Can Dell Software rescue its spiraling hardware sales?

Diana Hwang and Ed Scannell

As competitive pressures relentlessly squeeze profit margins out of Dell's core hardware business, the company realizes its PC and server sales won't guarantee a seat at the IT table for long.

Now, Dell Inc. must become a soup-to-nuts technology supplier with a strong software and services portfolio.

The marketing and sales tail wags the Dell dog. The software team can only do so much.

Former Dell employee

The transformation, however, has been mired in the mud of a bloody, drawn out transition to being a private company, difficulties in integrating its software acquisitions and creating a cohesive narrative for users. These challenges have all been compounded by the resistance from internal factions who want to stay the hardware course, sources close to the company said.

Some analysts believe the long-term survival of the company is at stake if Dell can't make this transformation.

Both HP and Dell are hammering hard on [the issue], and Dell for its part made interesting acquisitions of software companies," said Bob O'Donnell, founder and chief analyst of TECHnalysis Research LLC, Foster City, Calif. "Both those guys are big services companies and [that hasn't] panned out. The reality is, the writing is on the wall for these guys. It is a challenge for them to survive on hardware only."

Dell's metamorphosis leads to layoffs, acquisitions

This transformation started boldly enough with the hiring of long-time IBM executive John Swainson in 2012, who most recently salvaged CA Technologies from sinking into software anonymity, to be president of Dell's new software division. The company quickly added a handful of other proven software executives from companies including Symantec.

With Swainson's high-powered team, coupled with a raft of acquisitions, Dell appeared ready to make the same transformation to a software and services-oriented company that IBM pulled off a couple of decades before.

But there is evidence that Dell's hardware addiction and transition to a private company are having deleterious effects. The company recently laid off several thousand workers associated with a voluntary severance package.

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The layoffs are part of its plan to optimize its business and streamline operations, a company spokesperson said. The company added that it is hiring in strategic areas of the business.

Dell also called reports of up to 15,000 workers being laid off "widely inaccurate," the spokesperson said, declining to provide an accurate number. The company employs 109,000 workers worldwide.

Similarly, Hewlett-Packard (HP) will lay off 34,000 people by the end of 2014 as part of its restructuring plan. And just last week, reports surfaced that IBM, another major vendor whose server hardware business is in decline, may lay off as many as 15,000 workers sometime in the first quarter.

Meanwhile, Dell has been on a buying spree, making acquisitions to fill in its product gaps related to security, cloud, Software as a Service and systems management. Besides Quest Software, the company has snatched up KACE, Sonic Wall, Wyse Technology, Inc., Enstratius, Boomi, Credent and AppAssure, among others.

In an in-depth interview last December with SearchEnterpriseDesktop.com, Swainson said his two priorities are to integrate all the acquisitions and ensure all products are delivered through the right channel. He made it clear that software is the catalyst that will provide Dell users with more value and give Dell higher profit margins.

"Dell's incredible asset is the SMB distribution channel," said Brenon Daly, research director of mergers and acquisitions for New York-based 451 Research Group. He added that growth in the software market has slowed, making it difficult for Dell and its competitors.

Dell's hardware culture hinders transition

Despite the acquisitions of key personnel and software companies, some see the root of Dell's difficulties as something more fundamental.

"Dell doesn't understand how to sell enterprise-level software," said a former Dell employee who requested anonymity. "They brought on the right people who understand software and services. But they quickly found that every time they created opportunities using an integrated software approach, they were forced back to selling individual brands like KACE or Wyse."

On the other hand, 451's Daly thinks Dell's hardware can still pull through the software sales and provide opportunities to the company's bottom line.

Money talks

In its fiscal year 2013 10-K filing, Dell spent $5 billion in acquisitions and for the six months of its last reported fiscal year 2014, the software group reported revenue of $605 million and an operating income loss of $147 million. Dell has attributed the loss to planned research and development and additional sales investments required to take the company forward.

"If you look at the acquisitions that have done well, like KACE, it's an appliance with an add-on subscription-based software," he said. "That is valuable because it's predictable and really sticky. To the extent they can match software and services to a hardware sale is how [Dell] can execute."

Much of the internal resistance comes from long-time marketing and sales executives fearful of losing core hardware customers. After Swainson and his team presented their vision to the company in late 2012, many of the product groups retreated from the new strategy and reverted to promoting individual brands, one source said.

"The marketing and sales tail wags the Dell dog," the former employee said. "The software team can only do so much. To make this business work they need the entire company to shift."  

Dell's internal struggles reflect difficulties many companies encounter as they attempt to change long-ingrained corporate cultures.

"The challenges I've heard about relate to working through the massive reorganizations last year, and integrating all the groups together and making that work," said Steve Brasen, managing research director for Enterprise Management Associates, based in Boulder, Colo. HP and IBM also have similar issues of segmented organizations that need to work together, he added.

"My impression is there has been a natural resistance of change," Brasen said. "It is a positive move from what they're doing [but] people are frustrated. We are changing the way IT works and there is going to be pain."

But Dell's focus on software and services hardly means the company has forgotten about hardware. The company remains number three in PCs and number two in servers. Just last fall the company rolled out new notebooks and tablets and, most recently, has been showing off a 64-bit ARM-based server.

However, increasing pricing pressure has forced competitors such as IBM to sell its low-end x86 servers to Lenovo, and puts the heat on Dell.

"Lenovo will pressure Dell's low-cost value proposition, along with its ability to drive x86 server market share -- which Dell is largely dependent upon for its transition to an end-to-end solution provider," said Krista Macomber, analyst, computing and storage practice, Technology Business Research Inc., based in Hampton, N.H.

In addition, Lenovo now has IBM's converged products such as PureFlex coupled with IBM storage, services and support. That will pressure Dell's ability to expand in growing cloud and big data-focused workloads, Macomber said.

Dell did not provide comment about its transformation challenges.

Dell's collaboration works

Other Dell employees differ in their view of the progress the company has made in its transformation journey. They point to Swainson's mandate of taking a collaborative approach to all acquisitions, which resulted in a cross-functional team spanning all software, services and hardware organizations.

"Before we existed, we'd go to customer briefings with four different definitions of mobility, and technically they didn't integrate," said Neal Foster, executive director Dell Software group during an interview at Dell World in December. "There is a virtual team and folks in each business unit are contributing," he said.

Since this virtual team has started meeting on a biweekly basis, there is a more coordinated approach to the messaging and engineering required to review the products and their roadmaps, Foster said at the time.

For example, the security and management groups have worked together to quickly bring the mobile software tools Dell acquired to market in its new enterprise mobility management suite, said Chris Silva, research director for EMM at Gartner Inc., Stamford, Conn.

Indeed, Dell Software's cross-functional team approach so far seems to be working for IT pros.

"I put a few ideas on the bulletin board in the user voice and KACE is receptive and looks into those," said Jon Scott, desktop administrator for Oregon-based Salem Health, in a recent conversation. He uses the latest version of the KACE 2000.

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