A brutal logic to Dell’s reinvention: Eric Auchard

July 22, 2009

— Eric Auchard is a Reuters columnist. The opinions expressed are his own —

By Eric Auchard

Michael Dell in New DelhiLONDON, July 22 (Reuters) – Dell Inc needs to reinvent itself to cope with falling margins for key products and a spate of mergers which are rapidly reshaping the competitive scene.

So the computer maker’s moves into business services that help customers slash costs rather than add new programs look promising, given that every company under the sun is chasing this goal.

The other shift in Dell’s favour is that corporate buyers look ready to start spending again on technology to generate new business, albeit at lower levels than before.

There is a brutal logic to Dell’s reinvention. Personal computers are becoming low-cost commodities, yet still produce 60 percent of the company’s revenue.

Dell is showing a willingness to cannibalize its existing hardware business in favour of higher-margin software and services businesses.

More than other large computer vendors, it has embraced “virtualization” technology that lets many big tasks run on the same machine rather than separate ones.

This will cost Dell no small amount of future hardware sales. But it frees it to make money from more profitable services which can lower customers’ software and labour costs.

Dell’s current reliance on PCs also has an upside as it leaves it best-positioned among major computer makers for a long overdue upgrade of ageing corporate PCs set to start later this year with the introduction of Microsoft’s new operating system, Windows 7.

What could be the last great Windows replacement cycle will kick in during 2010 and 2011, buying Dell time to develop businesses beyond the PC.

The company says it is looking at outside acquisitions to fuel its internal growth in business services and software. Yet unlike rivals who have made big acquisition moves in the past year, Dell is steering clear of mega deal-making. Meanwhile, Oracle is buying Sun for $7 billion, while H-P paid $13 billion to acquire EDS.

Instead, Dell says it is looking at small- or medium-sized deals that allow it to attack what’s broken in corporate technology. The strategy is to provide managed services from remote locations at far lower to its customers cost than traditional hardware-software systems. It has signed up 5,000 corporate clients so far, mostly in the United States and is only now expanding into other regions of the globe. It manages 2.5 million PCs via such services.

The real magic lies in what Dell doesn’t do.

Dell services chief Stephen SchuckenbrockFor Dell, consulting should be more like a training session — brainstorming ideas and then proposing a plan of action. Strategy engagements are counted in days and weeks, not months and years. This threatens the old model of big-budget computer services contracts that were denominated in the hundreds of million of dollars per year and billions over the life of such deals.

Rather than technology differentiation, Dell believes most customers need a lot of the same things — affordable desktops and notebooks, and mounds of raw computer capacity and data storage. Above all, customers want technology that just works.

Dell reckons it can eliminate the need for complex and expensive systems and network management software by providing it online and only when required whereas rival vendors typically use such software to lock customers into buying other products and services.

This strategy is not without risks. But by shifting its business model to one that drives down fixed corporate spending, Dell has timed its revamp to fit the new realities in which we work.

— At the time of publication Eric Auchard did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can read some of Eric’s recent columns here. —

(Editing by David Evans; Photos: Reuters/B Mathur, New Delhi, and Brendan McDermid, New York)


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