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Dell's high-stakes storage gambit

U.S. Bancorp's Ashok Kumar says the start-small recipe that Dell Computer used to its advantage in PCs won't do the trick in the storage market.

It appears that Dell Computer has a genuine interest in delivering corporate systems-storage products to the market.

The company has been active in the industry, buying ConvergeNet as well as licensing technology and investing in the storage industry. So why isn't Dell more visible, and what does it need to do to succeed?

On the surface, the storage business appears to be rather simple. But this deceiving simplicity is paradoxically one of its greatest challenges. There are not many opportunities to innovate in storage, and most innovations are typically available to the entire storage industry.

Yet Dell is not much of a technology innovator anyway, so that's not the issue. Dell apparently believed that owning technology was important, as evidenced by the ConvergeNet acquisition. But that's been an expensive lesson in the challenges of integrating storage. Management should get some credit for trying, but it will just have to try harder next time.

To succeed in storage, a company needs to understand what money is spent on and why certain vendors succeed. While the pursuit of new technology may be the most interesting and romantic approach, the market tends to be paranoid about storage failures and craves old-fashioned quality and reliability.

Dell needs to check its assumptions about who makes storage-purchasing decisions. The fact is, it's not necessarily the same people who make the PC-purchasing decisions.

Storage customers tend to buy from companies with known names, sterling reputations and top-notch support. Cost is an issue with some, but price is not the primary driver. Disk drives are among the most advanced technology products, yet they offer the lowest margins. Storage subsystems makers, on the other hand, can sell the same disk drives at a premium. That's because in the storage business, there is great value in adding reliability, connectivity and management expertise.

Establishing a track record
The first priority of any new entrant into the storage business is to establish credibility and a track record for reliability and world-class support. This, of course, is much easier said than done. The kind of credibility needed to succeed in storage does not come from offering commodity products in high volumes from corporate Web sites as Dell does.

The kind of credibility needed to succeed in storage is the kind that stems from selling truly mission-critical products. Despite what Microsoft would have us all believe, this is not a PC-Windows environment. Few information-technology managers believe a system is mission critical if it has to be rebooted when a new application is installed.

So the first step for Dell is to accept the ugly fact that it is known as a seller of commodity computing products with virtually no credibility as a provider of serious data-center storage products. If Dell stays on its current track, it will see its server margins squeezed as other companies reap the higher margins of storage products.

What's Dell to do?

It first must make a move in storage that will not seem like a token gesture or an experiment. In other words, Dell has to take a real risk. Until it does, the market is unlikely to take Dell seriously. If the company fails to communicate a vested interest in succeeding in storage, it will not win the credibility it needs.

Instead of buying and investing in start-ups and technology, Dell should acquire an ongoing storage business that has customers and a track record. Then it should operate this storage business as a wholly owned subsidiary. That means an autonomous management team to run the subsidiary that does not need to live in Texas and report to Round Rock. Failing that, it is unlikely the effort will be able to get past the corporate religion and dogma of making and selling PCs.

Dell needs to go after the disk subsystem business, which is at the heart of storage. Unfortunately for Dell, a great deal of the consolidation in the storage industry has already taken place, with EMC, IBM and Sun Microsystems having picked the choicest fruit. Yet subsystem companies are still available; even if they are flawed, they still have the potential to create instant credibility for Dell.

Shedding old habits
As mentioned, this organization would have to exist on its own, including the development of sales channels that work for storage. For now, this means running a direct-sales organization with powerful incentives.

In short, the unit should operate in a manner totally opposite of the way Dell sells its products. Dell also would need to invest considerably in a world-class system-test facility, which it would need to promote aggressively. There undoubtedly would be management changes needed to give the organization new energy and vision, but again, the leadership for the storage business would have to be able to set its own objectives, not those of Dell corporate.

Patience would be required. The contest would be long, and Dell would have to let its new storage unit take credit for all its failures and successes. That way, the company would truly learn the subtleties of the storage business.

Eventually the storage organization would develop products appropriate for the Dell Web channel. Realistically, this could take years, but it does not matter much as long as the storage company is successful in creating credibility and brand recognition.

To some degree, Dell is a victim of its own success. High-volume PC production with minimal cost of sales is squeezing the margins out of the system business. There are no barriers to keep competitors from achieving similar results. If Dell wants to continue to grow, it must be a part of other businesses with higher margins. The good news about storage is that margins, while under pressure, are still significantly higher than in PC hardware. The bad news is that the cost of getting in the game is high.

The start-small recipe that Michael Dell used to build his company won't be useful this time. Big companies must make big moves. The real question is whether Dell's management team can trust others outside the company's circle to manage a new, strategically important business.