Michael Dell Is Back—Now What?

News Analysis: As Dell returns to the company he founded nearly 25 years ago, analysts say he will have to make bold and decisive moves to bring the company's finances back in order.

When Kevin Rollins took over for Michael Dell as CEO of Dell in 2004, company officials were quick to stress that the dual-management system the two had used for years—they even shared an office—would remain intact, giving the PC maker continuity.

But in the more than two years of Rollins tenure, the once high-flying Round Rock, Texas, company has seen its fortunes turn, its revenues lag and its place on top of the PC food chain be taken by rival Hewlett-Packard. Now Rollins is gone, having resigned Jan. 31, and the company again has turned to Michael Dell to regain the momentum it lost when he gave up the post.

Dell isnt the first tech company to reach into the past in hopes of securing its future, and the company, its investors and customers are hoping that Dells return mirrors that of Steve Jobs to Apple and not Ted Waitts second term with Gateway.

Rollins job security had been in question for months, and wasnt helped when Gartner released its quarterly and yearly PC market reports Jan. 17 and found that Dell had lost more ground to HP. Dell lost 17 percent of its global market share in the fourth quarter, causing one analyst to describe Dells "accelerated shipment decline in the fourth" as "surprising."

To be sure, Rollins had a number of issues that cropped up that didnt help his cause, including Dell having to recall more than 4 million notebooks in 2006 that were sold with faulty lithium-ion batteries from Sony Corp. of America, and an investigation by the Securities and Exchange Commission.

Still, said one customer, it was Rollins focus on containing costs at the expense of customer attention that drove the companys downward slide.

/zimages/4/28571.gifClick here to find out what eWEEK Editorial Director Eric Lundquist thinks Dell needs to do now that Michael Dell is back.

"In any reign, there are challenges that a company has to meet," said Graham Weston, executive chairman for Rackspace Managed Hosting, in San Antonio. "There were challenges during Michaels reign, and challenges during Kevins reign. The difference is that the decisions Kevin made were wrong."

Weston pointed to the companys gutting of its customer service business and its reluctance to embrace Opteron processors from Advanced Micro Devices as two examples. Rackspace, which buys about 1,000 new servers per month, was exclusively a Dell customer until June 2006, when, unwilling to wait any longer for Dell to offer the more energy-efficient AMD chips along with its Intel-based systems, opted to start buying from HP as well. Dell now sells AMD-based servers.

"It was a classic example of a company putting efficiency first," Weston said. "They wanted one supplier, not two. They wanted one motherboard, not two … so they chose efficiency over what the customer wanted."

He expects Michael Dell to change that approach. "Michael is a computer guy," Weston said. "He cares what the customer wants more than about efficiency. … One of the first questions Michael will ask is, how do we service the customer better, and answering that will bring Dell back to greatness."

What Michael Dell will do next is a key question, analysts said. He and Rollins were close and many of Rollins initiatives reflected Dells thinking and business strategy, they said. In statements following Rollins departure, Dell voiced his support for the "Dell 2.0" initiative, which is a holistic revamp of the companys strategy, including its product design and commitment to customer service.

The Dell 2.0 program still remains a long-term and far-reaching effort, one that will not satisfy a testy boardroom eager to make profits and regain market share that has slipped away in recent years, analysts said.

"There is no quick fix," said Roger Kay, an analyst with Endpoint Technologies Associates. "I really think that what Michael and company need to do is take a zero-base assessment of the company. There can be no sacred cows. They have to find out what practices are working and which ones are not working."

One of those sacred cows—Dells direct sales model—should be placed under a microscope, analysts said. In a note to clients released the day after Rollins resignation, Brian G. Alexander, an analyst at Raymond James, said Dell might have to look toward a more channel-oriented strategy to capitalize on growing markets, such as Acer has done in Europe and Lenovo Group in China.

Still, there is a feeling that Dell will continue the same business strategy as Rollins, except that he brings his stature in the IT industry to the company.

/zimages/4/28571.gifClick here to read about Dells efforts to simplify systems management.

"Michael has been the biggest defender of the direct model, and his strategies and philosophies have seemingly been in sync with Kevin Rollins, so we are not sure how Michaels vision, strategies, tactics, and ultimately, execution will be different," Alexander wrote.

There is a sense, however, that Dells mere presence will help. "There is no doubt that Michael is one of the greatest entrepreneurs of our generation who has a proven ability to create a business model with structural advantages," Alexander wrote.

As for the companys products, analysts said the company has to work harder to bring its consumer PCs in line with what users are looking for, namely features, experiences and the kind of service that has been associated with other vendors, like Apple.

On the enterprise side, Kay said Dell is "in pretty good shape" but will likely work on improving its service offerings. An influx of some new managers, executives and possibly a new chief operating officer, Kay said, will also help both with the enterprise and consumer sides of the business.

That might not be enough.

Besides the companys main problem of how to sell PCs in a highly commoditized and competitive market, the company faces a number of image problems that Michael Dell will have to sort out. Those include the backlash from the battery recall, the SEC investigation and its battered service reputation among customers and partners. Dell also announced that its next quarterly results would be below analysts expectations.

"Talking to my peers who did partner with Dell, many of them have [had] some pretty negative experiences, and Im not sure if Dell can reach the lower end of the market through the people they have partnered with without some investment in rebuilding those relationships," said Dwayne Mott, president of Orbex Computer Systems, an SMB (small and midsize business) VAR, in Guelph, Ontario.

"With the announcements of the reporting issues Dell had, I think there is a general concern in the market [as to whether] Dell will be a viable infrastructure partner for clients over the long term," Mott said.

No matter what happens, Michael Dells return will offer the company a grace period with investors and customers while he tries to bring his once market-leading company into a new world.

"We believe that Dell is stepping back into his former role in an effort to regain the trust of the Dell customers, whether corporate or consumer, while also offering reassurance to Wall Street," said analysts at Technology Business Research.

"We expect Mr. Dell to continue driving the companys Dell 2.0 efforts, which aim to correct its problems, including improving its customer support, and return its business higher rates of revenue and profit growth rates during 2007 and beyond."

Senior Writer John Hazard and Senior News Editor Jeffrey Burt provided additional reporting for this story.

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