Dell Strikes Gold in Government Market

Dell Strikes Gold in Government Market

By Nick Wakeman
Staff Writer

Although the clamor in the government market is for solutions and not just products, go-go personal computer and server manufacturer Dell Computer Corp. is not about to change its market approach.

Rival Compaq Computer Corp. of Houston may be buying Digital Equipment Corp. of Maynard, Mass., for its esteemed services arm, but Round Rock, Texas-based Dell feels no compunction to follow suit, said Robert McFarland, vice president of federal sales and marketing for Dell.

The company, whose stock value has tripled in the past year, has not made a single acquisition in its 14-year history. But Dell has still discovered success. For its fiscal year 1998, which ended Feb. 1, Dell had $12.3 billion in revenues, compared to $7.8 billion the previous year and $5.3 billion in 1996.

Dell's approach to providing government customers the services they require: relying on partnerships such as the one it forged with Wang Global of Billerica, Mass., McFarland said.

Robert McFarland,
Dell vice president

The two companies have worked together for several years, but expanded the partnership in March. Wang is now Dell's preferred provider of services for the government market, according to McFarland.

"As we got to know Wang, it became clear that there was a whole suite of services they could offer," McFarland said. Those services are tied to the sale of Dell's server line. Since March, government customers buying a Dell server also get 16 hours of free services from Wang, he said.

Such services can include consulting, system design and installation, McFarland said. "It's a whole set of things that Dell doesn't offer."

James Hogan, president of Wang's federal division, said the partnership with Dell is one of the company's three "very strategic relationships." The others are with Microsoft Corp. of Redmond, Wash., and Cisco Systems Inc. of San Jose, Calif.

"Going forward in this market, companies need to align themselves with leaders in the industry," Hogan said. With the trend toward outsourcing of network and desktop services, partnerships are the only way companies can provide the breadth of products and services customers want, he said.

Dell does not break out its government revenues, but IDC Government of Falls Church, Va., crowned Dell the top supplier of PCs to the federal government with a 20 percent market share for fiscal year 1996. Figures for fiscal year 1997 are not yet available.

Dell was the No. 2 supplier of PC servers to the government in 1996 with about a 20.9 percent market share. Compaq was No. 1 with 28.4 percent, according to IDC.

Going the partnership route for services, rather than having a large in-house services division, works for Dell because of the strength of its direct sales model, said Richard Schutte, an analyst with the investment company Goldman Sachs of New York.

Other manufacturers such as Hewlett-Packard Co. of Palo Alto, Calif., and IBM Corp. of Armonk, N.Y., often rely on their services divisions to subsidize or make up for the poor margins on the product side, he said.

"Dell sells just hardware, and at much better margins," Schutte said. Those margins give Dell room to outbid competitors, he said. And because Dell's services partner does not have a manufacturing wing to subsidize, the partner can outbid competitors that are also manufacturers, Schutte said.

"The total solution is as good or better as [Dell's competitors] can provide," Schutte said.

Dell has done a good job of balancing its direct sales through the General Services Administration schedule with a network of resellers that give it access to large indefinite-delivery, indefinite-quantity contracts, said Payton Smith, an IDC analyst.

Dell has done a better job of using resellers than has Gateway 2000, North Sioux City, S.D., Dell's closest PC competitor in the federal market, Smith said. Gateway had a 13.8 percent of the PC market in 1996.

With a firm and growing grip on the federal market, McFarland said, Dell does not worry about its competitors.

Dell's direct relationship with end users keeps the company abreast of what customers want, he said. "They give us incredible feedback. I don't have to rely on [the channel] to give me that," he said.

However, Dell should still expect competition in the federal market, Smith said. "They should watch Compaq because they are never going to give up the battle," he said.

But Dell is not standing still, Schutte said. The company will always have an advantage over manufacturers that rely on the channel because of Dell's unmatched inventory controls, he said.

"It is easy to identify Dell's advantages, but they are tough to emulate," Schutte said.

1996 Top 10 PC Suppliers to the Federal Government
Company Shipments Market Share
1. Dell 94,500 units 20 percent
2. Gateway 2000 65,260 units 13.8 percent
3. Zenith Data Systems 64,961 units 13.7 percent
4. Micron Electronics 42,026 units 8.9 percent
5. IBM 35,186 units 7.4 percent
6. Compaq 30,395 units 6.4 percent
7. Hewlett-Packard 12,030 units 2.5 percent
8. Digital 10,911 units 2.3 percent
9. IDP 9,840 units 2.1 percent
10. Apple 8,968 units 1.9 percent
Source: IDC Governmen

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