1094RA Dell’s Quest for Enterprise Software Business Should Lead to Cloud

What is Happening?  On Monday, July 2 2012, Dell Computer announced its planned purchase of Quest Software for $2.4 billion. Quest had been reported in talks with several potential buyers since at least the first quarter of this year.

In its announcement, Dell said that it plans to establish Quest as the core of Dell’s software group, which it expects to grow into a $2 billion-a-year business over the next three years – a planned total revenue growth of about 500 percent based on Dell’s current software business.

From Saugatuck’s point of view, the acquisition is relatively unsurprising, as Dell had been known to be in the bidding for Quest for months, and Quest fills an obvious need for Dell in its accelerating push into the data center.

But we also see this acquisition as being about much more than a need to move from SMB servers and laptops into enterprise software. Should Dell be able to integrate and efficiently manage its string of recent data center management software acquisitions – including Quest along with security management providers AppAssure and SonicWall – Dell will be positioned as a viable provider of core Cloud technology, infrastructure, and management capabilities for user enterprises and for Cloud-based providers of software and business services.

Why is it Happening?  The focus of most accounts of the Dell/Quest deal has been on Dell’s need to build business beyond its traditional PC-focused offerings into the huge, still-highly-profitable, enterprise software and services market. And Dell’s acquisition strategy has certainly focused on those types of providers, from consulting to storage to networking to security and now, with Quest, to data center management. With hardware margins shrinking ever smaller, Dell had to make strong, significant moves that change its business model, and these are the types of moves that enable that (1067MKT, The “New” Dell – Reshaping Toward Full-line Positioning, 10May2012).

The company’s own positioning strongly supports this. In announcing the Quest deal, John Swainson, president of Dell’s software group, said “The addition of Quest will enable Dell to deliver more competitive server, storage, networking and end user computing solutions and services to customers.”

But in order to succeed in enterprise-class IT over the long term, Saugatuck believes that Dell will need to position itself to take advantage of two simultaneous needs and desires by enterprise IT leaders:

1. Coordinate, consolidate, and efficiently manage the increasingly complex sprawl and reach of enterprise IT as it explodes beyond traditional boundaries; and
2. Never build another data center.

Saugatuck research shows that while most enterprise executives prefer that their new business software and systems be Cloud-based by YE2014, the vast installed base of enterprise IT isn’t going away for several years at best. It is going to continue to become more complex, architecture(s) and operating structures are going to become more complex and likely fragmented, and someone is going to need to manage all of it – whether together or in parts (1080CLS, Change, and Change Again: The Shape of IT Orgs to Come, 8June2012).

What Cloud does is allow some, and eventually most, of that wad of complexity to be shifted into multiple off-premises data centers – enabling significant increases in operating efficiencies, while also increasing the need for comprehensive and effective technology and services management. This is where we see Dell making some very solid moves with its business focus and acquisition approach.

As the “center” part of “data center” fades into the Clouds, Dell’s software acquisitions, including Quest, enable it to build, adapt, extend, and offer a broad collection of management offerings for all aspects of data center management – whether on premises, in Clouds, or in hybridized environments, including those that stretch outside of enterprise business boundaries and structures.

But as noted above, Saugatuck sees the technologies, skills, and services being acquired by Dell help to position it as a provider of critical capabilities for Cloud services providers as well. Our Cloud EcoStack™ model, presented in Figure 1, lays out the basic hierarchy of Cloud technologies and functions, building from foundational IT up through complex and sophisticated Cloud-based business services. Dell’s new business model and resulting acquisitions enable it to compete viably at each layer – a much stronger position for Dell that enables significantly greater revenue opportunities for the company.

Figure 1: Saugatuck’s Cloud EcoStack™ Model

Source: Saugatuck Technology Inc.

Dell had competed longest and most visibly at the Cloud Technologies layer, which is profitable at a volume/commodity level. Through acquisitions like Boomi, Dell improved its ability to compete at higher, more profitable layers of the EcoStack™. The acquisitions of Quest and other management providers’ enables Dell to compete effectively at all layers, vastly increasing its opportunities along with its ecosystem.

Market Impact  The Quest acquisition is, at its core, another indicator of the two trends noted above: 1) the need by enterprises to efficiently manage the cumulative complexity of increasingly undefined enterprise IT, and 2) the simultaneous desire/need by enterprises to shift more and more toward Clouds while managing what they already have.

The acquisition also firmly establishes Dell’s own business shift into data centers, both traditional and Cloud – and into most potential hybridized environments. It’s a fundamental change in position and strategy that also requires significant/substantial changes in and re-invention sales, partnerships, capital strategies, marketing and technological development. We look for a series of acquisitions that help to enable and support the business changes necessary for Dell, including the acquisition of more executives experienced with and capable of guiding Dell through the rough and rocky waters ahead.

Dell’s business shift is also a confirmation of the decline of influence that PCs and servers have on enterprise IT as we know it, and likely the final shift away from centralized IT. The structure of enterprise IT as an entity, and therefore its roles and responsibilities, are changing as a result (1080CLS, Change, and Change Again: The Shape of IT Orgs to Come, 8June2012).

Finally, for Dell, the Quest acquisition provides stronger positioning and much greater opportunity, regardless of how its new or existing data center customers see and utilize Cloud. That’s an enviable position for any provider.

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