Dell reboots its model

When Salesforce.com Chief Executive Marc Benioff wanted ideas about how to run his business during the technology recession of 2001, he turned to his friend Michael Dell.

Dell's advice: "Economic difficulties are a time when companies can reassess where they are in the market and rebuild themselves rapidly," says Benioff, who has known Dell's founder and CEO for 20 years.

Now Dell, 44, is trying to follow his own advice. Since returning as CEO of his namesake personal-computer company in January 2007, Dell has made 10 acquisitions, cut more than 10,000 jobs, outsourced 40 percent of production and entered the smartphone market in China.

The goal, Dell says, is to diversify beyond PCs, which he started selling from his University of Texas dorm room in 1984 at the age of 19.

"You're starting to see a real reshaping of the Dell portfolio and Dell business away from some things that were pretty important for us in our first 25 years," Dell said recently. "We're doing some new things that will be more important for our next 25 years. We're making progress."

To reduce its reliance on PCs, which account for more than half of revenue, Dell has expanded into markets such as computer storage and services and announced the $3.9 billion buyout of Perot Systems last month.

Dell said in the interview that he will consider more acquisitions or partnerships that expand the company's sales to health-care companies, which account for more than half of Perot's revenue.

Investor concerns

The pace of the overhaul, though, has left some investors and analysts unimpressed. The Round Rock, Texas-based company's shares have lost 35 percent since Dell ousted his hand-picked successor, Kevin Rollins.

PCs represented about 60 percent of sales at Dell in the past three years, down from almost 80 percent in 2000.

Services accounted for 10 percent of sales last year. Dell dropped to third place from second in the global PC market last quarter, according to market researcher IDC.

"The best thing that Michael Dell can do is take PCs off the table and diversify," said Ben Reitzes, an analyst with Barclays Capital in New York. "He's starting to do that, but he's late."

Dell has a "high degree of impatience and intolerance" for a lack of action, says Don Carty, chairman of Virgin America airline and a Dell director since 1992. "He is always the executive on the team that says, 'Why not faster?' "

When asked at an event in California recently where the company stands in its turnaround efforts, Dell said, "somewhere in the middle. We've made a lot of progress."

Carty says Dell hasn't been too slow. Investors may have unrealistic expectations about how long it takes to turn around a business with more than $60 billion in annual sales.

Longtime friends

Still, he can be patient when the situation calls for it. Dell first approached the Perots, who are longtime family friends, two years ago about buying the computer-services provider. Perot Systems, founded by H. Ross Perot, wasn't interested, according to regulatory filings.

But Dell raised its bid three more times before settling on a deal.

When asked why he didn't do a services deal sooner, Dell said, "We either weren't ready or it wasn't the right time for a variety of reasons," declining to elaborate. Asked about what caused Dell to go from bidding $17 to $30 a share over of five months of talks, he said: "This is what you'd call a negotiation."

As for PCs, Dell says he's looking to Windows 7, Microsoft's just-released new operating system, to buoy sales, at first to consumers.

Businesses, which account for 78 percent of Dell's revenue, may be slower to test and implement the new operating system, though Dell said there will be a major upgrade cycle for technology at some point in 2010.

Dell says he's focused on profit in the PC market, even if that means losing the company's No. 2 market-ranking, behind Hewlett-Packard.

"What we want to be is leading in profit share," Dell said. "Do we want to sell the most numbers of units? No, we want to have the most profit."

Dell's overall operating margin, or operating income as a percentage of revenue, was 5.22 percent in the past fiscal year, compared with IBM's 15.4 percent, Hewlett-Packard's 9.1 percent and 19.3 percent at Apple, maker of the iMac and iPhone.

Instead of a "PC maker," Dell says he considers his company "a solutions integrator."