Dell: Making the Move from Selling PCs to Selling Services

Dell’s announcement earlier this week that it planned to buy Perot Systems, a provider of information technology services, raises questions as to just how effective this move will be in getting Dell away from its reliance on lower-margin personal computer sales.

Both Hewlett-Packard and IBM have already moved into the service area, “recognizing that profit margins and opportunities for growth in selling products are limited,” says Wharton operations and information management professor Morris A. Cohen. “Product sales are very much driven by the business cycle, so you have a variation in sales volume” depending on the health of the economy. “When you sell services — including after-sales service, customer support and so forth — the business tends to be more stable. Companies that have moved into expanding their service offerings, especially during this recent downturn, have discovered that it acts as a buffer and provides a stable high-margin source of revenue.”

A significant challenge for Dell is that the two pillars of its business model — supply chain efficiency and direct build-to-order sales — don't provide the advantage they once did. In addition, Dell hasn't historically targeted its products to consumers — a segment that has generated most of the growth and innovation in the technology industry in recent years. Finally, Dell failed to invest in services the same way that IBM and other competitors did. “The decision to acquire Perot Systems is a recognition that the company has to move into services. They are trying to do this quickly by acquiring a company that does only services,” says Cohen.

The downside to this move, he adds, is that Dell “does not have a very good reputation for delivering service…. To be a service-oriented company as opposed to a manufacturing company is a very different mindset. The big question is whether Dell will be able to integrate Perot and leverage this acquisition, or whether this will just be something off to the side that won’t be fully absorbed.” On the other hand, he says, “Perot Systems has been around for a long time and has successfully carved out market share, which they have been able to protect. With Dell in the mix now, [the combined company] will be a more formidable competitor.”

Dell, based in Round Rock, Tex., expects the $3.9 billion deal to be completed in January 2010. Perot Systems, based in Plano, Tex., and founded in 1988 by H. Ross Perot, serves clients mainly in the health care and government industries, followed by manufacturing, banking and insurance.

For earlier Knowledge at Wharton articles on Dell, See:

Can Dell's Turnaround Strategy Keep HP at Bay?

Michael Dell: Still Betting on the Future of Online Commerce and Supply Chain Efficiencies

'Dude, You Need a CEO': The Return of Michael Dell