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.

IDC's Hassey: Dell's playing a waiting game

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."

The services market, particularly in the area they’re intending to get into, pretty competitive and flat in terms of vendor growth. There is market growth there but a lot of that growth is being taken up by a more diverse range of players, he says.

"There’s opportunity there for them to ‘Do a Dell’ so to speak but we haven’t seen them too aggressively into that market. They’re still busy locally getting Unisys locally to do their work so we’re not seeing a huge amount of drive from them at this stage. They could make people sit up and take notice if they land a big deal but they’ve been a bit quieter than what we would have thought. The market is very crowded."

He adds that there are many established players such as IBM, HP, EDS, CSC, Dimension Data and AlphaWest and at state and local level, there’s even more players which is going to make things hard for Dell.

"It’s going to be very hard for Dell, it’s a near commoditised market now and they’re not going to get the margins they’re used to in the PC world.

"It’s going to be a real challenge for them, it’s a much more fragmented market and you’re dealing with people not machines. Good people want good salaries and Dell’s reputation is as a high volume, low margin business which is not necessarily a great fit for services."

Frost & Sullivan’s industry analyst -- security and services, James Turner, also believes that Dell will struggle to get really traction in the services market but not for the same reasons.

"Dell is going to be competing against a lot of relationship-based engagements. Companies that bring in the local IT person or the shop down the street. Dell’s going to be trying to displace these people by increasing its attach rate but the companies are going to look at the pricing and be cautious."

Enstor's Charlaff: Dell relationship has worked

Turner did agree with Hassey that it’s much easier to drive costs out of a product when dealing with machines rather than people.

"Driving costs out using economies of scale and modular services would be nice if Dell didn’t have to maintain staff. Services is all around doing things which means you’ve got maintain headcount. Even if Dell is sub-contracting out at some point someone still has to pay the wages.

"Dell will sell the box and they’re experts on a limited range of services, setting up rebranded EMC kit, and doing Exchange and Active Directory migrations are not exactly hard."


Dell deal has worked

One local integrator storage specialist Enstor is upbeat about its relationship with Dell. Enstor national sales manager, Paul Charlaff, says the company has been building the relationship for four years and it’s been a mutually beneficial partnership that has helped Enstor grow.

"When we first started working with Dell, other members of the industry thought we were mad and now all of a sudden a lot of people are keen to emulate what we’ve done," he says.

"We initially had a very strong relationship with EMC, and we still do, but some time ago we looked at where our value add is in the market and we decided that it was around storage systems integration. The customer can get the box cheaper from Dell and we were making the money from the integration so that’s where we’ve focused."

Enstor’s relationship with Dell has been so successful that it has tracked the company’s services division’s overall growth. "Our business has grown around the 30 to 40 percent per year on Dell business," says Charlaff.

And while he admits that Dell has put some pressure on margins, Charlaff believes that is more than offset by the efficiencies gained from the relationship.

"Dell has more than just Enstor delivering professional services, they are our customer and like any customer, price is an important element of what they do. But we are not the cheapest supplier to Dell.

"They don’t use us because we’re the cheapest. They use us because we’re able to do a job efficiently and deliver it to them and to their customer quickly so they get paid and it becomes a happy relationship." The company however, had been asked to revisit its pricing, he said. "Dell would be lacking in due diligence if they didn’t but they have never said that if we don’t drop our price they won’t use us. The last thing that Dell wants to do is drive us out of business because then they won’t have a good service provider. Dell has, however, said that if we drop our quality they won’t use us any more."

Nevertheless, in the US market the situation is not quite so comfortable. Several systems integrators that have said their Dell business is on the rise admitted that the services work they do is for a lower margin than they would normally receive on their own.

In one example, Dell charged the client US$400 an hour for professional services, while the systems integrator doing the work was only being reimbursed for only US$150 an hour. This is compared to an hourly rate of US$200 to US$275 per hour for the same work, depending on the engagement, if the SI brought in the job on its own.

Several companies also said Dell requires its professional services partners to sign a no-
compete agreement that prohibits them from doing any work with the client outside the Dell relationship, however, this could not be confi rmed locally.

So where does Dell intend to take its services efforts from here? Dell’s Windeyer wouldn’t discuss it except to say that it was, at least initially, going after the low hanging fruit by continuing to work on increasing its attach rate.

Nevertheless, few of the system integrators said they had recently come up against Dell when competing for services engagements. Leading Solutions CEO, Frank Colli, says: "We haven’t seen them at all. I’m sure they’re out there and we have some clients where we compete against Dell for hardware but Dell hasn’t offered any services to them as yet.

"Where we always see them is at a price driven point, not doing services stuff. Any time we see them out there we generally lose business to them because they’re extremely aggressively priced but we tend not to lose business to them at the same price or higher. It will be interesting to see how they in the market with the services product offering but I don’t know if Dell really will be able to deploy the same model to services as it has to hardware."

By contrast, Dimension Data’s national practice manager, data centre solutions, Ronnie Altit, often comes up against Dell in various accounts. "Dell is not yet doing a consultancy led sell, it’s selling services with products such as its SANs," he says.

Business Computer Services' Nade: Smaller companies want ongoing support from resellers

And while he may see Dell in the market, Altit believes that Dell is going to struggle to get the sort of efficiencies it is after in the storage market. "Storage is not yet commoditised," he says.

"There are still a lot of companies that struggle to understand the storage concepts and the most effective and efficient ways to implement a storage solution. Dell obviously has a large incumbency with its server business and as organisations are consolidating servers they are also looking at storage at the same time. But with storage, backup and archiving becoming inextricably linked you need a breadth of skills to cover all three and not just from a hardware play."

At the small to medium end of the services market, Dell doesn’t seem to be having too much of an impact. George W. Nade, principal at reseller Business Computer Services, says he wasn’t aware of what Dell was doing in services. "We work in the small end of SME and at that end we are seeing a lot of clients looking at Dell because of the pricing but unless they have their own IT department, we’re not seeing them buy Dell from a business point of view."

He says from a margin perspective the company can’t compete against the likes of Dell in a straight hardware sale and "smaller companies want the ongoing service and support from organisations such as us".

While Nade concedes that the thought of Dell pushing services on his patch does cause some concern, ultimately it’s not just about dollars and cents. "With small clients, consistency of people is important. They like to see the same person and service they can reasonably rely on rather than a services organisation where they have to explain the same thing 17 times to 17 different people. I see it as something we can validly sell against unless price comes into it."

Some customers found the pricing of Dell servers, for example, was too good to pass up but his company would be employed to maintain the software.

"We have a policy of not touching hardware not supplied by us while still under warranty and unless the customer has bought the extended service they can be waiting days for someone to do something.

"But if our customers are looking at Dell because of the price, we tell them they can buy the machines and pay us to set them up and support them. I know Dell is trying to get that business but none of my clients have been offered that service."

Still, if Dell started pushing services harder it would make life harder for the reseller, he says.

"But then again, some customers will go off on the basis of price and then come back. At the small business end, service, knowledge of the people and the site, and if we sell that properly to the client, we will be able to maintain our client base."

Hugo Ortega, principal at reseller PC Anytime comes across Dell in the marketplace but he believes its approach to small business is still too much based on price.

"When it comes to problems in specific areas, many smaller companies want a little more intimate service, I don’t think our business has much to fear right now from Dell but it will have a lot to fear if we don’t get our act together and adopt similar best practices," says Ortega.

"We have to make a move from being computer technicians to consultants. There is nothing to fear if you adapt a similar mentality to the Dell mentality. We need to step away from being computer technicians running around with little backpacks and become consultants that can wrap up deals and sign contracts for three months, six months instead of just the $90 per hour in front of the customer."

Ortega has already started to copy some of the aspects of the Dell model. "We offer free telephone support in the first instance. Yes it does tie us up but if we can walk someone through a problem on the phone they’re empowered but if we do need to send someone out the customer can see where the service charge came from rather than just going out and charging an $80 callout charge for a two minute job," says Ortega.

As long as there is time for his company to adopt similar efficiencies to its larger competitors, Ortega is confident that at a local level, within 20kms of its own premises, he will be able to compete strongly. "People know that we are local and that we can provide a more intimate service because of that. Dell is synonymous with hardware so it will take a lot of time and effort for them to build a services business. Most people can’t distinguish between a good technician and a bad technician, but they do know whether the service was great or not, he says. "Companies like us need to focus on that, small things like how you smile, how you shake hands when you’re finishing the job."