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.

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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. “Why would you want to get a Dell?” said Arnie Bellini, president of ConnectWise, a Tampa, Fla.-based solution provider that also sells ConnectWise PSA professional services software. “It is nothing more than a white box out of Texas. Get it from us. We can guarantee the components and parts, and we won&'t switch those parts out every month for the lowest-priced bidder,” Bellini said.

As a result of Dell&'s troubles, Bellini said he thinks the vendor will start to get more aggressive on the IT services front in an attempt to boost its stock price.

“They are hitting a business wall that they are not going to be able to get through,” Bellini said.

“Their only way to continue to satisfy the appetite of Wall Street is to branch out into new markets. Our opinion is they will focus extremely tightly on their enhanced services,” he said. “I think Dell is going to get into higher-level consulting, managed services and IT services. I see them competing with all the ConnectWise partners not only for Fortune 1000 business but small- to midsize-business accounts as well.”

Steve Plotz, president of Computer Systems of Tampa, a systems builder in Gibsonton, Fla., said he sees a big difference in the Dell of today vs. several years ago.

Just last week, Plotz said, he beat Dell on a bid for 14 desktops and two servers because of concerns the client had about Dell services. “Dell doesn&'t have adequate qualified help-desk individuals to solve customer problems,” he said. “That has really helped us. Price is still a factor, but because everyone is so close on price, customers are looking at service as a differentiator.”

Plotz said Dell has lost sight of the original product quality and service that were hallmarks of the company. “They need to change their philosophy and stop trying to put everyone out of business and work with people in this industry.”

System builders said the higher standards in terms of the quality of the parts they are putting in their systems has turned the tide against Dell. “I use all Intel parts,” Plotz said. “I don&'t know who is making the Dell boards, but they are just not as solid as they were two or three years ago.”

Pat Walsh, owner of Computer Station, Orlando, Fla., said he is seeing more customer loyalty, with his clients choosing to buy a system recommended by him—usually an HP system—because of the services provided by Computer Station.

“We&'re an HP authorized service provider so they don&'t have to call [a toll-free] number and walk through 500 trouble shooting recommendations. They just call us,” he said. “We just fix it. They get the warranty service for free, and we get reimbursed from HP.”

Walsh said Lenovo has the potential to increase pressure on the Dell model. “As Lenovo gets that program together, they will be more price-competitive. My question is, will they have the VAR-authorized service programs to back it up? Authorized warranty service is crucial to places like us.” Lenovo, the Purchase, N.Y.-based PC maker that bought the IBM PC business earlier this year, last week reported 404 percent sales growth for its most recent quarter. Solution providers have said the company has maintained a large degree of continuity with the channel even during the merger, while Lenovo said its ThinkPad and ThinkCentre brands have shown evidence of making strong gains over competitors.

Walsh said Dell is facing pressure on the services front because customers are less willing to wait for service on their computer in the Internet era.

“There are many consumers and businesses that have bought Dells and sat on phones for hours or waited for Dell to send them a part and have someone install it. If they buy an HP, they can walk back in the shop and have it repaired locally without having to mail anything," he said. "So what if you save $35 to $40 on a system. If you have one problem that takes you hours to get resolved, is it worth it?”

The first tangible signs of Dell&'s predicament began to emerge earlier this year. Even in tax-angry California, where debates on government spending in recent years have ended political careers, simply being the low-cost provider is no way to win business with the state, and Dell found out that the hard way.

Earlier this year, the California Department of General Services shunned Dell in awarding a $116 million computer hardware contract, opting for a solution-provider-led bid that provided systems from rival HP instead. The state agency said that a large chunk of the decision-making had nothing to do with price. Bids were scored, and 40 percent of each score had to do with service-level capabilities and references. Dell was left out in the cold.

“They beat themselves,” said Terry Joslin, CEO of Western Blue, the Sacramento-based solution provider that led with HP systems in winning the California government contract. “We listened to our customer, and we&'re a lot more local-based and focused and nimble,” he said.

“You can commoditize hardware, but you can&'t commoditize information, knowledge and service,” Joslin said. “That&'s not a commodity—yet.”

CRAIG ZARLEY contributed to this story.