Dell Puts Hope in Health-Services Unit

News of interest from WSJ, I have been following up on the updates of DELL/Perot’s move in healthcare so I thought I’ll post the story here too.

Dell Inc. hopes customers like Methodist Hospital System will help cure what ails it.

Methodist has contracted with Dell’s services since December 2009 to help it create and maintain an electronic medical records system. Dell’s technicians are also customizing software for Houston-based Methodist’s 2,600 doctors so those records can be accessed by staff at any of its four community hospitals.

The Methodist contract is one of the most visible examples of what Dell hopes to accomplish with its $3.09 billion 2009 acquisition of Perot Systems, a specialist in health-care information technology. Dell is hoping it can use the unit to move up the technology food chain, offering higher-margin services that complement its relatively low-margin hardware.

If successful, the strategy would help Dell combat a slowdown in its core computer business that has pushed it from being the world’s largest computer maker to No. 3, behind Hewlett-Packard Co. and Acer Inc.

Whether Dell’s approach will work is an open question. The Round Rock, Texas-based company is late to the services space and is playing catch-up with H-P and International Business Machines Corp. In addition to having global reach, those companies serve a broader swath of clients than Dell’s narrow health-care focus.

Still, Dell’s effort comes at a potentially fortuitous point. Spending on medical IT is expected to boom because of the Obama administration’s overhaul of the U.S. health-care system, and Dell is hoping to get a big chunk of it. Spending on health-care IT by hospitals and doctors’ offices will likely rise to $13 billion by 2013, up 25% from last year, according to estimates by data tracker IDC.

Perot, which was folded into the struggling Dell Services unit, is at the heart of the company’s strategy. Its customers range from small regional hospitals, like Stellaris Health Network Inc. in New York and Centegra Health System in Illinois, to statewide insurance plans. One of its biggest clients is Massachusetts’ universal health-care system.

Dell Services President Peter Altabef, who joined the computer company after five years heading Perot, says becoming part of Dell will let the unit grow more quickly than it could have on its own.

“What this acquisition has done is enable us to expand that scale much more quickly,” Mr. Altabef said in an interview. He said Dell’s capital—the company has $10.9 billion in cash and equivalents—and long list of corporate customers are key strengths.

Dell Services has relatively little direct competition in the health-care IT space. While scores of companies serve hospitals and doctors’ offices, few have the national presence Dell does. Among the more well-known names are NextGen Healthcare and Epic.

With its deep pockets, Dell could choose to grow further by picking up other services providers. “Growing organically is very difficult,” said Gartner analyst John Lovelock.

Of course, Dell will face fierce competition in the broader services field and can’t offer the same degree of services IBM and H-P can. Historically, those companies have built complete IT packages to sell along with other services, a practice that lets them provide a one-stop shop to their clients. Unlike H-P, which makes its own hardware, Dell relies on products from other companies. For example, it packages networking equipment from Cisco Systems Inc. and storage devices from EMC Corp. with its computers.

H-P and IBM also have a much more diverse global presence, while Dell’s services are mostly domestic. They have an advantage in fast-growing markets, like Brazil and China.

Investors haven’t warmed to Dell’s stock, although pending litigation unrelated to its services unit has contributed to the pressure on its shares. Since the Perot deal was announced, Dell has fallen nearly 25%, while H-P has slipped nearly 8% over the same period.

Still, there is evidence to suggest Dell’s strategy is starting to make a difference. In the first quarter, services accounted for roughly 13% of Dell’s revenue and helped the company sustain its margins at 17.6%, while H-P saw its margins contract more than half a percentage point.

Importantly, Dell’s services unit is fueling more sales of the company’s bread-and-butter hardware. When Dell technicians started putting in Methodist’s new data system, Tim Thompson, the hospital’s information chief, decided to upgrade computer systems in its hospitals, spending another $3.5 million on new machines.

Mr. Thompson said hospital executives are confident having one company provide hardware, software and technical support makes sense. Dell, he said, “made it compelling.”

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