InformationWeek: The Business Value of Technology

"We'd like to be able to do what Dell's doing, which is pushing a lot of volume through our Web site," says Ray Giandrea, VP for information and technology at the Boston company, which books about 5,000 grocery orders per week. He's not just talking revenue, but also about the technical expertise needed to handle that kind of volume. "Leveraging what they do, day in and day out, would be a huge benefit to us," he says.

HomeRuns.com may get its wish, as Dell embarks on a campaign to transform itself from the industry's most efficient PC manufacturer to a world-class E-business vendor. It seems fitting that the parking lot of the Austin, Texas, vendor's sprawling headquarters is filled with big trucks and SUVs, because Dell is driving hard into this market. The vendor plans to share its E-business know-how through partnerships with high-powered consulting firms and use its supply-chain expertise to deliver low-cost, high-margin hardware, such as storage devices and specialized servers, to help customers populate their infrastructures. At the same time, it's looking to a future in which service providers are increasingly the consumers of hardware--and getting ready to use the reams of data Dell has gathered about its clients' wish lists to build relationships with this new class of customer. But there may be roadblocks--entrenched vendors such as Cisco Systems, EMC, and Sun Microsystems dominate the markets Dell is eyeing.

Arriving late for an interview following a meeting with a Nasdaq executive, Michael Dell explains the company's rationale for forging partnerships for its new E-services ventures. "Partnering is a tack we're very familiar with," says the chairman and CEO. "We very much have a strategy of not trying to do everything ourselves, and that will allow us to grow to a $33 billion company in 16 years." In recent months, Dell has bolstered its service and support offerings via a $6 billion deal that calls for IBM Global Services to provide on-site repair and warranty assistance for its customers worldwide. Dell also maintains service relationships with Unisys and Wang. Just this spring, the company partnered with Ariba Inc. to use its E-commerce software to turn Dell's business-to-business Web sites into full-service marketplaces for small and midsize businesses. It's also working with Interliant Inc. to provide Web-hosting services for small businesses. And Dell is expected to join forces with IBM in an upcoming E-marketplace for computer and component companies.

But it's Dell's pact with Arthur Andersen and Gen3 Partners that may be most interesting to companies such as HomeRuns.com. Dell said last month it would train those consultants in the intricacies of its vaunted E-business model. "In many ways, our technology environment is the same as theirs, just smaller," Giandrea says. But it's getting bigger: HomeRuns.com just agreed to buy 180 Dell servers--$5 million worth--to facilitate nationwide expansion. Dell got the business, Giandrea says, because it's been where his company is trying to go. For instance, HomeRuns.com wants to learn to use database clustering to improve availability and scalability of its systems as it moves into more cities, Giandrea says, and Dell has the background to teach this.

Accounts such as HomeRuns.com typify Dell's changing customer relationships. "As we have grown, [our customers have] asked us to do more--more services, more capabilities," says Michael Dell. Of course, it's in Dell's best interests to offer them; the company grew by about $7 billion last year and is looking to grow by another $7 billion or $8 billion in 2000. While Dell points out that the PC market grew 20% in unit terms in 1999, and that his company has repeatedly shown that it has the right cost structure, distribution strategy, and economies of scale to make money selling PCs, the profit-challenged PC business alone will not provide the kind of growth for which the vendor is aiming. That's despite the efforts, observed on a recent visit, of floor upon floor of phone sales reps, working under team banners bearing their managers' names.

Two weeks ago, Dell posted record revenue--$7.28 billion--for the 25th consecutive quarter, and a 21% rise in profits, to $525 million. But those rosy numbers belie the fact that even Dell isn't immune to the recent PC industry dips. For example, while computer makers typically count on a holiday bounce at year's end, Dell warned analysts earlier this year that revenue and earnings for its fourth quarter, which ended in January, would fail to meet expectations. Indeed, its fourth-quarter 1999 net income of $436 million on revenue of $6.8 billion barely surpassed the $425 million it reported for the year-earlier quarter.

Changes in the way companies purchase and deploy technology have as much to do with Dell's transformation-in-progress as falling profit margins in the PC business. Hardware is and always will be the heart of Dell, company executives say. But the push is on to expand offerings to include a broader array of strategic platforms, and to bundle those products with services that leverage its expertise in Web sales, supply chains, and Internet infrastructure maintenance.

Expectations are high for Dell's E-business consulting and hosting initiatives. The vendor estimates that the market for these services will be $71 billion in three years. "Clearly, we want to build this to be a multibillion-dollar business," says Steve Felice, VP and general manager of Dell's Internet services unit. "The fundamental principle of Dell is leveraging R&D."

Indeed, customers who opt for Andersen or Gen3's consulting services will get the benefit of research and development Dell has put into its own E-business, says Felice. In the past, Dell might simply have referred consulting requests to an EDS. "These relationships [with Andersen and Gen3] are different in that we're working with partners who are coming into Dell and are going to marry our content with their methodology," Felice says. While some technology-related aspects of Dell's highly effective build-to-order processes will remain proprietary, Dell expects to share supply-chain strategies, customer-relationship management techniques, and its experience in linking its front-end E-commerce servers with back-end legacy systems.

"Their objective is absolutely right on," says Roger McNamee, co-founder and general partner of Silicon Valley investment firm Integral Capital Partners. "There are thousands of companies in the economy that want to be like Dell. Who better to sell them that capability than Dell?"

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