Dell Is Going Down the Wrong Path with Perot Systems

Dell’s acquisition of Perot Systems clearly demonstrates that Dell (DELL) is in the midst of abandoning its historic advantage as the most efficient direct marketing company in the tech industry, in favor of following the increasingly failed outsourcing models of its bigger hardware rivals.

By buying Perot Systems, Dell is following in the footsteps of HP’s acquisition of EDS in an attempt to match the IT outsourcing (ITO) and services capabilities of IBM (IBM).

The only problem is that an increasing number of large-scale enterprises have become disillusioned with traditional ITO because these asset transfer deals have generally failed to achieve their business objectives. Even traditional IT consulting engagements frustrate many IT and business decision-makers because they tend to be too long and expensive.

Blending a labor-intensive business, like Perot Systems (PER), with a product-centric company, like Dell, is also a formula for trouble. These are two very different business models and corporate cultures. Just ask IBMers who have witnessed the constant tug-of-war between its hardware, software and services divisions.

It is for these reasons that I originally criticized HP’s acquisition of EDS. That deal may have fortified HP’s (HPQ) outsourcing business, but it also caused a lot of corporate infighting and hasn’t moved HP any closer to becoming a player in to what is increasingly a cloud computing arena, where the real action will be for years to come.

I always felt that it was unfortunate timing when Dell decided to expand its channels to market at the same time it was acquiring a number of Software-as-a-Service (SaaS) companies to develop greater remote service capabilities. These acquisitions could have given Dell an opportunity to redefine how IT services are built and delivered, and in turn could have further differentiated Dell in the commodity PC business.

Instead, Dell decided to push its products through a broader array of resellers, many of whom had built up a deep-seated hatred for Dell because of its direct sales tactics of the past. In order to placate these anomosities, Dell has slowed the development of its ‘on-demand’ services as it tries to determine how to position these offerings so they won’t further offend Dell’s potential partners.

Ironically, the Perot purchase will set off far more alarms among third-party service providers, including value-added resellers and integrators, who were just getting comfortable with Dell. Now, they will have to be convinced that Dell isn’t trying to compete with them in the IT services market.

As I said at the time of the HP-EDS deal, this transaction may make sense on paper but it misses the real market opportunity. The world is moving to the ‘cloud’ and Perot has very little to offer in this brave new world.

It may have data center expertise and hosting capabilities, but Perot Systems is not a recognized player in the cloud computing arena. Instead, its people and processes are more likely to reduce the innovation and agility which Dell desperately needs at this time to clearly set itself apart from its competition rather than just imitate them.

Despite the specific problems with this transaction, it doesn’t diminish my view that there is an important role for professional services, consulting and value-added resellers (VARs) in the SaaS and cloud computing market. However, it will take more future-minded IT service providers and tech companies to capitalize on this opportunity.

Comments

[Topher K&R Network Solutions]

Agreed. Companies should stick with what they do well, it's one of the first things taught in business school and it should be applied even in the most successful of company.
Everyone sees what they are trying to do, but while it looks good on paper, it usually doesn't pan out exactly as planned.

2009 Sep 22 03:08 AM

[Nettligent]

IBM is overvalue. Both HP and Dell are paying too much for their acquisitions.
Enteprise market outlook is very ugly. Demands for business solutions is getting worse. Customers are watching every dollar until economy is better.
Shareholders are paying the price.

2009 Sep 22 04:25 AM

[commoncents]

This may be the biggest mistake Dell has ever made. The valuation for Perot can not remotely be justified especially in light of the fact that it's corporate culture has been a serious problem in new business development. Huge mistake.

2009 Sep 22 07:49 AM

[FMN]

Major mistake on Dell's part. They are clearly looking in a rear view mirror instead of the windshield. Such a severe backlash on ITO is destined, especially when it's outside of the US. One of the major issues with outsourcing is that the whole idea is based around making money for a corporation, instead of providing a solution for a community and it's people. In this economic climate people cannot relate to someone in Dallas or India providing a service for their hospital located in small or midtown USA, while neighbors are layed off and searching for jobs. Some jobs stay in the community, and the outsourcer boast of this, however, customer service is always lessened, as you are now a vendor to the hospital or agency, and charging for every single ounce of service you provide. Major mistake.

2009 Sep 22 09:12 AM

[Stone Fox Capital]

agree. PALM seemed like a much better fit. Take a good product and put the muscle of DELL behind iit. Instead they paid handsomely for a worst of breed in PER. Wish they'd buyout some of the stocks I own. I'll sell for a nearly 70% premium.

2009 Sep 22 11:52 AM

[BeachRider]

DELL/PER is a bigger risk than ORCL/JAVA was. These companies are trying to broaden their brand & increase services. The physical proximity of DELL/PER (just like ORCL/JAVA) is giving them a sense of 'alignment'. If they pull it off, then they move-in on IBM's services business in a broad way. The 'alignment' seems far-fetched, from some perspectives.

As a customer of services like these, I wish them the best of luck.

2009 Sep 23 12:18 PM