Software is key to Dell's future viability, but it's currently starved
A measure of Dell's problem is its software division. Despite huge expenditures, the software division accounted only for $1.5 billion, or 2.4 percent, of the company's revenue in fiscal-year 2012. That's all the more startling when you consider that software is the linchpin of Dell's recovery strategy.
Software, says Ovum chief analyst Carter Lusher, can be a source of high-margin revenues, as well as a driver for business hardware and services deals. Succeeding in that business requires significant investment in R&D -- but Dell doesn't do the "R" in R&D.
Dell's overall R&D spend in 2012 was just 1.6 percent of revenue last year. According to Ovum, other major blended hardware, software, and services vendors spend significantly more. IBM, for example, spends an average of 6 percent of revenues. Oracle spends 12 percent. Even Hewlett-Packard under its cost-cutting-champ former CEO Mark Hurd averaged 2.8 percent. Dell's R&D spend becomes downright embarrassing when compared to pure software companies, which typically shell out 15 to 20 percent of revenues on R&D.
Despite the insufficient R&D spend at Dell, Lusher says its software acquisitions were well thought out. "You can't expect these companies to produce significant revenue overnight," he tells me. Wall Street lacks patience and won't want Dell to divert profits to R&D because their stock returns could be hurt, which is why he believes going private makes sense.
Even if Dell gets out of Wall Street's myopic view, Dell will have to increase R&D significantly to make the software strategy work. Based on his conversations with Dell executives, Lusher expects software R&D to rise sharply, even as R&D in other areas will stay flat.
Six things that could go wrong
Dell is not trying to become another IBM or an SAP; it's focused on the midmarket. But winning there will be tough. A lot could go wrong, Lusher says:
- Branding: Dell's brand is both a strength and a weakness. It is a strength because Dell is well known among IT buyers. It is a weakness because the current brand image of value-priced PCs and servers is not aligned with Dell's software strategy. Dell will have to invest heavily in sales and marketing to change the perception of its brand, Lusher says.
- Competition: IBM and other vendors focusing on the midmarket represent a significant competitive challenge.
- The cloud: The cloud could make Dell's vision of converged solutions a moot point. Midsize companies do not need Dell's software and hardware converged solutions if they decide to move to a cloud-based approach to IT infrastructure and applications.
- Mobile strategy: Does Dell even have one?
- The culture: Turning around a $62 billion company means a seismic shift in thinking that requires significant retraining and new blood, a process that could alienate key employees.
- Investors. Finally, there is the possibility of an investor revolt. Accustomed to short-term results, investors and Wall Street analysts may simply freak out as the company is restructured and short-term results take a hit. That's why the idea of going private makes so much sense.
If Dell goes private, there's at least a chance it will make the wrenching changes needed to once again become a high-flying force that matters.
This article, "To keep Dell afloat, going private isn't enough," was originally published by InfoWorld.com. Read more of Bill Snyder's Tech's Bottom Line blog and follow the latest technology business developments at InfoWorld.com. For the latest business technology news, follow InfoWorld.com on Twitter.