November 25, 2002 4:00 AM PST

Could Dell services push get too pushy?

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Dell Computer may find itself reaching for too much of a good thing--at least in the eyes of some of its partners.

Its tighter focus on corporate services has brought prominent contracts and growing revenue to both the PC maker and its partners that help provide the services. But executives and analysts say conflicts with those allies could be looming.

Consulting companies are expected to get a boost by teaming with Dell, the Texas-based company whose sales and corporate contacts have continued to grow despite an industrywide slump. However, these partners are also wary of finding themselves squeezed as the computer giant expands its services business.

On many contracts, Dell's portion of the services work results in the company hauling down about 30 percent of the revenue in that area, with the rest going to its partners. But by increasing the proportion of services it handles, Dell hopes to expand its take to 50 percent to 70 percent.

"It's not clear if the end point will be 70 or 50 percent. We'll figure this out with our customers along the way," said Jeff Lynn, general manager of Dell's Professional Services group, who nevertheless characterized the situation as a win-win deal. "Although on a percentage basis we'll be delivering more of the services and our partners less, on a dollar basis it will grow for everyone" because of the expected growth in contracts and in the overall revenue pie, Lynn said.

Not everyone, though, considers that scenario a given in the long run. Some Dell partners remain mindful of the potential for head-to-head competition.

Red Hat's Tim Lucas, vice president of professional consulting for the top Linux seller, said that though the company has initially dismissed worries of conflict, and plans to deepen its ties with Dell, the partnership isn't necessarily carved in stone.

"We did think of the potential for future competition when we entered the partnership," Lucas said, "but our intention is to expand our relationship. We are focused on being the best professional services team for Linux and, by trying to be the best, we hope Dell won't try to do this in-house. Over time, (however,) if Dell does do their own Linux professional services, then we may part ways."

Partners in other areas of Dell's business have already taken that leap as Dell has moved into their markets. Hewlett-Packard ended its printer partnership with Dell in July, and in September, both Cisco Systems and 3Com severed their deals.

Though such partings can work both ways--Dell phased out Digital as its primary service provider after rival Compaq Computer bought the company in 1998--they can be thorns in Dell's side as the company seeks to move its business forward.

Evolve or die
CEO Michael Dell acknowledges that his company must move beyond its highly successful direct-sales model to maintain its growth rate, and the company is indeed branching out to new markets. The $350 billion professional services market is one area of promise and already ranks as Dell's fastest-growing business unit and one with high profit margins.

To keep the momentum going, the company is planning rapid growth through new hires and some small acquisitions, such as its recent purchase of fixed-price consulting company Plural.

Dell employs 7,000 people in its services department. Most of them perform fairly basic tasks: network management, help desk functions and repair. Eight hundred, however, perform more sophisticated, Ernst & Young-type consulting services such as designing, building and accessing computer systems, and testing and fine-tuning the limits of those networks, said Ned May, an IT services analyst with technology research company IDC.

Dell hopes to increase its professional services staff to a couple thousand in the coming years, May said.

But should the company alienate its partners as it seeks to improve its services operations, the computer giant may risk losing lucrative contracts until it can bolster its own in-house staff or can find new partners to replace those with whom it has fallen out.

Conflicts have thus far been kept in check because Dell's partners find that their depth and breadth of offerings generally goes beyond Dell's expertise.

"I don't see them as a huge threat. If you look at other hardware providers and their continuation of (professional) services--like IBM and HP--Dell is still a good fit for us," said Jeff Gilliam, president of EDS Global Strategic Alliances.

EDS and Dell expanded their relationship last month. EDS will recommend Dell to its clients as the preferred computer vendor and will standardize on Dell's hardware and software for its own internal operations over the next three years. Dell, in return, will handle some of the call centers EDS operates to provide corporate warranty support in Latin America, and will also take care of EDS' technical help desk and downloadable tutorial services for consumers in the United States.

Dell and Red Hat also recently broadened their relationship to include cross-selling each other's professional services. And although revenue from this 3-month-old partnership have yet to spike, Red Hat has experienced an increase in the number of deals it can bid on.

"Typically, we work together, but (we) will occasionally compete for the same business," Red Hat's Lucas said. "If ultimately we compete...(Red Hat) will still be the closest to the bits and bytes and how the technology works. And that's our defensible position: being the best at what we do."

For Dell's part, Lynn said, "Our partnership with Red Hat gives us access to a larger pool of resources, so we can do bigger projects faster."

Some cards stay off the table
Another Dell teammate, Gen3 Partners, also appears to be comfortable with the relationship. Dell, which maintains an investment stake in Gen3, recently approached the company to partner in professional services, said James Sims, Gen3's CEO and the founder of the once high-flying Cambridge Technology Partners, which coined the term fixed-price consulting.

"Dell has taken a more aggressive look at services," Sims said. "They see this as a big opportunity to move into services with their partners and through acquisitions. But Dell has been forthright with us. If we go in areas that support them, they will support us."

Getronics, which teamed up with Dell's managed services a couple years ago, says that conflicts are usually smoothed out.

"If Dell tries to get into an account we're already in, generally we'll get together and see how we can best improve our chances to win the business over other competitors," said Garis Smith, director of Getronics' Dell alliance for North America. "One of us will stay in the bid and serve as prime (contractor), and the other will be a subcontractor."

Getronics' pairing with Dell has proved highly lucrative, Smith said. Opportunities to bid on projects have risen tenfold since the deal with Dell was originally struck, and Getronics has increased its Dell-related service revenues by two to four times since the companies expanded their relationship several years ago.

Still, other partners haven't been as lucky. 3Com cut its reseller ties with Dell when it suspected the computer maker was trying to push its own high-end networking gear over 3Com's products.

"We spent a lot of time training their sales force on understanding our market and how to sell into it," said David Smith, 3Com vice president of sales and service for the Americas. "Their intent was not to grow 3Com, but use us as a placeholder until they could do it themselves."

Dell's Lynn, however, maintains that his company is committed to long-term relationships with its services partners.

"I don't envision a time when we don't want or need services partners as a key part of our strategy," Lynn said.

Yet despite such assurances, and despite the lack of major conflicts thus far, Dell's services partners say that however much they value the relationship, they'll continue to play some hands close to the vest.

"We don't turn everything over to them," said Getronics' Smith. "They know what we do, but not exactly how we do it."

 

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