DELL in ERP-The secret is out.
Kemble
Interesting take on DELL's foray into the ERP market from the Aberdeen
Group. Like they say 'you ain't seen nothing yet'!,just look at the size of that market,WOW.
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(Courtsey:The Aberdeen Group-Excerpts only)
Dell Computer Corporation
One Dell Way
Round Rock, TX 78682
(512) 338-4400
dell.com
Dell and SAP: Bringing the Effectiveness of the Direct Model to the ERP "Tornado"
Preface
Enterprise Resource Planning (ERP) is hot.A $14.8 billion market (total estimated revenue in 1998) is projected to exceed $52 billion by 2002. In particular, SAP is hot, dominating the ERP client-server market with a 36% market share for its R/3 application software. Windows NT is hot too - with a total of 5,500 R/3 NT installations. It is estimated that 50% of new R/3 installations are NT platforms. And Dell is hot. Wall Street's darling of direct distribution is now the #2 server supplier in the U.S. and shows no signs of slowing down. Revenues for the past four quarters were $16.8 billion, and the latest (Q3 '98) announcement of earnings up 65% on revenues up 51% exceeded the consensus estimate.
So, what about Dell in ERP? What are the actual and potential effects when gorillas - Dell and SAP - come together inside the ERP market tornado1? Well, the secret is now coming out. Dell, NT, SAP, and the direct model are ready, and this is a story worth telling.
Executive Summary
Dell has increased its marketing focus on enterprise computing - attempting to leverage its presence on the desktop and in the workgroup to challenge Compaq, HP, IBM, and others for mission-critical applications. Dell's latest servers, the PowerEdge 6300 and 6350, are based on Intel's new Pentium II Xeon processor technology and appear to blend Dell's steadfast adherence to industry standards with innovative server and storage design necessary to meet the reliability and performance requirements of enterprise Information Systems (IS) managers.
But the keys to Dell's success in ERP are its continued core competence and its ability to ride the waves of (1) ERP penetration in the mid-market, and (2) the "hardening" enterprise characteristics of the NT platform. These waves are the strategic focus of the ERP application suppliers and Microsoft's NT-on-Intel platform partners, respectively. In addition, Aberdeen believes that the Dell-SAP relationship is a key to serious success - defined as a #1 or #2 market position. After all, Dell's CEO Michael Dell is not known to aspire to mediocrity.
This Aberdeen Profile presents Dell's SAP strategy and, with the results of Aberdeen field research, leads to the conclusions that Dell's SAP programs are off and running and early customers are delighted with Dell. But there are challenges remaining for Dell if it is to achieve its desired market position.
Market Strategy
Dell's Core Competence - If It Ain't Broke, Don't Fix It
The themes of Dell's success are embodied in its Direct Model, an efficient manufacturing and distribution philosophy that has made Dell the fastest-growing computer system company worldwide. Dell's motto, "Be Direct," speaks to its focus, its reliance on technology standards, its ability to leverage these standards and the efforts of its industry partners, and its accountability to its customers. The focus and leverage of the Direct Model translate to financial and operational advantages, and the Build-to-Order (BTO) Direct Model brings a level of reliability and predictability to Dell's customers from on-time delivery through service and support.
Dell plans to stick with what got 'em there and exploit the momentum of ERP and NT market dynamics to achieve its goals
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Riding the ERP Wave into the Mid-Market
The "Big 4" ERP application suppliers - SAP, PeopleSoft, Baan, and Oracle - have strategically targeted the as-yet-untapped mid-market - defined as companies with revenues between $50 million and $1 billion. Until recently, ERP has been associated with risk - high prices, difficult re-engineering, and lengthy implementations - not exactly a comforting thought for a CFO of a midsize manufacturer.
But the Big 4 are delivering on their strategy with product preconfigurations (or "bundles") and implementation and training methodologies to reduce the costs and risks of ERP. SAP's Ready-to-Run and AcceleratedSAP, Baan's Target Enterprise, PeopleSoft Select, and Oracle FastForward are already having a market impact, and the suppliers are not losing any time promoting their mid-market achievements. SAP says that 34% of its 14,000+ customers have revenues below $200 million; PeopleSoft has 450+ ERP customers with under $250 million in revenues; and, Baan shipped 500+ systems in 1997 to customers with under $350 million in revenues.
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Riding the NT Wave into the Enterprise
While a lot of credit for the rise of Windows NT is directed at Microsoft's vision and marketing muscle, there's also a lot of substance behind NT's progress. The software suppliers (Microsoft, SAP, Baan, Computer Associates, and PeopleSoft) and their hardware platform suppliers (Dell, Compaq, Hewlett-Packard, IBM, Data General, Unisys, and others) have been investing considerable time, effort, and resources into the enterprise "hardening" of the Windows NT operating environment. The improved performance of SQL Server 7.0 and additional features for availability (e.g., Microsoft Cluster Server) and multiplatform interoperability indicate that - while NT is not yet "there" for the largest mission-critical applications - it is making progress. This progress should encourage IS executives and further NT's momentum in the enterprise.
Dell's PowerEdge Servers: Enterprise-Ready for ERP
Dell's four-way Xeon-based PowerEdge 6300 was redesigned from the previous-generation PowerEdge server, the 6100, with the performance, serviceability, and space-consciousness demanded by corporate data centers. Up to six servers (with four-processor capability) can be fit in a rack, and components can be serviced and swapped out without tools. In November 1998, Dell announced the further enhanced PowerEdge 6350, reducing the size by nearly 60% and allowing up to 10 four-way servers in a standard rack enclosure. Both the 6300 and 6350 are certified to run SAP R/3 (Table 1).
Table 1: Dell's Certified Servers for R/3
Server model Date of certification
PowerEdge XL August 1996
PowerEdge 6100 March 1997
PowerEdge 6300 June 1998
PowerEdge 6350 November 1998
Source: Dell Computer Corporation, December 1998
Dell's enterprise-class PowerVault Fibre Channel storage products are also certified for R/3. (Demonstrating Dell's themes of focus and leverage, PowerVault incorporates Data General's award-winning CLARiiON storage technology.) In addition, Dell's server unbundling strategy supports integration with other high-end storage systems.
PowerEdge servers include other enterprise characteristics for high-availability such as standards-based hot-pluggability and clustering with Microsoft Cluster Server, expandability, and systems and network management. One enterprise IS manager described his new PowerEdge 6300 server as a "professional box, which should put to bed" customer reservations regarding Dell's servers' readiness for enterprise computing.
The Direct Model and ERP
Dell Focuses to Stay Lean and Mean
Dell maintains a clear product focus using only Intel processors, the standard Microsoft hardware application layer, and Windows NT. By working in close cooperation with its professional service partners, Dell is not distracted from its core strengths. In some ways, Dell divisions resemble startup companies where individual employees are required to perform several functions in order to meet group targets. Dell eschews an attempt at the "quick fix" - that is, the acquisition route. Similarly, resellers offer the potential to broaden distribution and increase sales volume. But, acquisitions and resellers are high-maintenance propositions, and Dell has chosen to grow within its existing corporate culture rather than try to blend in resellers and new cultures. A different strategy could lead to faster market share growth but would also jeopardize Dell's low cost structure.
Success at Dell is frequently measured by the numbers. Low cost with no unnecessary markups is a sacred Dell credo, and Dell is proud of its inventory management - only a seven day supply in inventory, significantly fewer than the more typical 50-60 days - and lower channel markup than the competition. Dell's strategic initiatives are also measured quantitatively. The number of SAP prospect contacts per week, the number of SAP system sizings per week, the number of SAP wins, and the length of sales cycles are tracked to ensure program effectiveness.
How Dell Demonstrates Leadership
Dell is focused on lower cost, standards, and customer satisfaction, but some customers want Dell to be a technology leader. Dell invests the majority of its research and development (R&D) dollars on improving product reliability and efficient manufacturing processes, incorporating commodity microprocessors and standard Windows NT. Aberdeen notes that certain NT server suppliers, including Data General, NCR, and Unisys, have applied advanced engineering for greater scalability without demonstrating significant advantages for customers, and, as a result, have not succeeded in capturing market share.
Dell's operational efficiencies produce "early-to-market" results as demonstrated by the PowerEdge 6300, the first Xeon-based NT server to be certified to run SAP R/3. One customer told Aberdeen that Dell does not invent new, proprietary technology, but "when they get to market, they're very strong." It is this clear focus on product quality and manufacturing efficiency that differentiates Dell engineering in the minds of its customers.
The Scaling of a Corporation
In order to facilitate Dell's transition to an enterprise computing company, CEO Dell brought in Michael Lambert, whose experience at Compaq and NCR qualifies him to lead Dell's Enterprise Systems Group. It appears that Dell plans to "hire not acquire" to bring in additional enterprise expertise and selectively partner for new products such as Data General's Fibre Channel storage. Aberdeen suggests that Dell's outstanding level of $900,000 in revenue per employee is indicative of a "perspire not acquire" mentality. All kidding aside, Dell employees seem to thrive in their startup-like environment, and Michael Dell is very aware of the desirability of preserving Dell's culture - and the problems being faced by some of Dell's competitors who have selected the acquisition route.
The Dell-SAP Business: Off and Running
In September 1998, Dell formalized its relationship with SAP by opening an R/3 Center of Excellence (COE) in Austin, TX, expanding its Dell R/3 Competence Center in Walldorf, Germany, and becoming a member of the TeamSAP alliance framework. The cooperation demonstrated at the two centers has significant impact on the Dell-SAP product performance, product quality, and service and support. The breadth of activities that occur are summarized in Figure 2, and, while these activities are in different stages of implementation within the maturing Dell-SAP alliance, they are all components of the partnership agenda.
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Many view the Dell-SAP alliance as a recent development, but Dell servers have been running R/3 since 1996 - in fact, there are more than 200 installations of R/3 on PowerEdge servers in 27 countries across six continents. Dell has established a goal of increasing its market share to 10% in 1999.
Strategic Alliances
Technology Partners: It's All about Leverage
Two alliances - excluding the Dell-SAP alliance - are far and away the most critical to Dell's success in the R/3 market: the Dell-Microsoft relationship and the SAP-Microsoft relationship. More than one customer told Aberdeen (see comments below) that, within the NT environment, the hardware platform is irrelevant to SAP. But, Microsoft's technology and marketing relationships with Dell and with SAP are of the highest priority to the Redmond giant as it watches NT climb up the R/3 radar screen and Dell climb in its NT Server market share. SAP is beginning to release some of its products first, or even exclusively, on NT - an indication of NT's strategic importance to SAP. Dell's adherence to standards and its operational efficiency allow it to leverage the efforts of these partnerships effectively.
Two other technology relationships worth mentioning are Dell's partnership with Intel - riding the microprocessor price-performance curve - and Dell's relationship with iXOS, a German-based technology expert with years of experience testing and certifying R/3 on Windows NT. iXOS performs all of the R/3 certification for Dell in Munich.
Dell's Challenge: Create an SAP Marketing Partner
Current Dell-SAP customers tell Aberdeen that there is little awareness of Dell within SAP's sales force and SAP's leading system integrators. This mindset is a hurdle for Dell to overcome. Its overall strength in PC server sales and its specific strength in markets such as government, education, and retail will eventually grab SAP's attention. In the meantime, Dell-SAP market share will grow from new applications on the Dell installed base or from Dell's displacement of other platform suppliers for existing SAP applications. Aberdeen believes that a stronger sales partnership between Dell and SAP in pursuit of new ERP accounts would significantly increase the likelihood of Dell's meeting its market share goals.
The Customer Appraisal: Passionate about Simplicity
The Dell-SAP installed base was excited to tell Aberdeen why it chose Dell - in fact, users were passionate. They cited time-to-market, price-performance, and service as positive differentiators for Dell. As for the Direct Model, one user commented that he "didn't have to go through a reseller who knew less than I did about computers." Dell is considered responsive (the "we try harder" culture was suggested as applying to Dell) and its service "superior to any service department we do business with," said one customer.
But the themes that were repeated over and again were simple - reliability, predictability, dependability. "There were no problems." "It works." "It's good technology." These responses are not profound messages, but they reflect the confidence Dell has built with its customers. And then there's the cost issue. To some customers, "hardware doesn't matter" as long as it's reliable, arrives on time, and has the lowest price. In all those respects, Dell customers believe they've chosen a winner.
Summary Observations
No one can dispute Dell's success in the PC server market. It is right behind Compaq, and the gap has narrowed to 5% (Q3 '98) in the U.S. market. Michael Dell is at or near the top of everybody's exec-of-the-year. And BusinessWeek named Dell number one in its November 3, 1998, Info Tech 100. Nevertheless, questions remain about its ability to transition from a "PC company" to an "enterprise player."
Issue One: Is NT enterprise-ready? Aberdeen says that NT is ready enough. Although Unix and its suppliers are still preferred for the largest mission-critical applications, the mid-market is the latest target of the ERP tornado, and Dell can ride the NT wave into the enterprise - in fact, Dell accelerates NT's momentum with its efficient and reliable operations.
Issue Two: Do Dell servers meet data center requirements? While Dell is still viewed predominately as a workgroup and departmental server supplier, these perceptions are changing with the introduction of the PowerEdge 6300 and 6350 servers and PowerVault storage. Users report that these products meet the performance, reliability and environmental requirements for their data centers.
Issue Three: How quickly can Dell execute this transition into the enterprise? Aberdeen agrees with Dell that the downside risks of a hasty acquisition outweigh the potential benefits, but there is a price to this "hire don't acquire" strategy. Although Dell is not jeopardizing its economic model and operational effectiveness by diluting its focus trying to blend in another corporate culture, the transition may take longer. Aberdeen believes that Dell's strengths will facilitate its steady progress into the enterprise and hopes that, for Dell's sake, its ambition doesn't outgrow its capacity to execute.
Issue Four: Can Dell get greater assistance from SAP in the market? Dell could improve its presence in the SAP mindset with some additional investment. Participation in SAP programs such as the Ready-to-Run packaged solution, and greater investment in its Competence Center activities by producing certified benchmark results and Dell-specific sizing and configuration models are desirable - or SAP and its partners will question Dell's commitment. Even though the commodity-like characteristics of the hardware and the NT/SQL software environment allow Dell-SAP customers to be ecstatic and passionate about their choice without greater SAP awareness of Dell, the Dell market share can only grow so fast without SAP's help. Aberdeen suggests that, given the outstanding reliability, delivery and service track record of Dell and the enterprise characteristics of its latest PowerEdge servers, SAP should take a closer look at the Dell option. In time, the market certainly will.
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(1 "Tornado" is Geoffrey Moore's metaphor for the "hypergrowth stage in technology markets" when the buying resistance of the mainstream subsides, creating a massive surge in demand. Gorillas dominate markets and resulting profits. SAP is a "gorilla" in the ERP "tornado," and Aberdeen considers Dell to be a gorilla in the PC direct distribution market.) |
