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)

8 comments

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While the strategy makes sense, Dell lacks the native talent — executive, sales, service — to drive such a fundamental change. And how is a struggling hardware company going to attract top services talent other than going above market on compensation, which throws a spanner into the works for cost containment.

Further, they’ve been teasing at significant new turnaround strategies almost quarterly since Michael Dell returned and as CEO, yet nothing has moved the needle. Their incremental moves in the consumer space (Alienware, Zing) have proved inconsequential and EqualLogic is not making inroads on the enterprise side.

You make a great case for this latest Dell strategy, but their record argues against their ability to execute.

Posted by Naked Empires | Report as abusive

Hi,

I’d respectfully disagree with your assessment that DELL “more than other large computer vendors, it has embraced ‘virtualization’ technology”. HP has had virtualization technology before DELL was founded. We’ve had virtualization in servers since the 80′s, began shipping virtualized storage in the mid-90′s and are currently VMware’s biggest partner. We’ve had our own server virtualization software (for HP-UX) for several years.

Frankly, compared to HP, DELL is a late comer to virtualization.

Boy, it didn’t take long to bring out the HP people. Dell’s challenge is to ignore what the entrenched services sellers are hawking and stay on its current path. Short term pain, but long term advantage. They’re doing fine.

Posted by zmartmoney | Report as abusive

Why is Dell, as the otherwise insightful article puts it, showing a “willingness to cannibalize its existing hardware business” by enabling users to gain more benefit from its hardware? Why isn’t it this simply sound long-term corporate marketing policy?

It sounds to me like a typical American perspective that raw profit from products is the main (or only) concern for manufacturers. My (admittedly limited) exploration of German manufacturing suggests that taking the consumer perspective and creating the most useful product mix in the world is the secret to Germany’s rise to first in the world in durable goods export (ahead of Japan and the U.S. with 2 and 4 times its population). That Germany makes a studious effort to understand and meet the total needs of consumers in the U.S. is suggested by its supplying cigarette machines to Virginia tobacco producers, Boston Harbor’s advanced sewage treatment plant, and Google’s book scanners.

I would welcome an in-depth article by Auchard comparing German and U.s. manufacturing policy.

[...] By HARISH VASUDEVAN A neat summary of Dell’s challenges and the path forward. Not comprehensive but a good [...]

[...] Commentaries » Blog Archive » A brutal logic to Dell’s reinvention: Eric Auchard |… – 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. [...]

Well seems a long way from Micheal Dell’s earlier stated policy. Dell was adamant not to spend on R&D. Seems now that is the only way foward.

Strategy makes sense.

Implementation would be a reckoner though.

Lets wait and watch how things unfold.

Posted by Waseem | Report as abusive

Dell Reinvents itself: Translation: China makes PC’s now and we are another US company that is incapable of manufacturing a product in the US. So instead, we must join the new US “Service Economy” and become another company that produces nothing of real value.

Posted by Scott | Report as abusive

Dell is a distribution and financial engineering business piggy-backed on the weakening Wintel monopoly; it has never been an IT or engineering business; they just latched on to PC supply logistics faster and harder than anyone else, becoming for a while the biggest mom and pop white box PC assembler on the planet. But that’s over now, and they’ve taken out all the retained earnings to buy back stock option exercises, leaving a very weak company lead by a very wealthy Michael Dell. Dell’s senior management has floundered for several years and this is just the latest of their daydreams of a return to the ego boosting glory days. Unlikely to happen given the shallowness of their talent. The company is not remotely similar to HP.

Posted by sleepy | Report as abusive

As the IBM view is for operating sysyems to become basic resource commodities as they have supported GNU/LINUX and Google is following with Android on a GNU/LINUX base for mobiles to synchronise with CHROME as a browser and operating system. With applications in the CLOUD SPACE, my only necessity for MICROSOFT WINDOWS is to drive my printer / copier / scanner / fax ALL-IN-ONE AND I CAN DO THAT ON ANY OLD PENTIUM 4 !!! Applications broken by upgrades of WINDOWS VISTA are a head ache for systems administrators, so why do corporate require WINDOWS 7 ? Access is a slow database compared to MySQL or PostgreSQL and the proprietary heavy weights; MICROSOFT SERVER IIS is uncompetitive unless the finance director has an inside trade on quantitative easing !!! Big fat budgets have an exit strategy by using fast growing players like RED HAT, recently promoted to the S+P500 index of quoted companies, and the demand is for server rationalization and thin clients like netbooks. LINUX FORMAT magazine http://www.linuxformat.com (August 2009 p44, LXF121)recommended for netbook:- MSI WIND U100, operating system UBUNTU NETBOOK REMIX and BLUETOOTH configured straight out of the box. Professional web developers prefer the LAMP stack (LINUX, APACHE, MYSQL,PHP) and similar as explained by the authors of the book:- PROFESSIONAL PHP6 (www.wrox.com). Legacy issues are holding people back from breaking free from the stranglehold of MICROSOFT proprietary lock-in. Open Office 3 (www.openoffice.org) and Content Management Systems offer a migration path to appeal to an aggressive cost concious finance director with a desire to recycle existing resources. As video conferences replace a significant part of the travel budget, and as the book said “WHO MOVED MY CHEESE?” Unique distinctive competence or race to Chapter 11 section 363 bankruptcy to wait behind struggling airlines in the queue ? This is not a definitive forecast, but capitalist logic !!!

[...] firms. I wrote in July of Dell’s wider services strategy in a column entitled ”A brutal logic to Dell’s reinvention.”    Shortly after acquiring EDS, HP set in motion plans to cut 24,600 employees, or more [...]

[...] firms. I wrote in July of Dell’s wider services strategy in a column entitled ”A brutal logic to Dell’s reinvention.”    Shortly after acquiring EDS, HP set in motion plans to cut 24,600 employees, or more [...]