August 15, 2002 6:39 AM PDT

Dell cooks up prix-fixe IT menu

Dell Computer is dishing out new IT services, a la carte.

Dell's Professional Services group is promoting a new menu of services--such as moving data to new storage equipment or installing new servers--for fixed prices that it claims are lower than its competitors'.

In a sense, Dell is trying to take the mystery out of services in the same way it did for PCs.

The Round Rock, Texas-based company, which reports its second-quarter earnings Thursday, has for years considered services an important element of its products. But services have been taking on greater importance as the company has moved up the food chain in the corporate world.

As a desktop PC maker, Dell didn't have to worry as much about consulting. But now that it has become a major player in servers and other backroom hardware, it needs to provide customers with greater contact. In addition, Dell executives have publicly stated their goal of doubling the company's revenue over the next few years.

Dell is hoping that companies will be more willing to buy specific, fixed-price services than to wade through proposals for custom services from its competitors. Dell is so sure of its ability to woo customers with fixed rates and an open menu that it recently made its second acquisition, the 200-employee company Plural, mainly for its capabilities in fixed-rate services.

"We're growing much faster than market revenue-growth rate for services right now. You've also seen in a small and very selective way that we're also willing to do professional services like we just did with Plural," said Jeff Lynn, general manager of Dell's Professional Services group, who was hired away from Compaq Computer as Dell's new services boss about eight months ago. "So through some combination of aggressive organic growth, adding small acquisitions, and then growing that combined business very quickly, that's our plan to ramp up," he said.

Fixed price has been tried before. The formula was coined by once high-flying Cambridge Technology Partners, which got slammed by the tech slowdown in 2001 and was eventually acquired by Novell. But unlike pure consultants, Dell will be able to piggyback on its hardware business, one of the few segments in the technology industry that is experiencing growth.

"We've made that model robust enough to take a look both at the straight product, and hardware costs and labor costs involved. We look at both of those cost components as we rethink the host consolidation environment," Lynn said.

Every project different?
Analysts agree that Dell's approach could draw in new customers.

"The argument could be made that every (project) is different, but I don't believe that's necessarily true," said Brooks Gray, analyst with Technology Business Research.

At least some of the methods used to carry out a certain kind of project could be replicated many times over in similar projects in the future.

"It's doubtful more than 50 (percent) or 60 percent" of a certain procedure can be replicated across all jobs of a certain variety, Gray said. "But if Dell can streamline its services and techniques for implementing its products...it's a strategy that all vendors need to look at."

Services vendors such as IBM's Global Services are evaluating fixed-cost offerings in some areas. But if the first pillar of Dell's services strategy is standardization and streamlining costs, the second part might be humility. The company won't try to tackle the humongous worldwide network configuration contracts that IBM and Accenture go for just yet. Instead, it will aim for more conventional engagements, often culled from customers who already purchase Dell hardware such as servers or storage.

"At this point, (Dell) won't be able to address every project. But it will be able to meet most customers' needs," Gray said.

Indeed, Dell has no immediate plans to take on Big Blue in the services arena.

"When people say to me, 'How are you going to compete with IBM Global Services?' I remind them we can go after the other 90 percent of the market first and then we'll worry about IBM," Lynn said.

Aside from presenting its menu of services in package form, Dell Professional Services will also take advantage of Dell's prices on hardware and its ability to contract with partners to provide on-site technicians at lower rates to help pare the total cost of a product.

Pick and choose
The menu method may get more appreciation from customers during these times of economic uncertainty, analysts said. When the economy was stronger, companies were more willing to try new services and more expensive approaches. These days, companies are turning to the suppliers they're used to doing business with, including IBM and Dell.

"People have less to rely on these days in terms of what they're willing to spend. They need to control their expenditures and they need to be very clear on what kind of stated value it's going to deliver them as a business. And they need a return as quickly as possible," said John Madden, an analyst with Summit Strategies.

Dell is following that trend and, to some extent, it's taking the rocket science out of consulting.

Conventional wisdom says that "professional services is an art, not a science, and everything is custom," Lynn said. "But the reality is there's a huge part of the professional services market that we want to go after where we do want to standardize and package...fixed-price offerings in a way that's not been the norm in professional services."

Lynn added that the company hears from its enterprise customers, "'Wait, tell me again, why am I paying $200,000 for that kind of service? Tell me again why I can't get a fixed price on this kind of offering.'"

Dell's services will also include data migration, setting up storage area networks and helping customers move from Unix-based hardware and software to technology that uses Microsoft's Windows operating systems or Linux and standard Intel hardware.

The Professional Services group will also tackle more customized jobs as well. Tasks include setting up high-performance computing clusters--groups of connected computers that share computing power to tackle large jobs--as well as application development and electronic commerce services. Some of these more custom offerings are available because of the Plural acquisition.

But there's still something to be said for custom services such as consulting, Madden said.

"To say that Dell's approach solves everything is overstating it, but it certainly plays to Dell's strengths and helps complete the triad" of its focus on servers, storages and services, he said.

Mergers in mind
More acquisitions are also on Dell's menu. As it looks to grow, Dell Professional Services may spur the company into making more acquisitions in services.

"You might be underwhelmed by what we're going to do in terms of the sheer size of the transaction," Lynn said. "We will continue to be on the lookout for good opportunities for small to medium-sized services firms that would add the right technical skills to our services portfolio."

If there's one thing Dell won't offer, it's hosting. Dell will avoid offering on-demand computing power or storage.

"We've taken a really thorough look at the whole market that pertains to all of the flavors of...(the) outsourcing/utility model. We've concluded that we have an emerging set of offerings that...are the best-of-breed hybrid of extremely low-cost service model (with) managed services on top of that that combine the best of both worlds," Lynn said.

Right now, services represent roughly 10 percent of Dell's revenue.

Services are "naturally evolving to be a bigger percentage of the company's revenue," Lynn said. "Even though all of our lines of business are doing well, services is growing a little faster than the average revenue-growth rate for the company."

But "do not expect to hear what you heard out of IBM years ago--which was services are our whole future. It's not going to be the Dell position," Lynn added. "You're going hear a more balanced version" of that tale.

 

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