10 Rules For Dealing With Dell

Some resellers are eager for the opportunity to work with the Round Rock, Texas-based PC maker. Others still look at Dell as the enemy. No matter which camp you're in, if you're a value-added reseller, you have an opportunity to grow your business and position yourself well as Dell changes the market. The key is to understand the new channel dynamics and rules. Here are a few:

1. COMPETITION

With another big player for channel market and mind share, Dell's rivals are up against competition they've not had to face before for the channel's business. Hewlett-Packard, Acer, Lenovo, Toshiba and others now have Dell as a competitor for those accounts. That means VARs can either lead with Dell products, or use Dell as leverage to win better margin and benefits from its rivals. According to Channel Group research, conducted last month in interviews with almost 150 solution providers, 20 percent of HP VARs not already selling Dell would de-emphasize HP's brands to increase Dell sales; 18 percent would de-emphasize Toshiba; 13 percent would de-emphasize Acer and 12 percent would de-emphasize Lenovo notebooks. In a market that's already brutal on vendors, those numbers can only work in the channel's favor in winning leverage from other vendors.

2. PRICING

Don't expect price cuts right away. Dell has been a pricing leader and is fighting to regain market share. But there are strong signals the company won't sacrifice margin in the channel to win that market share back. In its most recent quarter, Dell reported an increase in product margins specifically because it opted to decrease sales of lower- margin products. Even though Dell now is selling low-priced desktops at Wal-Mart, the commercial segment is a different part of Dell's strategy. A price war is unlikely.

3. LOGISTICS

Dell won't, at least initially, use distributors such as Tech Data or Ingram Micro. The company is committed to shipping directly either to the end user or the reseller. When new products such as processors from Intel or AMD launch, a reseller's ability to be first to their customer with new PCs or servers may very well depend on Dell's ability to get their products out the door quickly. Dell also carries about three days of inventory, which is orders of magnitude less than anyone else in the industry. That also means less margin for error if, say, a shipment of hard drives goes bad or there is a sudden shortage of memory.

4. FINANCING

If you haven't encountered Dell Financial Services in bidding for a customer's business, chances are you will soon. Dell Financial Services is one of the biggest players in IT financing and helps Dell close $6 billion annually in product sales. Dell executives want to open its opportunities up to the channel, but resellers should be careful. While Dell is poised to enact channel-friendly engagement rules to avoid channel conflict, Dell Financial Services is a separate legal entity from Dell (it's a joint venture with CIT Group). Every month in its billing statement to customers, it makes a direct pitch in marketing literature for them to buy more Dell products. If a reseller's customers are loyal and won't buy directly from the vendor, this isn't a problem. But it's worth watching.

Next: 5. Product Quality

5 . PRODUCT QUALITY

Dell continues trying to win back customers lost last year during the debacle over notebooks that caught fire or melted under the heat of faulty Sony batteries; of all of its major competitors, only HP avoided a battery recall. Dell, though, has been up-front about publicizing several defects in components or products--including a "vertical line" that blemishes the LCDs on several of its notebook models--and has been working to make it right with customers when products do go wrong. "On an overall quality and performance [basis], Dell has been right there in line with HP," says Ed Coyne, owner of Angelo PC, a West Angelo, Texas-based reseller.

6. LEADERSHIP

Pay very close attention to what both Dell Chairman and CEO Michael Dell and HP Chairman and CEO Mark Hurd say about the channel. Neither Dell nor Hurd are difficult to figure out, and both have a way of getting their organizations to snap-to when they make a decision or change strategy. While Dell is now opting for an expansive channel strategy, Hurd told financial analysts in response last month that the channel is "a pretty important asset for us and so we'll work hard to do the best we can to be the best partner" in the segment. Translation: The men who are running the industry's No. 1 and No. 2 companies have made the channel a priority from the top down.

7. RISK

After 18 months of losing market share, Dell is taking big risks on new ways of doing business. Hewlett-Packard, sitting in the industry's No.1 position, is playing it much more conservatively. For example: Dell is risking Microsoft's wrath by shipping desktops and notebooks preloaded with Ubuntu Linux. HP is shipping Linux PCs, but only on custom orders. Resellers need only look at their own business style of managing risk to understand how far they are willing to go before deciding how likely they are to choose one vendor over another.

8. MICROSOFT AND LINUX

Hardware vendors are taking different approaches to software, and that could have a ripple effect. Michael Dell says Microsoft has not given his company any blowback over its decision to preload Linux onto PCs, a statement that is backed up by Dell's continued competitive pricing vs. the competition. But that could change if Dell's Linux systems start taking a bite out of Microsoft sales. No other tier-one PC vendor--HP, Lenovo, Acer or Gateway--is preloading Linux as a standard order. While Linux represents a growing market opportunity, keep an eye on the public dance between Dell and Microsoft.

9. THE ENTERPRISE

Storage will tell the tale as to Dell's fate with resellers in the enterprise market. Dell, through its own legacy-branded systems and EMC-based systems, has been selling upward of $600 million worth of network storage each quarter, and the company smells an even greater opportunity. Recently, it has begun asking government VARs to consider selling storage into commercial accounts as well, as the company seeks to win business over IBM, HP and Sun Microsystems in the enterprise.

10. CHANNEL CONFLICT

Dell, HP, Lenovo and other vendors now sell both direct to end users and indirect through the channel. Dell says it's working on bringing a deal-registration program to market soon, in an effort to cut down on inevitable channel conflicts. After 23 years of working to cut out the "middleman," Dell has a channel working group of executives focusing on cutting out channel conflict. n