The Outsourcing Fundamentals For Dell Computers

Dell is one of the leading PC manufacturers in the world. Its business strategy involves outsourcing a number of its operations such as sales order processing, distribution, after sales service. The focus of this report will be to critically evaluate and analyse one such outsourcing project of Dell of its technical support which was considered a failure. There are a number of reasons why Dell chose to outsource its technical support call centre. The main reason for doing so is that Dell saw this part of its operations as non – core. It decided to outsource in order to concentrate on its core business processes which were manufacturing and design. The cost savings that an outsourcing deal offered also was a major factor in it doing so. Other factors such as to gain accesses to world class facilities , to share the risk involved, to accelerate redesign engineering process were also critical.

After having decided to outsource a deal with Stream Global Services was struck. Stream took its call centre in India to operate the entire tech support of Northern America. After the first term of the contract the deal was called off and Dell decided to back source the tech support from Stream and bring it back in-house. The report analysis the key issues for the failure of this deal. One of the most important issues that resulted in the failure of this outsourcing deal is the drop in quality of service. After initial period the quality of service provided by Stream went down considerably which resulted in unsatisfied customer and complaints. This resulted in fall of sales and loss of market share. Other issues such as loss of control over the operations and loss of tacit knowledge, unable to meet the customer demand due to large increase in customer base, loss of intellectual property, lack of expertise too played a critical factor in its failure. The tip of the iceberg came when negotiating a contract extension and Stream demanding more, which lead to Dell calling off the whole deal. Critical analysis shows that tech support may be a core competence of Dell, which they had to retain more control over. The possible recommendations are to offshore the call centre to a cost efficient location rather than outsource it. Put in a confidentiality agreement in place in order to protect from loss in intellectual property. Negotiate smaller lengths of contract and to choose quality over price as main criteria while evaluating vendors for outsourcing in the future.

Contents 3

Introduction 4

Why Outsource?????? 5

Non core function 5

Gain Access to World-Class Capabilities 6

Cost Saving 6

Accelerate Reengineering Benefits 6

Share Risks 6

Redirect Resources to more Strategic Activities 7

The Stream Story 7

What went wrong???? 8

Quality of Service 8

Loss of Control 8

Viability of Service Provider 8

Relative Size of Customer 8

The Issue of Trust 9

Lack of Expertise 9

Hidden and Uncertain Costs 9

Tip of the Iceberg 9

Conclusion & Recommendation 10

1 . Offshore not out-source : 10

2. Confidentiality Agreements: 11

3. Quality over price: 11

4. Short term contracts : 11

References 12

Appendix 13

Appendix I 14

Sales of Dell from 1999- 2007 14

Appendix II 14

Market Share of PC Manufacturers 14

Introduction

Dell is a multinational computer company which has managed to stay in the first place of computer system sales for over a decade. Ranked in the top 50 among the Fortune 500, Dell offers a range of IT products and services, including hardware, software, consulting services, support services, and managed services. Dell employs more than 100,000 employees at services, manufacturing, and design locations around the world. Its strong and revolutionized strategy of direct selling computers to the customers increased its success in the computer companies’ field providing it with a competitive advantage. Dell was founded in 1984 by Michael Dell a 19-year old teenager and it was named as PC’s Limited. Starting with a capital of $1000 and the aim of selling IBM PC-compatible computers he managed to establish Dell as one of the most worldwide successful and profitable companies only after the first years of its function. The first year gross revenues amounted to $6 million. In 1985 Dell introduced the first computer of its own design- the Turbo PC. In 1988 the company made its initial public offering at $8.50 a share and was renamed to Dell Computer Corporation.   By 1990 it had been expanded in 12 different countries. Six years later(1996), Dell began selling computers via its web site and offered online technical support at the same time and by the 1997 Dell was one of the top five computer makers in the world. As one of the world’s leading direct computer systems companies and a premier supplier of technology for the Internet infrastructure, Dell’s competitive advantage is its direct customer focus. Constant interaction with its customers online and via the telephone gives Dell the ability to understand unique computing needs that drive individual and enterprise productivity. Even though growth rates for the computer industry are expected to be less than previous years, Dell can still successfully operate, enjoying healthy sustainable profits.

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With its unique operation strategy and reduced inventory levels gives Dell a competitive edge over its rivals. Dell chooses to outsource a whole bunch of its processes of its operations. Right from most of its production line to sales order processing to distribution to after sales service. Outsourcing allows companies to focus on broader business issues while having operational details assumed by an outside expert. The main focus of this report will be around the outsourcing of its call centre for the technical support.

Why Outsource??????

The reasons why Dell chose to outsource its technical support are as follows:

Non core function

The main reason for its choosing to outsource this aspect of its operations is that Dell saw the technical support operation as not part of its core competence. A core competence provides a competitive advantage through being competitively unique and making a contribution to customer value or cost (Prahalad & Hamel, 1990). Long & Vickers-Koch (1995) expand the idea of core competences to core capabilities. They distinguish these two by noting that “…competencies relate to the skills, knowledge, and technological know-how that give a special advantage at specific points of the value chain, which, in combination with the strategic processes that link the chain together, form core capabilities,” (p. 12). Dell clearly identified techincal support or the call centre as a non core part of its operations. They saw themselves as clearly being a computer manufacturer who sold customised computers to the users directly and chose to concentrate on this aspect of its business which turned out to be a mistake, we will look at why this was the case in the later part of this report.

Gain Access to World-Class Capabilities

By the very nature of their specialization, outsourcing providers bring extensive

world-class resources to meeting the needs of their customers. Dell wanted to fully utilise this specialization that many of the outsourcing vendors had to offer. Partnering with an organization with world-class capabilities would offer access to new technology,

tools and techniques that the Dell may not have possessed more structured methodologies, procedures and documentation; and a competitive advantage through expanded skills.

Cost Saving

Cost implications are critical factor for any company when it chooses to outsource and Dell being no different. The single most important tactical reason for outsourcing is to reduce or control operating costs. Access to an outside provider’s lower cost structure is one of the most compelling benefits of outsourcing. The overall operating cost of the tech support would be significantly lower if the project was off – shored to a more cost efficient location. Although cost benefits would not be realised in the immediate future but over the long run it promised huge cost savings.

Accelerate Reengineering Benefits

Outsourcing is often a by-product of another powerful management tool; business process reengineering. It allows an organization to immediately realize the anticipated benefits of reengineering by having an outside organization one that is already reengineered to world-class standards process. Dell wanted to utilise the reengineered business process of the vendor to the fullest.

Share Risks

There are tremendous risks associated with the investments an organization makes in information technology like a call centre. Dell believed that by outsourcing they would become more flexible, more dynamic and adaptable to meet changing opportunities. This would reduce the risk both financially and strategically in the long term.

Redirect Resources to more Strategic Activities

Every organization has limits on the resources available to it. Outsourcing permits the redirection of resources from non-core activities toward activities that provide a greater return in serving the customer. Dell clearly saw tech support as its non- core activity and hence thought of outsourcing as a way to redirect its resources and attention to its core business activities like manufacturing and direct sales.

The Stream Story

After having decided to outsource the tech support and after careful vendor evaluation the eventual order for the outsourcing deal was struck with Stream Global Services. Stream was a business process outsource (BPO) provider specializing in customer relationship management services including sales, customer care and technical support services. Tech support for the entire North America was shifted to Stream located in Mumbai, India. The contract signed was relatively short term which needed evaluation in 4 years. Although, the initial few years of the contract was a success and the company started reaping benefits from sales and profit generation. In 2007 the sales growth started to take a downward turn. Dell started to lose its market share and HP had taken over the market as the premier brand. (Refer Appendix). While there were several factors in the downturn of the company’s fortunes, the outsourcing deal with Dell was also said to be a reason. After four years into the deal and when the time for evaluation and re contracting came along Dell decided not continue its relationship with Stream and the outsourcing deal went bust. There were several reasons for the failure of this particular deal.

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What went wrong????

Quality of Service

One of the main reasons for unsuccessful deal was that the quality of service that Stream was offering gradually went down. As with any outsourcing deal the vendor tends to provide high quality service to begin with but over a period of time this quality tends to drop due to several reasons. The average time per call went up, there was more waiting time etc. Dell started to receive a lot of complaints from unsatisfied customers, which was bad for the image of the company. Their competitors started offering better after sales services and Dell started to develop this reputation of having bad customer service. This resulted in sales dropping and Dell loosing market share.

Loss of Control

The main business strategy of Dell was that it sold computers directly to customers. It is paramount for Dell to know the needs of its customers. After having outsourced its tech support they started to lose control over this aspect. The market and customer demands are constantly changing and it’s critical for Dell to always be in close conjunction with these changes. Customer feedback is a medium through which they can keep track of the changing needs, but because tech support was outsourced they realised they did not have the control over feedback like they wanted.

Viability of Service Provider

Dell realised that Stream were not offering the services that was agreed upon. But due to flaws in the contract it was very difficult for them to make any headway into this matter. They realised that Stream did not have the technical proficiency that they had claimed to have had, thus resulting in lower service levels.

Relative Size of Customer

As the sales of the company grew there were greater customers needing technical assistance. This meant that there was a huge influx of customers for Stream which they did not have the capacity to handle at that time. This resulted in service levels dropping and quality going down.

The Issue of Trust

Intellectual property became a key issue as well. Stream at the same time were providing services to other computer manufacturers and IT companies which were if not direct but in direct competition with Dell. Hence, confidentiality became an issue with this relationship.

Lack of Expertise

Dell realised that Stream lacked the technical expertise that they expected. This was but natural as Dell was the experts in designing and manufacturing the computers and they had the technical knowhow of the product. Even with extensive training Stream could not fully gain the technical expertise possessed by Dell.

Hidden and Uncertain Costs

As in any outsourcing deal the uncertain costs and the hidden cost are always the main reason why any deal is called off. The outsourcer in this case Dell realised that there was a lot hidden costs that was involved in the deal and thus the overall cost benefits they had expected would not be realised.

Tip of the Iceberg

The final nail in the coffin of the deal came when the time for re-contracting had come along. As in many of the outsourcing cases the bargaining power of the vendor increases as the years go by. Stream had the knowledge that it had the upper hand when it came down to the bargaining power and demanded more money. Dell realised this and decided to bail out of the contract extension. It was a bold decision on the part of Dell because in-sourcing or back sourcing always is a tough task for any company as knowledge transfers becomes a critical issue. Never the less the decision to bring back its technical support in-house was made. After a couple of years Dell again outsourced its tech support but after having the experience of a failed deal they were more careful with this deal.

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Conclusion & Recommendation

The first and the foremost function of any company when deciding to outsource should be to evaluate its core competence. As mentioned above core competence gives a competitive edge over the competition. Clearly the technical support for Dell computers is a core function. The main reason for this being that as we saw that the sales started to drop and one of the reasons being the poor quality of customer service. After sales service is an order winner for most computer manufacturers as most of the customer choose to buy a certain brand based on the after sales support that they offer. Based on this analysis the following recommendations can be given. All recommendations given analysis its benefits and its limitations.

1 . Offshore not out-source :

Dell should look to offshore the tech support part of its operations rather than outsource. This means that they should retain control of the operation but try and move it offshore for a cheaper alternative. India, Philippines etc are cheaper alternatives that should be considered for future operations.

Benefits: They will retain much more control of the operations thus retaining the tacit knowledge and be in close contact with its customers. They will retain their core competence and will not end up losing their competitive edge.

Limitations: Initial capital for this is very large. Another limitation is that as in the case with outsourcing the overall cost of operations is not significantly low .This is because with a outsourcing vendor the cost can be reduced by means of economies of scale. Dell will not have this luxury and hence the cost as compared to outsourcing will be relatively high.

2. Confidentiality Agreements:

In order to safeguard the intellectual property of the company, some sort of confidentiality agreement needs to be made between Dell and the vendor.

Benefits: The core competence of the company will not be shared with its rivals and Dell will not lose its competitive edge.

Limitations : It is very difficult to negotiate such kind of contracts with any vendor and such agreement and at times do not hold much value in certain situations and countries.

3. Quality over price:

When evaluating a vendor quality and not price should be the foremost criteria. The capacity of the vendor to offer a certain kind of service should be looked upon first. Most outsourcing deals are looked at from a cost point of view and quality gets overlooked.

Benefits : Improved quality standards. The vendor will have means to cope with the change in customer quantity and demand. There will be less unsatisfied customers thus enhancing the reputations of the company which is diminishing quickly for its poor customer service.

Limitations: Price goes up. Quality always comes at a price and better quality means paying more for such services. These vendors will not be able to meet the price standards of the cheaper vendor which will very often be the case.

4. Short term contracts :

Dell should look at signing short term deals with the outsourcing vendors. Ideally the length of the contract should be 2 -3 years after which it should be evaluated.

Benefits: Gives Dell more flexibility and opportunity to evaluate the situation of the deal. If Dell feels that the service levels are not up to the mark then it will give them an opportunity to re negotiate. It will put the bargaining power in the hands of Dell.

Limitations: The problem with negotiating short term contracts with vendors is that quite often they try and increase their price as they are not guaranteed return on their investment. So they try and increase their profit margins so that they can compensate it for the short length of the contract.

References

Christensen, Clayton M. (2001), “The Past and Future of Competitive Advantage,” Sloan Management Review, 42 (Winter),

105-109.

 J. Barthelemy, The seven deadly sins of outsourcing, Academy of Management Executive 17 (2003) (2), pp. 87-97.

Magretta J. 1998. The power of virtual integration: an interview with Dell Computer’s Michael Dell. Har-vard Business Review 76(2): 72-84.

Long, C., Vickers-Koch, M. (1995), “Using core capabilities to create competitive advantage”, Organizational Dynamics, Vol. 24 No.1, pp.6-20.

Prahalad, C. K., G. Hamel. 1990. The core competence of the organization. Harvard Business Review. May-June.

Quinn, J. 2000. Outsourcing innovation: The new en-gine of growth. Sloan Management Review, 41(4): 13-29.

Quinn, J. “Strategic Outsourcing: Leveraging Knowledge Capabilities,” Sloan Management

Review (40:4), 1999, pp. 9-21.s

Willcocks L. Fitzgerald G., Feeny D., (1995). “Outsourcing IT: The Strategic Implications”,

Long Range Planning, 28, 5.

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