BPO update: Dell bails in bid to improve profitability

Michael Alan Hamlin

Posted on March 25, 2009

Several weeks ago, server and PC manufacturer Dell Computer announced that earnings plummeted a staggering 48% to $350 million in the three months ending in January. Revenues also fell in double digits, 16% to $13.4 billion, and units sold was down 12% in a period one report described as “three of the worst single months since PCs were invented.” The company’s gross margin also dropped to 17.2% from 18.7%.

In announcing its latest results, Dell added that it raised a previously committed cost reduction target to $4 billion from $3 billion. In reaction, Stanford Bernstein analyst Toni Sacconaghi estimated that the fabled technology company would have to cut another 12%-15% of its workforce on top of 9,400 jobs already eliminated, an 11% cut according to journalist Maureen O’Gara writing recently in .NET Developer’s Journal.

Dell is still the number two PC manufacturer in the world, but the global economic crisis has hit hard. Commercial sales to businesses account for 81% of Dell’s revenue and 96% of its operating income. With businesses delaying investments in technology or buying very low-cost netbook PCs – a segment dominated by competitors Asus, Acer, and HP – the company is trimming non-core manufacturing and services.

Still, it was a jolt to learn Monday morning that Dell Philippines has sold one of its two call centers located in the Philippines to business process outsourcing (BPO) services provider Teleperformance, which will take over the site’s support services for Dell. According to information available on its website, Teleperformance has “more than 6,000 workstations in five call centers in Manila and Bacolod City.” Worldwide, the company operates 248 facilities in 46 countries. The acquisition of Dell’s call center in the Mall of Asia (MoA) will increase the number of workstations in the Philippines by about 1,000.

According to reports, Dell sold the call center to “increase the efficiency of its business and provide better value for customers.” Insiders told me that the decision harkens back to an early 2007 pledge by Dell founder, chairman, and CEO Michael Dell to investors and Wall Street analysts that he would make significant cost cuts to improve margins. Because Dell is at its core a logistics management company, manufacturing facilities and call centers it invested in as it grew are seen to be expendable if necessary to fulfill that pledge.

By outsourcing manufacturing and call center services, Dell theoretically benefits in two ways. First, it refocuses on what it does best: logistics management. Providing fast, online response to customer orders placed over the phone and online made Dell the number one PC manufacturer for many years. Its focus on the corporate sector meant and continues to mean that Dell provides huge numbers of basic, nuts-and-bolts machines easy to assemble and ship (when customers are growing in a healthy economy, of course). Giving up manufacturing will generate cash and lower overhead, but potentially at the cost of control. However, with excess manufacturing capacity around the world increasing daily, for Dell it’s a buyers’ market.

The second way Dell potentially benefits is by leaving customer support to companies whose core competency is customer support. While there are benefits accruing from lower overhead by giving up shared services facilities and Dell’s current MoA workforce is said to have delivered outstanding performance, the real strategic benefit for Dell should come from enhanced world-class customer support, improved cross-selling of related products, and better up-selling of premium products, all important initiatives in the current environment.

All this suggests that Dell’s Quezon City facility will also be up for sale soon. Rumor is, in fact, that it already is. If true, it represents another opportunity for third-party outsourced services providers like Teleperformance. Since Dell isn’t likely to abandon the consumer market despite its challenges, and support services delivery for commercial and consumer customers is an obviously critical component of any company’s value proposition, the sale of Dell’s center here should be taken overall as a positive development for the Philippines’ BPO industry.

It’s difficult to deal with the loss of a major brand in the BPO industry lineup, true. But the opportunities it presents to services providers is a winning tradeoff. That will be important to remember as pressure on multinational firms of all types to lower costs builds and the financial downturn drags on. Dell is likely to be just the first global brand to shed shared services facilities in favor of outsourcing to third-party services providers.

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