Dell and the Cost of Cover-Ups

Rob Enderle

Ashlee Vance over at The New York Times is going Medieval on Dell's head this week over some faulty computers that Dell sold between 5 and 10 years ago. Vance and I go back a bit on Dell -- he once accused me of acting as Dell's agent when I went on record in The Economist predicting that Sun would fail due to a lack of a stable strategy. Dell was and is a client of mine, but it has never dictated what I write. However, I concluded that he really didn't like the company because he was going out of his way to make a story about Sun reflect badly on Dell. That still seems a little whacked to me.


Still, when you have a problem like this, it isn't unusual for folks to pound on you for it -- and rightly so. An element of trust exists between a vendor and its customers, and covering up a problem breaches that trust. After this occurred, Michael Dell came out of retirement and cleaned house. It illustrates that covering up problems is not only tactical, it can mean career suicide if you get caught and create image problems for the company even decades later. A lot of people still remember Ford's cover-up of the Pinto problems, GM's attempt to cover up the Corvair safety issues, (which made Ralph Nader), and I doubt there are many in my generation who can look at a Chrysler minivan and not wonder if it is going to eject the occupants.


Let's talk about why covering up problems can be deadly.


Dell Case


The plaintiff's attorneys in the case want to drive Dell to an early large settlement, so they are driving an aggressive campaign to disparage the company by using the evidence they got out of discovery to drive a news cycle. This is both a textbook approach and effectively legal blackmail. However, it doesn't always work because, like blackmail, it can open the company up to other like attacks that bleed the firm dry. The company, as a result, might step away from settlement and choose a path of aggressive defense instead -- and instead of "aggressive," use the word "expensive" as what the strategy really entails.


This is to make sure the company does not appear to be an easy target and that this new problem, being effectively a hostage to a past and now-corrected mistake, goes away. In my experience, it is generally better to use the threat of publicity over actual publicity because, like blackmail, when the actual threat is executed, the information loses value because much of the damage is done.


I should point out that this is one of the reasons I didn't become an attorney -- I had real trouble separating tactics like this from their criminal equivalents.


Now underneath all of this is a real Dell mistake. There was a serious hardware-quality issue with a low bidder that affected most of the PC companies and took about two years to become evident. In my opinion, Dell's leadership at the time was excessively focused on cost, so when it got parts that were inferior, this cost focus led to an escalating attempt to cover up the problem until it became a disaster. This same kind of cascading mistake appears to have resulted in the BP disaster, which might still kill that company.

The Risk of Cover-Ups


This reflects on a problem I ran into a lot when I was an internal auditor, and it was the foundation for one of my first big breaks as an analyst, my five-year forecast for Windows, UNIX, the MacOS, and OS/2. In that piece, I forecast the decline of OS/2 based on my knowledge that IBM had pulled nearly 90 percent of its support and marketing budget, information it had contained inside IBM.


I'd left IBM to join Dataquest (later acquired by the Gartner Group) as an analyst and figured it would be nice to do an accurate OS forecast as opposed to the more typical report showing a rosy future for all that vendors seemed to prefer. Silly me, I thought folks wanted the truth. It made me the most visible technology analyst in the world, nearly got me fired three times, and I got "You will never work in this town again" calls from many of the most powerful vendors.


It became clear that rather than using resources to prevent the declines, they instead were focused on shutting me up. But the forecast proved relatively accurate except for one part and that was that Microsoft -- and I should have seen this coming -- had its own cover-up coming.

Other Examples


When Microsoft launched Windows 95 to iPhone-like crowds, the product had some teething problems. It broke a lot. Microsoft service, because it was trying to contain costs and because it didn't want people (executives) to know that folks were listening to music on hold for hours, closed down the hold lines so that customers just got busy signals. As a result, the most successful launch in Microsoft's history became one if its biggest disasters.


A few years later, it covered up compatibility problems with the Office file system, resulting in a train wreck of a launch, and executive management cleaned house. Most recently, Vista problems were contained and Microsoft cleaned house again.


The point here is that excessive cost containment generally causes people at low levels in a company to try to cover up problems. The problems don't magically go away, and by the time an executive with enough authority to deal with the issue finds out, it is beyond his or her capability, which can be disastrous. Dell's problem didn't have to be a disaster, but it became one because it appears there was a practice at the time of containing bad news.


I should point out that when this happens, people aren't just fired -- their careers in the given industry are pretty much over because they become pariahs. They generally don't realize until too late that they are making career-ending decisions, but when they do, it often motivates them to cover up even more, often taking other employees down with them.


Wrapping Up


Use Dell's problems as an example for several things. First, that problems are best dealt with openly. Cover-ups have excessive risks that generally outweigh the rewards. Also, realize that in today's connected world, it is nearly impossible to cover things up indefinitely. Finally, realize that once a problem like this happens, just fixing it won't make it go away. You need to work on image recovery and have in place a litigation strategy to deal with those who want to profit from your mistake.


Don't compound the problem by being ill-prepared for what comes after. In the end, Dell will pull out of this, but you should try to make sure you don't get into a mess like this in the first place.

Add Comment      Leave a comment on this blog post
Jul 6, 2010 5:18 AM Robert Rosner Robert Rosner  says:


As I read your post - You did not talk about the offending models - IE SX260 and SX270. The company that I worked for replaces so many system boards due to blown caps it was not funny. We finally got Dell to replace them all. But we spend so much time on this issue it was not funny. Where if Dell had done the right thing we would have saved time and money...

Thanks for the Blog


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