The Fall of Dell: A Business Model Innovator Loses Its Way

Update: After this story went live, I had a chance to speak with a Dell representative. His comments are included below.

Stuff happens. People and companies make mistakes. If you've had a long-term relationship with a vendor, reaching for the divorce papers too quickly can be the wrong move.

But what we've learned about Dell recently doesn't qualify as an understandable mistake. Only a rotten company sells defective computers and lies about it. How could anyone in IT or anyone buying a computer for personal use ever trust that company again?

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I hate saying this. Although Dell was never a leader in technology, it pioneered a business model, including one of the world's best supply chains, that helped make desktop computing ubiquitous, affordable, and secure. And how could anyone not admire the smarts and drive of Michael Dell, who founded the company in his college dorm room and built it into a multi-billion-dollar enterprise in less than a decade?

When I was an executive editor at PC World in the 1990s, our service and reliability surveys generally ranked Dell at or near the top. I almost always had a Dell PC on my desk at work and at home, and I had no hesitation in recommending Dell products to friends and family members.

But today's Dell is not the same company. It's not going to disappear, but like once-high-flying CA, it will always be tainted by the scandal and by its shocking breach of faith with customers.

Blame the Man at the Top

Business culture is formed in the corner office. Even the largest enterprises are a reflection of the men and women who run them, particularly if those executives were founders. The Hewlett-Packard steered by Bill Hewlett and Dave Packard was very different than the HP run by Carly Fiorina.

Dell, though, has always been Michael Dell's company. Sure, Kevin Rollins was CEO during the period when quality plunged. But Michael Dell was chairman at the time and, by all accounts, in close touch with Rollins; they even shared an office for a while.

So blaming Rollins doesn't cut it, and neither does blaming the company that produced the faulty capacitors at the heart of this story. Dell, along with many other manufacturers of PCs, used capacitors produced by Nichicon, a Japanese electronics giant. According to court documents [PDF] in the suit against Dell brought by a major customer, Nichicon sold faulty capacitors, a key motherboard component, that leaked and failed with alarming regularity -- and Dell knew it.

In his excellent piece in the New York Times this week, reporter Ashlee Vance refers to an internal study by Dell that predicted its Optiplex line of business computers containing Nichicon capacitors were expected to have a failure rate of 97 percent over three years.

Dell didn't make those capacitors, but once the company knew they were faulty, it obviously had a duty to its customers to recall the affected machines. It didn't. Instead it covered up the problems, relying on ridiculous excuses and blaming its customers.

According to the Times, when the University of Texas complained that its Dell PCs were failing, the company said the school's math department had pushed them too hard, making them solve difficult calculations. And in a somewhat ironic instance of poetic justice, even the law firm defending Dell was stuck with 1,000 faulty PCs the vendor declined to fix.

Dell's Side of the Story

Not surprisingly, Dell doesn't think the suit has merit and believes the Times story was misleading. In an email exchange, Dell spokesman David Frink put it this way:

The implication that this situation affects Dell currently is incorrect. The AIT lawsuit is three years old, and the Nichicon capacitors were used by Dell suppliers at certain times from 2003 to 2005. We actively investigated the failures, audited the Nichicon plants and worked directly with customers to fix OptiPlex computers on a case-by-case basis. And Dell extended the warranties on all OptiPlex motherboards to January 2008 in order to address the Nichicon capacitor problem. The AIT lawsuit does not involve any current Dell products.

Frink added, "AIT was using the OptiPlex systems as servers, a use for which they weren't designed." (Dell's website has a fuller statement.)

Years of Problems

Frink has been fielding my questions for years, and he's a decent guy, but in this case, he's full of it. Dell has had truly awful quality control and customer service issues for years. It's also had some serious accounting problems (I covered some of them when I was writing about technology stocks for TheStreet.com), and according to the Times, the Securities and Exchange Commission may file charges against Dell himself.

The accounting and quality issues aren't directly related, but they do form a pattern of bad -- indeed, terrible -- corporate responsibility and governance. As the rest of the industry caught up with Dell's hype-efficient production and sales models, the company defended its margins by cutting corners. Customer service plummeted. Consumers fumed on hold and were finally routed to less-than-competent help-desk technicians. Even that would have been forgivable if Dell owned up and really fixed the inevitable problems.

Every now and then the company trots out a sincere-sounding exec to announce yet another initiative about improved quality and customer service. I don't believe them any more. This is how companies fade away and die.

I welcome your comments, tips, and suggestions. Post them here so that all our readers can share them, or reach me at bill.snyder@sbcglobal.net.

This article, "The ignominious death of Dell," was originally published by InfoWorld.com. Read more of Bill Snyder's Tech's Bottom Line blog and follow the latest technology business developments at InfoWorld.com.

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