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BW Businessworld

Dell-ivering Solutions

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Days after leaving Wipro, where he spent 25 years, Suresh Vaswani was on the treadmill at a gym in Mumbai when his mobile phone rang. It was a private number that would not display but Vaswani admits he connected the call accidentally. "Hi, this is Michael," said the voice at the other end. "Michael who?" was his instant reaction. The penny dropped when the caller identified himself. Michael Dell, CEO of Dell Computers, was wooing Vaswani personally.

Over the call, and in subsequent meetings, Michael made a pitch to Vaswani to take charge of the global role as the head of Dell Computers' multi-billion dollar applications and BPO business (including profit and loss responsibility), apart from heading Dell India as chairman. Michael managed to convince Vaswani that his experience of building Wipro's system integration business under Wipro Infotech and global businesses such as testing and validation, infrastructure management services (IMS), package implementation and engineering services, which together account for a large chunk of Wipro's current revenues, would come handy in his new assignment.

Vaswani reports to the matchmaker Stephen F. Schuckenbrock, president of Dell services, who is among the 11 people directly reporting to Michael. Schuckenbrock has known Vaswani from the Wipro days.

IT services: 11,000
Contact centres (BPO): 9,000
Global financial services: 1,100
Sales and marketing: 1,200
Manufacturing: 700
R & D: 500
Analytics: 400
eDell: 400
Others: 250
Total: 24,550
Dell worldwide: 103,300
Source: BW Research

The business Vaswani heads is probably smaller or roughly the same size as the business he built at Wipro. After all, Dell's services business under Schuckenbrock is barely $8 billion of Dell Computers' $61.5 billion revenue, and at least half of it is from services around the hardware that Dell sells. The other $4 billion comprises Vaswani's applications and BPO, among the nine technology verticals headed by other professionals. So what made Michael Dell woo Vaswani personally?

The answer lies in the future, not the present. Ever since he took back the reins as the company's CEO in 2007, Michael is fast transforming Dell Computers from a pure-play hardware seller into a complete solutions provider comprising software, storage and services so that hardware becomes a smaller part of the company's offering. Even the stockmarket values services differently. Last year, Dell had revenues of $61.5 billion and net profit of $2.64 billion. Its market capitalisation was $29 billion as of 20 October. Whereas Infosys, which is mainly into services, had revenues of $6.1 billion and net profit of $1.5 billion. Its market value was $31.5 billion as of 20 October. While the comparison might not be apt, it is an indication of where the investors think the future lies. Chinese and Taiwanese firms such as Lenovo, Acer and Asus have begun to drive down prices in the hardware business, forcing world leaders HP and Dell to move up the value chain for better margins and sustainability. HP has already decided to hive off its computers business into a separate firm and is looking for a partner. It intends to concentrate on servers, software and services.

Michael is not doing that. But he is banking on Schuckenbrock — and Vaswani — to take services from 13 per cent of the company's revenues to a third or more in less than a decade. Applications, maintenance and development (AMD), apart from BPO, will play a big role in this drive because they are the largest segments of the IT sourcing pie. For instance, top IT firms like TCS, Infosys and Wipro get nearly 60 per cent of their revenues from AMD and BPO. "In industries like financial services and manufacturing, or practices like testing, package implementation, engineering services and IMS, Dell can corner a bigger share. My mandate is to make this happen," says Vaswani.

The Realisation
Dell is altering its DNA, which is built around selling hardware to customers and businesses. Dell Computers, eponymously named after its founder, started life in Michael's dormitory room at the University of Texas in 1984. By eliminating the distributors and the retailers, Dell shipped personal computers (PCs) directly to the buyer at least cost, which made it the world's largest PC vendor by the late 1990s. It also made Michael a billionaire several times over. His current wealth is estimated at over $15 billion.

In the 1990s, the global PC industry went through consolidation. Following brutal competition and low margins, IBM — the creator of the PC — sold its computing business to Chinese company Lenovo. Hewlett Packard bought Compaq and Taiwan's Acer bought Gateway. Through this churn, Dell held its ground. It even leveraged its strength in PCs to make a dent in the entry-level server market. In 2004, Michael relinquished the title of CEO and took on the mantle of chairman. It was a disastrous move. Especially since the technology market was undergoing major changes. First, HP leapfrogged due to the Compaq acquisition to overtake Dell, a position Dell is yet to regain. More importantly, hardware got commoditised.

While IBM was smart enough to spot this trend early on and started bulking up on services through acquisitions, Dell was slow. In 2007, Michael was forced to return as the CEO.

From Hardware To Services
Michael admits that the direct-to-buyer model is not enough: "Value has moved from hardware to software, and now to services." To catch up, he has been on a buying spree in the past 18 months. He has spent more than $4 billion on 11 major acquisitions, including SecureWorks (security software), Force 10 (network portfolio), Compellant (storage) and Boomi (cloud offering). The biggest, of course, was Perot Systems, bought for $3.9 billion two years ago.
Fred Girron, vice-president and principal analyst at Forrester Research, says that Dell realises that the PC market, especially in the developed world, will contract in the near future due to emergence of new form factors such as tablets and smartphones. "That is why they have been trying to transform into a solutions player by offering software and services."

Dell's rivals in services (IBM, Accenture and Capgemini) have decades of expertise. Indian IT players such as TCS, Infosys, Wipro and HCL  offer compelling value propositions. For both Dell and HP, services will be a mighty challenge as they need to disrupt to succeed.

"Because of the hardware it (Dell) sells, it might have a relationship with enterprises. But unless it can build a differentiated model in services, it will be challenging," says an Indian IT major's CEO. Vaswani, too, emphasises on the strong CXO relationships that Dell has. But the challenge is cross-selling applications, BPO and consulting services. As a fallout of Dell pushing into storage and services, its long-standing relationship with the world's largest independent storage company EMC has fallen apart.

Dell intends to differentiate itself in three ways: focus on mid-market segment; offer open, scalable and affordable solutions; and offer solutions around intellectual property and platforms so that it can provide non-linear growth where revenue is not necessarily linked to head count.

Vaswani spends 15 days a month at Round Rock Texas, Dell's global headquarters, or on the road drumming up business. The other 15 days are spent in India, which gives him a perpetual jet lagged look. His mandate is to grow segments such as package implementation, infrastructure management, manufacturing, distribution and logistics, as well as financial services. Thanks to the Perot acquisition, Dell is now a leading player in healthcare and government business, especially in the critical US market.

But it will not be easy, says Seepij Gupta, senior analyst with Forrester Research. Headwinds in the global services market are in the same direction. MNCs and Indian IT services firms are adopting variants of the same strategy.

The Critical India Leg
Like many MNCs such as IBM, Accenture and Capgemini, Dell India's employee strength of 24,500 today constitutes about a quarter of the company's global workforce. But the India revenues, which are expected to touch $2 billion this year (about Rs 9,800 crore), are barely 2 per cent of global revenues. With Vaswani at the helm, Michael is betting that India operations will play the most critical role in Dell's emergence as a global solutions player.

GANESH LAKSHMINARAYANAN, president and MD, Dell India, and head of global consumer services

"Success in the domestic market, and India emerging as a key resource has vindicated (Michael Dell's) stance."

MAHESH BHALLA, executive director and general manager, consumer, small and medium business, Dell India

"The results might be getting reflected now but we have been laying the foundation for a while."

S. RAJENDRAN, chief marketing officer, Acer India

"Dell's focus on India as a growth market has helped. However, it is also a fact that they have outspent competition."

Vaswani's India charge is being aided by Ganesh Lakshminarayanan, a taciturn guy given to speaking in a slow drawl, who is president and managing director of Dell India (apart from being global consumer services head). Lakshminarayanan set up Dell's India operations as a BPO outfit in 1999. "It was Michael himself who wanted us to have a presence in India, which had opened up and was growing fast." Lakshminarayanan had conservatively projected 1,000 employees in the first three years, and ended up with 10,000 in five years.
But all that was in the backend. In the marketplace, Dell made half-hearted attempts at cracking the India PC market hoping its ‘Direct from Dell' strategy would work. It did not. Buyers wanted to touch and feel the product because unlike the US, where the PCs would cost 10-15 per cent of a buyer's monthly income, in India, it was a couple of months' pay. Lead times for closing the deals were far longer.

Moreover, arch rival HP was well entrenched with showrooms and a vast channel network. IBM, which had re-entered India in 1992, also had a strong and well-dispersed base, which it bequeathed to Lenovo. Price warrior Acer, which entered along with Dell, was also off to a good start. Lakshminarayanan says that while Dell might not have been successful in the first phase, it reversed its strategy in the second phase. In 2007-08, Dell set up franchise stores for deeper penetration into the market, and a manufacturing unit at Sriperembudur to offer competitive prices. The moves paid off. In the first quarter of 2011, Dell dethroned HP as the market leader in India with 17.9 per cent marketshare vis a vis HP's 12.7 per cent. Even though India is barely a 10 million units-a-year PC market against 76 million sold in the US, it is among the last big markets left with just one in 25 people having any kind of a PC.

It has usually been a five-way fight between HP, Acer, Dell, Lenovo and HCL, with a plethora of other brands, including the likes of Asus and Wipro and regional players like Amar having marginal presence.

Vishal Tripathi, prinicpal research analyst at Gartner Research, points out that the ability to woo the Indian consumer was key to leadership. "In markets like the US, Dell is seen as a utilitarian, value-for-money brand. But the company was successful in positioning itself as an aspirational, premium brand in India, especially in the consumer segment. Also, HP messed up its channel strategy, which helped Dell's cause."

"This Is A PC-Plus Era Rather Than A Post-PC Era"
Michael Saul Dell, 46, redefined the PC industry in 1984 by sell-ing directly to customers.  Now, as he tells Venkatesha Babu, he is keen to move away from being a low-cost box-pusher to a solutions firm.


Is the PC industry dying?
This year alone, globally about 440 million PCs will be sold. While the smartphone and tablet category has risen significantly, the PC is not going to disappear, at least not in the near future. When a person buys a smartphone, it is not as a substitute to the PC. In India and several other developing markets, the PC market is underpenetrated. I think (the market) can be described as a PC-plus rather
than a post-PC era.

What do you make of HP's plans to sell its PC business?
This is an incredible opportunity for Dell. (HP) customers are concerned and confused. We have been talking to them and our channel partners.

What is Suresh Vaswani's mandate ?
Suresh wears two hats — one would be to grow our services business, and the second as the Dell India chairman. We have built a very good business in India where we have become No. 1 (in PC market). Our resources there are fantastic and key to our global success.

What is the strategy behind the recent acquisitions?
The acquisitions — in datacentre, storage, security or services — have a couple of common themes. Over 90 per cent of the engineers being hired are in software. They fit into the overall theme of us being a solutions company. We have more than $16 billion in cash, and depending on opportunities, we will use it appropriately.

Mahesh Bhalla, executive director and general manager of consumer, small and medium business segment of Dell India, says, "The results might be getting reflected now, but we have been laying the foundation for a while."
Acer, the new No. 2 in India, has relegated HP to third place in the second quarter of 2011. S. Rajendran, chief marketing officer of Acer India, says, "Dell's focus on India as a growth market has helped. However, it is also a fact that they have outspent competition." But Bhalla rejects the idea that they have bought temporary market share through advertising: "That is not a sustainable strategy; we do not believe in it."

In the entry-level Blade server market (x86 segment) Dell is behind HP and IBM in volumes, according to IDC. In storage, Dell is at No. 5. In the domestic services market, Vaswani admits, the company has a way to go. So, in the third phase of growth, the company hopes to move beyond PCs to emerge as the overall market leader. Remember, Vaswani has a point or two to prove to his old mentor at Wipro — Azim Premji. And there is no better way of doing that than making Dell services transform Dell Computers globally into a solutions company.