VARs: Dell's Business Model Under Fire

That’s what solution providers gleaned from Dell’s unexpected warning to Wall Street last week. The Round Rock, Texas-based computer maker warned that its upcoming earnings report would show revenue of about $13.9 billion for its fiscal third quarter, down from the range of $14.1 billion to $14.5 billion it had previously forecast.

“Dell’s formula isn’t working any longer,” said Jay Tipton, vice president of Technology Specialists, a Fort Wayne, Ind.-based solution provider. Tipton and other solution providers noted that Dell’s direct-equals-low-price gambit no longer works with customers hungry for solutions and local service.

“Dell can only compete for so long on being the lowest price,” said John Marks, CEO of JDM Infrastructure, a solution provider in Rosemont, Ill. “Now the big boys [Hewlett-Packard, Lenovo, IBM] have figured out how to get to the lowest price along with Dell,” he said. “The evolution of the industry is that people are moving back to more value-added partners that can solve business issues and not just give them the lowest price. Dell hitting the wall was inevitable.”

Dell executives were unavailable for comment. But a Dell spokesman said its model remains viable and the company doesn’t intend to change it. He acknowledged that Dell has had problems with service and is working to address those problems.

Dell’s stock price Oct. 31 dropped from $31 a share to about $29, its lowest price in two years. The company reacted to its disappointing performance by beginning a round of layoffs, as well as announcing a move to streamline its consumer operations into its overall sales operation instead of running it separately. Also last week, Michael George, Dell’s senior vice president of consumer sales, quit to take the CEO position at retailer QVC.

While Dell stuck by its business model, HP distanced itself even further from the direct model last week when it said its Colorado Springs, Colo., call center would no longer make outbound direct sales calls but instead would work to support solution providers in SMB accounts.

Solution providers said Dell’s woes and HP’s actions only reinforce the growing strength of the solution provider-led indirect model.

“I have only lost two sales this year to Dell whereas a couple of years ago Dell was killing us on price,” Tipton said. “That was before their services fell off. At least once a week, we get a customer complaining about Dell’s service response,” he said. “Two years ago we weren’t seeing any Dell service complaints.”

Systems builders and analysts say that in Dell’s quest for low price, the company has sacrificed product quality. “We believe Dell delayed replacing OptiPlex GX270 motherboards that may have had failing capacitors, which could be another blow to its reputation for quality and service,” wrote Cindy Shaw, an analyst at Moors and Cabot Capital Markets.

Shaw, in a stinging report, openly questioned whether Dell has “lost its mojo.”

The Dell spokesman denied the charge, saying the company remains as committed to product quality today as it has in the past and that it stands behind its products.

But as part of its earnings’ warning, Dell said it was taking a charge of $450 million in the quarter, $300 million of which was earmarked to fix faulty boards on older OptiPlex desktops.