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Tue 8 Nov 2005 04:00 AM

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Tough transition

Channel tongues have been wagging about the real reasons behind the decisions by a couple of Microsoft Middle East executives to call time on their careers at the software giant and move on to pastures new.

Channel tongues have been wagging about the real reasons behind the decisions by a couple of Microsoft Middle East executives to call time on their careers at the software giant and move on to pastures new.

With Abdullatif Al Mulla and Emre Berkin both resigning so soon after Microsoft’s decision to merge its North and South Gulf operations into one unit, it is clear that Microsoft’s Middle East organisation remains very much in a transition phase.

Microsoft has stuck admirably to the corporate line, citing the length of service of both employees and their desire to move on to fresh opportunities and new challenges as the reasons behind the resignations. It’s great stuff from a PR perspective, but you don’t need to dig too deep beneath the surface to find some other issues that need to be addressed.

Microsoft’s channel partners in the Middle East remain disillusioned by the company’s current go-to-market policy. Couple this discontent with the recent restructuring and chuck in the problems earlier this year with parallel exports to the UK, and you start to see a slightly different picture.

Allegations of over-distribution remain rife and Microsoft partners are quick to point out that their margin potential has been eroded to such a point that it is difficult for them to justify investing in dedicated staff to develop the software giant’s position in the market. If there’s no margin to be made, what’s the point of investing to generate new business?

In fairness, Microsoft’s decision to merge North and South Gulf showed its awareness that changes were required in terms of its structure and business model in the Middle East. There’s still a long way to go and the vendor needs to do a great deal more to get its channel fired up, combat the rampant use of pirated software in the region, which still exists despite the protestation of bodies such as the BSA to the contrary, and also stamp out parallel export and grey problems.

I’m hearing reports of consultants being flown in from outside the region to sit with Microsoft’s Middle East team and identify the internal issues that need to be resolved. If this is true, it is undoubtedly a step in the right direction.

If Microsoft is truly serious about reenergising its Middle East partner community, it would do well to consult with the channel every step of the way. They know the problems that exist and they know the issues that they face every day.

Microsoft has embarked on a tough transition process in the Middle East. Fundamental changes need to be made to the organisational structure and the channel engagement model to take the vendor forward in this region. Has Microsoft got the courage and audacity to make the radical changes that are really required or will it simply be a half-hearted restructuring that appeases the vendor’s channel detractors yet maintains the status quo behind the scenes? Only time will tell.

Dell bashing

The financial community in the US has been quick to pounce on Dell’s lacklustre third quarter earnings update. The hardware behemoth announced that global sales would come in below its original guidance at US$13.9bn, citing a revenue shortfall in its UK business and the US consumer market.

Simultaneously, Dell announced that it would take a US$300m hit relating to ‘a vendor part that failed to perform to Dell’s specifications’. The problem occurred with a small percentage of the vendor’s previous generation Optiplex systems. Another US$150m charge related to, ‘workforce realignment, product rationalisations and excess facilities’, was also announced.

One of the main reasons that analysts and investors have been so quick to jump on Dell’s announcement is that this is a company with a pretty blemish-free financial track record. It’s one of the few opportunities that they’ve had for a spot of Dell bashing and they’ve raised a few interesting points.

The 11% year-on-year sales growth predicted for the third quarter is a sharp drop on Dell’s revenue growth recorded in the last six quarters. Third quarter global PC shipment data from numbercrunchers such as Gartner showed that Dell’s growth rate was now in line with the market average — not significantly above the market growth rate as had previously been the case.

So, what are the issues here? And when am I going to get to the channel angle? Well, the problem in my opinion is that Dell has a business model ideally suited to mature markets, but the strongest potential for further sales growth now exists in emerging markets — and that presents a real conundrum for Dell.

In the US, Dell’s direct model is awesome. The vendor has one-third of the US desktop market and a level of efficiency that no other vendor can touch. The advantages of this model are also visible in the highly mature markets of Western Europe. However, maybe Dell has now gone as far as it is possible to go in these markets. If that is the case, the vendor may now need to turn its attention to emerging markets, allocate its resources accordingly and understand that cracking these markets requires a very different business model.

Given the limited resources that Dell Middle East has and its inability at present to replicate the direct model used in developed markets, the local team has done a solid job in the region to date. They’ve had to recruit distributors, train up a channel and even fight for space in retail stores around the region — alien concepts to their counterparts in the UK and US.

As Dell’s growth prospects in the US and UK diminish, the vendor needs to reassess its approach to emerging markets such as the Middle East. It needs to pay more attention to these markets and dedicate more resources. If this means recruiting a channel-to-market, Dell should do so aggressively, not in a half-hearted manner that leaves partners wondering when they will eventually be disintermediated.

I met some senior Dell EMEA executives at Gitex this year and their knowledge of the Middle East market and the vendor’s current strategy and go-to-market model was patchy at best. I asked them when Dell would launch a Middle East consumer e-commerce website — like the ones used in mature markets — where customers can configure and purchase their perfect PC online? ‘You can already do it,’ was their confident reply, ‘Dell’s direct model is the ultimate in terms of supply chain efficiency and offers unbeatable prices for customers.’

Just to be clear, you can’t order an individually configured Dell PC online in the Middle East yet. Dell’s UAE website tells customers to contact their local distributor.

The point I’m making is that Dell’s total commitment to its direct model has undoubtedly reaped rewards in developed markets. But there is a real danger that this success has blinded Dell’s senior executives to such an extent that they don’t want to admit that other models could work better elsewhere in the world.

If Dell’s growth does start to stutter in developed markets, it will be the vendor’s ability to adapt and show a degree of business flexibility that will truly determine whether or not it replicates its developed markets success elsewhere in the world and maintains its meteoric growth rates.

I’m not bashing Dell’s Middle East operation here. I’m telling the EMEA and global executives to wake up and realise that their future growth potential rests on putting the right business model in place for these emerging markets. And that means now. Not waiting for the market to mature to such an extent that the direct model becomes viable before committing meaningful resources.

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