Dell's Private: Now Comes The Hard Part

Michael Dell

Gone is the bitter battle to take Dell private. Gone is the Wall Street spotlight. Gone are corporate raider Carl Icahn and his biting tweets. Now comes the hard part: transforming what founder and CEO Michael Dell is calling "the world's biggest startup" into an enterprise solutions channel power.

Just weeks after shareholders approved Michael Dell's $24.9 billion leveraged buyout of the company he founded in 1984, he told solution providers attending CRN parent The Channel Company's Best of Breed Conference that he would like to return to the event in the future and be recognized as "your best partner."

That's a pretty lofty ambition for a company that prior to 2007 had no channel program to speak of. Today, the channel represents about $15 billion, or 25 percent, of Dell's nearly $60 billion in annual revenue. Michael Dell has said that the percentage of Dell sales going through the channel has the potential to reach as much as 60 percent of the company's commercial sales—with no limit on just how high it could go.

But when you compare the size of the Round Rock, Texas, company's channel business to some of its rivals, it's clear that Dell has a lot of catching up to do. Seventy percent of Hewlett-Packard's $110 billion in revenue comes via the channel, putting its channel business at $77 billion, more than five times the size of Dell's channel business. Cisco Systems' channel business, meanwhile, accounts for around $39 billion, or 80 percent of its $49 billion in sales, according to the company.

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Michael Dell is no longer a brash 23-year-old CEO with nothing to lose. At 48, he is betting on a successful second act, leveraging his experience and, more importantly, Dell partners in his quest to get a bigger bite of the multitrillion-dollar IT solutions apple—a market of which Dell owns a tiny sliver.

Transformation is hard work. Michael Dell’s critics say the culture and internal politics of the company must change. Key to growth is more effectively leveraging Dell’s 140,000-strong army of worldwide channel partners. And Dell must burn its image as a low-cost hardware supplier and convince the world it is a full-solutions player.

Dell is moving quickly to get there. Only 20 days after its stock was delisted from Nasdaq, the company moved to tightly integrate its channel business into its sales organization in a move that Dell himself said is designed to accelerate channel sales growth.

The changes, which came just weeks before the start of Dell's annual Dell World customer and partner event, put both direct and indirect sales under one organization. The company also named a new president of North America, Bill Rodrigues, and a new vice president of global channels and alliances, Cheryl Cook. Partners said at this point it is difficult to tell whether the duo will pivot toward a direct or indirect sales model. They said only time will tell.

Cook replaces longtime worldwide channel chief Greg Davis, who moves to a new role as Dell's vice president of software and peripherals. Davis started the official Dell channel program nearly seven years ago and helped build it into what it is today. "When we started the channel program back in 2007—because it was a relatively new effort—it kind of made sense to have it as a separate organization," Michael Dell told CRN in an interview the day after the news of the management shake-up. Dell said the changes are going to lead to "enormous" new opportunities for partners as Dell works hand in hand with them to grow sales. "We are going to be working even more closely with our partners to increase our reach and coverage," he said.

The net impact for partners: "Faster, easier, better and bigger," said Dell, who noted that the changes could very well allow the company to accelerate his stated bid to more than double the percentage of commercial sales going through the channel. "It is really up to our partners. There is no reason why we can't get there faster."

Ron Dupler, CEO of longtime Dell partner GreenPages Technology Solutions, a Kittery, Maine-based national cloud integrator, said he sees the management changes as a positive step. "Dell has been committed to the channel. And with these changes, it picks up even more velocity. It's streamlining for the future. Over the years they created a strong channel program — kudos to Greg Davis. Now Michael is moving faster to bring end-to-end solutions deeper into the enterprise and he's streamlining to bring partners with him," Dupler said.

That's just the way Dell's Rodrigues, who is overseeing North America channel sales, sees it.

"Dell's channel partners are now an integral part of the way that we communicate and work with our customers globally, and their feedback on our strategy and go-to-market is extremely important as we move forward as a private company," said Rodrigues in a statement emailed to CRN. "Our new structure came about partly in response to feedback from the partners and is designed to simplify decision-making and further optimize our operations."

NEXT: The Road To Success Goes Through The Channel

The Road To Success Goes Through The Channel

Today, Michael Dell doesn't talk a lot about how he reinvented the supply chain and pioneered selling direct. Now, he preaches the channel instead. Dell's future, he said, is dependent on solution providers. "Because of the mix of products and solutions we have now, the indirect channel sale is more profitable than direct," he said. "Channel partners are selling more software, more storage, more network, and more servers."

New key Dell lieutenant Cook, a channel veteran who ran Sun Microsystems' partner program from 2006 to 2010, is responsible for growing Dell's PartnerDirect program and continuing the momentum started by her predecessor, Davis.

"From a strategic lens, we have to expand and grow our presence in certain markets and portfolios where Dell is under-represented. There are too many opportunities to take, and we need more partners to help us grow," Cook said in an interview with CRN. Last year, the number of Dell PartnerDirect members increased 38 percent, according to Davis. But for Dell, Cook said, it's not about partner head count. Success in the channel is about building relationships between Dell, partners and customers.

Cook's partner approach will differ from Davis', she said, by stepping up an emphasis on sales of end-to-end solutions that drive Dell software and services deeper into the enterprise. That approach, she said, is a switch from the earlier focus on transactions on Davis' watch.

Davis is widely credited for creating and pushing the Dell channel more deeply into the company's direct-sales culture. But now the channel, which was a separate silo from Dell's direct business, is rolled into one organization overseen by Marius Haas, Dell's chief commercial officer and president of enterprise solutions.

Two of Dell's biggest challenges going forward will be training partners to cross-sell and boosting the number of top-tier Preferred and Premier partners that now make up only a tiny fraction of Dell's global partners. To that end, Dell is on track to deliver 250,000 training courses in 2013 and just introduced four new training programs in its most lucrative business line, software, according to Davis.

Cook said channel program changes could come as early as 2014. "Over the next month or quarter, I'm going to get a lay of the land. I'm not going to fix things that are not broken. But where I see areas that need modification and where we identify unique challenges or see unique hypergrowth opportunities, yes, we are going to absolutely move fast."

One of those changes, she told CRN, will be to incent partners to sell Dell's full portfolio of products, pushing end-to-end solutions from the client to the server, including security and converged infrastructure. She also said Dell will be working hard to shore up its field engagement to reduce channel conflict and strengthen partner sales.

Jed Ayres, senior vice president of partner management and marketing at MCPc, a $262 million Cleveland-based national solution provider ranked No. 89 on CRN's Solution Provider 500 list, said the channel is more important than ever to Dell now that it has gone private.

"Dell is just an amazing opportunity for us right now because of the ubiquity of their brand in many of the accounts we are in," he said. "We see the ability to go wider and deeper with Dell with the acquisitions they have made. How are they going to get a return on those investments without the channel? The channel is becoming a much more important part of their go-to-market strategy."

Ayres sees Dell World as the most important event of the year for his business. "We are sending a small army to Dell World, bigger than any other partner summit all year," he said. "We are sending 16 people to Dell World because of the potential for sales growth."

NEXT: The Specter Of Channel Conflict

The Specter Of Channel Conflict

Michael Dell has some big legacy issues to address to convert the channel masses to the Dell gospel. Talk to Dell partners and you hear a common refrain that the company is still, at its roots, a direct sales outfit.

CRN spoke with more than a dozen large and midsize Dell partners prior to the management shake-up. Each praised Dell products and services. But each also complained that Dell — more so than other OEMs that they do business with — makes it difficult and time - consuming to register deals. Sometimes, they claim, overzealous Dell direct sales reps outright steal deals away from them. "We've had several instances where we have had to fight Dell's direct sales for a deal registration," said Robby Wright, chief technical consultant and CTO at Abtech, a Carlsbad, Calif., Dell partner.

"Dell direct sales can be very aggressive. Sometimes we can spend hours squabbling [with Dell] over a deal registration. Multiply that by 10 deals a day and deal registration becomes a full-time job," Wright said.

Dell's company line is it is channel-neutral, meaning there is no financial incentive for Dell's direct sales team to exclude a channel partner from a deal. Dell's sales representatives are compensated at the same rate whether a deal is done direct or with a partner, Davis said. This can be a conflict as some direct sales people feel more in control if they handle a deal themselves, and the compensation plan does not push them to work with the channel.

Dell rejects 29 percent of deals partners try to register, according to Davis. Dell does approximately 1,800 to 2,000 deal registrations a week, he said, adding that there are always going to be some deals that don't get approved.

Cook makes no apology for Dell's direct strategy, stating that the company is committed to giving businesses a choice in how they want to buy Dell products and services. "Dell has an 'omni' channel model which is unique to Dell. We are going to continue to support that," Cook said. That means keeping partners happy while promoting its direct and online business to customers.

"If you have a desktop and server relationship within an account and we want to expand it into other areas, we really want to work jointly with you," said Frank Vitagliano, vice president of Dell's channel sales. "The idea is to develop a tight relationship with partners so we both know each other and can help each other reach mutual goals."

Complaints about Dell channel commitment taper off quickly the larger the partner. MCPc's Ayres said Michael Dell reaches out regularly to help his company, one of 22 solution providers in Dell's Large VAR program. MCPc's Dell sales are up 50 percent this year in no small part because of Dell's personal commitment to MCPc, Ayres said.

"Dell's channel program is simple, they listen to us [and] have one point of contact," he said.

NEXT: The PC Is Dead: Long Live The PC

The PC Is Dead: Long Live The PC

After years spending billions on beefing up services and acquiring 30 companies, Dell is still first and foremost a PC company, with the bulk of its revenue tied to client device sales. Its next chapter must include stepping away from selling commodity boxes and moving into lucrative software and services.

But dropping out of the PC market is not something Michael Dell says he wants for his company—today the No. 3 PC maker. Even with PC shipments expected to drop 8 percent worldwide this year according to research firms IDC and Gartner, Dell said that two out of three business customers' first experience with Dell is buying a PC. About 90 percent of those customers go on to buy other products and services from Dell, according to the company.

"The obituary of the PC has been written 25 times. The term 'post-PC era' was first coined in 1999 by IBM. At the time, there were about 120 million PCs sold per year. Now there are 450 million PCs sold per year. So the post-PC era has been better for the PC than the pre post-PC era," said Michael Dell.

Dell's primary objective isn't ditching the PC; rather, it's how to muscle into the data centers of tomorrow where it can sell lucrative software and services. The challenge for Dell is how to get there. To that end, with PC sales driving cash flow and acting as a springboard to new business, Michael Dell says it comes down to internal leadership to turn old Dell into new Dell.

Vitagliano, a 30-year industry veteran and former channel chief at Juniper Networks, was hired in April and is part of Dell's effort to win SMB deals. SMB is the fastest-growing segment of Dell, with huge upside potential as a company's needs scale up into the data center as they grow.

Paul Clifford, president of Davenport Group, a St. Paul, Minn.-based solution provider, said Dell's aggressive pricing has helped his company win deals but, more importantly, Vitagliano has been rolling up his sleeves right alongside Davenport Group, helping it close deals. "We had an infrastructure overhaul we were bidding on. We knew they were leaning toward HP," Clifford said. "We sent Frank an email and by the end of the day he was on the phone with our customer," he said.

Vitagliano flew Clifford and the customer to Dell's offices, where the Dell vision was laid out. That personal touch, Clifford said, had his customer "doing backflips."

Other recent Dell hires include Anand Sankaran, a former executive at Wipro Infotech who headed up the company's global infrastructure services business. Sankaran was hired the same day Dell officially became private and is now president of infrastructure services and cloud computing, overseeing 10,000 employees.

With these new hires and the recent management changes, Dell is prepping itself to cater to the customers it wants. To achieve this goal, Michael Dell said he's gone to great pains to reorganize his company into four businesses (end user computing, enterprise solutions, software and services) to reflect his customers—consumer, SMB and large enterprise. Each business has its own leader who knows how go to market with very clear priorities, he said.

Jeff Clarke oversees end user computing, Haas leads Dell's enterprise solutions group, John Swainson heads software, and Suresh Vaswani runs services.

According to Dell's last reported numbers as a public company, the four business units are having mixed success. The enterprise solutions group business grew 8 percent year over year, with revenue of $3.3 billion in the second fiscal quarter, ended Aug. 2. Dell services saw anemic year-over-year growth of 2 percent, reporting $2.1 billion revenue, and its software division reported $310 million in revenue and an operating loss of $62 million, a 20.1 percent drop year over year. End user computing reported revenue of $9.1 billion, a 5 percent drop compared with the year-ago quarter.

NEXT: Investing In The Future

Investing In The Future

Some of those losses in its software division track back to big investments Dell is making in research and development, according to the company's financial report. Michael Dell said spending in R&D is growing 25 percent year over year. "We are investing heavily in organic growth. We have an army of 20,000 developers and engineers developing new products and software," he said.

R&D spending at Dell has been low relative to its peers, estimated at $1 billion a year, or 1.5 percent of revenue. By comparison, HP spends 2.8 percent of its revenue on R&D and Cisco spends 12 percent, according to a Bloomberg analysis. Why is R&D so important? With Dell's aging PC business and cloud computing on the rise (ultimately meaning Dell will sell less hardware) it needs new tricks in a hurry if it wants to grow.

Michael Dell seems to agree, telling CRN that being competitive "requires more R&D, more capabilities and having the innovative solutions to help a company accomplish their goals." And now, as a private company, he can make R&D a priority. As for access to capital, he said, being a private company makes a big difference. "We have access to all the capital we need. The capital structure we have is better. It is more flexible and allows us to invest more in channel partners, R&D and growth now that we don't have this short-term pressure."

"We are already impressed with Dell's investments in R&D," Davenport Group's Clifford said. Some of those innovations include Dell's Compellent Flash-optimized storage, which uses a mix of Flash and disk drives, for higher performance and lower cost, and Dell's PowerEdge VRTX, which combines servers, storage, networking and management software into a single box.

All this transformation is hard work. So one of the biggest head-scratchers for many outsiders is why does Michael Dell — the 25th richest person on the planet, with a personal wealth of $16 billion, according to Forbes — want to tackle the enormous task of remaking Dell?

"You ever try doing nothing for a while?" he said. "You look at all the big unsolved problems out there—the environment, education and health care. A lot of those problems are computational. Our potential for good is what motivates me."

Steve Burke contributed to this story.