3 Reasons for Dell Outsourcing Customers to be Bulls – and 3 to be Bears

Assuming shareholders approve the deal, bulls have reason for optimism as Dell is freed up to streamline and standardize its impressive set of acquisitions. However, bears are concerned about Dell’s ability to grow and mature its services business, especially in Europe.

Before diving into the details of the recent Dell deal, a shout-out to my ISG colleagues across the globe, as the heritage of sharing in-the-trenches experience, data and opinion continues unabated. The ability to easily reach out to and quickly get answers from 800 global services gurus, many of whom are currently working on some of the biggest and most transformative deals in the industry, continues to be one of the hallmarks of ISG.

I tapped into this expert source last week to get insight on the yet-to-be-closed Dell deal. I narrowed the field by asking folks to respond only if they recently worked on a deal where Dell was selected, nearly won, or if they had a current client where Dell was the incumbent. The rationale: only solicit input from those folks that have direct and recent experience working closely with Dell.

3 Reasons to be Bullish

  1. Uncertainty will subside: whereas HP feels that the deal will lead to an extended period of uncertainty, we feel the opposite: assuming the deal closes, prospects and customers will be happy that this time of uncertainty is over, and are excited about the possibilities. Does this mean Dell won’t face an uphill battle convincing customers they should be on their shortlist? No, but the ability to boldly communicate a long-term vision for differentiation will settle current clients’ and prospects’ nerves, leading to more at-bats for Dell in 2013.
  2. Accelerated product and service integration: It’s no secret that Dell has been on acquisition tear over the past five years. In fact, Dell makes it clear in its 10-K for fiscal year 2012 [PDF]: “We acquire companies as a part of our growth strategy”.   The challenge for Dell, and for their outsourcing customers, is that Dell’s current structure produces a strong incentive to retain go-to-market brands and associated revenue streams for each distinct product, creating integration friction. This is frustrating to outsourcing buyers who want to buy services, not products. Under the new ownership structure, each line item of the P&L will face less scrutiny, freeing Dell up to accelerate integration of its impressive product arsenal. We believe that outsourcing customers will benefit by seeing a much more integrated (albeit smaller) set of products and services much faster than they would with Dell as a public company.
  3. Leveraging the Microsoft investment: It’s been well publicized that Microsoft is investing $2 billion into the group buying Dell. As it happens, Microsoft CEO Steve Ballmer has acknowledged that hardware is the future for Microsoft. Unlike Microsoft, Dell knows the hardware business cold – as long as it’s a PC on someone’s desk, or a server in a datacenter. The smaller stuff like smartphones and tablets – not so much. If Microsoft and Dell can parlay these complementary hardware strengths into compelling mobile software, hardware and services, opportunities abound for both Dell and its customers. This is because one of the best ways for service providers to engage existing or new outsourcing clients is through services focused on Bring Your Own Device (BYOD), mobile device management, mobile applications and app stores. It’s a hot area that CIOs want to talk about, and need help with – this combination creates a natural lead-in for Dell and creates a more unified “stack” for customers.

3 Reasons to be Bearish

  1. Mega-ITO acquisitions have not fared well: Recall that not so long ago, Dell acquired Perot, Xerox acquired ACS and HP acquired EDS, in a veritable blizzard of acquisition activity within a very small 18-month window. Have any of these acquisitions truly paid the dividends envisioned when the deals were struck? We’d argue no. How then will a new ownership structure breathe life into a business model that is under assault from today’s transformation trends of shorter deals, multi-sourcing and utility pricing models?
  2. Investment is needed in Europe: my European colleagues sense that while Dell is eager to win business in Europe, and has shown a strong commitment to customer satisfaction, it needs to mature delivery capabilities, especially relative to those in the U.S (where they are quite mature). Will they make these investments? Probably too early to tell at this point, but keep in mind that for fiscal year 2012 Dell grew non-US revenue to over 50% of total revenue; however, the majority of this growth came from the Asia Pacific region. Notwithstanding the very difficult business conditions in Western Europe, Dell’s ability to mature and grow the European services business given the new ownership structure will be critical.
  3. Building automated platforms is capital intensive: My colleagues Tom Young and Paul Reynolds have recently been focused on how automation is rapidly transforming the outsourcing market. The premise is that Wave 1 of the technology sourcing market was sustained by labor arbitrage, whereas Wave 2 will be sustained by labor automation powered by next-generation platforms. However, building mega-scale platform services require significant up-front investment, unlike traditional outsourcing services where infrastructure is procured for each new client. Under the new ownership structure, will Dell invest in these large-scale, long-term payoff platforms in order to take advantage of the next wave of technology sourcing? Again, too early to tell.

I’m interested to hear what you think – especially Dell services customers. Are you a bull or a bear on the Dell deal?

About the author

Stanton helps enterprise IT and sourcing leaders rationalize and capitalize on emerging technology opportunities in the context of the global sourcing industry. He brings extensive knowledge of today’s cloud and automation ecosystems, as well as other disruptive trends that are helping to shape and disrupt the business computing landscape. Stanton has been with ISG for more over a decade. During his tenure he has helped clients develop, negotiate and implement cloud infrastructure sourcing strategies, evaluate and select software-as-a-service platforms, identify and implement best-in-class service brokerage models, and assess how the emerging cloud master architecture can be leveraged for competitive advantage. Stanton has also guided a number of leading service providers in the development of next-generation cloud strategies. Stanton is a recognized industry expert, and has been quoted in CIOForbes and The Times of London. You can follow Stanton on Twitter: @stantonmjones.