A bit long, but a good article
Fez
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INFORMATION WEEK
September 28, 1998, Issue: 702
Section: Top Of The Week
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Can Dell Scale? -- The PC Phenom Ramps Up Its Technology, Services For High-End Push
Mary Hayes
Dell Computer's success in direct sales of low-priced, industry-standard PCs is established. But to sustain its astonishing 50%-plus growth, the company will move further up the Wintel chain into enterprise-class clustered systems over the next six months-leveraging the same efficient manufacturing and distribution model that made Dell a household name.
CEO Michael Dell realizes, though, that if customers are going to count on the vendor as an enterprise IT solutions provider, it will have to shed its legacy as just a "box maker." So Dell is also preparing an array of supporting products, including high-end storage devices, systems-management software, and enhanced services from third parties.
Following this week's introduction of the PowerEdge 4300, a two-processor system that can be racked as high as six servers, Dell will roll out a four-processor PowerEdge system next month that can be racked to 10 servers. The four-processor PowerEdge, Dell's densest rack system to date, demonstrates the company's determination to accommodate the space restrictions of most companies' data centers. Equally important, the server will be offered independent of storage-it will be compatible with high-end storage systems from EMC and other vendors.
Mike Lambert, senior VP of Dell's enterprise systems group, says the four-processor PowerEdge is the first example of an unbundling strategy that could propel Dell into the server big leagues. Under the plan, Dell will separate industry-standard components-including storage, CPUs, and I/O subsystems-from high-end servers, giving customers the flexibility to buy only the pieces they need when they need them. Lambert says the component approach will, within three to four years, let Dell customers build massively parallel systems at a much lower cost than they can with Unix or other NT systems.
"By adding complementary pieces into the data center, we'll eventually ease out Unix systems," he says. "There are old-line followers who don't think the commoditization of high-end servers will happen. But it's coming, and it's coming fast."
The component concept sits well with Dell customer Sprint Communications, whose data center is packed with EMC storage hardware. "It's something very new for the NT-Intel server, and it's an example of how NT and Intel are growing in the enterprise market," says Lorin Olsen, senior manager of enterprise network services at Sprint.
In some cases, however, Dell is moving away from its standards model to win higher-end enterprise business. Dell recently demonstrated a proprietary 16-node server cluster running IBM's DB2 database. Dell says some customers, including a major financial services company, are showing interest in the system. By early next year, Dell plans to offer Wintel systems that support Oracle Parallel Server on as many as four nodes, as well as a standards-based server that scales to eight processors.
On the services front, Dell has hired former NCR executive Gary Cotshott to pump up its 2,300-person internal services organization while expanding the fleet of partners that install and maintain Dell systems. One area for investment, Cotshott says, is professional services, including project management and consulting. The services organization must now decide where to invest money in-house and where to rely on partners. Within two weeks, Dell will disclose that integrator DecisionOne Corp. is a certified Dell service provider, adding 5,000 technical specialists to the 25,000 now provided by Unisys and Wang.
Lessons From The Past
It's clear, however, that Dell isn't prepared to jeopardize its 22% gross profit margin and 60% profit growth in order to barge into the data center. Dell learned the lessons of reckless ambition five years ago, when it rushed into the notebook market with poor-quality systems and posted its first-ever quarterly loss. Dell is taking a more calculated approach to scaling its systems. For the most part, it's waiting for next year's introduction of NT 5.0, for the subsequent release of Intel's 64-bit Merced processor, and for both Microsoft and Intel to enhance their clustering technologies.
Dell, for instance, isn't particularly aggressive about making its proprietary 16-way server generally available. By comparison, Compaq already has a variety of proprietary clustering options, for its VMS, Himalaya, Unix, and NT platforms. Compaq, in fact, has had a 64-node NT cluster in its labs since February-though Compaq, too, says it isn't sure whether it will ship the system commercially. "There are special situations where we can build [proprietary NT systems] for certain customers," says Compaq senior VP and chief technology officer Bill Strecker. "But Dell in my mind is a company not prepared to support a nonstandard system."
Although Dell has considered (and rejected) a couple of dozen acquisitions over the past two years, a bold play for a high-end IT systems and services provider-especially one on a par with Compaq's $9.1 billion purchase of Digital Equipment-isn't on Dell's short list, company executives say. "Growth is a matter of matching our ability and the opportunity," says CEO Dell. "It's a question of how much fun a company can have in one day and get up the next day and continue."
Most of Dell's upcoming enterprise offerings will be delivered through partnerships, similar to its deal to license Fibre Channel storage from Data General. Dell is negotiating with several networking companies, including Giganet, to license technology for a Dell-branded high-speed, low-latency interconnect that will let customers build clustered database servers. On the systems-management side, Dell will bundle Hewlett-Packard's Manage/X Special Edition software on all of its servers starting in early October.
The company also plans to deliver within three months management software designed for specific types of servers, as well as new disk-management, remote-management, and security software. In the first quarter of 1999, Dell aims to roll out load-balancing and load-management software for optimizing clustered server performance, as well as new storage-management software.
Not One-Stop Anytime Soon
Despite all these moves, Dell isn't likely to be a one-stop enterprise systems supplier anytime soon. Even Dell executives say it will be two to three years before its NT systems are as scalable and reliable as current Unix systems. Meanwhile, other NT server vendors, including Data General, NCR, and Unisys, have begun selling proprietary NT systems that scale beyond anything Dell currently has in its labs.
The Nasdaq electronic trading exchange uses nearly two dozen four-processor Dell servers to run its Web site, but it turned to Unisys for a 10-processor NT server to collect and process trading information for the site. Nasdaq would have preferred getting all of its systems from Dell, says John Delta, the exchange's director of interactive services. "Dell is a superb company, but it's very much tied to open systems," Delta says. "It's a great strategy, but we need massive databases and scalability right away. I'd like to see some in-house research and development [at Dell] that gets us to large NT scalability quickly."
Service and support is another enterprise concern. Systems-control manufacturer Honeywell Inc. this summer implemented dozens of Dell servers to support a Microsoft Exchange E-mail system that processes 2 million messages per month. While Honeywell is pleased with the Dell hardware, Dell's implementation support could be improved, says Steve Pine, director of technical integration and network applications. Two Dell engineers installed the system adequately, Pine says, but Honeywell would have benefited from Dell experts who could optimize server configurations for message routing.
Pine notes that vendors with a history of catering to the scalability demands of large companies might have been able to offer those services. Indeed, competitors losing PC server market share to Dell (see chart, p. 18) are quick to jump on Dell's shortcomings in the high-end systems arena. "Dell is much more of a routine purchase. It's like ordering a pizza," sniffs Mike Liebow, VP of strategies for IBM Netfinity systems. Dell will face problems even as NT continues to scale, Liebow argues. "For ERP through SAP or data warehousing through Oracle, Dell does not have the same level of capability as IBM," he asserts.
HP will soon offer 99.9% NT server availability, something Dell can't guarantee without a stronger services component, says Gartner Group analyst Joe Barkin. What's more, Dell relies on partners to deliver many services, and it runs the risk of losing those partners should they be acquired by another company in a rapidly consolidating industry, as Digital was by Compaq.
But Dell argues that its services model is more flexible than the for-profit services organizations of Compaq, IBM, and HP, since it doesn't have to hire to expand. And Dell services partners aren't in the business of pushing Dell products-an arm's-length relationship some customers appreciate. "I want Dell for what Dell does best, and that is put hardware together for a fault-tolerant solution," says Ash Shehata, IS director for Antelope Valley Health Care Systems in Lancaster, Calif. "I've never really trusted manufacturers for any services."
So long as Dell is accountable, customers don't care who actually delivers the service, say Dell executives, who note that the vendor's direct model ensures that a customer's first contact is always with a Dell representative. "It seems to be working," says William Conroy, an analyst with Sanders Morris Muddy in Houston. But Conroy adds that future growth could pose problems. "There is a realistic possibility that the company will face a decision regarding whether they have the capability in-house to handle services, or whether they continue to partner," he says.
Limited By Wintel's Scale
Dell's reliance on the Wintel model means it will continue to be limited by the scale that other vendors' software and processors can support. Meanwhile, the company says it can maintain its revenue growth by expanding its notebook, desktop, and low-end server lines into new geographic markets, by cutting into the 30% PC market share of "white box" vendors, and by wresting business away from its chief competitors. Chairman Dell says the company is capable of taking up to 25% of the aggregate "personal systems" market within a few years (it had 5.5% of the global PC market in 1997). Analysts are skeptical-but Dell has surprised them before.
Dell's growth in the high-end market is essential to its continued success. Dell's goal is to derive half its revenue from non-PC sales within the next few years, as PC profit margins narrow under pricing pressure. The company's share of the U.S. Windows-Intel server market rose more than any other vendor's in the second quarter, to 16.5% from 10.8%, according to Dataquest, and Dell appears to have taken market share from Compaq and IBM.
But that success is in the sale of low-end, commodity servers. Dell's biggest challenge will be to convince customers it can offer them higher-end systems and service even if it doesn't have the Unix and other scalable offerings of a Compaq, HP, or IBM. Despite Dell's insistence that it can ride the lower-end personal systems wave for another two years, the high end is clearly on the minds of executives. "If you poke our salespeople with a stick at 3 a.m., the first thing out of their mouths will be 'servers!'" says Brian Wood, Dell VP and general manager of enterprise accounts.
Dell has a phenomenal track record, but it knows its past accomplishments matter little as it moves up the enterprise. "Our Achilles' heel is the legacy that comes from success," says senior VP and CFO Tom Meredith. "Our challenge is to move from success to significance." If Dell executes as well as it has in the past, its legacy will be complete.
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