Dell Software chief Swainson talks scale, perception, growth

John Swainson, head of Dell's software unit, has a tall order: Convince the business technology masses that his company is about more than hardware and scale his division.

That challenge is one faced by a few hardware-centric players. Hewlett-Packard is increasingly talking about its software footprint as it applies to its hardware. Dell obviously wants to be about software too much like a mini-IBM. And even Samsung is playing up its software over its obvious hardware, supply chain and scale advantages.

Why the software fuss? Hardware is a tough business that's only going to get tougher amid cloud computing and a breed of C-level executives who see tablets and mobile devices replacing PCs and companies like Amazon Web Services nixing those data center build out plans.

In other words, Swainson (right) and Dell have a lot to navigate once it goes private at some point in a leveraged buyout. On the obvious issue of going private, Swainson said Dell's plan for growing its software unit won't change. He added that he doesn't expect any customer concerns about going private either. "Being private doesn't affect us in the least. The corporate structure of Dell doesn't make a difference on how customers interact with our products or how we develop or sell them, said Swainson.

Here's a recap of my conversation with Swainson:

What's scale for Dell's software unit? Swainson noted that the $1 billion in annual revenue mark is a key tipping point for software companies. Dell's software unit is on an annual run rate of about $1.5 billion and has 6,000 employees courtesy of the Quest Software acquisition. The Quest deal was all about scale and critical mass around engineering, product and sales, said Swainson. "Dell had a few acquisitions with Kace and Boomi and some rudimentary capability, but needed scale," said Swainson. "Big software businesses are more profitable and if you do it right you can gain tremendous volume of sales through products." The catch is that a software company at scale needs to grow sales and have a manageable roster of products. "Microsoft has a relatively small number of products," noted Swainson. To Swainson, Oracle CEO Larry Ellison has repeatedly proved the scale and software profit connection via that company's buying binge over the years. Dell Software won't be Oracle, but needs to be "significantly large in enough areas to create volume efficiency."

My take: The wild card is whether the conventional software models---perpetual licenses and maintenance---will continue to work as applications move to the cloud.

What's big enough? Swainson said that having a $1.5 billion revenue footprint inside of Dell, which $56.7 billion in revenue in fiscal 2013, may not be relevant enough. "What's big enough in the context of Dell?" asked Swainson, who committed to $2 billion to $3 billion in revenue in fiscal 2016. That revenue growth will be "organic primarily," but the $5 billion in annual sales for Dell Software will have to be hit at some point. "Generating 20 percent to 30 percent of operating income would be a good definition of big enough inside of Dell," said Swainson.

My take: The biggest perk of going private for Dell would be that it can use software as the glue tying together its hardware stack. Dell Software will have to grow organically and through acquisition.

Swainson's experience and how it applies to Dell. Swainson was CEO of CA for five years and was credited with turning the company around after years of scandal. However, Swainson said his experience at IBM may be more relevant to Dell. "This is more like IBM and making software relevant in a company with a hardware heritage," said Swainson. The aim for Dell, like IBM, is to tie software to hardware and services.

My take: The IBM model has worked for years, but it has been hard to emulate for rivals.

Dell Software's bets and narrative. The bets for Dell revolve around endpoint, cloud, systems management and security. Bring your own device is also a key theme. Swainson said that Dell Software doesn't have to do everything, but fill real needs. "The Dell narrative is to focus on make it easier to deploy technology and gain value from it quickly and manage work as it evolves from physical to virtual to private and public cloud," said Swainson. "We're not trying to have an exclusive narrative that we do everything. We'll partner with others for essential elements and fill in pieces." There's already a precedent for that approach in how Quest deals with Microsoft and managing Windows environments.

My take: It's an open question whether Dell's software unit can hit scale by filling in gaps.

The role of SaaS in Dell's software unit. Dell delivers its wares via SaaS in some cases, but the bulk of revenue will be license and maintenance, said Swainson. "There are lots of things to like about SaaS revenue. It's sticky and sustainable, but takes a long time to grow profits on a GAAP basis," said Swainson. Ultimately, Dell Software will see $200 million to $300 million in SaaS revenue if it grows to be as big as Swainson hopes. "Inside of the data center I don't see the shift to SaaS over the medium term or long term," said Swainson. "Think about the things most successful delivered as SaaS and they are applications delivered through a browser. We're likely to stick with infrastructure type technology because it's a natural fit for Dell." Systems management and low amounts of data latency don't scream SaaS generally speaking.

My take: The emphasis on getting big forces a more traditional software model. Should Dell consider disruption or size?

What's Dell's toughest sell? "Dell's first challenge is going to customers and showing the breadth of what we do," said Swainson. "People still associate Dell with desktop PCs. If you do a word association game Dell equals PCs." The solution for Dell is to become part of proofs of concepts in the enterprise.

My take: Dell's business will revolve around hardware for the foreseeable future so Swainson and his software army will need to evangelize.

When will Dell be thought of as a software player? "It takes a long time to change the perspective of customers in the marketplace. At IBM it took a decade to get the fact that company moved away from hardware to be a solution oriented company," said Swainson. "Dell only started a couple years ago. We're not to the point where people think of us having the breadth of an IBM, but with midsized customers we have a better story." Swainson said that in the long run, the only way to be seen as a software player is to "get in there and demonstrate capabilities." "When you get established in an industry and geography and make a few customers successful (awareness) happens virally," said Swainson. "But it's a multi-year process."

My take: Swainson is realistic about the time it takes to change the perception about Dell.