The Dell Factor

That's the dilemma facing many solution providers as they consider working with Dell, which in recent months has rededicated itself to controlling a larger portion of the services revenue from Dell platforms.

Dell reported a 30 percent year-over-year increase in what it calls enhanced services, to $1.1 billion for its first fiscal quarter ended April 29. That marks the first quarter Dell, Round Rock, Texas, has broken out its services revenue. And just last week, Dell, which has flat-out said it wants to drive down services margins, announced its latest salvo, a Custom Network Installation Assessment service for small businesses. The assessments will be priced starting at $279, according to Dell. The company won't talk about who does the services or specifically how they will be delivered but, in some cases, third parties are performing the assessments and implementations. Dell has been using Coast Solutions Group, a value-added distributor of enterprise professional services, as a proxy to recruit companies in the channel to deliver services around Dell platforms.

That creates a double-edged sword for those solution providers considering partnering with Dell. Yes, Dell is creating access to some higher-level services opportunities, they say, but the company also seeks to control the prices they can charge for their work, which could readily put services margins on a downward spiral rivaling hardware margins.

To those who might be enticed by the promise of additional services revenue via a partnership with Dell, solution providers like Arnie Bellini say: Beware.

"I tell IT service organizations that every single Dell box you put in your client's shop is a Trojan horse that you are wheeling through the gates of your clients," said Bellini, president of ConnectWise, a 24-year-old $5 million managed services provider and maker of the ConnectWisePSA software suite for managing IT services organizations, which is sold by ConnectWise's 320 services partners. "Dell is mounting an offensive against the entire profitability of our business. This will take away the future profitability of every IT service organization and leave us with the scraps of break/fix and time and materials," he said.

There is no doubt that Dell is looking to solution providers to aid it in its assault on the services market. Solution providers working with Coast Solutions Group say they are finding growing opportunities with Dell in areas such as Microsoft Active Directory migrations and Citrix Systems implementations. Kevin Kelly, vice president of Agile360, an Irvine, Calif., solution provider specializing in virtualization technologies including VMware and Citrix, said his company has done a number of professional services engagements with Dell subcontracted from Coast Solutions Group. "It was good business for us," he said.

All Covered, a Redwood City, Calif.-based national IT services company focused on small businesses, already considers Dell its best partner. CEO Kevin Laughlin said All Covered's Dell services business is up significantly in 2005 vs. 2004. And, what's more, a lot of clients referred by Dell end up signing up for additional services. "We have a great relationship with Dell," Laughlin said. "If they are going to provide services through outside providers, which they have historically, we want to be one of them."

However, a number of solution providers that said their Dell business is on the rise privately admit the services work they do is for a lower margin than they would normally receive on their own. One said in some instances Dell is charging the client $400 an hour for professional services, and the solution provider doing the work is being reimbursed for only $150 an hour.

Solution providers on their own in some cases are getting from $200 to $275 per hour for the same work, depending on the engagement.

And several sources said Dell also requires its professional services providers to sign a noncompete agreement that prohibits them from doing any work with the client outside the Dell relationship.

ConnectWise's Bellini believes solution providers doing services work on behalf of Dell are making a huge mistake. His rallying cry to fellow partners is simple and straightforward: Stop selling Dell. He believes that, ultimately, the services battle with Dell will be played out in the managed services arena. "We absolutely view them as a 100 percent threat," said Bellini, who plans to rally ConnectWise's services partners to battle Dell on all fronts at a fall ConnectWise Partner Summit in Tampa, Fla. "They are stomping onto our turf, plain and simple, with their foray into managed services. We are declaring war on Dell. The fox is in the chicken coop."

Bellini expects to see Dell offer a full spectrum of remote management services offerings by the end of the year, billing customers anywhere from $3.95 per workstation to $39 per workstation for a menu of services. He says the Dell managed services effort is in stealth mode, being test-piloted in certain regions. Dell executives were unavailable to discuss the services push. Dell also will not talk about its partnering strategy, other than to say that the company considers partnering a key focus. In addition, the company will not discuss what percentage of its annual $4 billion-plus services sales are done by third parties and solution providers as opposed to Dell-badged employees.

In the case of the Dell Custom Network Installation Assessment service for small businesses, some of the services work is certainly being done by third-party partners. All Covered, for one, recently did network and implementation work on behalf of Dell for Cowan, DiGiacomo and Associates, a Marlton, N.J., CPA firm. Christopher DiGiacomo, CEO of Cowan, DiGiacomo and Associates, said All Covered did a good job for him, but noted that he would rather deal with Dell as a preferred contact, letting the company point him to third-party providers.

"All Covered did a good job, which is a reflection on Dell," he said. "They knew to get the right people out here." At first, DiGiacomo said he did not know the provider was not a Dell employee. He said when he tried to get a business card, the All Covered representative would not provide it, noting it would be a breach of ethics since they were sent on behalf of Dell. The full bill for hardware, including four PCs, one laptop and one network file server, came to $12,000, and the services and installation bill came to $4,500, said DiGiacomo. He says he paid Dell directly with All Covered being reimbursed by Dell.

Laughlin won't talk about his services margins in terms of the Dell business. But he said the analogy that Dell could have the same impact on services margins as on hardware margins may be a stretch because services require IT labor talent. "I'd like to see the math on that," he said. "You are shipping people instead of product. I am not sure where the scale comes in." The PC hardware margin reductions occurred as component costs declined and manufacturing costs declined with economies of scale, said Laughlin. "The only way to significantly get the cost down is by either changing the amount of time required or the compensation of a person doing the work." This comes as IT needs, even for small businesses, are more complex than ever, he said.

So where does Dell intend to take its services efforts from here? Dell won't discuss it. But some solution providers say it's inevitable that the company will be involved in remote network management and monitoring for small and midsize businesses.

Dell does say it wants to apply Moore's law to the services market, much as the company used that maxim to dramatically drive down PC product margins. "The services cost structure has been kind of stagnant over the past 10 years," said a Dell spokesman. "We think now as Dell gets more and more into services that we have the ability to help drive down those costs for customers and apply the 'Dell Effect' on services, as we have in many product lines. Our priority is to continue to deliver these high-quality services at a great value to our customers."

Some solution providers that make the decision to do services work with Dell realize there are risks that come with the allure of that additional revenue. For one thing, they say, they know doing such work subjects them to the whims and caprices of a vendor that has relegated them to second-class-citizen status. Several solution providers contacted for this story certainly place Dell well behind vendors with formal channel programs such as Hewlett-Packard, IBM and Cisco Systems in forming services ties with them. That said, they concede that if they have the talent sitting on the bench, it's better to use it for a Dell job.

Nowhere were the perils of partnering with Dell on services more evident than when the behemoth earlier this year sent hefty bills, in some cases tens of thousands of dollars, to solution providers that wished to remain Dell services warranty providers. These local services warranty providers say that the move is a way to cut them out of the equation in favor of larger national firms.

Bennett Tavar, president of Logical Business Solutions, Jacksonville, Fla., said his annual bill jumped from $1,500 to $23,500. "Partnering with Dell is a deal with the devil," said Tavar. "Their opinion of people like us is pretty low. It's kind of a joke."

As to whether he would continue to work with Dell, Tavar is pragmatic. "You know how life is," he said. "If they turn around with another deal and it makes economic sense, I wouldn't throw it out of hand. What are you going to do? I have been doing this for 23 years, and one thing I have learned is you can't trust a manufacturer or a big organization. They will stab their mother in the back to make the numbers for their shareholders."

Despite concerns like these, in the professional services arena more solution providers are doing work for Dell. Special Order Systems, Rockland, Calif., for example, is doing a growing amount of services work that is being farmed out by Dell. Special Order Systems CEO Gia McNutt says whether she takes the Dell services jobs—which have included Windows Active Directory migration and Citrix software engagements—depends on the hourly rate and whether her professional services talent is available. "It doesn't always make sense," she said. "Sometimes we decline it because my own profit model does not fit in with the hourly rate. But when it does, then we accept the work." McNutt said she does not see Dell as a partner in the same light as Cisco, which actively helps her close deals. But she respects the marketing muscle that Dell brings to the table and the hard work that Coast Solutions Group does to broker the services deals.

At the end of the day, though, a number of solution providers are choosing to keep Dell at arm's length because of the vendor's reputation as a channel antagonist.

"Dell is driving down the cost of everything they sell," said Gerard Louise, president of Technical Support International, a Foxboro, Mass.-based systems integrator who said he will not work on a Dell system that is under warranty unless the client is willing to pay for his rapid service response. Louise, who is moving into the managed services business, says he does not see Dell as a services threat. "We are bringing an offering with a much higher level of professional services," he said, noting that a number of customers have contacted him in the wake of problems they've encountered with Dell services. "Most customers realize that if they have a contract with Dell, they are very limited in the services they can get. Customers get a lot more from smaller regional companies like us." Louise does not believe that will change as Dell moves more into services. "I may be wrong," he added. "But I don't see it at this point in time."

Yet without a formal program or partnering framework in place, solution providers say they are aware that even if they are getting work from Dell, the company could turn around at the drop of a hat and give those jobs to a lower-priced bidder.