Dell Services Still Cipher

pulled the plug on a deal

The proposed alliance with Reliable IT, an online service that dispatches field technicians nationwide, would have seen the operation become an official extension of Dell's service and support operations, said Scott Shaul, president and CEO of Reliable IT, Springfield, Va.

The original talks were between Dell, Reliable IT and ServicePower, a field logistics automation company in Louisville, Ky., that optimizes the scheduling and deployment of field service calls, he said.

"Unfortunately, we didn't land that book of business," Shaul told CRN last week. Several sources said Dell's decision to end the negotiations could be a classic case of Dell squeezing yet another supplier. Shaul declined to speculate on reasons the deal failed to move forward. Dell declined comment.

To create and manage its footprint of available field technicians, Reliable IT partners with online IT services dispatcher OnForce, New York, which has more than 10,000 nationwide IT service providers on call. Many of those technicians possess more Dell certifications than certifications from any other vendor, according to a published list of OnForce's national hardware providers.

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At roughly the same time that Reliable IT's talks with Dell were in earnest in April, the pace of Dell field services and warranty work running through OnForce accelerated, according to an OnForce service provider. But lately, OnForce work orders for Dell products have slowed dramatically, the service provider said.

Efforts by Dell to remediate service calls remotely could be contributing to the decline. In June, the vendor began offering free online support via DellConnect, in which Dell call-center employees use PC remote control applications to diagnose and repair problems.

Dell has fortified call-center services efforts like DellConnect in a major way, according to the Round Rock, Texas, vendor.

During Dell's second-quarter earnings call Aug. 17, the PC maker explained the conversion of temporary and outsourced workers to Dell-badged employees added about 6,000 to the employee head count in three months alone. Those freshly minted employees were mostly all inside technical support personnel, not field services, a Dell spokesman said.

The bottom line is that Dell's services business has not grown to the size company executives predicted after Chairman Michael Dell publicly projected the unit would eventually produce $10 billion a year. By the end of its most recent fiscal year, Dell service revenue reached $4.9 billion.

In fact, Dell services' growth rate is actually slowing. Two years ago, Dell's enhanced services business grew at a 28 percent clip. In its most recent annual report, for the year ended in February, Dell reported that services growth had slowed to 24.5 percent.

By contrast, rival Hewlett-Packard saw its services business grow by 10.5 percent two years ago, but in its most recent fiscal year (ended last October) HP Services grew 10.9 percent. HP's services business is working off a much higher top line—$15.6 billion compared to Dell's $4.9 billion.

The pressure on Dell could only increase. Among the biggest clients of Dell's services offerings is aerospace giant Boeing, Seattle. Boeing has a five-year services deal with Dell that is set to expire in 2008.

Dell's analyst meeting, slated for Tuesday, Sept. 12, in New York, has been widely anticipated by some but others now believe it could be a yawner.

Goldman Sachs analyst Laura Conigliaro recently issued a report downgrading Dell stock to a "sell" rating from an "underperform" rating, and said she believed the briefing would be uneventful unless executives present a major shift in strategy.

"Dell's playbook is not working right now," she wrote. Conigliaro noted one specific ill that has garnered much attention: Dell's deteriorating position in customer service and its efforts to repair it.

"At the same time that Dell's revenue growth is slowing, the company is increasing its operating expenses to correct customer support issues that have festered over the past few years, increasing its incremental spending in this area from $100 million to $150 million," Conigliaro wrote.

The combination of these factors will throttle Dell's operating margin at about 5 percent, 300 basis points below the operating margins it reported when exiting last year, she said.