Beyond the tipping point

Doug Woodburn

Speaking exclusively to CRN, Michael Dell explains why the channel will soon be generating half of Dell's business

One-time channel tormentor Michael Dell met up with UK partners and CRN earlier this month to underline how the channel remains an integral and growing part of the formerly direct-selling vendor's business.

Four years after its formal channel entrance through PartnerDirect, Dell now generates close to a third of its sales through partners.

Speaking to CRN as he stopped off in London on a whistlestop tour of Europe, the Texan said that figure is "well on its way" to becoming a 50-50 split.

Dell's channel odyssey has not been plain sailing. Perhaps unsurprisingly, its early engagement with partners was dogged by accusations of conflict with Dell's direct teams. A minority even harboured suspicions that Dell would ditch the channel once it had secured their customer details.

Those suspicions proved unfounded. Since then, Dell has introduced "compensation neutrality" for its direct sales teams and ploughed vast sums into building a comprehensive partner portal featuring deal registration. It has also strengthened its partner base through acquisition, snapping up a string of channel-centric enterprise vendors.

Dell told CRN the channel is now in the very fabric of the company. "Today, our channel business is not billions of dollars, it is tens of billions of dollars, so, yeah, we are fully converted and spreading the religion far and wide," he said.

"Because it is such a substantial and fast-growing part of our business, we have altered the core of the company itself to become channel-centric. We don't think about it as a second thought. It is integrated into everything we are doing - every new offering and capability has partners in mind."

The vendor is in the process of setting up a European bank licence for Dell Financial Services, which it is rolling out globally. "That's an offering that will be critical for our partners to extend financing to their end customers," explained Dell.

Humble beginnings
The man who is 44th on Forbes' Rich List started Dell in 1984 as a first-year college student on the back of a $1,000 loan from his parents. Initially supplying PC accessories, his firm has grown into a $62bn turnover behemoth with a technology portfolio spanning PCs, printers, servers and, latterly, storage, networking software, systems management and services.

Dell kicked off an M&A run in 2007 with what is widely regarded as one of the industry's most well-timed acquisitions in the form of virtualised storage specialist EqualLogic. More recent conquests such as Compellent and Force10 have thrust it further into the datacentre, which Dell said plays into its partners' hands.

"In complex areas such as datacentre, security, virtualisation, storage and networking, partners play a big role in designing, architecting and implementing those solutions," he said.

But with the datacentre now the firm's clear focus, does Dell plan to ditch the business on which he built his fortunes?

Absolutely not, responded Dell, as he drew a clear line between his firm's strategy and that of arch-foe HP. "If you want to figure out what the implications [of HP's announcements] are, it's really easy to ask partners," he said. "They'll tell you very quickly. It's hard to see how it's not a great thing for us. We believe the client device continues to be very important and are fully committed to providing a broad range of solutions from the client devices to the datacentre and beyond."

Dell waved off suggestions that the PC space is no longer attractive from a margin perspective.

"You have to look at what is going on with our margins," he said. "In the last several quarters, we've had a pretty dramatic increase in our margins. Our EPS in the last four quarters are up 83 per cent versus the prior year. In the first half of this year, we earned operating income of $2.7bn - that's a record for Dell.

"We are very happy with the client business and also happy with our growth in servers, storage, software and beyond. We have a supply chain and an ability to provide those essential business-critical client devices, and can earn a healthy profit doing it."

Dell refuses to indulge suggestions that the tablet will oust the PC as the dominant client form factor, predicting instead that the market will continue to conform to a three-device rule.

"It's still pretty early in the context of how the tablet market is going to develop," he said. "Estimates of how many tablets will be sold this year range from 40-50 million: 440 million PCs will be sold this year and the install base is 1.4 billion. Gartner says there will be two billion in 2014. While the tablet is an exciting device, it is an additional device as opposed to a replacement for something else."

But Dell said the client market will evolve.

"The interesting question is what new devices will there be in the future?" he said. "If you followed the Microsoft Build Conference you heard about Windows tablets and Windows 8. We think there will be a lot of interesting new form factors where they might be called tablets or laptops - I don't care which. Some will be really light and some will have more features. If the industry is successful, we will see these hybrid devices bridge the gap."

Schmooze operator
Dell was in London to schmooze UK corporate customers, but the channel was as much a part of his agenda as he held a roundtable with eight top partners.

Andrew Henderson, commercial director at Lanway (pictured below, fifth from left), compared Dell's enthusiastic demeanour with that of a boy in a sweet shop. "It was phenomenal to sit next to a guy who has shaped the world we live in and built a business of that size," said Henderson. "The thing that struck me was how an industry veteran could be so enthusiastic, passionate and focused on his business. I thought he would be more reserved."

Lee Ganly, chief information officer of ADA (second left), and Stuart Rae, managing director of Nviron (fourth from left), both found the Texan "refreshingly unassuming" for the founder and chief executive of a company ranked 41st in the Fortune 500 list.

"He was very humble and very sharp," said Ganly. "He could go from strategy to detail in a heartbeat."

Rae said: "He was very credible, technically knowledgeable about the business and commercially aware. His key message was that Dell is genuinely committed to the channel as it's a serious part of its business now."

All three were generally upbeat about their experience of partnering with Dell.
Rae said: "I think Dell has it about right. If there's ever a dispute over a single deal, it normally comes down on the side of the reseller. It works both ways and we have to be pragmatic about who holds the business relationship."

Ganly agreed: "We appreciate there are global named accounts Dell has worked hard on and with whom a global procurement strategy has been negotiated. We are happy to be grown up about it and there still might be skills where we are needed, such as professional services. We have excellent access to the commercial and technical senior executive team."

Henderson admitted Dell's relationship with the channel will "never be perfect", but said the more that resellers put into its collaborative selling model, the more they will get out.

"Dell's senior management team has bought into it, but there are some obstacles to get account executives to trust us enough to partner and collaborate," he said.
Dell's acquisition runrate is about eight a year, and Rae urged the vendor to continue splashing the cash.

"It gives us a one-stop-shop for new opportunities," he said. "It means we don't have to go round and identify new companies as they are coming to us via a single channel. I hope Dell continues to make interesting acquisitions that hit the right technology sweet spots and brings them down to the channel as quickly as possible."

Dell confirmed his company would continue on the acquisition path, but declined to offer many hints.

"We find that if we announce them before we do them, the price goes up a lot," he joked. "But if you look at the last 12, they have all been in fairly predictable areas such as datacentres, storage, servers, networking, security, software as a service, cloud, systems management and services."

Dell concluded: "We think we are in a great position to continue to grow with our channel partners and welcome the opportunity to sign up some new ones. The interest level and the activity in the past few weeks has been heightened."

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