Dell's acquisition of Perot Systems is a good move but won't be enough

Together
with some of my Forrester analyst colleagues earlier today I listened into the
conference call hosted by executives of both - 
Dell and Perot Systems - to explain the rationale behind Dell's
announcement to buy Perot for US$ 3.9 billion cash. There has been some
speculation lately about Dell possibly making such a move, but the timing and
the target they finally picked came as a bit of a surprise to everyone. The speculation was rooted in some of the statements made by Steve
Schuckenbrock, President of Large Enterprise and Services at Dell, earlier this
year where he pronounced that Dell would get much more serious around the
services business. Now, you would of course expect nothing less from someone
like Steve - after all he has spend much of his professional career prior to
Dell as a top executive in the services industry (with EDS and The Feld Group).
To this end Steve and his team finally delivered on the expectation, even more
so as this had not been the first time that Dell promised a stronger emphasis on
services.

So what is
the rationale behind this move? Since its computing equipment business got
impacted negatively by the economic downturn in recent months, Dell has been
exploring alternative growth areas. While it has been slowly building up its
own services capabilities over the last two years, up to this point Dell’s
services division lagged the size and scalability to tackle the existing market
opportunities across a wider set of customer segments and geographies. So the
acquisition of a sizable and reputable services player was definitely in order.

What will
Dell get from Perot? Perot is not only a sizable but - what's even more
important these days - also financially healthy.
Although the company in the past has been through various re-inventions itself,
Perot seems to manage the vagaries and risks associated with the recession much
better than some of its immediate competitors. The executive team under the
guidance of Peter Altabef, current CEO of Perot and future head of services at
Dell, has done a fine job in establishing a solid sales pipeline and services backlog
over the recent years. I guess you could say that the level of conservatism
often associated with Perot's corporate culture and management style has paid
strong dividends (you simply can't argue with a firm that has audited no net
debt on its balance sheet).

Perot's services portfolio offers a nice mix of
different services that reach well beyond Dell’s existing IT support services. Service
margins are healthy and Perot’s footprint in the public sector and healthcare
arena offers some nice growth momentum in times where other verticals are
suffering. Perot’s
customer base has grown increasingly global in recent years but there are still
some weak spots across Europe and Asia (frankly, there is also an image issue associated with Perot's Texas-based culture and heritage that some European customers in particular find off-putting - although as a Bavarian myself I find this totally unjustified).
The company has also managed to expand its offshore resource base significantly allowing the company to
compete more effectively against its India-based rivals.

Overall Perot enjoys a high level of
customer satisfaction with its enterprise clients thanks to its
customer-centric culture which distinguishes the firm particularly from some of
its larger services rivals. For Dell this will provide the much needed change
agent to move the company from its product-orientated mindset to a corporate
culture that focuses much more on solving the customers’ needs and problems.
While in the short term the difference in corporate cultures is surely going to
create some integration challenges, in the long term the cultural change could
very well provide the biggest strategic value the acquisition has for Dell.

So will this
be enough? Surely not! As we heard this morning on the analyst call the
combined services business of Perot and Dell will reach some US$ 8 billion
annually. That is sizable, surely, but just about as much as HP produces in
services in just one quarter alone. Getting serious around services means more
than just making one medium sized acquisition. It means building and maintaining
the scalability and footprint to drive profitable growth across multiple
customer segments and geographies so that you can effectively compete with the
likes of IBM, HP or Accenture.

Although
the integration challenges are not as huge as in the case of HP/ EDS (not least
because of the relatively smaller size of Perot) there are still open questions
around how the combination will play out from an organizational as well as
cultural perspective. Besides the fact that both parties are based in Texas
(which came across as one of the factors Dell and Perot see as a positive element
to leverage) there is not much that they actually have in common. Revenue and
incentives models are widely different as is the nature of their existing
enterprise customer relationships. While the combined services entity will be
run by Perot executives the key question is whether Perot will be able to
retain the key personnel it has running and delivering existing client
engagements in the field.

Finding the
right balance between service standardization and customization is going to be another big
issue. As they outlined in various briefings in the past, Perot and Dell share
a vision for building and providing more modular services to their clients.
However, the key challenge will be to find and maintain the right balance
between standardized cost-efficient services and the more customized value add
solutions. In particular in the vertical segments that Perot currently covers
through a more industry-led solution approach the focus on standards and
modules could start to raise some client concerns.

But the big
challenge pertains to changing the overall value proposition and brand
perception of Dell. Dell’s current positioning is still that of a product
company that provides limited business value beyond the production and delivery
of cost efficient computing hardware and resources. While there is a lot to
gain from Perot’s existing positioning the challenge will be to do so by
creating a truly consistent and integrated image of the new Dell. The question
then quickly becomes whether this is about following in the shoes of IBM and/
or HP or whether Dell has something really new to offer here.
That is something Dell has failed to articulate so far and so the jury is still out on this one.

Comments

re: Dell's acquisition of Perot Systems is a good move but won'

One more consideration is that the corporate culture at Dell is a far cry from the positive corporate culture at Perot Systems. While the acquiring company leaves the acquired management in place, for a while, the biggest mistake Dell can make will be to impose it's dysfunctional management behavior upon Perot and try to "fix" what's not broken. Dell could learn a great deal from its more experienced, and mature, new BFF.