How many Dell employees does it take to screw in a light bulb? According to Heard on the Street (paid subscription) in today’s Wall Street Journal, that’s a question CEO Michael Dell and his management team are now deliberating. The company’s employee base jumped by nearly 50%, to 82,200 workers, in the past two years. Wall Street thinks now is a perfect time for Dell to reduce headcount, just as rival Hewlett-Packard successfully did two years ago. A Goldman Sachs analyst upgraded her rating of Dell’s falling stock to ‘buy’ because she predicts that slash-and-burn moves are imminent. I counsel thinking one more move ahead in this chess game.
Given that the key to Dell’s past success was an efficient direct sales model, why did headcount go out of control? Was it sloppy management? Or is something more fundamental going on?
No doubt missteps occurred, including an ongoing SEC investigation into company finances as senior managers fell on their swords. After Dell faded in customer satisfaction and laptops exploded in flames, plenty of bad press ensued. In response the company said last September it was investing $150 million to enhance customer relationships, including adding 2,000 support staff. But that move failed to reignite sales.
Why didn’t ramping up support headcount pay off? It’s tempting to blame poor execution. But I think that Windows PC support costs are rising so fast that Dell, no matter how hard they run, will never profitably catch up. When customers suffer malware, phishing attacks, or defective patches, they call tech support. With razor-thin margins in the PC hardware business, every tech support call erases a pile of profit. As a thought experiment, imagine what two additional years of support (above the one year warranty) for a $359 PC should cost. Now go to the Dell website, price that computer, and check out the support cost. Ouch.
Why is Dell considering offering Linux on its computers? Hint: it’s not just to save the few dollars that go to Microsoft for every computer shipped. Support costs are almost certainly a key part of the equation. Imagine how many tech support calls would vanish if Dell delivered a robust operating system.
What’s more, Dell is struggling with a global trend: transition from a computer industry driven by corporate information technology to one that’s centered on consumers. The company’s response involved broadening its product mix to include consumer items like digital cameras and television sets. That strategy didn’t pan out for CompUSA; it nearly put them out of business. Considering Dell’s accounting issues, it’s hard to evaluate the toll this strategy has taken, but the outlook isn’t favorable.
So the time has come not just to “streamline the organization,” but to consider real alternatives to the Dell 1.0 business model, which has grown too long in the tooth. The company must recognize that Windows PCs have become low-margin appliances like lamps, dishwashers, and toasters. Going forward, PCs need to be reliable like lamps and supported like toasters. You can’t achieve that by throwing thousands of warm bodies into a call center in India in a futile attempt to screw in that light bulb. Dell 2.0 ought to mean reshaping PC support by totally redefining the PC product experience. Else nobody will be left at Dell to turn out the lights.