Gartner to Dell buyers: Read the fine print

In a research note issued earlier this week and seen by CNET News.com, Gartner warns corporate buyers who have not dealt with Dell before to avoid letting themselves get blinded by low pricing during negotiations. Dell, which went on a market-share blitz in 2001, has gained a number of new customers by using its lower prices as a way to win large contracts.

But the report says that buyers who jump in with both feet may hit a rocky bottom of unforeseen circumstances. Dell, for instance, will offer special prices for a set number of specifically configured PCs. If customers discover that they need more memory in the machines, however, "the increased cost is typically substantially more than the special price quoted," according to Gartner.

In the note, the research firm says the best defense for buyers against later surprises is to carefully consider a wide variety of possibilities and to negotiate contingency clauses to limit financial impact.

"Once the 'honeymoon period' is over," the report says, "both partners can discover annoying habits they hadn't noticed in the beginning."

Dell seems comfortable with the report, even viewing it as a sort of primer for new customers, according to a Dell spokesman. "Our perspective on it is that anything that does a service for new customers or helps customers in general to be smarter about their relationship with Dell is a plus," said Dell's Dwayne Cox.

Aside from costs that could arise as the result of reconfigurations, the Gartner report continues, customers who are lax in negotiations might later find that the PCs specified in the contract have been discontinued and replaced by similar yet more expensive models.

"Many buyers quickly discover that, as Dell brings new technology to the market, the attractive upfront pricing may erode, and the hardware configurations they initially selected are no longer available," the report says. "It is critical for enterprises and small- and midsize-business buyers to understand what they will, and will not, get in a long-term relationship with Dell if they sign the standard contract."

The report points out that when Dell reconfigures a given PC, it can either add more-expensive components, which drives up the price, or delete features such as extra memory to keep the price the same. Though Dell price changes are difficult to track because the company often changes its PC hardware configurations and prices daily, analysts have noted a general increase in the prices of Dell's most basic PC configurations. This upward swing was seen recently in the consumer market, for example.

Dell spells it out
The Gartner report acknowledges, though, that Dell is quite up front about the potential for changes. Its standard contract includes clauses that allow it to change product configurations and list-price discounts at any time. But the onus is on the customer to understand this and alter the standard contract if necessary.

"Dell will negotiate with clients," said Frances OBrien, one of the analysts who wrote the note, "but if clients are not aware of what they should be negotiating for, it could put them in a difficult spot."

Part of the issue is adjusting to the way Dell does business, Gartner says. The company builds PCs to order and will change its standard PC configurations over the course of a year, based in part on component prices.

By contrast, at various times Compaq Computer, Hewlett-Packard, IBM and others have taken a different approach. They've promised customers that certain computers in their respective corporate lines would change little, if at all, over a nine- to 12-month period. IBM at one point promised up to 12 months, dubbing these machines workhorse models. During the Year 2000 computer scare, Compaq committed to keeping its corporate PC configurations stable for 18 months.

All of these companies effectively try to ensure that any changes will not alter the "software image" for a given customer--the uniform bundle of software that is identical across a corporate environment. Companies try to avoid changing the image because of the effort and cost involved in reinstalling software on each employee PC. IBM even provides services designed to save on the cost of creating and distributing these software images should a customer decide to make a change.

Dell accommodates customers' desire to maintain a stable software image, but, Gartner says, customers have to make sure to ask for this kind of treatment.

Negotiating with Dell can sometimes be tricky, said Roger Kay, analyst with IDC.

"Dell's just got sharper practices than the others. They protect themselves in some ways," Kay said. So as a customer, "you'd have to say, what's going to happen if it turns out I need to double the memory? Those are the kind of questions the (customer) has to ask and I guess are typically not asking."

Dell's Cox recommended that customers review the report and note Gartner's action items. The items are part of a list of terms Gartner says should be included in every negotiation.

First, Gartner suggests that Dell customers who desire consistent hardware should require Dell to maintain configurations for six to nine months and notify the company of any changes at least 30 days in advance.

Gartner also says Dell customers should require the company to provide advance notification in writing at least a month before any major price increases or reductions.

Finally, the firm suggests that Dell customers specify their service contracts and warranty terms in their contracts and require Dell to honor these terms throughout the life of the agreement. Should Dell discontinue a certain service, Gartner suggests customers ask to be given notice at least 90 days in advance, to allow time to select an alternative to provide the service work.