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Does Dell Deal Signify the Death of Pure Hardware Vendors?

Bill Kenealy
Insurance Experts' Forum, September 22, 2009

Dreams die hard, dude. When word emerged this week that Dell Inc. was paying $3.9 billion to acquire IT services provider Perot Systems, it certainly seemed to mark the end of an hardware-centric era for a company that was famously spawned two decades earlier in CEO and founder Michael Dell’s college dorm room.

Dell’s push into IT services seems to be a necessity in a rapidly evolving competitive environment. Long-time Dell nemesis Hewlett-Packard itself made a move toward services when it bought Dallas-based EDS last year for $13.2 billion. Another primary competitor, IBM, had long since embraced IT services as a complement to its hardware operations. What’s more, seeking to simplify data center architectures, networking giant Cisco Systems has started to push into the server space.

One of ironies surrounding the deal is that it was Dell’s legendarily lean manufacturing model that helped usher in an era of cheaper servers. While this drop in price engendered an explosion of server sales that initially benefited Dell—and data centers everywhere— it ultimately led to the problems that forced Dell to diversify its revenue stream.

Foremost among these problems was the commoditization of servers and the sundry hardware components that comprise them. It’s certainly telling that the world’s largest user of servers, Google, opts to build their own rather than rely on a traditional hardware vendor such as Dell.

The rise of cheap hardware also had reverberations within the data center. The specter of spiraling complexity and ballooning energy bills has led IT managers to embrace virtualization technologies as a way to simplify and shrink their physical footprints.

While virtualization has hastened the commoditization of servers, other trends question the need for them altogether. Indeed, looking forward, the advent of cloud computing may further stunt server sales as companies push more functions out of their data centers. In this light, the Perot acquisition makes sense for Dell, which could conceivably wed its expertise in hardware with Perot’s services expertise to offer industry-specific, cloud-based offerings.

While insurers may someday benefit from these offerings, they may currently profit from the lesson Dell provides. Dell’s reinvention underscores that no company, not matter how innovative or well-run, can afford to rest on its laurels.

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