PC Makers’ Unrequited Love Tue 29 Sep 09

Why Dell and Xerox are going after services companies.

Recently hardware firms Dell, HP and Xerox made a flurry of announcements about combining selling hardware and providing technology consulting services.  Dell said it would acquire Perot Systems for $3.9 billion. HP's announced it will re-brand consulting firm Electronic Data Systems as HP Enterprise Services. Not to be outdone, Xerox said this week that it’s buying Affiliated Computer Services (ACS) for $6.4 billion.

There may be some sound logic behind the Dell and HP moves, but frankly I just don't see it. Judging from how the stock market reacted to Dell's announcement, I may not be alone. Xerox's move does however present an interesting opportunity.

The Xerox acquisition has the right elements to be successful. ACS is a business process outsourcing (BPO) and IT services firm, but almost 80% of its revenue is from BPO.  “By combining Xerox's strengths in document technology with ACS's expertise in managing and automating work processes, we’re creating a new class of solution provider," Xerox CEO Ursula Burns said in a company announcement. 

Although some may argue that this is a tenuous linkage, I think it makes some sense.  Whether or not they succeed is more a matter of execution than strategy -- which is what I believe is missing from the Dell and HP moves.

Both Dell and Perot are fine companies.  It's just that I don't see what combining them does to increase value to their customers or to necessarily do to increase their earnings.

In Dell's press release announcing the deal the company made a number of assertions which only raise skeptical questions. The first: "Dell and Perot Systems share several key characteristics and our products, services and structures are overwhelmingly complementary."

Does this mean Dell intend to have its consultant push projects that will require more servers and PCs? Will the hardware salesmen suggest customers need consultants to install and set it up properly?  I certainly hope not.  Most customers won't appreciate firms with a hidden agenda making recommendations intended to get them to purchase more hardware or hire their consultants.

Although the hardware and consulting groups may share the same customer base, the people they sell to, the way they sell, and the type of transaction are all different. 

Another assertion from the Dell release: "The [two companies] have similarly strong, relationship-based business cultures."

So what?  Why should I care, as an investor or a customer? What's in it for me? These relationships are based on trust, and if they violate that trust, there goes the relationship. While both may have a relationship-based culture, I think in most cases they are different. The hardware side is based on providing quality, low-cost equipment quickly while the consulting is based upon expertise and trusted advisor status.

A third assertion: "People in both organizations are recognized for helping customers thrive by using IT for greater effectiveness and productivity." Again I have to ask, so what?  How does combining them increase that?  The deal doesn't necessarily detract from this, but it sure doesn't seem to improve on it either.

And yet another assertion: "The combination also provides some compelling opportunities for improved efficiency, which will benefit our customers even further."

And those are? I just don't see a lot of synergy here, other than some back office operations (and even that may be limited) -- and this is hardly a good reason to do the deal.  As far as benefiting their customers with no particular synergy other than the back office consolidation, I only see the potential of corresponding reduced prices -- which I doubt will happen.

Having gone down this same path a year ago when they bought EDS, HP is now initiating a rather strange re-branding by re-naming EDS as HP Enterprise Services.  HP states, "Today we are combining the strong services brand equity that EDS has built over the last 47 years with HP’s technology leadership to become the leading IT services provider."

It seems like they are squandering their brand by dumping the EDS brand.  To be sure, the full name, Electronic Data Systems seems a little dated, but it is a known brand, as is EDS.  I can't imagine IBM changing its name just because it stands for an equally dated name, "International Business Machines".  IBM did re-brand PWC Consulting when IBM purchased it, but that was part of an absorption into the existing IBM Global Services. It also avoided confusion with PWC's management consulting services.

Buying Perot or EDS may in itself not be a bad investment. However, I don't think investors or customers expect or want Dell or HP to be merely investment portfolio managers.  In these days of $9.99 stock trades, we're happy to be our own portfolio managers. We want more and, sadly, the "more" seems to be missing in the Dell and HP moves.  While these changes may be ego-gratifying to those involved, it is not clear what the true long-term benefit will be.

Mike Schaffner directs information technology for the Valve and Measurement Group of Cameron in Houston and aims to infuse a business-based approach to IT management. He also blogs regularly at Beyond Blinking Lights and Acronyms and you can follow him on Twitter at mikeschaffner.

This article is also posted on Forbes.com.  Feel free to join in the discussion either on this site or at Forbes.com

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