Dell and HP Rumors Suggest Accelerating Disruption in the Tech Sector

The Twitter feed never ceases to gain my attention.  Dell reportedly explores going private while news gets out there might be potential suitors for HP’s EDS and Autonomy business units.

The two-pronged market disruptor generically called the "Consumerization of IT" that drives the business market towards simplicity and/or “Utility Computing” sledge hammers conventional wisdom in multiple business segments.  It starts with the continued erosion in hardware margins exacerbated by the new IT provisioning pathway of the Cloud with its “as-a-Service,” metered permutations.  As hardware profit potential collapses, many different business entities seek asylum in adjacent routes to market.  VARs become MSPs, for example in a very compressed time period to do now on their small scale what IBM has been doing ever since Lou Gerstner taught that Elephant to dance.

In the middle then, between Best in Class IBM and small businesses sustained by hardware resale margins sit a series of hardware entities with various challenges.  Dell and HP appear to be the first to face this challenge while analysts sit and wonder whether entities such as NCR, Unisys, and Teradata will be able to take the impending hammering to their business operations from these inexorable market forces.

Within this context, then, what does it suggest about the rumors swirling around Dell and HP in the Twittersphere?

1. Dell would seem to be trying to protect itself from a hostile takeover bid.  It likely has modeled out different scenarios tied to the extent traditional IT provisioning shifts over to the cloud.  Forecasting the rate of attrition to the cloud remains anybody’s guess, and to that end TBR has just launched a new report series called SourceIT calibrating this three dimensional disruptor in per industry reports starting with retail.  It will come from the top of the customer stack and from the bottom and vary by industry to make the forecasting a three dimensional challenge.  The new factor happens to be the bottom up adoption, making customer erosion akin to Napoleon waging a war on two fronts.  In past disruptions, it has usually come from Fortune Accounts downward.  Being able to scale IP down market, then, becomes a critical best practice against consumerization/utility computing.
   
   IP development has not been a Dell competitive differentiator.  It has been scaled distribution of volume products bypassing the distributor middleman for margin capture.  This is a tough, tough transition for any company, and Dell likely realizes the short term hits will be severe and wants to do it in private in hopes of coming out of the transition as a standalone entity knowing its stock price will take a beating during the process.
   
   If it embarks on this transition while public, opportunistic entities with scaled commodity distribution best practices could become aggressive suitors for an unwilling partner.  To that point, then, Dell seems to be sensing it is prey for a wildebeast and is trying to hide better inside the herd to avoid getting gunned down. 
   
   
2. HP has challenges across multiple fronts and breaking up the conglomerate might be the only course of action against the backdrop of consumerization/utility computing.  The challenge, becomes, though, what to shed and why?  For firms in challenging downturns, the strong performing assets become the pieces suitors seek as value plays.  For the selling firm, however, shedding profitable entities to generate cash can be akin to a balloonist holding onto the ballast and letting the air out in an effort to gain altitude.
   
   It ain’t gonna work.  Just ask W. Michael Blumenthal who in 1986 masterminded the merger of equals between Burroughs and Sperry to form Unisys. 
   
   So the HP rumors certainly seem more far-fetched assuming HP has righted its managerial ship after what, to be kind, has been a very tumultuous period in its existence.

At the end of the day, these rumors may be all for naught.  We know consumerization/utility computing will consolidate hardware-centric vendors as various business models up and down the distribution chain become dehydrated from evaporating hardware profit pools.  The consumerization/utility computing hammer has already hit Software and the “as-a-Service” model which smashed traditional pricing metrics over the past ten to fifteen years. 

 

But consumerization/utility computing will not stop there.  It is coming after services and it will come after it hard in the next couple of years.  It was in days past that large firms could hide bodies over in services as margin models shrank and required headcount attrition.  But services automation strips labor out of what has previously been the labor intensive piece of IT business models.  

So price competition will hit services hard.  It will change deal structures.  It will demand nimbler “prospect to close” practices for shorter deals.  It will heighten the challenge of staffing workloads based on shorter, more volatile contracts.  Most importantly, though, services firms will have to determine ways to take custom developed IP and scale it to embed into existing services products to strip yet more labor out of their services delivery model to defend its installed base downmarket in a very vicious and unforgiving cycle.

And it all starts with hardware centric vendors and their margin challenges.  That top tier hardware vendors are rumored in the Twittersphere to be looking to go private and to shed core assets suggests the consumerization/utility computing sledgehammer has commenced shattering conventional business models and the firms who live by them.