Computer, consulting services collide over data

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Just a year ago, Dell Computer Corp. was racking up gross margins on hardware in the 25% to 35% range -- a good 5 to 15 percentage points better than its rivals.

But things have changed. The falling price of chips, combined with PC oversupply, has pared industry average gross margins on commercial desktop PCs to 5% or less.

To ensure revenue growth, Dell has joined the legion of technology providers accelerating a shift from hardware to information technology services, an industry sector fueled by the proliferation of e-commerce.

Dell, the nimble direct marketer of PCs, this year kicked off a splashy ad and marketing campaign to flag its Dell "Ecommerce" strategy. Dell's objective is to provide consulting services to its customer base gained via direct sales over the Internet.

Dell's entry into the information technology services sector is belated. Rivals IBM Corp. and Hewlett-Packard Co. are well ensconced in the market. H-P, in fact, has big growth plans, this month offering $18 billion to buy PricewaterhouseCooper's global management and technology consulting business.


PricewaterhouseCoopers, Andersen Consulting and Electronic Data Systems are among a cadre of companies already entrenched in IT services. Software providers Microsoft Corp. and Oracle Corp. also are adding services to help customers integrate their products.

Rewards in IT service are substantial. Average gross margins of 32% to 35% appear stable, according to Eric Rocco, VP-services research at Gartner/Dataquest, a technology research company. IBM's transition from boxmaker to service provider has created an ebusiness marketing juggernaut. This May, it launched a $150 million worldwide ad campaign touting its software expertise in the ebusiness environment. Services at IBM now account for 50% of its global revenue.

IT service offerings are broad: Web integration, hosting, site management, customer relationship management, data-mining and back-end infrastructure support. Consulting services for marketing and brand strategy, management and communications are also part of the mix. B-to-B e-marketplaces are a potential boon for tech companies.


"All types of service providers are expanding and aligning their offerings to be better positioned to meet the needs of e-marketplace clients," notes a recent report by Leo Lipis, senior analyst for International Data Corp.'s eMarketplace Services research program.

Over the next few years, services in the customer relationship management segment, including customer data warehousing, integration and analysis, are expected to explode. Worldwide revenues from CRM data warehousing software and services will grow from $4.2 billion in 1999 to more than $20 billion by 2004, IDC projects. Software represents about 52% of this value, but by 2004 services will generate 55%.


Analysts say over time, companies like Dell and Compaq Computer Corp. -- both currently focusing on providing integrated services for their own hardware brands -- may become service providers for other brands.

Although Dell was late to the field, Compaq has tripped over its feet. Its acquisition two years ago of Digital Equipment Corp. was supposed to give it the edge in services, but a troublesome cultural integration and management churn have slowed the strategy.

Compaq is still perceived as a hardware company and must quickly articulate and expand its services business or risk leaving the market to quicker, more nimble competitors, says Mr. Rocco.

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