Risks await Dell and Xerox

Product companies that buy services companies face the question and the risk of how to run that business.

First, Dell Inc. bids on Perot Systems Corp. and then Xerox Corp. jumps in signs an agreement to acquire Affiliated Computer Systems Inc.

I made the point earlier that the deals showed the services are king in the technology market and that includes both the government and commercial sectors.

The logic is that you need a services business, otherwise you are relegated to the low-margin product business that is increasingly commoditized.

But just because it is logical doesn’t mean that it isn’t risky.

After talking and exchanging messages with a few executives, I thought I’d share some insights on those risks.

One executive told me that all successful companies, regardless of the market, must excel at one of three things – operational excellence, innovation or customer service. They need to be good at all three, but they can only excel at one of them.

Successful services companies such as systems integrators are really in the customer-service business, while product companies excel at innovation.

And that will be the top challenge for Dell and Xerox. Will they run their services businesses like a product company? If they do, that could be a recipe for disaster, executives told me.

“There is a basic difference in the approach to the customer, to long-term relationships with the customer, bidding strategies, etc. between those business markets,” one said.

Other issues include what kind of incentives do you give employees. A person whose job it is to understand the mission and the challenges a customer faces may not translate that understanding into units sold.

A big question yet to be answered is how much Dell and Xerox see these acquisitions as new channels for selling products. Are the services people going to get bonuses based on increasing sales of Dell and Xerox products? If so, will the services units be seen as resellers or pushers of Dell and Xerox products? Think of the hay competitors will make if there is even a hint of that perception.

One motivator that has been cited for these deals is that Dell, Xerox and Hewlett-Packard are following the leader, i.e., IBM, into the services and systems integration space.

So why does it seem to work for IBM? One executive told me it goes back to structure and incentives. IBM keeps its services business separate and on top of that, there is no expectation that IBM Global Services will sell IBM servers and software.

Again, it sounds like a simple solution, but when you are talking culture and values, nothing is simple.