VideoWhen Michael Dell, chairman and CEO of Dell Inc., made the startling pronouncement last year that the Round Rock, Texas-based technology giant will double its revenues to $60 billion during the next several years, he sent a clear signal that the company plans to move well beyond its PC roots. Achieving growth of that sort in a weak economy will require many things, first among them a strong commitment to corporate customers. Those customers have snapped up Dell's low-cost PCs and servers in astounding numbers, but will they give Dell the same respect accorded to the two unquestioned leaders in corporate IT, IBM and Hewlett-Packard?
That question is very much on the mind of Dell CFO Jim Schneider, who joined the company in 1996, the year in which it made its first foray into the enterprise space, with low-cost (and low-end) servers. "There's good news and bad news about being in finance here," says Schneider. "The good news is you're involved in everything. The bad news is you're involved in everything."
To date, he has been involved in plenty of cost cutting, helping to trim $1.3 billion last year. But despite Dell's vaunted efficiencies, his work is far from done. Michael Dell has said that his ambitious revenue target will co-exist with a further $2 billion in cost cuts. "In this business, you grow or die," says Dell. "At the moment, enterprise computing offers us the best revenue growth and market-share opportunities."
How does Dell plan to grow so fast and become ever leaner? Primarily by moving "up the stack," extending its proven business model to a range of products and services essential to corporate computing. It's a path Dell has followed for several years, and if Merrill Lynch's projection of 27 percent annual growth in enterprise product sales through 2006 hits the mark, analysts believe $60 billion is possible—even with a modest 5 percent annual growth in Dell's core PC, notebook, and workstation business. "I think it's doable," says Merrill Lynch analyst and first vice president Steven Milunovich. "As various technologies commoditize over time, Dell's direct-to-the-customer strategy presents a highly attractive cost advantage that's tough to ignore."
The company has been steadily expanding its array of business-oriented products for several years. It introduced servers in 1996, enterprise storage equipment in 1998, storage-area networks in 1999, network switching equipment in 2001, and printers and projectors just this year. In fact, the company tries to downplay any notion that it is a recent entrant in the corporate space, but it's clear from Michael Dell's comments and other developments that the company is now targeting enterprise customers like never before. The key question for Dell will be whether it can be a true enterprise player simply by doing more of what it does well or whether it will have to make fundamental additions and changes to a business model that has performed almost flawlessly.
A Focus on Finance
Dell founded his eponymous company in 1984 on a simple concept—a direct business model that eliminates retailers, which add time and cost to moving and selling products. The model allowed Dell to build every product to order, from a home PC to network switches, at very competitive prices. "Dell is the poster child for built-to-order technology," says Navi Radjou, principal analyst at Cambridge, Massachusetts-based Forrester Research. "If you look at IBM and HP, they tend to produce equipment based on forecasted demand. That requires them to source adequate material and have enough inventory and capacity available to meet the projected demand. Dell's model is the reverse—sell first, build later."
CFO Schneider says that makes his job demanding, to say the least. "When we enter a quarter, I have to tell Wall Street how we stand, even though we have little or nothing booked yet. I'm envious of other CFOs who enter a quarter with a backlog and already know whether they'll make their numbers," he says.
Fortunately, Schneider says, Dell's staff understands that. "Everyone here is very analytical and has a good finance bent," he says. "They know that if they're not focused on finance, we can't survive."
The company has no more than two hours' worth of inventory at any time, and no more than three days of inventory across its entire value chain. Inventory turns at an astounding 73 times a year, compared with an average 5.4 times across the high-tech industry. "Dell's inventory turns at a rate well above the average for the industry, so not surprisingly, Dell enjoys an industry-leading negative cash-conversion cycle of 37 days," says Radjou.
As impressive as that is, Dell faces a number of challenges and questions. For example, will an improving economy dampen its low-cost appeal? The company has benefited in the past three years from the economic downturn's impact on cash-strapped IT budgets, making its various lines of low-cost hardware, storage solutions, and services cost-effective buys. But if IT budgets expand, enterprise customers may opt for more-expensive, higher functionality gear from Dell's competitors. And with component prices firming, Dell may have difficulty reducing costs further even as competitors such as HP vow to price more aggressively.
Reader Comments» Post a comment