What the New Dell Means for IT Outsourcing Customers

Dell put the rumors to rest today with its announcement that it will indeed go private as founder and CEO Michael Dell and private investment firm Silver Lake Partners acquire the company in a deal estimated at $24.4 billion.

But questions remain about what the new ownership model will mean for Dell’s IT services business-and its outsourcing customers.

“On the positive side, Dell will no longer be driven by quarterly earnings pressures and the need to put more resources behind the largest part of their business-PCs-[rather than] outsourcing,” says David Rutchik, partner with outsourcing consultancy Pace Harmon.

“By getting away from public scrutiny, they will be freed up to make investments in tools and in other areas to better compete in the IT outsourcing space, even if they won’t move the earning needle overall in the near term,” Rutchik says.

A private Dell could redouble its efforts to compete against the likes of IBM, HP, Accenture, TCS and Wipro at a critical time in the industry.

Dell Will Refocus IT and BPO Offerings

“With the IT services market slowing this year, the competition will be–and already is–stifling for the proliferation of vendors fighting over the scraps,” says Phil Fersht, CIO of HfS Research.

“Dell being insulated financially will allow it to refocus its IT and business process offerings and avoid gambling on unprofitable contracts, especially against low-cost arbitrage players, such as HCL and Syntel,” Fersht says.

Dell bought its way into the IT services market with its $3.9 billion acquisition of Perot Systems in 2009 and had recently begun to focus on more standardized offerings in the IT services space.

“Dell will likely accelerate changes in the IT outsourcing line of business including greater focus on remote, virtualized and standardized services to improve profitability and modernize service delivery,” says Bryan Britz, research director in the ITO and Support Services group at Gartner.

Dell May Target Midmarket

Dell could seize this opportunity to go after the middle market, which is opening up, says Fersht. But that would require changes in its sales structure.

“Dell says it is building IT services for the midmarket that can scale up,” says Britz. “I haven’t seen evidence that its sales model is effectively scaling down to that market. It’s an initiative they are working on.”

Dell is also well-positioned to serve the growing needs of clients in the healthcare space, an industry in which Perot was a significant player. “Dell will have the chance to position its healthcare business process outsourcing and analytics offerings effectively, which it has struggled to do in the wake of the recent noise,” Fersht says.

Should Dell’s IT Outsourcing Customers Shop Around?

Dell’s IT outsourcing customers who rely on customized services, however, might want to start shopping around. “IT outsourcing will be much more industrial in design and delivery,” says Britz, “and that does mean Dell will likely stop doing some things they do today that are customer-specific, or seek price premiums for such exceptions.”

As for future IT outsourcing customers, the new Dell is more likely to woo clients willing to accept Dell technology within a managed private cloud, says Britz. “Similarly, Dell is also likely to seek increasing its traction in productizing IT outsourcing scope into services that lean upon its product support business.”

The nature of the deal–a leveraged buyout–may have outsourcing customers concerned that Dell would have to sell off part of its business to pay off debt.

“IT outsourcing customers should challenge Dell’s commitment to the IT outsourcing space, as well as its ability to contribute free cash flow to innovation, technology and process improvement when they have a large debt to service,” says Rutchik of Pace Harmon. “It’s certainly [not] inconceivable that the IT outsourcing business [could be] spun off or sold in the future to reduce financial leverage and drive increased focus on what is still very much the core business of hardware.”

Stephanie Overby is regular contributor to CIO.com’s IT Outsourcing section. Follow everything from CIO.com on Twitter @CIOonline, on Facebook, and on Google +.