Channel hopping

Dell's relationship with the channel is not proving as simple as its 'direct vendor' branding suggests

The Dell story is a modern-day legend. Michael Dell started his company in 1984 with a simple business idea: bypass the channel and sell directly to customers, then reduce costs further by building products to order.

Twenty years on he is running a company with a turnover of $40bn - not bad for a business idea that fits on the back of a fag packet.

So how does a vendor that has made it big out of going direct feel about doing business with resellers? And how do resellers feel about working with Dell?

At Dell's recent pan-European press conference announcing the new range of blade servers, CRN asked Kevin Rollins, Dell chief executive, what is his message to UK resellers.

His response was simple: "We believe in selling direct, but some accounts want us to work with traditional partners; some have a fulfilment house they want to keep working with. We don't think that's a good idea, but we will work with that third party if that is what the customer wants."

He went on to emphasise the role of the customer in driving any channel business. "Working with the channel is a customer-nominated option. I would say at the SME level we are 100 per cent direct, but for other customers we believe in what we call 'virtual integration'.

" We are often the prime contractor and we bring in other players, some resellers for example are our service providers and have a warm relationship with us. But the key is we own the relationship with the customer and we subcontract to others," Rollins said.

Since that comment, Dell's press office has added the following statement: "A small portion of Dell's business moves through the channel. We consider the channel to be a customer set, not a distribution mechanism. VARs receive similar offers and promotions to Dell customers and we do not run a specific VAR programme.

"While our VAR business has evolved and grown Dell is committed to selling direct. It's fundamental to who we are, how we relate to our customers and how we do business.

"We work with VARs that truly add value and are not just reselling a system; these VARs either have end-users that prefer the Dell brand or are typically unhappy doing business with our competition and come to Dell for the best value."

So as Dell continues its meteoric rise, is it increasingly developing a more pragmatic approach to the channel?

For competitors such as Fujitsu Siemens it is a matter of Dell facing up to the strengths of the channel. Ian Snadden, director of channel and SME sales at Fujitsu Siemens, comments: "It's not surprising that Dell is beginning to accept the channel has a role to play.

"Over the past few years it has seen enough of its products going through the channel - at its customers' specific request - to know they value the role the channel plays, and can cover for the failings of the direct model."

More importantly, Snadden also believes the channel is covering for any weakness in Dell's distribution system.

"The channel is good at aggregating the complete solution and managing complex roll-outs to multiple sites in line with a project plan. And the channel is good at covering when Dell ships with missing items or part ships," he says.

According to analyst Canalys, Dell has an ad hoc approach to the channel.

"Clearly, a proportion of sales are going through the channel," says Alistair Edmunds, senior analyst at Canalys.

"In some European Union countries it does have a formal programme and there is anecdotal evidence that Dell pays reference fees to resellers, which Dell denies."

Canalys estimates that between five and 10 per cent of UK resellers are currently selling Dell kit.

Edmunds believes that a lot of resellers are tempted to sell Dell kit. But he adds: "It's driven by what a lot of the other vendors are doing. If a reseller takes the service contract on, then Dell is less of a threat.

"It's also driven by customers. About one in four PCs in business are Dell, so some customers say they want to buy Dell but still want the reseller relationship. It's a great business model. It makes a lot of sense, but Dell cannot risk its unique selling point of being direct; it can't be perceived as doing both."

Meanwhile, analyst Quocirca recently polled 213 resellers, asking: "Which IT supplier does your company work with most?" Five per cent of them said Dell.

Bob Tarzey, service director at Quocirca, says the typical profile of those resellers is those selling in the SME sector.

"They are not buying in huge volume, so they are used to small margins. Therefore they are less likely to be losing a good deal with other vendors. Typically they are system integrators, small consultancies and ISVs that focus more on service than hardware, but there is no typical size of company.

"You have to remember Dell has a strong relationship with Microsoft and the small business server is now pre-installed on Dell servers. IBM has only just started doing that."

But perhaps part of the key to understanding Dell's strategy is to look at its approach to service. Analyst Ovum Holway has been looking closely at Dell's service strategy.

"Its model is all about partnerships," says Kate Hanaghan, research analyst at Ovum Holway. "It sets up partnerships and takes responsibility for the supply chain. That's why is is winning large managed services contracts."

Indeed, Dell has just announced a massive five-year contract to supply and manage desktops and network systems to Dutch electronics giant Philips in a deal worth a whopping $700m.

But Hanaghan also believes the approach can get Dell into conflict.

"Mainly, it works through Unisys and Getronics to provide service, but there can be conflicts. For example, Getronics can win business from Unisys but keep Unisys on to service the customer, which is very strange," she says.

"So understandably there is a strong feeling in the support services world of being threatened. You ignore Dell at your peril; it is ramping up [its presence] significantly over the next couple of years and is making no secret of that."

But as can be seen by press coverage in the past few years some of Dell's support has come under sustained attack, notably its services in India. In April this year the company admitted "learning a lesson" and announced cutting back some Indian services.

A Dell representative says: "In most cases Dell's customers don't care where they call or who they speak to. They care about having any issue resolved. Our goal is to resolve issues quickly and we meet that goal with the overwhelming majority of our customers."

Not surprisingly, many resellers are pragmatic when it comes to selling Dell kit. Greg Carlow, managing director of reseller Repton, says it is a matter of facing up to customer demand.

"There are customers who standardise on Dell so you respond to that," he says. "But the trouble is, Dell has no loyalty. We had a customer and Dell made promises, but later on they took the business direct. So they are principally a competitor, but it is seldom black and white in this industry."

But Carlow adds that existing relationships are powerful. "We have spent years hanging on to HP [Hewlett-Packard], so we get attractive prices compared to list. With Dell I can't build a long-term business, so it's less attractive. We all moan about HP, Sun and IBM, but with Dell you just don't know where it's heading."

WStore is more critical. Stewart Hayward, commercial director at WStore, says: "It is a question of trust. We consider ourselves in partnership with the primary manufacturers. We would not be in the strong position that we are in now if we didn't trust our manufacturer partners to support and strengthen the channel.

"Then you have Dell. How many times have we read statements that they have no need for a reseller channel, that they will take services from the channel, or that direct is the only way they are interested in running their business?

"The truth is it probably doesn't need much help selling the product, but like every other manufacturer it needs resellers to support its product. From a resellers' point of view what does Dell give you? A slim margin and the promise that they will try to steal your business in future? Sorry, but we like to trust our partners."

Meanwhile, Tony Ruane, sales and marketing director at VAR RedStor, is more positive. "Dell has done a fantastic job at commoditising product. So we look at Dell kit where we or the customer thinks their kit forms part of the solution," Ruane says.

"It's not about making money out of the sale of the kit; it's about easing the implementation. Sometimes the customer wants Dell kit but prefers to work with a specialist supplier. The fact is the Dell brand is strong and they have a clear message to the upper end of the market."

Dell may never win the hearts and minds of most resellers, but few doubt that it will grow its channel-related business every year. What remains to be seen is how long it can continue to maintain such growth while holding on to its unique direct-to-market brand image.

CONTACTS

Dell (0870) 907 3333
www.dell.co.uk

Fujitsu Siemens (0800) 004 003
www.fujitsu-siemens.co.uk

Hewlett-Packard (020) 7216 0059
www.hp.com/uk

Ramsac (0870) 756 9001
www.ramsac.com

RedStor (0118) 377 6500
www.redstor.com

Repton (020) 8894 9000
www.repton.co.uk

WStore (08700) 113 310
www.wstore.co.uk