More than a month after closing the deal on a $3.9 billion acquisition of Perot Systems, executives from Dell went before analysts and reporters to tout the deal’s ability to help Dell expand beyond its systems-making roots.
During an hourlong Webcast Dec. 16, the Dell officials spoke of the potential financial boost (about $7.5 billion in annual revenues), the size of the company’s new services unit (42,000 employees), the size of the IT services market (about $800 billion) and Dell’s place in it (among the top 10) that the acquisition of Perot brought with it.
They also talked about catering to the “underserved” midmarket and how they planned to differentiate themselves from larger rivals such as IBM and Hewlett-Packard with modular offerings, high degrees of automation and shorter engagements.
“The old approach of embedding an army of consultants locked in processes, frameworks, and proprietary software and hardware is inefficient and burdens consumers and their customers with too high of a cost,” said Peter Altabef, president of Dell Services and formerly president of Perot. “In contrast, we want to help organizations innovate and focus on strategic objectives while spending less on routine IT management. This is a new initiative that is redefining services from the customer’s perspective, making IT easier to access and simpler to manage and, most importantly, aligning our solutions to our customers’ success.”
Paul Bell, president of Dell’s public sector group, said his company is looking at services engagements that run 60 to 90 days involving two or three Dell Services people.
“Our competitors continue to bring teams of consultants that don’t want to go away,” Bell said.
Dell is only the latest of the larger systems makers to see services as a way of expanding its reach beyond its rapidly commoditizing hardware business. HP, already a significant services player, has integrated services company EDS into the fold some 16 months after closing the $13.9 billion deal. Even printing giant Xerox is getting into the game, with its $6.4 billion purchase of Affiliated Computer Services in September.
All are looking, in one form or another, to mirror some of the success that IBM has had with its Global Services unit over the past 15 years, moving away from low-margin hardware sales to stronger services businesses that offer recurring revenues.
IBM Claims the Title
“All of the major vendors are looking to expand their services one way or another,” Pund-IT Research analyst Charles King said. “IBM has been doing this a long time. The HP acquisition of EDS was to some degree to let HP … grab some of the [services] business that IBM was taking.”
There’s a lot of business to be had. In 2008, IBM Global Services generated almost $59 billion, while HP generated over $22 billion. Dell-pre-Perot-had about $5.7 billion in services revenue.
“It is fair to say that IBM Global Services has represented the gold or platinum standard for IT services for several years now,” King said. “If you’re a vendor looking to grow your services, you couldn’t do much better than using IBM Global Services as a model.”
Michael Daniels, senior vice president of IGS, said over the past few years IBM has worked on tighter integration with the company’s software unit around such capabilities as analytics, bringing new tools from IBM’s research group and instilling greater automation-“creating more capacity with the same number of people”-as avenues to expanding its services capabilities.
IBM’s use of a combination of industry expertise and software-like services has helped fuel IGS’ growth over during this decade, according to IBM officials. It’s also that ability to draw on other parts of IBM-from software to hardware to IBM’s research labs to the vendor’s vast IP (intellectual property)-that differentiates IBM from others like Dell and HP, Daniels said in an interview.
“When I look at what they say to shareholders, they talk about their ability to extend product through a service channel,” Daniels said. “I don’t believe clients will buy commodity products through a service channel. … At the end of the day, the services business is vastly different than the product business. Product companies celebrate a sale. With services, our work begins once the contract is signed.”
King said IBM’s $3.5 billion acquisition of PricewaterhouseCoopers in 2002 also has led to IBM developing industry-focused schemas, essentially templates that simplify the services engagement by creating a common starting point for discussion with the customer. In addition, IBM has created a Service Science area in IBM Research to improve its capabilities.
“They’ve been winning a lot of business,” King said.
David Gee, vice president of worldwide marketing for HP Enterprise Services, in contrast to what IBM’s Daniels argued, said HP’s portfolio-including its PC and server businesses-is a key part of the company’s overall services strategy.
“We’re big for a reason, and it gives us economy of size and scale,” Gee said.
HP, Dell Argue Their Advantages
HP can come to a customer not only with its services play, but also with its tightly integrated PC, networking, server and printer businesses, he said.
“IBM has bought a lot of software companies, but you can argue that there’s not a lot of integration” within the software unit, Gee said.
In addition, HP has armed itself with its EDS acquisition, which Gee said significantly expanded what HP can offer in way of services. HP already offered technical services, but now it also has IT outsourcing, application services and business process services. The combination of the two has helped HP Services expand its customer base, Gee said.
“We’re going out and winning some business where as stand-alone [companies], neither one of us would have won,” he said.
Dell officials said they plan to use the same approach that enabled them to expand their hardware businesses to increase their services capabilities.
“Dell became an IT leader through a highly efficient build-to-order hardware solution,” Altabef said. “When you take that business methodology and the workflow associated with that, we believe we can do the same thing in services-reducing complexity and driving out inefficiencies across the service and support life cycle. Dell Services is large enough to be credible yet nimble enough to lead a transformation in the services industry.”
The focus on the midmarket also will be important, according to Steve Schuckenbrock, president of Dell’s Large Enterprise group.
“Many of these customers are actually not interested in doing business with the really big outsourcing firms because they feel like they will be lost in the noise as they continue to scramble on some of those big deals,” Schuckenbrock said. “They don’t see that with the combination of Perot and with Dell.”
Pund-IT analyst King said Dell’s shift from a hardware vendor to more of a solutions company makes sense.
“Dell is still a $50 billion company, but profit margins in those [hardware] areas ain’t what they used to be,” he said.
While Dell is running behind the likes of HP and IBM, King said the company is taking an interesting tack with such ideas as doing as much services work as possible remotely and keeping customer engagements as short as possible while still getting the job done.
“That’s a pretty different kind of approach,” King said.