Can The PC King Excel In Services?

In recent years, Dell has made plenty of headlines for its efforts to move
"be yond the PC" with assaults on markets including printers, storage
gear, MP3 players, and most recently flat-panel televisions. But one of the
company's least glamorous initiatives is also gaining traction. In its
earnings announcement on May 12, Dell reported that its $1.1 bn computer
services operation grew 30% from the year before-almost double Dell's 16%
overall growth and almost five times faster than the overall services industry.

That's bad news for any tech company that relies on service and support to
pay the bills. For the past two decades, Dell's hyperefficient ways have
forced its hardware rivals to sacrifice profits or surrender market share-and
often both-to compete with the Round Rock company. Now, Dell is looking to
commoditize parts of the services business in the same way it did hardware. It's
aggressively expanding in basic phone support and repair services, and it's
promoting a range of newer offerings, from helping businesses load software on
employees' machines to helping them recycle and replace old models. It's
mundane stuff compared to the big-think consulting provided by IBM, Electronic
Data Systems Corp, and others. But if Dell has its typical impact, it could put
a sizeable crack in one of the most reliable profit centers of its rivals.

Still,
that's a big if. For now, Dell is wisely exploiting the easiest opportunities.
It is selling primarily to existing corporate customers, particularly those that
don't ask it to support products from its rivals. And in a striking exception
for a company built on having a direct, no-middleman connection to customers,
Dell relies heavily on subcontractors that are willing to take on
near-profitless assignments-say, driving to a remote rural account in North
Dakota. But to keep taking share, say skeptics, Dell must ensure its hired help
keeps providing top-notch service, while it further expands its range of
offerings to win over big customers that want a one-stop service shop.

A Different Mindset

That could require daunting changes from the time-tested approach that has
made Dell the king of plain-Jane computers. When hawking hardware, its focus on
efficiency has given customers what they want: low prices and no-fuss delivery.
But computer services is a different game, one that requires an up-front
investment in people and parts. Far from the discipline of Dell's just-in-time
production lines, computer services is about managing disorder-whether it's
coffee spilled on a keyboard or a massive hacker attack.

Dell hasn't always shone in this regard. In 2003 complaints against the
company piled up, in part because it was routing support calls to India. That
November it discontinued the practice for most corporate customers. And in the
fourth quarter of 2004, Dell fell behind Hewlett-Packard in a customer
satisfaction survey done by research firm Technology Business Research Inc.

Whether Dell can make the jump could have huge implications for the company.
That's because services is a key element of Chief Executive Kevin B Rollins'
plan to propel the company from $49 bn in revenues in the latest fiscal year to
$80 bn by the end of 2008. Rollins hopes to get about $5 bn of that $31 bn
increase from services.

That's not to discount Dell's fast progress of late. Just as it did in
PCs and other markets, the company is attacking a market segment ripe for
commoditization. Back in the 1990s, tech buyers typically inked a slew of deals
with various services companies-one to repair laptops, say, and another to man
a help desk. Now, some 70% of buyers want cheaper bundles of basic services,
says TBR. While Dell isn't alone in going after this market, its fast-rising
share of the PC business gives it an unrivaled opportunity.

Rollins thinks Dell also has an edge in how it's approaching this market.
For starters, the company isn't trying to do everything-it's focusing
mostly on jobs that will help it boost hardware sales. The message, says
vice-president of services Gary Cotshott, is that "to take advantage of the
full value of Dell, you ought to combine our technology with services."
Plus, Dell is keeping tight control of costs. It's using its market clout to
get great deals from subcontractors such as Getronics and Unisys Corp to handle
the workaday tasks. Its own staff is much leaner than its peers: Dell has 10,000
people providing hardware support, vs roughly 40,000 for Hewlett-Packard. The
result: Dell generates $254,000 in revenues for each services employee, compared
with an industry average of $151,000, according to TBR. "They are going to
be a dominant player," predicts Paul D Jameson, Getronics' vice-president
of marketing. "They used to not be invited to bid for projects. Now they
are invited to the show every time."

What Dell doesn't do

But only certain kinds of shows-at least so far. Dell doesn't address
some of the biggest segments, such as taking over the operation of customers'
technology shops or providing consulting to help them find new ways to use tech
gear to improve their businesses. Indeed, the markets where Dell now plays total
just $86 bn of the $635 bn services industry, according to Gartner Inc. And in
other markets, such as helping companies manage their software programs and
configure their servers, Dell remains a bit player. "Dell is doing a good
job of getting a lot of press," says Dan Socci, vice-president of marketing
for HP's technology services unit. "But their portfolio is nothing like
the broad portfolio we have."

But Dell may someday be forced to move out of its comfort zone to maintain
its services growth. For starters, there are only a limited number of customers
that have only Dell gear. Even Austin Peay State University in Clarksville, Tenn,
is debating whether to give Dell a $100,000 contract to set up a storage network-one
reason it's hesitating is that Dell is reluctant to support the Sun
Microsystems Inc gear it already owns. And many large multinationals prefer to
hire a soup-to-nuts provider that can help them apply technology to their
business problems-not just help manage the gear itself.

Dell's reliance on subcontractors could present another problem. Currently,
companies such as Unisys and Getronics agree to provide their manpower for
little profit, since it gets them in the door to sell higher-margin services,
say analysts. Should Dell go after those opportunities as well, these
subcontractors may refuse to play ball-or at least insist on a little more
profit.

To be sure, no technology company has a better track record of living up to
its promises than Dell. But it may have a tougher time than usual delivering
when it comes to computer services.

By Louise Lee in San Mateo, Calif., with Spencer Ante in New York in
BusinessWeek. Copyright 2005 by The McGrraw-Hill Companies, Inc