Dell Buys Perot Systems: The Hidden Benefits

What a services unit gives you is higher customer loyalty and, assuming you do it right, a hedge against bad years. What it takes away is some of your agility (it adds size) and rapid financial performance (services typically don’t move up or down quickly). In a down market, a services unit can substantially slow revenue erosion; you see that most strongly in HP’s recent financial results, which emphasize the benefits of the EDS acquisition.

Services organizations provide some additional benefits, ranging from better account control to better market intelligence for the segment of the market they occupy. Let’s start off with this aspect of services because, I expect, others will be covering other aspects of this Dell-Perot Systems merger.

Market Benefits

Services organizations span a large number of companies and look at the market differently than a hardware vendor. Their success isn’t based on selling the deal but on creating and maintaining a very deep relationship with their clients. They would rather trade off losing a hardware sale, even in places like HP and IBM, than on losing the trust of the client. While they tend to favor their own company's goods and services, they will generally avoid sacrificing the relationship to do so. This means that they are heavily motivated to assure the hardware and software products they use in engagements do perform as advertised and have no interest in covering up another division’s mistakes. In fact, they are effectively compensated to catch these mistakes and correct them before their customers ever see them.

They typically report up through the office of the CEO and in this role can play a very strong quality assurance function because they can very credibly point out where a unit is not performing or is creating problems, allowing for more timely executive corrective action. Companies without strong services units have to depend on Quality Control organizations, which generally don’t report up high enough and are often forced to play political games to protect the careers of the employees in them. Employees in services organizations tend to remain there, which helps assure their quality assurance role.

Customer Loyalty

One of the interesting studies I did a few years ago was to look at Microsoft and customer loyalty and trust. What was fascinating was that the companies that engaged heavily with Microsoft’s services unit were vastly more loyal and trusting than those that were not. Similar work done in Microsoft resulted in the standard bundling of services into its enterprise agreements because happy customers are vastly more likely to renew and are more lucrative for other products than unhappy ones.

Services connect the customer to the vendor more closely and give the customer more voice while protecting the customer better from vendor decisions. This is because what results is more of a partnership between the firm and the company they are working with. Unlike a typical vendor sale, which may occur once every several years in the case of servers or PCs, a services engagement remains constant (when it isn’t broken) throughout the contract period. Complaints and problems tend to get fast-tracked through the services organization, which tends to be more intimate with the bureaucracy existing in any company.

When it works right, vendor services are like buying a premium relationship, much like the higher-quality relationship you get when you buy a Lexus over a Toyota. One of the highest costs any company incurs is replacing lost customers. Lost customers are very difficult to recapture and tend not to come back easily. While I was at IBM, we used a five-year rule as a working model. In other words, once a customer was lost it generally took about five years of effort (read cost without revenue) to get them back. Once the deal is completed (figure around 24 months), Perot Systems should improve the relationships many of you have with Dell significantly. This assumes success, of course.

Wrapping Up: Services' Hidden Benefits

Mergers are problematic because the skills necessary to do one well generally aren’t in the companies that do them occasionally. Dell is such a company, which does point to the risk here. However, there are benefits to a services organization in terms of market intelligence and customer loyalty that make the risks worth it. If this is successful, in about 24 months many should benefit from the result. To get these benefits, Dell will need to learn from the somewhat similar EDS/HP merger that just completed and make sure Services gets the executive focus it needs to make these benefits work. If they don’t have a seat at the executive table or aren’t vocal, these benefits will remain hidden even to Dell. Looking at the initial announced structure, the expected beneficial outcome is more likely.