EMC Redux: once a high-flyer, the data storage king stumbled badly. Now CEO Joe Tucci is leading it through a wrenching transformation.

Watching your company's stock price collapse by 90 percent in your first year on the job would be enough to discourage even the most seasoned CEO. Yet peering into the abyss seems only to have energized Joe Tucci, who took over EMC, the $5.4 billion data-storage group, two years ago.

Tucci has hit his stride in recent months, jetting around the country to ink deals with Steve Ballmer of Microsoft and John Chambers of Cisco. In July, he announced EMC would buy Legato for about $1.3 billion in an allstock deal. The move extends EMC's push into software and leaves the company's cash reserves of nearly $6 billion intact for another big deal. By midyear, the company's share price had more than doubled since its trough last year. It also eked out net income in both the first and second quarters, after a long series of losses.

A man who seemed uncertain of his role two years ago, Tucci now cuts a confident figure. Shareholders at the May meeting in the company's suburban Boston headquarters nodded approval as the CEO reviewed upbeat results. "We're starting to gain some traction," he said.

But Tucci is not just pulling EMC out of a slump; he is pushing the company in a different direction. Harddriving and inwardly focused, EMC once seemed determined to push very expensive data storage equipment down the throats of customers faced with little choice. Stiffening competition, however, has forced EMC to rethink its strategy.

Being nice to customers is suddenly of paramount importance. Tucci is looking to expand rapidly in high-mar gin open-standard software products that can be used on a wide number of machines, including those of competitors. As proof of its new "the customer is king" philosophy, EMC is also pushing for industry standards for data storage software. "The industry will have to go that way because that's what customers want," says Tucci.

The company's new strategy is cause for concern among rivals. "EMC's idea of" open standards is that everyone conform to their standard," says Brian Truskowski, general manager of storage at IBM. But customers seem to like EMC's new software. In May, Tucci named key executive Mark Lewis to head the Open Software Operations division in the company.

Once, organic expansion was all EMC desired; now Tucci says the company's goals can be achieved only by buying other companies. He has also come to view partnerships with important technology players as a necessity, another strategy aimed at outmaneuvering IBM.

As Tucci sees it, the technology world is composed of different "silos" dominated by the likes of Cisco, Intel, Dell and Microsoft. He's not about to take on those players in their areas of expertise. But Tucci knows that by working with them, EMC can boost dominance of its own patch: data storage. So EMC is integrating its products with those from Microsoft and Cisco. Tucci has also deepened EMC's partnership with Dell.

Tucci's logic is that second-tier players will be out of the running in the medium-to-long term and EMC will only thrive if it stays on top in the storage segment. "In almost any segment of the industry, there are only three players that matter," he says. "And in most cases, the top player takes 50 percent of the profits in that segment.

"Storage will go the same route," he predicts. "My job is to make sure that EMC is at least one of the three, and hopefully No. 1."

Remaking EMC is possible only because the company fell so hard from its lofty perch. In the 1990s, EMC was the second-best performing U.S. stock, after Dell Computer, yielding a stunning 84,000 percent return. Annual sales grew 40 percent in the peak years and in 2000, revenues reached $9 billion. Mike Ruettgers, ENIC's CEO at the time, was one of the most lauded managers in the country.

The good times ended soon after Ruettgers stepped down as CEO to become executive chairman in January 2001 and Tucci took the reins. The rolling collapse of the dot-corns, new wave telecoms and service providers proved devastating. In the second half of that year, the company lost a shocking $1 billion.

Tucci confesses he was at first unsure how to read the situation. "When you're as successful as EMC was, there's a temptation to see that kind of event as an anomaly and not a sea change," says the Brooklyn native. "Now that history is written, it's clear it was a sea change."

Tucci is liked and admired in the industry for his no-nonsense approach. He is unconcerned about perks. Whereas Ruettgers commuted to EMC from the tony suburb of Carlisle, Mass. Tucci still lives in the Nashua, N.H., house he bought when he was pulling Wang Computer out of Chapter 11 in the early 1990s. "Tucci's as tough as they get and none of the past regimes at ENIC would have been able to effect as much change this quickly," says Steve DuPlessie, an analyst at Enterprise Storage Group.

It's a classic case of taking a very proud company and attacking its culture to allow it to survive. "We're redefining EMC, but that takes time," says Tucci. "It's like turning the Queen Mary."

The company developed a case of arrogance in the early 1990s when it was able to dominate a niche that was only of peripheral interest to big high-tech players: furnishing data-storage capability to banks, airlines and others. But demand from telecommunications and Internet companies pushed growth to levels impossible for competitors to ignore. By 2001, EMC was facing a new reality. Competition from Hitachi--sold under the HewlettPackard umbrella--IBM and others had grown fierce. Rather than concentrate almost exclusively on high-end hardware--the group's flagship Symmetrix line--EMC realized it would need to refocus on mid-tier products.

Under Ruettgers, EMC had made moves into the midrange storage market with its Clarion product. Last year, the company moved more radically down-market with the new Centera system, which provides fixed storage for static data like old emails.

Even a broader, more flexible range of hardware is not enough to sustain a turnaround, however. Storage hardware has become increasingly commoditized. While demand is still rising at a rate of about 40 percent per year, prices are falling at nearly the same rate.

All of which explains why Tucci's eye has fallen on the high-margin businesses of software and services. Within the next two years, the CEO wants to boost software's share of revenues to 50 percent, up from about 23 percent right now. And software's share of profits should rise even more steeply.

The cultural challenge

Services, which now make up just over one-fifth of the company s sales, look set to rise dramatically as well. Deep corporate cuts in information technology departments may have devastated EMC's hardware sales, but they have also provided an opportunity. Because companies have fewer resources, they need assistance. "Customers are saying, 'My staff's really busy. Can you help?'" Tucci explains.

The shift to software and services may be compelling from a business viewpoint, but the change is jarring because it must be accompanied by a cultural overhaul. During the 90s, the company was unpopular with customers who complained about EMC's "buy-it-and-shutup" style. Now that the customer wields new power, EMC'S sales and marketing staff must adapt. Not everyone is coping with the change, and Tucci admits to pushing out employees who don't conform. "It's difficult to move from being a one-product company to becoming a solutions company," says software honcho Lewis.

While the company has made strides in implementing a cultural change, the transformation is by no means complete. "EMC's salespeople no longer threaten to murder the people who refuse to buy from them anymore," jokes DuPlessie. "But they still have trouble being clientfriendly."

Tucci hopes the soon-to-be acquired sales team at Legato can help teach old EMC dogs new tricks. Legato is used to providing flexibility to customers by selling "platform-independent" products that work on competitors' hardware and talk to competitors' software. Platform-independent software enables customers to purchase the best product in any category, rather than be locked in to something else because of compatibility issues.

EMC has laid out a matrix to measure the move to standardization. The top-line products have the highest level of compatibility; the lower end has less. "We're making progress," says Tucci. He predicts that by the end of the year, EMC will have reached nearly full platform independence. By that time, the Storage Network Industry Association is expected to publish the first industry standards.

Making sure EMC is viewed as being committed to open standards is key. If customers see EMC's systems as inflexible, they are less likely to buy them. "EMC's doing well on the technology side, but the challenge is on the customer-perception side," says Bill North, an analyst with International Data Group, a research firm.

EMC is now tackling both customer perceptions and its own sales traditions. But even if it does everything right, the company is probably looking at slow growth going forward. That assessment gnaws at Tucci, who dreams of restoring EMC to double-digit revenue growth. IDG is predicting dollar sales growth for data storage of 4 percent per year. "Even if we grow at twice that rate," says Tucci, "it won't be enough."

While the company may never again bask in 1990s-style glory, Tucci is pushing his organization through a dramatic transformation. He just might succeed in turning the Queen Mary around.