Michael Dell: We’re a ‘solutions’ company

Few CEOs have witnessed more change from the same seat as Michael Dell. When he founded Dell in the 1980s, his Austin company was among the first to sell PCs by mail, often at a lower price and with better tech support than established competitors offered. The ’90s saw Dell extend that lean and mean approach to become a pioneer in user-customized systems and just-in-time manufacturing. And in the 2000s, with the rise of Linux, Dell established itself as a leading supplier of hardware to the data center — both x86 servers and enterprise storage systems.

Today, Michael Dell oversees a global corporation that, with the 2009 acquisition of Perot Systems, has become an “enterprise solutions” company targeting the midmarket. By that, Dell means prepackaged combinations of consulting services, hardware, and software — to serve verticals like healthcare or to address horizontal needs like enterprise-class security. The strategy appears to be working: When Dell announced its FY11 results in February, it reported the largest revenue increase in the company’s history.

As part of the IDG Enterprise CEO Interview Series, Chief Content Officer John Gallant — along with InfoWorld Editor in Chief Eric Knorr and InfoWorld Executive Editor Doug Dineley — sat down for a 45-minute interview with Michael Dell. A key part of the discussion focused on Dell’s aggressive plans to grow his portfolio of solutions by acquiring more intellectual property and what that means for customers and longtime partners. Along the way, Dell was willing to speculate about new devices that blur the line between notebook and tablet and even what the computer industry might have looked like had his venture never existed. We began by asking him to elaborate on his company’s decision to put solutions, rather than hardware, first.

John Gallant: Dell says it has become an enterprise solutions provider. That’s a big shift from being a box seller and a fast adopter of new technology. Why is Dell making this change and what are you trying to accomplish?

Michael Dell: Throughout the latter part of the ’90s and early 2000s, we started creating more and more powerful enterprise products, and as we sold those products into the data center, it became clear to us that customers wanted more than products. We started to build a bigger business services capability and to verticalize the business. It was most prevalent in the public sector — because it was a business of verticals, with education and health care and the defense and civilian aspects of the federal government. As we were doing that, it became clear we needed to go faster.

So we bought Perot Systems, and for the last year or so we’ve been pretty aggressively investing both organically and inorganically in accelerating our solutions momentum. The reason is that we found that it works really well. I think the reason it works is that we’re solving the real problem that the customer has — and getting into the real opportunities in a bigger way.

Gallant: How were you approaching customers before?

Dell: Five years ago we would say: Hey, we’ve got shiny boxes. And the customer would sort of say: Well, don’t really care, I’m busy, leave me alone. What do you actually know about my problem? And can you help me solve this problem I have? I’m trying to build a next-generation supply chain. I’m trying to make my sales force more productive. I want to get better outcomes for my students or my patients. If you know something about that in the vertical that I’m in, then I want to talk to you. If you don’t, go away and leave me alone.

Building that capability requires new skills, new capabilities, new intellectual property, some of which we can grow organically, some of which we have been acquiring. I think it also changes the frame of reference of the opportunities for Dell, because now we look at the entire $2.7 trillion IT industry and say: That’s actually the entire space that we’re going after. We’re not confined to this box or that box.

If you look at what we’re doing today, certainly you can find some places where we’re highly advanced — like in health care IT, where we’re number one in the world. We’re doing health information systems and evidence-based medicine systems, electronic medical records and claims adjudication systems, affiliated physician systems, and really entire solutions that help care providers ultimately deliver better outcomes for patients. That’s actually what they want to do. They don’t want shiny boxes, although shiny boxes may be part of the solution. We’ve changed the conversation, and that is producing a steady stream of improving results financially. Our GAAP earnings in the last year have more than doubled. That’s a good thing. We like that. People seem to like that.

Gallant:  I would imagine so.

Dell: That success gives us a greater degree of freedom in terms of our ability to expand and grow and invest organically and inorganically. And that requires some new things. It’s not as if we started doing this last quarter, right? So three and a half years ago, we bought a company called EqualLogic up in Nashua, N.H., and that was in a space that we were pretty familiar with. Dell has sold 15 million servers in the last decade — pretty hard to find a data center where it’s not Dell. About a third of the servers sold in North America are Dell. So what goes with servers? Well, storage goes with servers, networking goes with servers. Those are pretty obvious places for us to expand.

Doug Dineley: You mentioned vertical solutions; Dell has also talked about a big focus on providing horizontal solutions that go across midsize companies of all kinds. What sorts of solutions are really catching on with those customers right now?

Dell: Among all the solutions, you’d say roughly 80 percent of them are horizontal and 20 percent of them are vertical. To the extent you can create the horizontal solutions first, you can sell them to everybody, and there’s more demand. Things like virtualization — no great surprise there. What does the next-generation data center look like? How do I implement cloud computing? What does the mobile client look like? What about IT security, migration to the cloud? There are pretty big horizontal solutions that are highly repeatable activities. You can almost apply factorylike thinking in terms of how you deploy them — efficiently for customers, with a very high degree of predictability that’s going to be successful and implemented on time. It’s just not that hard to do over and over again.

Eric Knorr: That scales nicely from your perspective.

Dell: Yes, and we very much focus on the midmarket because we see a lot of new solutions being created there — and moving up. Think about x86 servers. When the x86 server started, it wasn’t in the world’s biggest companies. In fact, I remember very well going to some of those big companies and they said go away because we’re doing mainframes, we’re not doing x86 servers. Actually, x86 servers started with the small, nimble, fast companies, worked their way up into medium and large [businesses], from the Web tier to applications and to the database layer. And now it’s finally eating away at the core of the data center in the world’s biggest companies.

If you look at any new company, it’s all x86. Google and Baidu, these guys don’t have mainframes or mini-computers. The whole thing is x86 and probably some ARM coming out in the future as well. So you think about flat tree networks. You think about virtualization, think about iSCSI, think about social computing, and all the forms that new collaboration skills take. This stuff all starts with small midsized organizations.

If you look at the actual total IT industry, at $2.7 trillion, you have consumer over here, and then you have these big global companies, and then you have the public sector — which is actually bigger than consumer or global. But the two biggest parts are SMB — which is the biggest — and large companies. Now, what’s really interesting is that if you look at it from the frame of reference of the big vendors in our industry, they usually design things with big customers in mind.

Knorr: What’s wrong with targeting big corporate customers?

Dell:  It’s not necessarily a bad thing to do. We sell to those customers, they sell to those customers. They use channels and distributors and multistep distribution to deal with these customers, although one could argue whether they’ve done a particularly good job at it or not.

So we sell to the biggest companies in the world and we sell to the smallest, the consumer. But we also think the SMB market is not only the biggest, but it’s also the fastest-growing. Think about all the new emerging companies around the world.

The other thing you find is that the pyramid of companies is like unbelievably wide. Go to LinkedIn and they have advanced search tools that let you look at companies by size. You’ll notice that there’s an enormous number of companies that have 1,000 people or 5,000 people. There aren’t that many companies that have 100,000 people or 200,000.

Knorr: Obviously, you’re not the only company to lead with services and solutions. Compared with IBM and HP, is the only difference in your target audience, or are there other differences?

Dell: I think [the market segment] is one difference. The other difference is that we don’t have the legacy of an installed base of proprietary stuff, which is why we’ve taken this open approach. If you look at our approach in the data center to orchestration, to systems management, it’s a very open approach. Dell has always been a leader in standards, and I think customers know and appreciate that. It’s a great position for us to continue to carve out. It’s pretty different than our competitors.

Gallant: And where does Perot fit into that mix? How do you see using Perot to address the needs of that small/midsize market versus the way services normally work with these big companies?

Dell: In the large company sector, you have companies with thousands, tens of thousands of people. That’s actually where Perot did most of its business. You didn’t see as many of the superbig global companies in their portfolio, though they had some. And then they had a lot of public sector, particularly health care. About half their business was health care, which is a tremendously decentralized industry.

Our approach today is very consistent with that. Our challenge with the cloud and with remote-based services is — how do you bring these services to smaller organizations? And we’ve also been acquiring some interesting new capabilities there.

One of the big challenges that customers have is IT security, and the first thing [customers] do is go and buy all the various equipment from the leading security companies and put firewalls and other security hardware in place. Then they start getting attacked and wonder — well, what do we do now? So they call on the phone, go to websites, read white papers, look here and there. But it’s really, really hard to know exactly what to do when you get malware and botnets. It gets complicated. So what [Dell] SecureWorks does is solve that problem for thousands of companies, from the biggest banks in the world to thousands of credit unions and community banks — and all sorts of big websites that transact a lot of dollars and mortgages. These companies are in the trust and assurance business. Information security is essential to them.

Dineley: I presume Perot Systems’ expertise went into building those solutions for the health care market, right? The electronic medical records systems, image archiving, those kinds of things?

Dell: Yeah, absolutely. It’s a foundation layer for us.

Dineley: Can you translate expertise in that vertical to provide deeper solutions in financial services or other verticals?

Dell: Yes, we’re  building out other verticals — certainly banking and financial services. Insurance is the biggest one to go after and we already have a fairly significant presence there.

Gallant: I wanted to ask you more about the focus on solutions and what it means for the company. The companies you’ve acquired have expanded your portfolio of IP. Does it change Dell as an open company — or as a great strategic partner — if more and more of what you deliver is your own versus pulling together solutions from across the industry?

Dell: I think we’re going to continue to pull together solutions across the industry, but there are clearly areas where we’re investing more heavily in our own technology. What I’d also tell you is if you look at the way we’re delivering our solutions, we’re still giving customers an enormous amount of choice. With our data center solutions, yes, you can buy networking from us, and you can buy storage from us, you could buy servers from us, and you could buy orchestration from us. But if you want our orchestration and you don’t want to buy any of our servers or networking or storage, you can do that, too. So we’re much more open than really anyone in the industry.

Gallant: But are your strategic partners as excited about this transition as you are?

Dell: Well, we certainly don’t design our deterministic future to make others in the industry happy. We decided to make customers and shareholders happy and give people at Dell a great opportunity. So “don’t really care” is the simple answer. But what I’ll also tell you is that…

Gallant: That’s a simple answer.

Dell: …is that if you define Dell at any given point in time and say, OK, this is what Dell does, in the future Dell wants to do more things. By definition, when you go do more things, somebody’s probably not going to be happy. So are you living your life to make other people in the industry happy, or are you living your life to help your customers and your shareholders?

Gallant: But you don’t think it changes the customer view of Dell?

Dell: Actually, we’re seeing very positive response from customers as we learn more about their problems. We’re able to bring more definitive solutions, and customers appreciate that we’ve invested heavily in key intellectual property. Now, of course, it has to be the right [solution], it has to work well, and I think we’ve chosen quite carefully. Our track record speaks for itself in terms of our ability. I mean, when you acquire something, you don’t create any value. When you successfully integrate it and continue to invest in it, that’s when you create a lot of value.

Knorr: I assume a good part of the $1 billion investment you mentioned is going to cloud technology, building out data centers?

Dell: Yes.

Knorr: Can you give us a longer-range view of your cloud strategy and compare that with, say, Microsoft, HP, others who are moving into the space?

Dell: Well, I think we see customers increasingly embracing cloud as a way to transform their IT environment and…

Knorr: Public and private cloud?

Dell: Public, private, hybrid. And we don’t believe there’s one-size-fits-all in terms of the cloud or most other aspects of IT, but certainly not the cloud. If you look at large companies, they tend to be held hostage by their legacy environments, and they look at cloud and they say — hey, this is a way for us to break free from some of these old systems and have a more flexible infrastructure, and we really want that. They may want a private cloud. I think no matter what you do you’re going to have a hybrid cloud, because you’ve got services that are outside of your data center, you’ve got services that are inside your data center, you’ve got to connect those things together. Data integration is a big, big deal. That’s why we bought Boomi — really helping customers link those together.

Knorr: So you see yourself as playing a major role in helping your customers manage hybrid cloud environments?

Dell: Implementing, deploying, operating — whether they do it themselves or they want us to do it in our data center. Then if you look at the smaller and midsize companies, they look at cloud and they say, Hey, we could never really implement these big-company IT systems because it was too expensive and took too long. And the infrastructure and the whole deployment process are unbelievably difficult. So now, with cloud, they can onboard these systems much more easily and capture the benefits that larger companies have. I think [cloud computing] truly is the big enabler for the next decade of our industry and it’s important for us to play a big role in it.

Knorr: But all the pieces aren’t in place…

Dell: I don’t think anyone has all the pieces. Also, I think these transitions take time.

Knorr: What are the specific opportunities for Dell to fill in those gaps in the cloud for your customers and in the solutions that you’re providing?

Dell: Well, I think it’s certainly in the infrastructure layer. That’s a natural place to start; we have a lot of experience there — a big advantage. We’re the leading supplier to the Internet companies. We’re now on, I think, the fourth generation of our modular data center, really leading in innovating in terms of densely organized modular data centers. I think roughly 60 percent of the Chinese Internet runs on Dell.

We’ve done a great job in serving the most complex users out there. We know how to build the cloud infrastructure layer, whether a company wants to build its own private cloud or they want us to operate it for them in one of our data centers. I think data integration is a big barrier and challenge/opportunity. I have an old XYZ system and I want to go to Workday or I want to go to Salesforce.com or I want to go to SuccessFactors, or whatever it may be, how do I connect that with my old system? That’s what Boomi does.

If I have two cloud systems, how do I connect them together? Cloud providers will tell you — oh no, you don’t want to do that. Because they want all the data to stay in their system and not go anywhere. But that’s really impractical, the bigger the company the more you need data to integrate and talk to each other. So again, Boomi is perfect for that.

Knorr: Boomi is a great example of a public cloud service. Are there other public cloud services on your road map?

Dell: I think when you get into the verticals, there are lots of them. Certainly in health care, a lot of the services I described earlier we provide as cloud-based services today. If you look at medical imaging, we have 4 billion medical images in InSiteOne, which is a medical imaging archive. I think you’ll see lots of opportunities for vertical clouds, particularly with our customer access and go-to-market model.

Knorr: Sounds ideal for health care.

Dell: Health care — and education. There are 15,000 public school districts in the United States, and each one has some kind of an IT infrastructure. Maybe it has a data center, but there are horizontal apps that run in almost every school district in America. And does it really make sense for that to be replicated 15,000 times? Or would the county or the state or any particular region be better served having that as an on-demand service where you charge by student? We’re already doing that today for some fairly sizable school districts, and as we get that working and get it to scale, we’ll go add more school districts.

Dineley: Can we shift to the old business for a second? The Windows PC market has taken a dip and we’re seeing a lot of other devices surging in the market right now. If it turns out that tablets, smartphones … Android and iPad devices represent a major shift from the Windows PC into this multiplicity of devices, how does that affect your business in the long term?

Dell: Well, it would have affected it a lot more maybe 5 or 10 years ago than it does today, because our business is very different. If you look at our sources of margin and profit, the majority of them are not the stuff you’re talking about. I think there’s definitely an enormous variety of devices out there and usage patterns are changing.

I don’t necessarily see that they’re all replacing each other. A lot of the new devices are in addition to the devices you already have. So, for example, when you get a smartphone do you get rid of your PC? I don’t think so. Now, the interesting one is the tablet. When you get a tablet do you get rid of your smartphone?

Dineley: No.

Dell: No? OK. When you get your tablet, do you get rid of your PC?

Gallant: Not yet.

Dell: OK, so now we went from a person who has one device to one who has three devices. Now explain to me why this is a problem. When we’re in the server business and storage business and making data centers? Now, would I love it to be our smartphone and our tablet? Absolutely. But if the total market expands, you know, if the 2.7 trillion becomes 3.7 trillion because people are storing more data…

I mean, I look at some of our big customers, the fast-growing customers, and they have nothing to do with PCs. We have a big customer in China called TenCent, and TenCent I think has like 700 million mobile phone customers. Almost everyone in China who has a phone uses one of the TenCent services. So we’re selling them huge data centers and servers and storage and networking — nothing to do with a PC. When people consume content, video, whatever, on tablets, smartphones, the content has to come from somewhere. Where does it come from? It comes from servers and storage. You look at these new companies that are popping up all the time with streaming audio, streaming video, and there’s a pretty good chance those are running on Dell servers.

Dineley: So you win on the back end regardless. But as for the devices themselves, what’s your plan to make Dell’s Android or whatever tablet devices and smartphones that people buy?

Dell: Yes. [laughter]

Gallant: Is it too early in the game to say how that’s going to shake out? You asked the question of the desktop versus the tablet. People haven’t made that decision today, but do you see that the usage pattern will change down the road, and how do you deal with that?

Dell: Go back a bit to the netbook. What’s a netbook and what’s a notebook? Maybe there’s a high priest of defining what is what. But you know, I think the lines start to get real blurry. I could look at a tablet and say: Well, the reason somebody bought a tablet is that it’s light, it’s thin, it comes on right away — and they can access their information, they can carry it in one hand. And then you say: Well, why did the notebook insufficiently do that job? And can you make notebooks better to approach that need? The answer is absolutely you can. It doesn’t mean that we won’t make tablets. We will. But as you get ARM processors and notebooks with Android, Windows 8, etc., I think the lines of what’s a notebook, what’s a tablet, I think it’ll be harder to distinguish.

Gallant: Do you think there will be a different market for an enterprise tablet versus a consumer tablet? Cisco has one, and Avaya has one, and BlackBerry tried to do it they’re targeting a very different kind of audience than the consumer tablet. Is that a different market?

Dell: I think there are some needs that enterprise customers have, and it could take the form of software and services — certainly security. I mean there may be unique products as well. Again, a market this big, it’s certainly not one-size-fits-all, and there will be companies that say, Hey, bring your own and we’ll secure it and we’ll fence it off and OK, that’s great. And other companies that say, No, no, you have to use the company-issued one. I don’t think there’s one answer.

Knorr: We hear today about explosive change and that this is one of the most exciting times in enterprise technology. What technology gets you the most excited?

Dell: Well, there’s a lot to go around. I certainly get pretty interested in the changes that are going on in data centers. Look at how virtualization is changing, the whole server and storage networking layer. You used to have one application and one server, and attached to the server, you had a port that led to a switch, and then you had all these other things to protect the network.

Now the server is a lot bigger and a lot more powerful, and you’ve got 50 virtual machines inside the server and those networking boxes are running inside the VMs and the switching is getting virtualized inside the server. Yeah, you have a top rack, but the top rack is going to 10Gb and 40Gb and 100Gb. It’s a flat tree network, you have storage virtualization. I think the ability to build these highly flexible data centers and burst out to a secure cloud, the flexibility customers have, I mean it’s just tremendous. So that’s pretty interesting.

Knorr: In our interview series, you’re one of two CEOs who is also the founder of the company. So looking back all these years…

Dell: Still here…[laughter]

Knorr: What would you say is your proudest achievement?

Dell: My four kids.

Knorr: That’s a good answer.

Dell: You know, there are many things to look back on and be proud of. Dell started in PCs, but in the mid 1990s we broke out of PCs and we broke into the data center. I think we changed that market forever in the sense that the traditional enterprise companies had to react to what Dell was doing. If I look at the whole concept of how does technology enable people, I think we fundamentally altered the course of the industry in terms of opening up competitiveness. Just imagine for a second if among the companies that sold all the products into data centers, Dell wasn’t included, I think you’d have a very, very different Internet today because I think we inserted competition into that. Now, some could argue — well, if you hadn’t done it, someone else would have. OK, fine. Well, we did do it, so we can take credit for it.

Gallant: Let me ask you a similar question. You’ve been a small business, a medium business, a large business, a global business. You’ve run the company through all those phases. Today it’s a tough environment for medium businesses or small businesses because the economy is sort of caught in the wind. What would your advice be to someone who is running IT at one of these medium to small businesses? What would you do?

Dell: If you’re running a business, you have to think about surviving. That’s just part of running a business, particularly a small or medium-sized business. I think that there are so many opportunities to get ahead using technology.

I’ll give you a big one that I think is extremely relevant to medium-sized business. We’ve been providing storage systems to midsized companies for a long, long time, and they’ve been storing their data because they had to [due to] regulations, because it was thought to be a good idea. You have to have a database; you have to maintain all the information. But how does the information actually help you make better decisions?

People talk about big data. I think: big impact, big decisions, and big insights. And there’s a lot of work going on in our industry. Dell is working on this in a big way to say how do you take all the data companies have stored and then turn that into much better decisions? And smart midsized companies will actually be able to do that in a faster, more nimble way than some of their larger competitors who are kind of stuck in these larger legacy systems.

Gallant: We’re in what they’re calling a jobless recovery right now — a slow recovery. Do you think tech has been a big contributing factor in the jobless part, that people have figured out how to do much, much more with less?

Dell: It’s kind of a debate. You could also argue that tech is why all the jobs are being created. You’re into kind of a highly theoretical argument. I believe that tech is at the fulcrum of all progress in the world, in any industry, and not having technology would certainly not be the answer. I do think it expands opportunities, opens up opportunities, but also it requires a lot of flexibility and agility.

When people show up and they’d like to work at Dell, we say this is an industry that changes really, really fast and you have to be very flexible, you have to be very agile, and you have to really love change. If you don’t love change and you don’t love the highly dynamic environment, it’s probably not the right company for you. In fact, it’s probably not the right industry for you. I think what’s happening now is that the influence of technology is finding its way into every industry.