Dell and Perot: What this means

Look at more than the upside to any acquisition

Dell and Perot are getting married. This acquisition puts approximately 23,000 Perot services employees in with Dell. (see Larry Dignan's detailed post on the transaction ) (here's an InfoWorld post, too)

From the macro view, here are my observations:

1) This deal is the latest where a hardware vendor moves up the technology stack and acquires a major IT services vendor. HP did it with EDS. IBM did it with PWC. Services margins can be solid but not all services and services firms deliver great margins. In fact, for sheer gross, gross margins look at the margins coming from application software vendors.

2) Interestingly, some software vendors are starting to move up and down the technology stack, too. Oracle’s acquisition of Sun is one example. What's driving acquisitions appears to be this: many tech sectors are experiencing slow to no growth. They need to get hitched to players in more robust spaces. On-premise vendors of software are in trouble. SaaS vendors are not. Some BPO services are not growing.

3) Competing on hardware alone is hard and low-margin work. With more technology going to the cloud, the need for on-premise data center gear may have peaked for a while. If a hardware vendor is to grow its top line revenue, it needs to move into the high growth spaces.

4) Some services firms are more interesting deal partners than others. The late BearingPoint wasn’t huge yet it could not attract a buyer for the whole enterprise during its last days. BearingPoint was carved up into pieces. Some services firms aren’t ever considered for an acquisition. Accenture, my old alma mater, may be too big to be acquired. Others have poor fitting cultures. Others have reputation damage. Others still are priced at too great of a premium to be acquired. Cognizant (full disclosure: I own a few shares of this firm) and some of the Indian-based services firms are not bargain priced at this time.

5) Managing services firms is different from managing a manufacturing concern. The language of services (e.g., bench time, utilization, target chargeability, unplanned fee adjustments, etc.) has no parallel in manufacturing circles and vice versa.

For Dell, my advice is:

1) Find/Use great talent to run this part of your firm. Get the best services (not hardware) executives you can for Perot.

2) Get realistic on the potential synergies this union will spawn. Use the executive contacts that Perot personnel have to extend your presence in the accounts. Use Perot people to work the upper levels of client management in the existing Dell customer base. But, don’t expect your Dell people to sell Perot services and Perot people to sell servers.

3) Culture is a big thing in a services firm. Understand Perot thoroughly before you start to change it. Hopefully, this was a part of your due diligence but don’t be surprised if it comes back to bite you repeatedly. People-centric businesses are really touchy about this.

4) Understand that every sales call Perot people make today and in the near future will be tougher as a result of this deal. Your competitors will feed clients and prospects a lot of questions that may embarrass or stymie the Perot sales professionals. Competitors will position themselves as more stable, more secure, etc. Sure, this happens in lots of acquisitions but in a services deal, it really stings when the customer is questioning whether any of the people in a proposal will still be with the combined firm in the next few days. Dell must provide absolute certainty to the employment, proposals, staffing, etc. of the Perot people or business development will suffer. Dell will also need to communicate this message of stability publicly to all prospects and customers.

5) Watch for brain drain. The best and brightest don’t like the apple cart getting turned over. They’ve invested a lot of time, energy, etc. into getting promoted within Perot. Now that Dell is the new owner, the best and brightest are going to question where their career is (or isn’t) going. There’s a reason service firm acquisitions often get low multiples: unlike capital, machinery and patents, people leave these firms. And, after an acquisition, they can leave in great numbers. If Dell doesn’t move very fast, defections will occur and Dell with end up with a services firm that lacks many of its best people and now appears to be an over-priced acquisition with lessened revenue prospects.

6) Sell the growth strategy internally and externally. Services people want to be part of growing (not volatile, stagnant or declining) firms. None of them want to be the last people out. Make sure you have a compelling vision for this part of your business and relentlessly communicate it to everyone there.

7) Understand the impact of this deal on the brand of both Dell and Perot. Both firms have good name recognition but a brand is that thing people instantly recall about a name or logo. IBM created a new entity for its services business while appending the IBM moniker to it. Ask yourself, what does Dell want us to think of when we hear of its services unit? Is it value, excellence, outsourcing, etc? I doubt its hardware sales.

Good luck Dell