Dell Is Going Down the Wrong Pathwith Perot Systems

|
Includes: DELL, HPQ, IBM, PER
by: Jeffrey M. Kaplan

Dell’s acquisition of Perot Systems clearly demonstrates that Dell (NASDAQ: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 (NYSE: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 (NYSE: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 (NYSE: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.