewhat like listening to one end of a telephone conversation but I
have included only those that more or less stand on their own.
I have not included Barney's letters principally as a matter of
privacy but also because I could not easily match them with my replies
and I had not saved all of them.
I disagreed with both premises of Barney's
that GE's efforts in the computer business were a failure and
that GE's management philosophy was to blame.
efforts to persuade him in these matters had only minor success. (The
final book was toned done considerably from the first draft. His
negative interpretations of events was more indicative of one who had
been fired - not one who had resigned for personal reasons)
SUCCESS DURING THE LAST HALF OF THE 20th CENTURY IS
SUFFICIENT EVIDENCE OF THE EFFICACY OF GE’s MANAGEMENT PHILOSOPHY
(I hope that those who think otherwise were
not "short sellers" of GE stock during this period)
& HOANG K. SNIVELY
April 22, 1993
Homer R. "Barney" Oldfield, Jr.
716 Wood Lane
Sarasota, FL 34237
George Trotter called me last night with news of your address. It may surprise you to know that you have been the object of
a wide search. WGBH TV, the
Boston based PBS station, wanted to interview you concerning ERMA for
their series on the computer, called "the
machine that changed the world".
They had planned an extensive piece on ERMA and the early GE
efforts but couldn't find you and both Clair Lasher and Al Zipf were too
ill at that time to journey to Boston and appear on camera.
Footage of me (as a last
resort) telling the story of the Computer Department was left on the
cutting room floor for lack of corroborating evidence and other visual
material. (The series was
driven by the availability of visuals - i.e. Echert and Mauchlay's home
movies of UNIVAC got considerable play, while Von Neumann received minimal
voice-over comment with only his photograph on camera.)
There are any number of people who would like to get in touch with
you. Nate Norris
advises that he has sent you a copy of the Computer Department alumni list
and tells me that you have been in contact with Bob Johnson.
Clair Lasher and Ray Barclay, in particular, would like to hear
cc: Ray Barclay
phone number 813/955-0598)
May 8, 1993
Today I received your letter of May 5 with the April 25th
You ask so many questions, I hardly know where to start. So I will
just start - and ramble.
First, my "tall tales" was not meant to be a spoof - but
a memorial to you. My guess
is that less then half a dozen people in the audience of approximately one
hundred Computer Department Alumni had ever heard of you.
I didn't want you and your efforts to be forgotten and didn't know
that you were still alive and well and able to speak for yourself.
(We couldn't even find a picture of you for WGBH.)
My old memory may have been faulty, but it is the story as I
remember it. (Some of
the episodes were as reported to me by Russ Krapf and Ken McCombs.
The later was admittedly not a very good reporter.)
As you know, history fades into myth and then myth becomes history.
I stayed until August 1967. At
that time there had been roughly 500 people at sub-section level and
above. Approximately 80 were
still in place. Of the
remaining 420, a number resigned, one (I can't remember who,) was
promoted, one (me) stayed at the same level throughout the whole period
and the balance were either fired or demoted.
It seemed time to leave.
Lasher, of course, succeeded you - but as "Acting" and I
don't know that he ever was made permanent. Ray Barclay and Ken McCombs
stayed until Van Aken fired them both.
Ken Gieser (now deceased) was shunted aside and down.
He stayed through the Honeywell merger - ending up as the
"Major Domo" to entertain visiting dignitaries.
Art Newman (still living) was demoted several times - when I left
he was in charge of the employee store.
I thought that Herb Grosch left on your watch.
I distinctly remember you billing IBM for his unpaid expense
accounts and for his carpeting.
I don't recall how long Bob Johnson stayed.
You have Ray Barclay's address.
Ken McCombs has disappeared. Ray
stopped by to see me several years ago, principally to see if I could
enlighten him as to why Van had fired him - I couldn't.
replacements for Ray Barclay and Ken McCombs were both excellent choices.
Cy Statt, whom you may remember from GED in Syracuse, as
Manager-Manufacturing and Gil Gillespie from Financial Services as
confusion over the number of ERMA systems is probably due to the
"commercial" version being referred to as the GE110.
Someone in the GE Alumni group (Vern Schatz I believe) has a
listing by serial number and customer.
65 is a believable number. Security
Pacific Bank alone ordered 10 and I believe took delivery on all of them.
was not able to market the 304 successfully.
It is surprising, but as I understand it, in addition to the
machine's costliness NCR did not thoroughly understand the department
store application that was supposed to be their strength.
It was also likely that IBM was too entrenched in the data
processing function. Only
a very limited number were sold.
There were also extreme corporate culture differences in the
manufacturing area between GE and NCR.
Sassenfeld, one of Von Braun's people, succeeded Herb Grosch at the ASU
Computer Center. The
Huntsville project was ultimately lost but Helmut built a nationwide
network of computer service bureaus.
It became a very large and profitable time-sharing network, which
GE kept in the merger with Honeywell.
As far as I know it is still a large operating network.
(Unless the PC's have greatly impacted it).
I'm surprised that Reg Jones stated that all 14 years of the
Computer Department were a loss.
I was under the impression that he was the only one besides Gerald
Phillippi who understood the bookkeeping where the greater the success in
a rental business, under GE's bookkeeping policies, the greater the
"book loss" (or tax shelter).
The principal problem with the Computer Department was that no one
understood the financial statements. I will prepare an appendix of explanation.
Lasher was a planner. His
first inclination, after he got the "Big Look" approved was to
recognize that it was out of date and to start re-planning.
It didn't seem to occur to him to implement. (He was also
emotionally exhausted). Fortunately,
or unfortunately, Lacy Goosetree, as Manager -Marketing, and Bob
Sheeley as National Sales Manager were implementers.
Bob Sheeley assembled a national sales organization "Par
Excellence". It included
the likes of Ken Fisher (later of Prime Computer), Jim Pompa (to become a
Honeywell V.P,), Tom O'Rourke (founder of TYMSHARE), Warren Prince, Jim
Helm, Vic Casebolt (to become at one point President of Storage Tech. and
now V.P. -International Paper), Clint De Gabrielle (to become the Czar of
Computing for the State of Washington), Curt Hare (to become President of
TERAK and half a dozen other Silicon Valley ventures) and on and on
through a whole other host of outstanding capable people like Leo Mott
(who formed a Dallas based facilities management company), Vern Schatz,
Bill Duster, Paul Shapiro, Jay Kear (President of an Orange Co. software
firm), Dick Nosky, Pete Repenning, Gene Ringstad, Len Call, Bill Peake
-the list is twice as long. I've
only scratched the surface. The
legacy of the GE Computer Dept. is the later accomplishments of the people
who left. Unfortunately, they out-sold the capacity of the Computer
Department to produce, principally in the software and applications area.
In May 1961 Bob Sheeley and Lacy Goosetree, shortly after Lasher
received approval for the "Big Look", and planned earlier in
anticipation of the OK, held a national sales meeting.
This weeklong meeting was held at the Superstition Ho Hotel in
Apache Junction. Its purpose
was to put the GE brand on the above group, most of who had come from our
competitors. This up-beat
meeting with everything done very professionally and first class more than
accomplished its purpose. Everyone
who attended cherishes the experience and it is this group of people who
form the nucleus of the Computer Department Alumni.
Lasher was always successful in getting 570 to approve his
ambitious plans - but lost his courage in implementing them as the red ink
flowed. He would, as also did his successors, abort the plans
before they were fully implemented. This
created confusion. It
was impossible to justify "losses" to 570 when he himself was
aghast at them. It seemed
"flippant" to month after month explain larger than anticipated
losses by suggesting that we had a better month than anticipated.
(See the enclosed spreadsheets)
We had nearly 100% of the banking business (with the GE 225), which
proves the success of ERMA, a goodly chunk of the internal GE business and
were making sales for manufacturing applications based on the strong GE
manufacturing experience. However, many of these external sales were
"paper tigers" as far
as deliveries, applications and software capabilities
were concerned. You were not
the last computer salesman to learn that it was easier to sell a computer
that had yet to be built then to sell an existing one.
The obscured fact of the computer business at this time was that
IBM was essentially selling to themselves.
They had trained and placed the Data Processing Managers whose path
of progress was for IBM to place them in a better assignment with another
company. Their loyalties were to IBM and not the company that employed
them. IBM assisted them by
having most of the Fortune 500 companies pass Corporate Resolutions
forbidding the purchase of computers (for all the old familiar arguments)
thus eliminating the need for the DP mangers to bother with cumbersome
Appropriation Requests (and raising the cost of entry for competitors).
They also convinced upper management that Purchasing was incapable
of making procurement decisions in regard to computers. Only the DP Managers were capable of this. As a result, this
was a difficult market to crack, particularly when these facts were not
understood and marketing strategies and tactics were not developed to
The consequence was that our customers, to a man, were mavericks. The ones with the courage to jump the IBM traces.
They extracted a price for their courage.
IBM and their DP Manager customers would enter into a mutual
conspiracy of silence if a particular program or piece of hardware was
late or failed to perform. On
the other hand, it was incumbent for our customers to alert their
management at the first sign of potential problems.
We built many customer files into what Bob Sheeley called
"monuments to negotiations".
(Speaking of which, it might interest you to know that the ERMA
contract was not finally executed until after the last system was
shipped.) IBM also very
effectual kept GE's upper management informed of the Computer Department's
I don't recall anything particularly dramatic or traumatic about
Clair Lasher's exodus. In my
memory, he just quietly slips out and is quietly replaced by ???. (Who was
so un-memorable that I can't remember his name).
I remember ??? as
being from the mold of old line GE General Managers.
A mild mannered, pipe smoking, graduate of the "Test"
program. He sat calmly and quietly in his office as the computer
business swirled around him. In
relatively short order he was named the General Manager of the Process
Computer Department, which was a natural fit.
Following this lamb, Van Aken came in roaring like a lion. Van
became very frustrated and confused when his roaring against the tide of
the computer business was to no avail.
He also became paranoid when GE's upper management would learn of
the Computer Department's problems from IBM before Van knew of them
himself. He would become even
more paranoid, emotional and irrational when Lou Rader, newly returned
from UNIVAC, replaced Harold Strickland and began forcing ex-UNIVAC people
is now retired and living in Tempe looking relaxed, tanned, healthy and as
dapper as a Gentlemen's Quarterly model.
You should contact him for the story of his reign as GM of the
first to go was Bob Sheeley when Lou Rader "suggested" an ex
UNIVAC salesman, Art Ashauer, for that position.
Art was likeable, easy going and relatively competent.
However, the sales force, which was fiercely loyal to Bob Sheeley
and most of whom were more competent and experienced than Art, were
astounded by the move. Rader's
next move replaced the well liked, competent and effective Tom O'Rourke
with Ted Green (also from UNIVAC) as the Western Regional manager.
The final straw, which destroyed probably the best sale force ever
assembled, was the replacement of Lacy Goosetree (who is also alive, well,
and active - you should contact him) with Vern Cooper from GE Supply.
Vern was articulate, imposing, vain, intimidating, incompetent,
stupid and naive. (I later
learned that he was
Herch Cross's son-in-law and the Computer Department
was just a temporary assignment on his "fast track".)
Vern Cooper's classic remark concerned the banking business.
He didn't think we were doing well in the business since we didn't
have any of the important New York banks and "whoever heard of
Security Pacific Bank (then #7) or Northwest Bancorp?".
The very closely-knit banking industry, which has a very active
grapevine, always watched us closely for any signs of wavering in our
support of them. Vern could
not understand why we had more salesmen at headquarters than in the field
and one of his first moves was to disband the headquarters industry
support groups and send them to the field.
The banking market was lost in one fell swoop when he disbanded the
banking support group. I was
at Pittsburgh National Bank (a good GE 225 customer) getting the final
documentation executed for the lease of two GE 400 systems the day this
move was announced. The bank
decided to wait to see what was happening and delayed executing the lease.
They ultimately went with Boroughs. I
was also in the meeting with Martin Marietta(sp?) when we were trying to
save the GE 600 installation with a number of non-green dollar concessions
as delayed starts on net lease rentals and etc.
totaling $3 million soft dollars. The
meeting ended when Vern, to show Charlie Lighthouser, then Executive V,P,
of Martin, that he was tougher than Charlie said, Take your $3 million
dollars and give me back my machines!".
When I interrupted to point out that the
concessions were in consideration of Martin keeping
the machines I was told to "shut up" that he knew what he was
doing. Charlie looked at me,
shrugged his shoulders and indicated that it was an offer he couldn't
refuse - and he didn't!
The follow on to ERMA with the B of A was a contest between two
"paper tigers". We
were proposing the not yet in production GE 600 system and IBM was
proposing a likewise situated upper model of the 360 series.
IBM ultimately "bought" the business but you will be
delighted to know that part of the price IBM paid was to pay the monthly
maintenance bills for ERMA for any months they were late in delivering.
For nearly 18 months IBM paid us the monthly bill of $250,000.
Van Aken was followed by John Hanstra from IBM.
This was a very un-GE like move (If it was engineered by Lou Rader,
he atoned for some of his above sins).
John, who had been responsible for the IBM 360 series, was very
affable, self confident, easy to talk to, and extremely knowledgeable
about the business. He
garnered immediate admiration and respect from one and all.
Unfortunately, he had hardly settled into the position before he
died in a crash of his two engine airplane
John was followed by Lou Wengert.
Wengert grew up in the financial function of X-Ray and became
General Manager of several GE large motor departments.
He came to us from Locomotive.
He also came in "roaring", but after Van Aken it seemed
like more of a "meow", particularly
when afterward he would smile like he didn't mean it.
He also became very emotional and irrational as had Van Aken.
I left sometime, maybe a year, after Lou arrived. (You will note
the lack of dates in this whole narrative - I just
can't recall them).
Shortly before I left the Department was split up into half a dozen
different Departments. As I
Jack Vanderslice took over the Oklahoma operations.
I don't remember who the other GM's were.
Soon after the split up, Lou Wengert was promoted to V.P. of one of
the industrial groups. Stan Smith, replaced Lou Rader about the same time
that Wengert came aboard.
I had lunch with Lou Wengert, who is retired and living in
Carefree, AZ., several years after he left the Computer Department.
He told me that he had been appointed GM of the Computer Department
because of his manufacturing expertise and that he was ordered out to
phoenix to fix the manufacturing problem.
Sure enough there was a big manufacturing problem. After focusing
on this problem for nearly eighteen months he suddenly discovered that
this problem, as big as it was, paled in comparison to the engineering and
marketing problems, but it was too late.
I will end here. I
suspect that I have raised more questions then I have answered.
I'm sure that I have told you far more than I actually know!
I will give you time to digest this missive and will then
give you a call.
My very best regards,
PS I think that the only way the story will be
clarified is to get half a dozen of the knowledgeable people together so
that their individual recollections can trigger each other's recall.
May 10, 1993
The enclosed spreadsheets will illustrate the problems that the
rental business presented in the Computer Department financial statements.
The first Case is probably the most dramatic.
When Fred Borsh became President of the Company he let it be known
that the results of a study that he had made showed that GE had never been
successful in a business where they had less than 30% of the market. This
was particularly true in markets, such as computers, where there were few
competitors. He let it
be known that those Departments who could not demonstrate the ability to
capture 30% of their markets might be short lived.
Consequently, Clair planned the "Big Look" to see what it
would mean if the Computer Department aggressively pursued a plan to reach
30% of the computer market in 5 years.
This was in late 1960 and early 1961 and the 1966 computer market
was being estimated at $3 billion. (It
actually nearly doubled that amount.)
The Case I. enclosure ignores the real problems of achieving such
an objective but shows the impact of the rental business on the financial
results should such an eventuality be profitably achieved.
As you can see, huge losses are incurred - due to GE's bookkeeping-
even if the product’s sales and rentals are quite profitable by
themselves. I don't recall
the starting point, but the end result was to be an "if sold"
volume of $900 million in the 5th year.
Case II. Shows the
result of backing the projection down to 12.5% of the 5th year market.
This plan had a chance of being achievable and affordable even
though the numbers are still large and negative.
Defying the industry experience of 80% rental and 20% sales we
forecast 30% sales to improve the numbers.
Case III. This case was prepared to show the effect of changing the
percentage sold to 50%.
Case IV. This case shows what happens if you stop growing at some
point. You need to project
out farther then 10 years to end up in a "steady-state"
Case V. An extreme
case to show that the money comes flowing in if you cease shipments at
I recall at one point calculating that if we were to grow at more
then 12% a year that we would theoretically never book a profit.
This in a market easily growing at more than 25% a year.
Case II. approximates the "Big Look" that Clair had
approved. While it called for
a 12.5% market share we had to run like hell to obtain 7% or 8%.
However, this smaller percentage was a larger than planned volume
as the market grew much faster than forecast.
At the time I was preparing the forecasts for Clair I had to do
them manually. Each
projection took about 40 hours as I had to project each shipment month by
month and layer by layer. Who
knows how we may have been able to fine tune them strategically had we had
the "what if" capability of current spreadsheets.
As far as I am aware, neither Clair or anyone else had difficulty
in getting 570 to understand these projections when they were presented in
the "abstract" so to speak in a long range plan.
It was when the current month operating results actually reflected
these numbers did the lack of understanding suddenly
The problem was that even though it was understood that success
would generate huge red numbers, for any one month it was difficult to
discern how much of the variance from plan was caused by success, how much
from a change in the sales/rental ratio and how much was the consequences
of favorable or unfavorable operating problems.
The problem was amplified out of all proportions by the three
months rolling forecasts, which I'm sure you remember.
The current month's result could vary by a $1 million or more
within days of submitting the forecast.
A customer for a $1million dollar system which we had forecast as
being "sold" would decide, usually the day of shipment (which
you know is always the last day of the month) to rent instead.
This would cause nearly a $1 million swing.
Such large swings in the matter of just several days severely
strained the creditability of the Computer Department's management with
570, even though they were completely beyond the control of management.
In answer to your question about 570's attitude toward the Computer
Department, I would sum it up by saying that they were always supportive
of the business and willing to invest in the big picture.
For many of the reasons demonstrated above, plus known operating
problems and IBM's input, they were not always
supportive of Computer Department management.
May 11, 1993
Just a short note on my long view of the people involved in the GE
Computer Business and it's profitability.
Without diminishing the important contributions of many, many
people, there are only five who really made a difference.
You of course for initiating the venture against great odds.
Clair Lasher for his planning which got people thinking big.
Arnold Speilberg for bootlegging the GE 225
Bob Sheeley for assembling the sales force that created the forward
It didn't make much difference who was involved after this.
All anyone could do was to try to hang onto the tiller as the
forces in the market place drove and buffeted the business. (Despite what other's egos might think - the market made most
of the decisions.)
Finally, Reg Jones for negotiating the very timely and profitable
sale to Honeywell.
I would argue that on an "if sold" basis the business was
always reasonably profitable. Gerald
Phillippi argued, legitimately, against the use of "if sold". His argument was that any small adjustment to the top
line of the operating statement fell right through to the southeast corner
where it is magnified. That
"ipso facto" we had not sold the rented systems and to have done
so would have likely required a reduction in selling price, a decrease in
volume, or both, resulting in either case in a reduction from the income
calculated on an "if sold" basis.
May 17, 1993
It was good talking to you today.
You have entered into an ambitious project - nothing new for you -
and I give you my best wishes and support.
If you haven't already done so, I suggest that you contact Bruce
Bruemmer at the Babbage Institute.
He has been gathering information, including attending one of the
Alumni meetings and interviewing many of the attendees, about the GE
computer business. Perhaps
the two of you could collaborate in this
In my long view everything that happened before the 1961 Second
First Annual Sales Meeting was prelude.
The first act curtain raises on this meeting.
You will be able to find a goodly number of people who stayed with
GE from this point through the sale to Honeywell.
(Many of the products and activities mentioned in this meeting were
suddenly concocted to meet the needs of the meeting, don't put too much
credence on anything presented there.)
I would contend - but neither long nor hard - that with the ERMA
deal in hand you would have found some engineer or engineers to execute
it. Only you can judge whether Bob Johnson was absolutely
essential to this project and should be on my "short list".
Lou Wengert will be able to fill you in on the sale of the Process
Computer Business, which he negotiated.
( He may be too embarrassed to mention the proposed sale to
Fairchild which garnered a lot of national publicity when it fell through.
Your local newspaper morgue or library should have it. Or you can
find it if you are "with it" and have
computer access to the various databases).
Manufacturing had to contend with the rapid transitions being made
in the industry from wire wrap, to printed circuits, through discrete
components, single sided, double sided boards, etc. to IC's.
I'm sure that these transitions, and the growth, were much more
rapid than 570 had ever seen before and, understandably, there were
attendant problems. Cy Statt
can ably fill you in on manufacturing.
About midnight on ( You can find the exact date from the Wall
Street Journal files) I took a break from running out the "Big
Look" numbers required to capture a 30% market share and went down to
the cafeteria for some coffee. I
picked up a copy of the Wall Street Journal that was lying on the table
was Sarnouf (Sp?) claiming that RCA was going to be
number two in the computer industry in five years doing $1 billion a year
in sales! The same goal as
ours, but I had already concluded that GE could not finance such an
ambitious goal and that we would have to scale back drastically (even if
we could per chance achieve it operationally).
I went back upstairs and grabbed a copy of Moody's to look up RCA.
here was no way that Sarnouf could back up his claim.
RCA was in default on the interest on $50 million of debentures,
had nominal earnings, and I don't now recall but presumably wasn't paying
any dividends. The
stock price was down and it was certainly no time for them to go to market
for more money. HE COULDN'T
DO IT! This led me to analyze
our other competitors. IBM
was having problems at this particular juncture ( I believe they were
between the 1401 and the 360). Prudential
was balking at providing a previously scheduled take-down on a debenture
issue and was insisting on a higher interest rate.
I don't recall the status of our other competitors but obviously
none of them, except IBM, could do it either. I stayed up all night making
these analyses and showed them to Clair the first thing the next morning.
Clair incorporated these analyses in his presentation to the
Executive Office of the scaled down "Big Look".
It was reported back to me, I don't now recall whether directly by
Lasher or through McCombs ( and a lot of creditability rests on this
question) that Ralph Cordiner called in John Lockton and Gerald
Phillippi to get their views on the competitive
analysis and whether GE could finance the venture.
In those days John Lockton thought that GE could finance the world
if necessary and gave an unqualified yes. As reported, Cordiner then
stated, "Up until now I saw no reason for GE to be in the computer
business as we had no unique contribution to make.
It is essentially an assembly business, not manufacturing, so we
can't capitalize on those skills, we had no unique technology as the
engineers are freely exchanged, and we would be up against reputedly the
greatest marketing organization. However,
I now see it as a table stakes game and we have the stakes." And thus the go ahead.
Ultimately the basis for the decision proved to be wrong.
It was not the cash required but the earnings impact of the rental
business on the widows and orphan that own GE that proved it wrong.
In my financial naiveté of the time, I thought that RCA had no
wriggle room. However,
Sarnouf took a gamble and called the debentures, which were in default.
They converted to equity and I don't know what he would have done
if they had opted for the cash. Next,
while we were involved in the "mating dance" with Bull, he was
busily selling them $50 million worth of computers on a letter of credit.
You know what a boost an outright sale like this gives to the financials
of a rental business. It
seemed to me at the time, and still does, that his approach to Bull was
far superior to ours!
To me the Bull episode is an example of what happens when you shunt
operating managers aside into staff positions without portfolios.
They run around getting into mischief.
I think I may have now exhausted my pertinent recollections.
Good luck in trying to separate fact from fiction in your efforts.
amusing episode about Van Aken concerns his first staff meeting which he
called for eight o'clock on a Monday morning.
Promptly at eight o'clock he closed and locked the conference room
door. This left Lacy
Goosetree and Ken Geiser pounding on the door to be let in.
(There was no relenting). The
word quickly spread to the troops and my poor secretary, who religiously
punched in three minutes early,
came in in tears the next morning when she was nearly
fifteen minutes late. She had
been caught in the biggest traffic
jam that the Black Canyon Highway had ever experienced as everyone tried
to get to work on time.
May 17, 1993
Mr. H. R. Barney Oldfield, Jr.
716 Wood Lane
Sarasota FL 34237
A further comment about Haller's "NO!, NO!, NO!".
As I forthrightly stated, and you have now confirmed, you could
never hear the word "no". A
rare attribute possessed by only the most superlative of promoters and
This meeting, which was about the Appropriation Request to expand
the Microwave Laboratory fourfold to build ERMA, was not attended by
either me or George Trotter. It
was reported to me by Russ Krapf who, in contrast to Ken McCombs, was a
I prefer his version as expanding the Microwave Laboratory at that
time made no sense in light of the mission of the Laboratories Department
and Haller's desire to create a computer laboratory at Penn State.
In addition, the expansion didn't happen.
The reason we were so successful with the banks is because they had
not opted for the punched card and had no entrenched IBM DP Managers.
We had a level playing field.
The aborted negotiation for the sale of the Process Computer
business to Fairchild was between Gene White for Fairchild and Lou Wengert
for GE. Subsequently, Gene
became President of Amdahl and is now Chairman Emeritus.
When Gene was appointed President, he interviewed me to be CFO.
In discussing the opportunity with Lou, he was about as
uncomplimentary about Gene as one can be about someone.
When it later became apparent that Gene was going to be successful,
and not fail as miserably as Lou had predicted, Lou then cottoned up to
him when they served together on the board of Don Oglesby's Three Phoenix
Company. (I was not offered
the job and also predicted his failure when he told me that Amdalh's big
advantage was that since they were "plug compatible" with IBM at
a lower price they didn't need to spend much money on sales &
May 26, 1993
The importance of ERMA as the machine that launched the banks into
the use of computers and GE into the computer business, can not be
exaggerated. However, don't over emphasize its importance as a product.
It required considerable redesign into the GE 210 to make it a
commercially feasible product. The GE 210, in turn, was quickly obsoleted by the GE 225 at
less than half the cost.
Time-sharing is the principal legacy of the Computer Department. It was made possible, fittingly enough, by another bootlegged
product - the DATANET 30 - which married the widely diverse technology of
computers and communications. It
led to the present net-working of the world.
It also put computer terminals on peoples desks and promoted
distributed data processing and started a process which has terminated in
the personal computer.
Bill Bridge did the hardware design and Dick Smith and Don Knight,
working with Dartmouth's John Kemeny, helped develop the BASIC language to
make it "user friendly". The
first system was installed at Dartmouth. (A GE 225 with the DATANET 30)
My best as usual,
keep requesting me to identify the key problems.
This is difficult. There
were significant problems in almost every functional area most of the
time! The majority of them
were "good problems" - those that are caused by success. These problems were caused by the unprecedented growth
that stretched and unbalanced all resources, including the human ones, to
the breaking point. We
went through an ungodly number of good people.
June 6, 1993
Thanks for the Forbes article.
I was always amused when outside sources quoted and interpreted,
second hand, GE's computer business numbers.
We who were compiling them didn't know what they were or how to
interpret or explain them!
Market numbers were equally as illusive.
Dollar volumes contained a mix of sales, rentals, maintenance and
systems, or main frames, did not take into account a great disparity in
size and peripheral mix. I'm
sure you get the picture. (We,
at one point, had a District Manager in Kansas
City -whose name I of course can't remember- who
prided himself on knowing where all the computer installations were in his
district. He thought he knew
them all only to find, when he hired a knowledgeable ex IBM sales manager,
that his list included less than half of the IBM installations.)
The Forbes Article states that GE's management did not contribute
to, or comment on, the article. Forbes
thus was relying exclusively on ex-employees who can not be expected to be
particularly complementary. It
would take a lengthy essay, with contributions from many more
knowledgeable than I, to rectify the impression left by this article.
It is obvious that Herb Grosch got his two cents worth in.
The comments about GE's management philosophy and lack of computer
industry knowledge is almost a Grosch quote.
If the quote from Bob Johnson is accurate, it confirms my
recollection of him as more of a "laboratory type", "state
of the art" engineer than a product designer.
Lasher was 100% right in dropping the W, X, Y and Z line. It would
have been sheer folly to try to take on IBM across a broad spectrum of
their line when we were running like hell trying to keep up in our several
The GE 600 product line encountered all the usual problems involved
in trying to convert a military project into a commercially practicable
To put the Forbes article in perspective it must be recognized that
we were starting nearly five years behind (May 1956 - May 1961). While we were concentrating on ERMA and the NCR 304 and then
suffering through the process computers only period, our competitors in
the general purpose computer business were ramping up very rapidly.
When we got the green light, we had to ramp up one hell of a lot
faster just to stay even (Lasher was appointed Acting-General Manager to
succeed you with instructions to complete the ERMA and NCR 304 programs
and then to limit the department's scope to process computers.
The Forbes article hints at this).
I wouldn't read too much into Lasher's leaving.
My sense is that he put into motion something neither he, nor
anyone else, could control. He
was too nice a guy and the job rapidly out grew him - and many others.
It was already too big for Van Aken by the time he came aboard.
Many jobs outgrew people almost as fast as they accepted them.
My reply to people who complained that a new manager didn't know
the business was, "Good! The
business is a different business today than it was yesterday and it will
be a different business tomorrow. We
don't need people who know the business as it was yesterday.".
I'm glad you contacted Chuck Ettinger, though he is somewhat
controversial, as he is the only section manager to span the Lasher-Van
Aken period. In addition, he
was appointed (by Stan Smith I believe) General Manager of the Small
Computer Operation which included Olivetti.
You should ask Vern Schatz for his poem on the history of the
I do not have a copy of the Metcalf or other reports.
It's interesting that we didn't place any historic importance on
them at the time. WGBH tried
unsuccessfully to find them - but they couldn't find you either. Someone told me that George Metcalf is still alive, he
might have a copy.
need a time line. The only
dates that I'm sure of is the November 1956 move to Phoenix, and the May
1961 Sales meeting. Do you
have a list of corroborated dates? I
thought you left in 1959 not 1958 as Forbes says.
This would put the "Big Look" approval much earlier than
I recall. What were the dates
of the changes in General Managers?
July 19, 1993
I am 100% with Lacy re Hersh Cross and what he did to Van Aken. I would be as charitable as Lacy towards Van except
that Van's attitude as a 100% company man made him shoulder the full
responsibility rather than letting on that the firings were not totally
his decisions. This
posture of his figured into the
I can readily believe that the GE600 schedule was shortened by 12
months over that planned by the engineers and software people.
As I have previously indicated,
the market forces were irresistible and this accelerated schedule
was likely required to compete with other "paper tigers" - or
quit the game. (I
recounted in an earlier letter how IBM was 18 months
late in delivering the system to the B of A that had beaten out the
I would love to see a copy of what Lacy has on the June 1960
"Big Look" presentation.
This date puts it about 6 months earlier than my poor
recollection. Does George
Metcalf have a copy of the Metcalf Report?
I'm sure that Helmut Sassenfeld and Dick Lemon will get back to
you. The time sharing
service business was not, as you put it, "taken away from the
Computer Department". By
this time the Computer Department had been broken up into several
Departments and a number of operating sections and was now the Information
Systems Division. I was
gone by the time this move was made, but my guess is that one of the
reasons for the move was to change a large user of the Division's products
into a large customer. At the
time of the sale to Honeywell this time sharing service business was using
well in excess of $1 Billion worth of computer products. It may also have been to position it out of the sale to
As indicated above there were two aspects of the time sharing
business. (a) the sale of timesharing hardware and (b) the sale of time
sharing services. The
saga with O'Rourke concerns the former.
As I understand it, Van Aken had two sons neither of whom turned
out to be role models. To
compensate, Van "adopted" two people as the sons he wished he
had had. One was Chuck
Thompson, now an Executive V.P. of Motorola and the other was Tom
O'Rourke. They socialized
together, went on golfing trips together and etc. When Rader returned from UNIVAC he brought Ted Green with him
and gave him his choice of marketing regions.
Ted chose the Western Region which O'Rourke was managing.
Van would rather have cut off his right arm than to replace Tom,
but with the attitude as indicated above, he did it and never told
Tom that it was other than his (Van's) decision.
Once the move was made he wanted nothing more to do with Tom. I was not aware of this posture until later when I
inadvertently became directly involved.
After Tom was replaced he decided to resign and to go into the time
sharing service business. He
came to see me to help him with his business plan.
(When the Department was split up into several operating sections
each Finance sub-section manager was assigned as a financial counselor to
an operating section. I had
been assigned to Helmut Sassenfeld and thus had some experience and
insight into the business.) We
prepared the business plan and five year projection for TYMSHARE on my
living room floor in Carefree.
I then introduced him to Tom Clausen (later Chairman of B of A) who
at that time was managing the National Accounts for the Southern part of
the B of A and also had an SBIC under his control.
He arranged for his SBIC (which was managed by George Quist and was
later spun out of the bank and became the investment banking firm of
Hambrech and Quist) to make an investment of $250,000 in Tom's company.
Tom then negotiated an order to rent a GE235 timesharing system.
Van was aware of these negotiations but apparently had anticipated
turning the order down for credit reasons.
When that day came Tom said "but Snively has already approved
the credit". Van has no
master when it comes to "chewing" someone out and I got the full
treatment when I was called to his office.
I further compounded my error when, during one of his more
histrionic moments, I said
" You mean that the B of A is not a good credit?".
This led to an unbelievable explosion in the midst of which he
declared that it was a stupid business
decision to rent GE235's so near the end of the
product life cycle and that they were only to made available for cash
sale. "Did Tom have
enough money to buy one?" The
answer was "no" and the meeting ended on that note.
There were immediate repercussions to this policy change as both
Ford Motor Company and Chrysler had GE235's on order to rent.
Both had IBM instigated policies prohibiting their purchase of
computers and both threatened anti-trust suits on the assumption that the
policy was an attempt for Helmut's operation to monopolize the business.
It took a lot of negotiating to work
out of this problem. (I.L.
Stevenson -if he has not suffered too many infirmities- can fill you in on
these legal maneuverings.)
Meanwhile, Arnold Spielberg had gone to work as V.P.Engineering for
Max Palevsky(sp?) at SDS. Tom
approached them to design a time sharing machine for him.
They agreed to do it if Tom could find a customer for a second
machine. Tom got Jim Pontius
of Comdisco in Chicago to place an order with him and SDS proceeded to
design a machine. TYMSHARE
ultimately purchased a large number of timesharing systems from SDS.
The GE235 market never took off.
But it really didn't make much difference.
By this time the business was being pulled by the market for the
GE600 systems. The banking
business was no longer such a major factor that Vern Cooper's thoughtless
killing of it made a substantial difference and the time sharing hardware
market was soon to be satisfied by the GE600.
My best as usual,
October 18, 1993
I enjoyed your Prelude. The motto of the Alumni group should be
"it was one hell of a ride"!
(page IV "Frank Walsh" should be Jack Walsh.)
Tom Watson was a mover and shaker in the same circles with Ralph
Cordiner but IBM was not GE's best customer as assumed by Bob Johnson - to
the contrary, GE was IBM's biggest customer.
IBM bought some vacuum tubes and fractional horsepower motors but
not in the significant volume of other radio and TV and appliance
manufacturers. The Federal Government was GE's "biggest" customer.
The misinformed notion that IBM was GE's "best" customer
seems to be endemic among the engineers.
We did bid on the successor to ERMA (Perhaps not with a
"responsive proposal" and I have a vague recollection that the
bid specs were written in IBM's favor).
I can't place the time frame - but we bid the 600 system.
Bob Johnson would have left by this time.
Lacy Goosetree may still have been involved -
check with him.
Al Zipf had moved up in the Bank and I suspected that IBM had
managed to infiltrate the Data Processing operation.
They would have had to justify their selection of IBM to the
rarefied atmosphere that Al Zipf now occupied as being due to "GE's
IBM was still stung by your success in getting ERMA. They could not
afford to lose the biggest bank in the country a second time.
The goodly sum I mentioned was the $250,000 a month for the
maintenance of ERMA that IBM had to pay us each month of the 18 months of
their delay in getting the successor up and running.
Have you communicated with Reggie Jones?
You must have been surprised to learn that he was behind you all
the way! I have no idea where
he was during the early days of the computer business.
Phillippi was an early staunch supported and ally of the Computer
To my knowledge Jack Walsh was never anywhere near the computer
business. His biographer
would have had to rely heavily on the same media stuff with which we are
familiar. I agree that GE was
reluctant to sell businesses but they never hesitated to liquidate them!
You picked up on the contradiction about acquisitions.
However, GE was always constrained by anti-trust considerations
(and a not invented here attitude) from making acquisitions.
As a result, GE had limited experience in negotiating or managing
Bill Bridge and Clint DeGabrielle can personally give you the
DATANET 30 story.
THE BUILTMORE MEETING.
I don't recall who requested the Builtmore meeting but Phillippi
(sp?) had been instructed to drop everything else and concentrate fully on
the measurement problem which was confusing management about the Computer
Department's P & L.
The attendees, in addition to Phillippi, were George Smith (and one
other whose name I can't recall) from Accounting Research Services, ??
McCarthy from Tax Accounting Service (plus as I recall a tax lawyer from
legal), Murray Furgeson the leasing expert and GECC Board member from
Credit & Collection Services, John Stanger, President of GECC's
Leasing Company and Dewey Mehew, Treasurer of GECC.
Ken McCombs, Tom Hage and I represented the Computer Department.
These, with a few exceptions, were all very intelligent and
imaginative people. I do not
believe that there was any alternative or option that was neglected in the
wide-ranging discussions over three days of seclusion without
John Stanger, who was at heart a "peddler", salivated
over the possibility of GECC handling all the rentals and leases.
Dewey Mehew pointed out that CECC was organized under the banking
laws of The State of New York and as such would be in violation of banking
regulation "Y" if they entered into non-pay-out rentals and
leases. McCarthy discussed
the possibility of the consolidation of GECC with GE, which would
eliminate the assumed arms length advantage in any event.
We were promoting my scheme of "POLO" which involved
splitting the Computer Department into a Product Operation that would sell
to a Leasing Operation. The
issue here became the question of transfer price.
McCombs tested everybody's sharpness by making foolish statements.
Tommy Hage was a nervous wreck trying to figure out who was winning
so that he could be on the winning side.
Needless to say the discussions were far ranging and exhaustive.
I have previously related Phillippis’s summation.
My best as always,
I suspect that GE's top management was frequently cautioned by the
tax lawyers about making public statements explaining "losses"
in the computer business as tax shelter.
Very early on (and prior to the Builtmore meeting - which was
principally involved with accounting issues) we were imaginatively and
creatively structuring "full pay-out net leases" which we could
book as "sales" -see note below. These leases were attractive to
our banking and utility customers. I also established early relationships
with the first personal property leasing companies - Al Zises of Bankers
Leasing and Pod Boothe of Boothe Leasing.
A little later I established an exclusive relationship with Lease
Financing Corporation who administered a number of tax sheltered leasing
partnerships set up by Ollie Vanderbilt.
Our competitors could not meet the attractive and flexible terms we
were able to offer the banks and other customers with this program.
With the advent of the GE 400, working with the principals of Lease
Financing Corp., we structured a plan for third party financing of
intermediate term non-pay-out rentals which GE could book as "sales'.
This was the 4-5-6 Plan, named for it's four, five and six year
terms. This was in the era of
the 8 year
investment tax credit and 8 year net-net leases.
This was an extremely complex plan which required the establishment
of an arms length third party -Systems Capital Corporation (SCC). SCC
provided part of the risk capital -raised through a public offering
underwritten by Blair & Company, Ollie Vanderbilt's investment banking
firm. The senior debt for the
firm portion of the leases was furnished by AEtna (with the commercial
banks warehousing them to a $10million size).
Ollie's tax sheltered limited partnerships provided leverage on
this debt to generate a low cost of funds and some risk capital.
This program was relatively successful by itself, but it was highly
successful in getting the customers to realistically assess the useful
life of their installations and many were thus persuaded to purchase or
lease (not rent).
Obtaining approval of this
program within GE was difficult to say the least. To have to admit that
there was something they couldn't do between the financial resources of GE
and GE Credit was traumatic indeed. The
full power of the GE Credit Corp.'s management descended on me a number of
times before the program was implemented. But the problem was too big to
ignore - and they couldn't provide a better alternative.
With GE's acquiescence I joined Systems Capital Corp.
The ultimate beneficiary of this program was Nate Norris.
Ollie Vanderbuilt called me one day in great distress after one of
the banking customers, near the end of the rental term, had called
inquiring for his address in order to return three GE 400's.
I informed him that Nate Norris had just begun making a
market in used GE 400's and gave him Nate's number.
Ollie did not have to clean out his carriage house and Nate got an
inexpensive supply of product! (Nate
ultimately sold his company for $6,million - $4 million in cash and a
note. He later got it back
when the buyer defaulted on the note.)
Too bad you and I lost contact.
In 1970 I started the Snively Financial Organization to handle
short term rentals. I'm sure
we could have provided you a better program than Trans Union Leasing Corp.
I have only interesting personal recollections of Herb Grosch. I don't recall anything directly relating to the business,
except his obtaining the Huntsville contract. In my memory, he wasn't
around very long. His
"modus operandi" was to operate as a shop steward.
He had his programmers convinced that he and only he stood between
them and management. That
without him they would be subjected to all kinds of indignities, such as
coming to work on time, committing to completion dates, budgets and etc. I believe that Hal Norris spent some time in Herb's operation
and might have some comments.
My best as always,
Company-wide task force that both Lacy Goosetree (from the Communications
Department) and I served on in late 1956 to early 1958 issued two
definitive volumes on leasing. One relating to the Lessor and the other to
the Lessee. These extensive
reports anticipated the FASB and IRS rulings by nearly 10 years.
We were too smart for our own good.
While we were smugly anticipating the future FASB, IRS
and SEC rulings, others such as Memorex, Storage Technologies and
Data Products were furiously playing by the then existing rules.
December 21, 1993
THE BEST KEPT SECRET OF THE COMPUTER INDUSTRY
General Electric's financial success in computers!
GE made a "cash-less" entry into the business when
progress payments from the B of A for ERMA and NCR for the 304 created
positive cash flows for the first two years.
This was followed by years of large "tax shelter" created
by GE's bookkeeping for the rental of
Then a profitable sale of the hardware business, structured such
that there was no recapture of the tax deferments.
Finally, continuing large profits from the huge time-sharing and
networking business that it retained.
Merry Christmas and Happy Holidays,
January 10, 1995
I am up to Part IV in my review of the book.
I remain impressed with your intuition about conversations that you
weren't party to and the captivating flow of the book.
Enclosed are copies of the pages that I have made editing changes
or etc. Don't spoil the flow
of the story if incorporating any of these suggestions does so - I
appreciate the need for a measure of poetic license.
Most of the corrections are self explanatory but I expand on some
of them below:
Page III. If there was
an award for you, don't be too modest to mention it.
If not, it's because you "disappeared" and no one knew
what had happened to you.
Page 4. They were
called Product Scope, not Product Charters.
Product Charter nay be a better understood term for non GE people.
By the same token, outsiders think the Computer Department is the
DP operation - Division is a better understood term.
However, substituting it in this saga would lead to no end of
confusion. Do you require
Page 30. At one point,
when we were trying to extend the ERMA derivatives to the smaller banks, I
lobbied long and hard to market them at x cents per items processed.
The banks had a "rule of thumb" that it cost them $.03
per item. (No one was able to
tell me where the number came from - but they believed it.)
I figured we could get the system in at low volume and grow as the
bank grew. Replacements would
be at our option as a cost reduction rather than the bank decision based
on competitive activities.
Page 35. Electronic
Park in the mid-fifties:
Bldg. #1 Administration
Bldg. #2 Cafeteria
Bldg. #3 Electronics Laboratory and Materials & Processes
Bldg. #4 Power plant and maintenance
Bldg. #5 Television
Bldg. #6 Cathode Ray Tubes
Heavy Military Electronics and Technical Equipment (Old timers referred to
it as the transmitter
bldg. - However by 1950 it was home of the Commercial and Government
Page 41. George
Metcalf's C&GED was broken up into the Heavy Military Electronics
Department, Light Military Electronics Department and the Technical
Equipment Department on or about the time of the Metcalf report.
George remained as GM of HMED.
Page 42. While doing
graduate work in Mathematics George Snively was working in Ohio State
University's Research Foundation when he was recruited for GE's Financial
Management Training Program. As
an undergraduate he had pursued a double major in Anthropology and
Electrical Engineering. Because of his technical background he had been assigned to
the Electronic Laboratory as Supervisor of Accounting following completion
of the FMTP courses. He was
eager to "join up" having participated in
several of the previous business planning efforts to
initiate a computer business.
(Edit the above as you see fit. Being 32 in 1956 I'm not sure of
your later use of the adjective "young")
Page 105. Don't want
to confuse silicon valley with the valley of the sun.
I was wrong about Bill Lord - he came later to run the Peoria Ave.
Plant. It was Stan Brown on
Page 106. It was
either The First National Bank of Arizona or the Valley Bank.
I suspect it was Valley Bank where we opened our payroll account -
for which we were later roundly criticized by Paul Walendorf of Banking
Services. The Valley Bank,
owned by the Bimson family and Chaired by Walter Bimson, was not a
National Bank. It's
substantially smaller reserve requirement gave the bank the muscle to pump
up the Phoenix and Arizona economies.
Page 111. ?? Douglas
was also a Director of GE. When
the Arizona Republic broke the story of the selection of Phoenix as the
site he tried to get a hold of Cordiner to divert us to Tuscon.
However, Cordiner was attending the annual two week planning
session in Florida and not reachable.
Page 118. The site
team had optioned 1000 acres, some from John Jacobs and some from ?? Eaton
(who later built the Peoria Ave. plant to lease to us), in Deer Valley
prior to the announcement of the move to Phoenix to prevent speculative
price increases. Only the option on 160 acres was later exercised.
Page 135. It was at
the cocktail party following the Computer Symposium at Electronics Park on
June 28, 1956 that a groan went through your staff when they saw you go
off to closet yourself with Herb Grosch.
This was long before the selection and move to Phoenix.
(Do you have a copy of the report of this meeting?)
Somewhere you need to mention his fish tank.
Page 146. Maybe we
could get Karsten to endow a chair in your honor.
Page 149. At this time TWA served Phoenix with Constellations (the
last airplane to fly by flapping it's wings) from Chicago with a stop in
Alberquerque for refueling. American
served Tucson from Chicago through Dallas.
Shortly after George Haller came aboard (1955?) the Signal Corp.
announced that it's
electronics development was to move to Ft. Huachuca
(sp?), Arizona from Ft. Monmouth, N.J.
In order to build the necessary infra-structure in Arizona the
Signal Corp. sent notice that only companies with a physical presence near
Ft. Huachuca or Tucson would be considered responsive bidders on
development contracts. Russ
Krapft and I made two trips via American Airlines to try to locate space
to lease in Tucson. It was
like a land grab and we were fortunate to locate some run down warehouse
space. Haller then made a trip to inspect our selection.
When he returned his friend C. R. Smith, the Chairman of American
Airlines called him to tell him that he had been selected to be a charter
member of American's Admiral Club. While he had him on the phone Haller complained about the
difficulty of getting to Tucson from
next day two representatives from American Airlines appeared in Haller's
office. Shortly thereafter we
had American service from Syracuse to Chicago connecting non-stop to
Page 223. GE's
management (including the Computer Department) didn't understand IBM's
practice (also the practice of airplane manufacturers) of waiting until
they have an adequate number of orders before beginning development.
This should keep you occupied until I can get to the balance of the
January 16, 1995
I have finished my "nit picking" and copies of the pages
with comments are enclosed.
In the prior stuff I sent it seemed to me that some of your
comments about Herb Grosch were out of historic context.
Herb may jump on any of these to attack your creditability.
Page 327. I don't
recall a particularly enthusiastic welcome for Rader, even by the
engineers. Bob Wooley for
example thought that Rader asked him some "idiotic" questions
about the NCR 304, but you also knew Wooley.
Marketing was always too busy to pay much attention to these
changes but took concentrated notice when he replaced Bob Sheeley and Tom
O'Rourke. You can quickly
assess Marketing's opinions by how often someone is invited to help in
sales situations. Rader, with
his technically superior attitude, was unpalatable to the salesmen.
Page 330. The 600
incorporated time-sharing features.
Page 334. By 1965 the
Venture Capitalist's had them coming out of the woods.
Hardly a week went by without Tom Clausen, who was the Manager of
National Accounts for the B of A in southern California (later to ascend
to the Presidency and Chairmanship over Al Zipf) and who also managed an
SBIC, calling me to check on a new peripheral company who was forecasting
large sales to GE.
Page 335. The Martin Marietta meeting was a big meeting at Martin's
headquarters in Baltimore lasting three days.
(Your version makes if appear too intimate).
GE was represented by myself, Chuck Ettinger, Vern Cooper, the
Eastern Regional Manager Cliff Sink, the District Sales Manager (name?),
the district Product Service Manager and the salesman for the account (and
maybe others). There were an
equal number of Martin people led by Charlie Lighthauser the Executive
V.P. of Martin.
I had earlier had several Meetings with Charlie during their
original rent, lease or purchase studies and had negotiated a seven year
Net Lease Agreement with him. (At
one point he had opted for a third
party lease but while we were putting it together he, sensing developing
problems, became reluctant to go
Charlie was extremely bright, straightforward and a consummate
numbers man. He was an open
and forthright negotiator, as quick to point out how contract language
could be misconstrued in his favor as in ours.
Vern Cooper on the other hand was the most number dumb person I
have ever met. He had
absolutely no understanding of the relationship of one number to another.
To him a number was a number.
When problems did develop with Martin, Vern Cooper gave Chuck
Ettinger the assignment to check into them and to develop a proposal to
save the account. Chuck got a
hold of me and we worked out a series of non green dollar concessions
calculated to provide an equitable sharing of the financial costs while
the problems were being corrected. They
totaled approximately $3 million which would be recouped in various ways
over the term of the lease.
The first day of the meeting with Martin was spent in fact finding
and trying to determine what they felt were the problems and their
magnitude. I got the impression that they were not unduly troubled or
surprised by the problems with such a large machine at this point in the
program. They just wanted to
know what our plans were to fix the problems and to lessen the impact on
them. They apparently had
been through this before with IBM. Chuck
Ettinger and I spent that night revising the proposal based on what we had
learned that day.
The second day was spent in presenting and explaining what GE was
planning to do to correct the problems and presenting our proposal for
financial relief to Martin while this was being done.
Charlie Lighthauser asked some very penetrating questions which
Vern Cooper was not technically equipped to answer - but he tried to
answer them anyway. Not a
very pleasant sight. That
night at the hotel, in his cups, Vern Cooper let it be known that his hero
was Robert McNamara the Secretary of Defense and that he Vern Cooper
planned to use GE as a stepping stone to that position as had
"Electric" Charlie Wilson. He had come to the conclusion that Charlie Lighthauser would
be a competitor for that job and said, Lighthauser thinks he is so smart
and tough and a captain of American industry but I'll show him
Charlie Lighthauser, on opening the meeting the next morning,
indicated that they were reasonably satisfied with GE's proposal to solve
the existing problems but wanted to get a clearer understanding of the
concessions we were proposing. Cooper
took offense at Charlie's questions and did not let Chuck
Ettinger and me give adequate replies.
It appears that he had already decided to tell Lighthauser
"Take your $3 million and give me back my machines".
I've reported the rest and Lighthauser's reaction.
It was the second most incredible episode I've witnessed.
If I hadn't been there - I wouldn't believe it!
(Van Aken's reaction to O'Rourke's order is in first place costing
far more than $3 million). Man is a thinking animal - this gives him the ability to be
Vern Cooper reported, first to Hersh Cross and then to Van Aken,
that he had managed to get the 600's out of Martin without a big lawsuit -
for which he was commended!!
Page 352/3. You imply
that re-organizations were the actions of a malevolent management.
In fact, they were responses to an explosive growth in a veritable
myriad of new and different directions with the "Peter
Principal" working rapidly. Only
those caught by the "Peter Principal" had time to Hillary (i.e.
Page 358. You appear
to carrying Lou Rader's water for him.
Page 366. One of the
cogent comments I heard about the re-organizations were that they were
from the top down and didn't effect the engineers and draftsmen who
continued to design the boxes that didn't fit together.
Page 413. Shortly
after I left GE Ollie Vanderbilt got a hold of me and asked if I would
help with a problem of American Research and Development, a VC with whom
he invested. I journeyed to Boston to meet with the staff of AR&D who
advised me that they had invested in this new computer company with a
computer ready to go to market but that General Doriot, the CEO of
AR&D (a professional management type?) would not let the company rent
the product. I helped them
prepare a very sophisticated presentation about the facts of life in the
computer business and how it was impossible to enter the market without a
rental program. The General
said "bull shit". If
Digital Equipment's customers weren't willing to pay cash for the product
then maybe Digital had no business in the business.
The rest as they say is history.
Too bad the General wasn't knowledgeable in the
business!! I learned again
that any enforced decision, good or bad is worth ten good ones not
implemented. This was not the first or last time that a successful
enterprise emerged acting contrary to my advise!!
January 17, 1995
Without meaning to detract from the incredible job you have done
with your book, I'd like to offer some "global" (to use a
current buzz word) comments.
Ken McCombs would often turn to me when he needed to draft a letter
or memo for your signature. First,
I would draft it. Next, I would go back and change every negative sentence
to a positive one. Then I
would go back and change every inactive verb to an active one.
I would then be close to sounding like vintage Oldfield!
(One time, for reasons I don't recall, I was asked to review an
appropriation request for a new plant written by Sy Ramo for presentation
to the Thompson board. It was
the only thing that ever came close to your style and I would have sworn
that you wrote it.)
Uncharacteristically your book comes off less than positive.
It seems to be sub-titled "A Trashing of
Philosophy of Management". This
seemed to be the theme of the external media which I always assumed,
perhaps unjustly, came from Bob Johnson and Herb Grosch after they had
left the company. I
seldom, except occasionally from an engineer, heard such negative comments
about GE's management philosophy - we were all too busy.
You slighted the positive story.
The creation and the accomplishments of an unusually outstanding
sales and marketing organization. Their
accomplishments are even more incredible in view of your thesis that there
were many bad management and engineering decisions.
Either our salesmen were unbelievably good or our competition was
not making much better product and engineering decisions.
After all, they at all times outsold our resources to produce and
created a momentum that continued notwithstanding Vern Cooper's moves.
I would liked to have seen much more input from the marketing
people. Chuck Thompson, Jim Helm, Jim Pompa, Bill Duster, Tom
O'Rourke, Ken Fisher, Chuck Ettinger, Vern Schatz, Art Aschauer and, of
course, Lacy Goosetree himself.
Also some of the stories of the success's like the Wherhauser
story, Chrysler, the railroads, the taking of the Hughes Aircraft account
from IBM's renown Buck Rodgers, the Pillsbury story, the Army, CalComp,
U.S. Steel, the many banks with the GE 225, Clark Equipment, GTE, Mac
Truck, the internal GE
successes against surprisingly fierce IBM resistance,
on and on. (Even the winning
of the Martin Marietta order - despite it's disastrous outcome). Many have sales stories rivaling the ERMA story.
After all, a goodly number of our salesmen later turned out to be
successful entrepreneurs. You started it all!
Also the story of the fiercely loyal GE 225 user's group who
extended the profitable life of the 225 well into Honeywell's reign.
(In the rental business a delay in getting new products to the
market place was not necessarily a bad thing)
I assume that the negativity results from the input from the
stories are usually negative. There
is no point in keeping an engineer on the payroll who is happy with the
current products. in
addition, any engineering group worth it's salt will propose ten desirable
projects for each one for which there are sufficient resources to carry
out. This means that for
every worthy project that management selects there are nine disappointed
sponsors who decry the short sighted and technologically incompetent
management who can't see the merits of this particularly outstanding
proposal. They are also the
ones with time on their hands to grouse - the winners
are too busy.
This standard phenomena was exacerbated in the Computer Department
with the existence of three competing engineering groups which essentially
stymied each other. Whatever
was proposed by one group could be effectively shot down by the others who
were equally technically competent to do so.
group was headed by Ken Gieser, nominally the Manager
of Engineering, one by Bob Johnson, the technical leader, and one by
Arnold Speilbergh with the product engineering skills. (Chuck Thompson,
who should have been the mediator, was more concerned with trying to
determine the politically acceptable solution than the technically
desirable one). Furthermore
the engineers, who expected to be “prima donnas”
in the highly technical computer business, were relegated to third
place. They took second place
to the operating systems developers, who let their preferences of computer
architecture be known, but essentially could work with whatever platform
was provided to them. (There were likely some engineers who thought that
COBOL was a gem stone!) They, in turn were subservient to the applications
software people which GE management philosophy had wisely assigned to
marketing. (In this regard Nancy Tafel deserves an important mention in
the ERMA story).
The criticism of GE's management philosophy does not hold water. It is an article of faith among the venture capitalists that
the technical founders of an enterprise need to be replaced with
professional managers after two or three years.
Besides, where was
there a pool of executives with industry experience for GE to draw on?
Four years was a generation in the business and
"experienced" people often turned out to be hopelessly out of
I would argue that Tom Watson, Sr. was probably no more
knowledgeable, except for sales tactics, about the computer business and
computer technology than Ralph Cordiner.
For every successful business (more than $100 million in annual
volume) still run by it's technical and industry savvy founder there are
many, many more where the founders have been replaced with professional
management. The rare
exceptions are Seymore Cray and Ken Olsen (albeit with a kick from General
It is difficult to get across to someone who was not there how
explosive the growth was. We
were rapidly growing to a size and complexity nearly equal the size and
complexity of the total GE company as you and I knew it in the early 50's.
I continue to be amazed at your accomplishment and the effort and
energy expended in writing the book.
It saps my energy to critique it and the critics effort is trivial
in comparison to the writer's!
You should be proud of the accomplishments of the enterprise you
started. Not disappointed!
Best wishes in finding a publisher,
PS: Two Jeopardy questions,
1. What professional
manager, with no technical background in computers or knowledge of the
computer industry, was appointed General Manager of the Computer
Department over a person who
had made a thorough study of the computer industry
and market and another person who had worked on some of the earliest
computers in IBM's Laboratories, had managed a large group of programmers
and been a user of a large computer?
2. What carpetbagger went to the west coast from his eastern
headquarters to set up an operation which he used as a stepping stone to
return back east as a General Manager?
It all depends on perspective doesn't it.
February 7, 1995
IT WAS ONE
HELL OF A RIDE
I agree with Arnold Spielberg that your book could be much longer -
if you have the energy. (I
apologize for exercising you to rebut my global comments.
I merely offered them for what they were worth and didn't mean to
detract you from continuing your work on the book)
To me the growth of the business was like the "Big Bang"
that created the universe. ERMA
happened in the first nano-second and the "Big
Look" in the first few seconds.
After that, hang on for exponential growth and complexity.
Much, much more happened after Arnold had left than happened during
time he was with the business - and he apparently
feels there is more to be included from his era.
I have been using the "Peter Principle" somewhat
incorrectly. The Peter
Principle applies to people who are promoted to a level above their
competency. There were only three promotions to or above sub-section
level during my tenure. One
was Clair Lasher (from Mgr.-Marketing to GM), Chuck Ettinger (whose
Product Service Sub-Section was elevated to Section level and his later
promotion to GM of the Small Computer Department) and the third was Lou
Wengert (from Dept. GM to Division GM and then to Group Vice President).
A corollary to the Peter Principle was at work.
The jobs themselves grew to a size and complexity that outgrew the
incumbents. I don't fault the
people who were caught in this process.
You yourself commented early on to your secretary, Audrey, that Art
Newman's job would out grow him. It
did - and his replacement, Bill Houze, was head and shoulders above Art.
Next to go was Ken Gieser. The
existence of the three engineering cliques was a result of his (and
Lasher's) loss of control. I'm
not sure his replacement did much better.
I didn't mean to blame the engineers for that situation.
I love Clair Lasher, but he sowed the seeds of his own demise with
the "Big Look". He
initiated something that he couldn't control.
(Unfortunately, his later failure as President of Houston
Instruments confirms the principle).
His replacement, Van Aken, was a prime example of a promotion to a
position above his competency. (Again,
his later failure as President of Hallicrafters confirms the diagnosis).
Cy Statt, Ray Barclay's replacement, was first-rate.
It took awhile for others to recognize how out of his depth Ken
McCombs was. His replacement,
Gil Gillespie, was far far superior.
Lacy Goosetree grew in competency with his job. (He appears to have
been a victim of nepotism.) This
was demonstrated when Lou Rader brought in Art Aschaeur and Ted Green, the
pride of UNIVAC's marketing, who couldn't hold a candle to Bob Sheeley and
Tom O'Rourke whom they replaced and to many others in the marketing
organization. Lacy and Bob created a momentum that carried some along with
it, but many couldn't keep up!
Chuck Ettinger was a good product service manager but his
replacement, John Croyle was even better.
You once asked me why I hadn't "made out".
I think the above recital indicates that it was an achievement just
to grow and run fast enough to be the only one to remain at sub-section
level. All others were
demoted, fired or resigned. Is
it any wonder you get so many negative comments?
Many months ago we started this correspondence with me claiming
that after the "Big Look" the business took on a life of its own
and it didn't make much difference who was trying to manage it.
I have not changed that view.
Only Stan Smith seemed to be able to get his arms around it and
start to control it.
On to the story.
Paul Shapiro was the salesman on the Hughes Aircraft account.
He can give you the basic story and I can then fill you in on the
very complicated financial tactics.
Curt Hare was the salesman on the Weyerhauser account.
Len Call was the salesman on the Pillsbury account and I believe
while Ken Fisher was still the Minneapolis District Manager.
Jim Pompa was the salesman for Chrysler.
Vic Casebolt was also in the Detroit office at this time and has an
interesting story about the National Twist Drill account.
Lacy may be the best one to give you a feeling for how hard we had
to fight for the internal GE business.
Jim Helm can tell you about U.S. Steel and may also have some
personal knowledge of some of the fights for the internal GE business.
Don Klee was the Denver District manager and was the salesman for
the Martin Marietta account for the Denver operation where the equipment
Jack Lorenz was the salesman on the GTE account.
I don't recall who the salesmen were on the railroads - there were
three connecting roads, the Western Pacific, the Denver & Rio Grande
and the Atchison, Topeka and the Santa Fe. I helped close the Western
Pacific deal by arranging a "sale and leaseback" of some of
their mainline track to free up funds for the computer.
Bill McNamara was the salesman for the Zellerback Paper Company.
This is all off the top of my head.
You should probably canvas the salesmen for their recollections of
the important stories. (Or
just the District Managers to cut down on the number)
Mitchell Marcus, President of Production Systems, Inc., Walthan
Massachusetts, was a long time President and supporter of the GE 225 users
group. Mitch and his brothers Herb and Jerry were all three
MIT graduates. You should be
able to locate him through your MIT connections.
I believe that Vern Schatz was closely allied with the users group.
(Ken Gieser may have served as the Company representative to the
group for awhile.)
I have no problem with your combining Strickland's visits. I was only concerned with how historically accurate you
wanted to be.
Who is the "Wiggans" that Warren Prince
complains about? I can't put
much weight on his comments if he wasn't close enough to the man to know
his name! Warren wasn't in a
position to know
what peripheral products were being pushed by
engineering to "make" or by purchasing to "buy". Nor was I. You
need much more Product Planning input from Chuck Thompson and Dick
Enclosed is the report of the June 28th, 1956 Computer Symposium. Ken McCombs, Ray Barclay and I were standing with drinks when
you went off privately with Herb Grosch and Ray said "there goes the
My best as usual,
believe that Lou Rader's Industry Control Department didn't market direct
but sold through Apparatus Sales. My
guess is that it would have been relegated to unit status in one of the
Operating Sections of the computer business had it been part of the
computer business in the mid sixties.
February 7, 1995
FROM ERMA TO
I like the above. 'ARMAGEDDON'
is too Wagnerian!
DID DOMINATE THE BANKING MARKET WHILE CLAIR WAS GM!
Vern Cooper, during Van Aken's reign, cooled the banking market
towards GE. However, by this
time the importance of the banking market was fading in relation to the
size of our other markets. Chuck
Thompson belongs mainly to the Van Aken era.
I don't remember John Couleur - who must have come somewhat later -
being with the Department. We've
since become acquainted.
If Lou Rader didn't bring in Art Aschaeur and Ted
Green, who did? Certainly not
Van Aken to replace his favored Tom O'Rourke nor Lacy, Art Aschaeur to
replace Bob Sheeley. Lacy
should be able to confirm what happened.
Chuck Ettinger should also have been privy to these goings on.
Sorry, but I vividly recall that the cocktail party following the
June 28 Symposium was abuzz with stories about Herb Grosch and his and
your moves were intently observed by most of those present.
Jim Pontius (another multi-millionaire) or Clair Lasher should be
able to confirm.
Your choice of reviewers puzzles me.
I should think that you'd have chosen some of the on-site managers, i.e. Strickland, Lasher, Van Aken, Wengert, Goosetree,
Gillespie or Ettinger to review it. (I
still don't know how Dick Shuey fits in).
The big story was Marketing - not technical - and if making copies
weren't such a problem for you, I'd recommend that Barnes, Thompson,
O'Rourke, Fisher, Prince, Helm, Pompa, Duster, and Schatz review it.
With your approval, I'll be happy to make up to five copies and
distribute them to any of the above you select.
Whenever I was in 570 people would ask me what was wrong in
Phoenix. I could never find out where the general impression that
"something was wrong in Phoenix" came from.
I suspect IBM's fine wooing of corporate personnel. I always
replied, "There is a basic misunderstanding here that we are in a
technology game. Not so - we
are in a marketing game the likes of which GE has never been in".
I would then be told how great GE was in the marketing of
appliances and etc.
Before the advent of the microprocessor in the mid-seventies,
computers "at best" didn't work. Applications except in banking
and utility billing were wrong headedly forced onto data processing
functions which were better done by other means.
In addition they were horribly expensive.
However, due to their "sizzle" and obvious potential,
they were marketed and sold in sizable quantities by skilled and powerful
sales organizations. GE's
Computer salesmen were among the very best.
Only when memory costs dropped from $80,000.00 per megabyte of RAM
(Which is what The Snively Financial Organization
paid in 1973 for Data Products Large Core Storage Units) to less than
$80.00 per megabyte today, could programs be written which realize the
just talked to Art Aschaeur who confirms that Rader
hired him. He in turn
hired Ted Green.
March 25, 1995
A whole new book would need to be written to cover the Hughes
Aircraft transactions and their aftermath.
Who was Don Benscotter? The
greatest salesman I've ever known - and I've known a few.
(i.e. Bob Canning who recruited me into the GE Business Training
Course!!!). I need to give
you some background in the history of personal property leasing in order
to properly introduce him.
In the mid 1950's, a Stanford student named Dave Pearsely(sp?)
wrote his master's thesis on the subject of using personal property
leasing to provide tax shelter. For
some reason I've never understood, the Bank of America and the Ford
Foundation financed his doctorate thesis on the subject.
Following graduation, he set up "Capital Equipment Lessors"
the first personal property leasing company.
The purpose of Capital Equipment Lessors was to provide leases to
the Bessamer-Phipps trusts. You
may recall the publicity (several Fortune and Wall Street Journal
articles) in the late 50's, about one of the Phipps heirs, a "do
gooder" who wanted to give away millions, bringing suit against the
attorney (again names escape me) whose family had handled the trusts for
generations, for stopping him. He charged them with fiduciary irresponsibility.
One of the elements of the suit, but not a major one, was that
Capital Equipment Lessors did not treat all of the trusts equitably.
This was true as the leases, with different starting dates and
terms were obviously not all the same size.
In addition Capital Equipment Lessors was in trouble as Dave
Pearsely was not a good administer. He
had rapidly built a nationwide sales force of commissioned salesmen who
could quickly make a lot of money with the acceptance of leasing in what
later became known as the "pots & pans" part of the
industry. (i.e. leasing butcher cases and other store fixtures).
Capital Equipment Lessors rapidly became swamped with these small
uneconomic leases. As a
result of these two things, Price Waterhouse, who were the accountants,
recommended that Capital Equipment Lessors be shut down.
Dave Pearsely went back to teach at Stanford and somehow Price
Waterhouse and Ollie Vanderbilt (Oliver DeGray Vanderbilt III) got
together. Price Waterhouse
advised that while the program would not work with trusts - it would work
for partnerships. Ollie
indicated that he had many relatives and friends that could use tax
shelter. They got a hold of
Niles Edwards, who had been the Comptroller of Capital Equipment Lessors
and Omar Ash who had been one of their more successful salesman and had
them form Lease Financing Corporation to find, package and administer
leases for partnerships that Ollie would form.
Omar had been one of those NCR salesman who could earn in excess of
$100,000 a year (a lot of money then - and now) during the 50's until a
change in the commission plan had caused him to
jump at the opportunity presented by Capital
Equipment Lessors. Omar was
made President of Lease Financing Corporation and Niles the Comptroller.
Omar Ash, in contrast to Dave Pearsely, was a good administrator
and had excellent banking contacts from his days with NCR and, taking a
lesson from Capital Equipment Lessors, he established $1million as the
minimum size for transactions that they would finance.
He targeted the emerging CATV business as a likely source of large
transactions and contacted Don Benscotter who he knew to be an investor in
Don Benscotter had been a founder, with Bob Dee and I assume
others, of Electrodata - the first independent computer company.
George DeSheill was the sales manager.
The founders became wealthy when Electrodata was subsequently
acquired by Burroughs. Don
and George went with Burroughs as salesmen and Bob Dee into Burroughs
accounting where he went on to become V.P. of Finance.
Benscotter retired soon thereafter and moved to
Texas. Soon bored with
retirement, he acquired the Arizona franchise for the 7-11 stores and
moved to Phoenix. He spent
several years developing a number of stores in Arizona before becoming
bored with the grocery business, sold his franchises and retired again.
Phoenix was one of the centers of promoters for CATV businesses,
and again bored with retirement, he became involved in this business. I
believe that Omar Ash and Don Benscotter were previously acquainted in San
Diego where Electrodata had been headquartered and where Omar Ash had been
an NCR salesman. They now
By this time I had begun working with some of the early leasing
companies - Al Zises of Bankers Leasing and Pod Booth of Booth Leasing -
to provide third party lease financing to our customers.
They both had reliable sources of funds and could handle the larger
transactions. However, their
rates, while very competitive, were "money over money" rates and
their 100% debt financing made them inflexible and slow to respond to
requests for rates.
I think it was about the fall of 1963 when Don Benscotter, seeking
another source of large transactions, asked to see me.
Having been beleaguered by "finders" for leasing
companies, I reluctantly made time available to meet with him.
He told me that due to their blending of senior debt at one rate
funds at a much lower rate permitted them to offer a
lease rate lower than the rate on the senior debt.
Furthermore, they could respond with a commitment of the equity
funds and a preliminary lease rate within 24 hours.
He also agreed to a lower limit as our smaller systems were around
$300,000. I was skeptical but
told him that I would give him an opportunity to bid on one of our
I don't now recall what the next transaction was, but I called Don
Benscotter, Pod Booth and Al Zises for quotations.
Don got back to me within several hours with an unbelievably low
rate. When Zises got back to
me several weeks later his rate was approximately 4 points higher than
Don's and Booth never did
respond on this particular transaction.
I was reluctant, due to some disbelief about the low rate, to risk
passing it on to the salesman to give to our customer and called
Benscotter for another meeting.
He had me call Omar Ash in Philadelphia who assured me that the
senior debt was available from Girard
Trust at 6.5%, gave me the name and number of the lending officer
if I wished to call him, and assured me that their quoted lease rate of 6%
- a half point under the cost of the senior debt - was firm.
In addition he advised me that I was welcome to tell our customer
the rate that Lease Financing was paying for the senior debt and if the
customer had a friendly banker who would supply it at a lower rate which
Lease Financing could use, the lease rate would be 1/2% below that rate.
Needless to say, our customer was very impressed.
It was not long, due to their responsiveness and very attractive
lease rates, that I began to work almost exclusively with Lease Financing.
They in turn always advised our prospects up front that their services
were only available through us (other leasing companies would turn around
and offer to lease our
competitors system if we lost out). They also turned
out to be very flexible. The
use of the equity funds for tax shelter actually made
"stair-step" leases extremely attractive to them.
Don, Omar and I worked together very well and evolved a "dog
and pony" show where I'd advise the prospect of the various Rental
and Lease plans that GE could offer and then have Don or Omar present the
additional flexibility and lower rates they could provide.
We would attempt to get the prospect to open their
"kimonos" and tell us their problems so that we could tailor a
unique solution for them. (i.e. the Western Pacific Railroad where we learned that the
ICC and IRS regulations regarding track replacement was inhibiting the
computer acquisition and Weyerhaeuser’s ordinary loss problem doing
likewise for them)
We ultimately evolved the following extremely successful
"closing" routine. If
a salesman called me for a lease rate I would provide him with a tentative
monthly rental to run past his DP Manager customer.
If the DP Manager expressed an interest then I would agree to come
meet with the customer but that I did
not want to meet with the DP Manager but with the
financial people to talk "beans" not "bytes".
I would meet with the financial people and provide them with the GE
options and give them Lease Financing's rates.
I would suggest inviting Lease Financing to meet with them, but
didn't want to bring them in
unless they could meet with the next level of
management. Omar Ash in the east, or Benscotter in the west would then
come in with "live" documentation.
We would put on our "dog and pony" show and they would
push for the prospect to have their lawyer review the documentation and to
contact Lease Financing's lawyers to make sure that there was mutual
understanding about the documentation.
Once the lawyers finished their review and negotiation over
contract language, the documentation would usually be presented to whoever
had the authority to execute the documentation. They inevitably signed
them. You will note that
throughout this process no one had to make a positive decision to do the
deal. Anyone could stop the
process along the way, but it worked like a charm.
The banks loved the program. It
was not unusual for Omar Ash to arrange for Bank B to provide the senior
debt to Bank A and Bank A to do the same for Bank B who would mutually
agree on their "creditworthiness" and the interest rate to
charge each other. Their
respective lease rates would then be below that rate.
In affect they loaned the money at one rate and borrowed it back at
a lower rate.
Lease Financing was very professional in everything they did.
The lease documentation was prepared by Ollie Vanderbilt's high
powered Philadelphia lawyers and reviewed by Price Waterhouse.
There was no hesitation in obtaining IRS rulings on any
questionable tax aspects to any transaction.
Benscotter was a smooth salesman with the uncanny ability to rapidly move
a transaction up through an organization.
We would often meet, as planned, with the V.P. Finance in the
morning and by afternoon would be taken to meet the Treasurer, the
President and others. Many
times the prospects would have Directors or others who served on other
Boards with Ollie or had made investments through him.
(i.e the Pews of Sun Oil, Emlin Roosevelt's - the Teddy side -
Elizabeth National Bank, the Woomsley's (sp?) New Orleans bank (name?) and
Don would often come out of the prospect with considerable business
in addition to the computer. I
took him to meet with Green Giant to finance a $450,000 computer and he
ended up financing two packages of farming equipment for them - one for
$12 million and another for $8 million.
This was typical.
Leo Mott, our Memphis District Manager, had set up a meeting with
the Cashier of the Fifth National Bank of Memphis for Don and I.
Leo called me the afternoon of the day before the meeting to tell
me that the management of the bank were suddenly called into an unplanned
meeting and that the Cashier would not be available to meet with us.
I advised him that there was no point in us coming to meet with the
DP Manager and to reschedule the meeting.
I called Don to tell him but found that he was already on his way
to Memphis. Leo was very
apologetic when I called him back to tell him that Don was already on his
way. I told him not to be too concerned and that I would also be there. I
told him of Don's ability to move a transaction up and told him to
"watch tomorrow". I
told him that I had not been able to figure out how
he did it but that maybe Leo, being a fellow
salesmen, could watch and tell me how he does it.
Leo answered, "Maybe so, but there's no one available".
The next morning we met with the DP Manager and the Cashier was
suddenly available for lunch. After
lunch Don was introduced to the President who asked him to meet privately
with him and the
Chairman about (I found out later) a questionable tax
shelter that the bank had put one of their clients into.
Leo was stunned and said "I didn't believe it when you told me
that it would happen".
This should answer your question - "Who was Don
I didn't intend to ramble on this long when I started this missive. However, I think that it's background that's needed to
understand the Hughes Aircraft story that completely confounded IBM.
I'm looking forward to receiving Paul Shipiro's recollection of it
which I will flesh out promptly.
My best as usual,
March 25, 1995
Do you have a FAX machine? Perhaps
you can FAX me Paul Shapiro's letter or send me a Xerox copy of it - maybe
I can decipher it. My FAX
number is above.
The various financings were tailored to specific circumstances
involved in the sales situation - nothing to do, as you suggest, with
Hughes Aircraft's financial situation (which was extremely private and
I need jogging re these situations and the names of the people
My best as usual,
off to ski for a couple of days (at 70+ I can do it for free) but my FAX
machine will be on.
April 1, 1995
Hughes Aircraft (The Aircraft Co. never made any airplanes.
The helicopters were made by the Hughes Tool Co.)
I still haven't received a copy of Paul Shapiro's letter from you -
but will try to recall what I can about the Hughes deal.
When Hughes Aircraft's annual costs for the "rental" of
IBM equipment reached $12million it came to the attention of someone in
the company (maybe Shapiro knows whom) who concluded that they were being
a "patsy" for IBM and they went searching for someone to change
They hired a Dr. Cleven, an Astrophysicist I believe -again maybe
Paul knows, who had recently retired as a Colonel in the Airforce where he
had been one of General Curtis LeMay's Strategic Air Command's big guns.
His first move was to cancel orders for IBM equipment which would
have added an additional $2 million to the annual rental bill. Next, he analyzed their equipment usage and returned
equipment with some $4 million in annual rental to
IBM. He obviously had not
endeared himself to IBM at this point.
Hughes Aircraft was renting two IBM 7094's, one being used in the
technical side of the house and one being used in the business side.
Dr. Cleven planned to merge both centers into one after selecting
next generation equipment, either one of the IBM 360 series or GE's 600.
In order to evaluate these two systems he decided to set up a two
year contest between the two companies.
He would install the latest IBM offering in one center and GE's in
the other. Paul should be
able to advise you whether competitive proposals were made for each system
or if Dr. Cleven chose which
went where. As I recall
-again Paul- GE was to supply the equipment to the business side.
I don't recall -again Paul- why I was brought into the procurement. I wouldn't normally have been brought in where the
concessions, such as the requested three months free rent, were not
extraordinary and the customer wasn't pushing for something unusual.
In any event, I made a visit to Dr. Cleven.
During this visit I learned that IBM had offered to reduce the rent
on the 7094 to zero following the delivery of a 360until the 360 was up
and running - approximately 90 days.
At $30,000/month this was a total of $90,000.
In addition they were paying IBM substantial shift premiums.
We, of course, could not
make the same offer and Dr. Cleven indicated that it
was a lot of money for him to swallow and we needed to somehow match IBM's
proposal. I told him that I'd
ponder the problem and returned to
It occurred to me that he might save a lot of money on overtime
charges -in addition to much lower rentals- if he were to exercise his
purchase option on the IBM 7094 and have it leased back to him during the
18 to 24 months until delivery of the GE 600.
I checked with him (presumably through Paul) and
found that they had accrued the maximum rental credit
toward purchase of the 7094 and were down to the minimum price of 50%.
I had Paul tell him that I had an idea and asked him to get the
correct purchase option price from IBM.
After much foot dragging by IBM and a lot of pushing by Dr. Cleven
he came up with the price, which I recall was somewhere around $500,000.
(I won't be able to recall exact amounts for you).
The IBM 7094 deal.
Based on Hughes Aircraft's purchase option price for the 7094, I
calculated that the rental, plus maintenance, on a 48 month net lease,
would save him, in addition to overtime charges, about $10,000/month.
This would total $150,000 to $180,000 over the 15-18 (?) months
until delivery of the GE600 system. I
believe that I then had Paul set up another meeting
for me - in any event I went over to LA to show these numbers to Dr.
Cleven. I advised him
that GE would not want to have an IBM computer on their books but that I
knew of a leasing company who would be able to handle the transaction and
would like to set up meeting with them and him to explore the
possibilities. He was very enthusiastic and a meeting was set up.
Don Benscotter and I put on our "dog and pony" show for
Dr. Cleven. During the
presentation I referred to the investment tax credit as "diamond
dollars" - after tax dollars, the hardest kind to come by.
Doc was intrigued and amused by this term and repeated it a half
dozen times during our meeting. This
would subsequently prove to be important in the GE 600 proposal.
We proposed the purchase and lease of the IBM 7094, but lacking
financial information, we only had preliminary lease rates.
We discussed the options that Hughes would have at the end of the
15-18 months. (1) Terminate the lease - without firm numbers we estimated
that the termination cost would be approx.
$290,000 at the end of 18 months. This would be off-set by the residual value of the equipment.
IBM equipment tended to sell on the secondary market at or near the
minimum purchase option price of 50% of list price.
It seldom sold for less than 35% -$350,000 in this case- so Hughes
should be able to terminate at no cost.
(2) Sublet the system to someone else for the remainder of the
term; or an extension of term to reduce the rental even further.
Dr. Cleven was very interested and agreed to set up a meeting with
the financial people for us to obtain the information needed to firm up
Dr. Cleven set up a meeting with John Couterie (sp?) the Treasurer. IBM -who were livid with Dr. Cleven for canceling orders and
sending back equipment and horrors of horrors asking GE for proposals- had
been trying unsuccessfully to get to see John to complain and he felt that
if he talked to GE salesmen he would also have to see IBM salesmen.
He would meet with Benscotter and I, but without any salesmen
present! You can imagine the
fear and trepidation caused in sales by the thought of two bean counters
running loose in the upper reaches of their account and screwing up their
deal. It was traumatic for
Shapiro and Ted Green, but to their credit they let
us do it.
Don Benscotter and I met with Dr. Cleven and John Couterie.
John was enthusiastic about our proposal and after cautioning Don
that Howard Hughes had black listed a long list of banks (mainly
those involved in taking TWA away from him) he gave
him the name of the B of A officer who handled the Hughes Aircraft
Most of the discussion centered around the termination provisions
with Don and I assuring them that there was little or no risk of a
deficiency in view of the stability of the IBM secondary market.
John's reply was that if there was little risk, then GE, who was in
a better position to evaluate it, should be willing to accept it.
In addition GE was in the computer business, had a large sales
force, and was in a much better position to profitably dispose of the IBM
7094 than they. I told him
that GE didn't have a direct financial interest in this transaction and
couldn't directly benefit and to provide it's corporate guaranty would be
"ultra virus" (or whatever it is that the attorneys call it).
I was sure that they wouldn't guaranty this transaction.
We went around this horn several times before reaching a
"Mexican standoff". To break the impasse, I suggested the following:
In the event of a deficiency, Hughes would pay the first $50,000 -
thus assuring them of a minimum savings of $100,000 over the period and GE
would pay any remainder.
They thought that this was a sensible proposal and I agreed to try
to get GE management's approval. (I
"closed" over $400 million of transactions
for the Computer Department and never once made a concession. In fact, in many cases I recovered previous concessions
-Martin aside, where we would have recovered them- in the restructuring of
agreements and will do so later here in the financing of the GE 600. This
was the first -and only time- that I put GE "at risk" in a
I don't remember who carried the ball to get Cooper's approval.
It had to be either Paul Shapiro or Ted Green - I'm sure I would
recall my trauma had I tried to explain this number dependent proposal to
Vern Cooper. In any event, it
Implementing the IBM 7094 deal.
Needless to say, IBM was not very cooperative.
They refused to let Hughes Aircraft assign their Purchase Option
rights under the Machine Service Agreement to Lease Financing Corporation
even though this had become a fairly common practice with leasing
companies. Hughes did not
want to exercise the option themselves even with a simultaneous sale to
LFC. They were concerned that it would create a sale/leaseback.
I don't now recall how the problem was solved.
I vaguely recall Don Benscotter having
Hughes set up a "computer" subsidiary to
handle the transaction. (It
could also be that Hughes threatened legal action or that either Howard
Hughes or Ollie Vanderbilt had some pressure points in IBM which they
used). In any event, the deal finally got done.
Sometime during the late 70's I was visiting a venture capital firm
in the Westwood area of LA who had an investment in a computer service
bureau in their same building. On
our way out of the building I was asked, "When was the last time you
saw an IBM 7094?". I
answered that it was over 10 years ago at Hughes Aircraft.
"Come with us and we will show it to you!".
When Hughes no longer needed it, they sublet it to Shell Oil for
something like six years
and then to this operation who had had it for a number of years and had
only recently taken it out of service.
I estimated that Hughes had made well over $500,000 on this
transaction - not counting their initial savings.
As you can see, once you got me started recalling this transaction
the recollections came flowing back.
This should demonstrate that there is an important marketing
distinction between "renting" and "leasing" - not just
a technical "bean-counter" difference.
The second half of the story, financing the GE 600, is equally as
fascinating and more complex. I
will try to recall it as well - but in another letter.
This will give you enough to digest at one time!
My best as usual,
CC: Paul Shapiro
April 5, 1995
HUGHES AIRCRAFT (Continued).
You have previously been introduced to Don Benscotter.
It should come as no surprise to you that after negotiating the IBM
7094 transaction with John
Couterie, Hughes Aircraft's Treasurer, that John asked him to finance
several other transactions for them.
John was relatively new on his job and had found several
transactions left in his desk by his predecessor who had been unable to
get them done. These were
things that Howard Hughes had put a high priority on
and it was quite a feather in John's cap when Don was able to do them
promptly. One was an approx.
$30million financing for the CATV system for Ecuador, for which Howard
Hughes had acquired the franchise, and I never knew what the other one
was. It was not long before Don was in direct communication with the DI
and making periodic trips to Las Vegas.
Getting back to the GE 600 deal, you will recall that Dr. Cleven
was going to run a 24 month contest between an IBM 360 system and a GE 600
system. As a result of the
IBM noise surrounding the IBM 7094 transaction he made every effort to
give the appearance of scrupulous fairness in setting up the
would have liked to pitch a purchase or long term lease to him but we
could only propose our monthly rental Use Agreement.
However, I had a plan. In
a somewhat analogous situation with CalComp I had put together a purchase
with option to rent.
Benscotter had gotten close to Dr. Cleven and John Couterie and he
occasionally took his wife with him to LA to have dinner with them and
their wives. He could get
proposals to Dr. Cleven without them coming from GE.
I called Don and told him what I had in mind to propose.
A sale with option to rent! We
would sell the GE 600 system with an option to return it, if we lost the
contest, during the 24th
to 27th month. If
the option was exercised we would refund the purchase price plus the
monthly maintenance paid less the rental that would have been charged
during the period. I asked
him if LFC could handle such a thing as a termination provision in a
lease. He said he was sure that they could, but that he would have
Omar Ash run some numbers on it and get back to me.
He called me back and said that they could handle it.
I suggested that he talk to Dr. Cleven and tell him that GE might
be amenable to such a transaction. He
told me that every time he talks to Doc he asks how he can get some of
those "diamond dollars". He
said that several weeks before Doc had speculated
on various ways Hughes Aircraft might get the ITC.
Don said, "Not
only can I get the proposal to Doc but I think I can arrange it so that
its his idea. I'm having
dinner with him tomorrow night and I'll remind him that he discussed this
idea with me several weeks ago and that's why I had Omar work out the
tell him that I don't know whether or not GE will go along with it".
The day following Don's dinner with Dr. Cleven, Doc called me
demanding that I catch the next plane to LA.
I asked him what the crisis was but he wouldn't tell me.
I told him that I couldn't came that day but that I'd catch the
11:00 plane the next day and would be there at noon.
"Good, I'll pick you up at
the Airport and we'll go to lunch."
At lunch the next day I asked him what the urgency was and why he
was being so mysterious. He wouldn't tell me but said,
"I'll tell you when we get to the office and I'm paying for
lunch today - I'm selling you.".
Doc was a "blackboard" man and one wall of his office was
covered with a school room size blackboard.
He proceeded to cover it with numbers to sell "his idea"
to me. I asked him where he
came up with these wild and crazy ideas but he assured me that it was a
"win-win" situation. Hughes
Aircraft would get the Investment Tax Credit and a greatly reduced rental
during the initial 24 months and for the following 5 years, of a 7 year
net lease, should they elect to keep the GE equipment.
Even if GE lost out and the equipment were returned GE would have
had use of the monies for the purchase for two years, Hughes would have
paid the personal property tax and insurance and GE would still get the
same rental as if it had been rented under the existing agreement.
I asked him how the rent was to be calculated in the
event the option was exercised - specifically whether
it would be calculated as 21 months in recognition of the three months
free rent included in the present agreement.
He said that it might be adding insult to injury to take the free
rental if they were returning the equipment and that the rental charge
calculated from the date of turnover to the date
returned to Phoenix.
I told him that it was beginning to make sense to me and that I'd
go back to Phoenix and put a pencil to it.
He said that that wasn't necessary as Benscotter had already worked
it out and my job was to go back and tell Cooper he'd be crazy not to
except the proposal. I promised to try.
I let two days pass before I called him to tell him that we'd go
along with the deal but that we couldn't just grant the option without
some value received for it and we would need to charge 1% of the purchase
price for it. He groused about it for a bit but when I pointed out that
Lease Financing would include it in the rent, which would be increased
very slightly as a result, he acquiesced.
I called Benscotter and told him to prepare the documentation.
When word leaked out to IBM that Hughes had executed a long term
lease on the GE equipment they went ballistic.
went in to Hughes with all flags flying and all guns blazing.
He accused Dr. Cleven of taking bribes from GE and kickbacks from
Lease Financing and numerous other sins.
Dr. Cleven had developed the habit of going down to the cafeteria
each day at mid-morning for a cup of coffee.
There was an old codger, whom he assumed was part of the
maintenance staff, who was
usually there at the same time and they became coffee-break buddies.
With little prompting from this old timer,
Doc would discourse on his problems and exploits and now he told
him of IBM's actions and accusations.
This old timer was (Howard?) Hall an attorney who appeared on no
organization charts but reported directly to Howard Hughes.
He had been making meticulous notes of their daily conversations
and now introduced himself to Doc and gave him specific language to relay
to Buck Rodgers concerning his notes on IBM's activities from prior to the
IBM 7094 transaction and his contemplated action against IBM
for defamation of character and a number of other
This is the last thing I heard about this transaction.
I presume that we won the 24 month contest and lived happily ever
after, but you'll have to get the rest of the story from Paul Shapiro.
My best as usual,
CC: Paul Shapiro