The Dell Effect

In the IT industry it’s called the Dell Effect. The computer manufacturer picks out a market segment where other companies are making good profit margins, figures out how to do the same job for less potentially draining profi ts out of the market.

Dell started with desktop PCs, before moving on to do the same in computer servers, data storage systems and printers.

Now it’s trying to do the same to professional services and consulting. Dell Australia’s services division has been going for a number of years and while it has yet to make much of an impact locally, in the US market Dell has picked up Blue Chip customers such as Boeing, ExxonMobile and Ford Motor Corporation.

In its first fiscal quarter ending April 29, Dell broke out global services for the first time ever, reporting revenue from ‘enhanced services’ of US$1.1 billion and a 30 percent year-on-year increase for the quarter. Total revenue for services grew 34 percent last year to US$3.7 billion.

Despite coming from a low base, Dell’s Australian services business is growing at a similar rate to that of the US, and Dell’s services sales manager for Australia and New Zealand Tony Windeyer, is confident that the company will continue to grow at 30 percent plus for several years yet. "Our goal for the services business is to grow at twice the rate of the overall Dell business," says Windeyer. "We’re achieving that and over the next 12 months we’re looking to continue to grow at twice the rate of the overall company."

Initially focused on break/fix and helpdesk style services, Dell’s services group now offers software migration and storage network planning and management services, an area that Windeyer says his division has been recording growth of double the overall services business growth.

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While Dell is planning to broaden its services offering over the next 12 months it will remain ‘close to the box’.

Applied to services, the Dell direct model means a limited menu of standardised support packages that are tied to hardware sales and largely involve planning, managing and maintaining computer systems.

Unlike some other service outfits, such as IBM Global Services, Dell doesn’t plan to develop custom applications, do strategic consulting or run a customer’s data centre. And in contrast to the hardware agnosticism of service outfits such as IBM and EDS; Dell, at least for the moment, isn’t interested in chasing customers who don’t have Dell kit.

"Particularly in the PC and enterprise space we have a lot of our own customers to go and talk to and make sure they understand our services portfolio and how we deliver that before we have to look outside that area," says Windeyer.


Ramping up

But as it ramps up its services business, Dell has realised that it can’t do everything itself and it needs to partner with systems integrators and other professional services organisations.

"As our professional services business continues to grow, our customers are looking for Dell to be that single point of contact," says Windeyer. "We select on skill set and geography but we’ll partner with local companies to provide those professional services."

Dell’s willingness and need to partner with local systems integrators creates a dilemma for those companies that are considering partnering with the company. Windeyer says its installed base of over one million seats in Australia and New Zealand offers systems integrators access to considerably larger revenue stream as well as higher-level services opportunities.

The flip side is that these opportunities could possibly come at significantly lower margins than integrators have traditionally been used to. Dell has said it wants to apply Moore’s law to the services market, much as the company used that maxim to dramatically drive down PC product margins.

"The services cost structure has been kind of stagnant over the past 10 years," said a Dell US spokesman. "We think now as Dell gets more and more into services that we have the ability to help drive down those costs for customers and apply the ‘Dell Effect’ on services, as we have in many product lines. Our priority is to continue to deliver these high-quality services."

Windeyer admits that Dell’s goal is to do the same in Australia. He was unwilling to say much as to how Dell would actually achieve these efficiencies beyond the blindingly obvious such as enabling tight integration between vendor and business partner to obviate having two project managers.

While Dell’s Australian services push is a fairly recent phenomenon, it’s been going on long enough in the US to have more of an impact and American services organisations have been getting jumpy.

"I tell IT service organisations that every single Dell box you put in your client’s shop is a Trojan horse that you are wheeling through the gates of your clients," says Arnie Bellini president of US-based services provider and software maker ConnectWise.

"Dell is mounting an offensive against the entire profitability of our business. This will take away the future profitability of every IT service organisation and leave us with the scraps of break/fix and time and materials."