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Is Dell the Biggest Loser in the HP/EDS Deal?

 
 
By Jessica Davis  |  Posted 2008-05-23 Print this article Print
 
 
 
 
 
 
 

Dell the longshot? In the week and a half since Hewlett-Packard announced plans to acquire Electronic Data Systems (EDS), observers have diced and sliced the deal in many different ways. One of the big questions looming is this: how will the deal affect Dell? After all, EDS has been a big pipeline for Dell hardware. And Dell has been trying to build out a services business, even hiring away EDS's co-chief operating officer last year to head up that effort.

But will this deal now mean that mean that Dell will lose a huge channel for its hardware? eWEEK's Scott Ferguson points out that Dell has been one of the main suppliers of PCs and other hardware through EDS in big federal contracts such as a 2000 agreement for the U.S. military worth $1.4 billion, a fiscal year when the company reported $31.9 billion in revenue. (In its most recent fiscal year, Dell posted revenue of $61.1 billion, and said that no one customer accounted for more than 10 percent of its sales)

So will EDS now favor HP hardware sales over Dell, effectively shutting down what has been a big channel for Dell in the past?

The answer seems to be no, certainly not in the short term. End-customers who have Dell hardware in place are not going to rip it out tomorrow to install HP equipment. And the sales cycles of companies and governments can stretch to multiple years. And what about the long term?

"It is too early to predict over the long term what will happen between EDS and Dell, although HP has said they will continue to support 'heterogeneous' environments," says Tiffani Bova, a research director at Gartner. "I believe HP will look first to realize cost savings, improve and enhance current offerings and capitalize on the opportunities the two companies have combined in accounts where there is no overlap."

And even if EDS did begin to favor HP equipment over Dell equipment, would it really matter in the long run? The industry has widely acknowledged that computer hardware has reached commodity status, as Ferguson points out in his article. There's just not a lot of profit to be had in it.

That's why both HP and Dell are bolstering their services businesses - HP through the EDS acquisition, and Dell through many smaller acquisitions such as Silverback, Everdream and ASAP Software over the last year. And it's why so many VARs are considering an MSP business model. Still, Dell's services business has a ways to go. In the most recent fiscal year the company reported services revenue of $5.2 billion of the company's total revenue pie of $61.1 billion.

That compares to HP's services revenue of $17 billion and IBM's services revenue of $54 billion in a market that Gartner estimates was worth $740 billion in 2007, Ferguson points out.

But, in spite of its longshot status, Dell knows that services customers are a prize worth pursuing and winning. They are much more profitable and much more entrenched than hardware customers are. And major outsourcing deals like the ones that EDS signs with its clients usually run for seven years, making a fast change over highly unlikely.

Besides, Dell's big services push is all about software-as-a-service (SAAS) offerings, Dell's senior vice president for Global Services, Steve Schuckenbrock, tells eWEEK. Schuckenbrock, the former co-COO at EDS, says Dell is moving away from traditional services offerings such as the ones EDS provides and more towards so-called cloud computing.

And it's early in the game for both these companies. Just last month Dell launched a direct sales pilot program of its SAAS platform - one that it plans to extend to its new channel partners this year as well.

And HP has the massive job of integrating EDS into its operations - something that is likely to take years and come with its own series of headaches - some of them migraines. Remember how challenging it was for HP to integrate its Compaq acquisition?

So for now, the HP versus Dell war race is still at the starting gate. Both companies are looking ahead to the finish line of minimizing their reliance on hardware sales and to grab more of their revenues from services. And this horse race is not over. It's just beginning.

 
 
 
 
 
 
 
 
 
 

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