Dell Not Well After Knell

A death knell usually means the end of something. Sometimes it happens after a long illness. In the case of Dell, the bell tolls for for conditional listing, for having to restate four years of accounting records, for being unable to predictably deliver products on time. It's the end of Dell as everything thought they knew it.

I'm generally suspicious when praise of anyone or anything gets too loud and continues for too long. It was perhaps three or four years ago that there were some obvious signs that Dell was traveling down a dark path. They were insanely profitable compared to other PC vendors, and while Wall Street rejoiced, investors should have been scratching their heads. As the saying goes, when a deal seems too good to be true, it probably is. Given the thin margins and massive supplies of products, pricing dropping faster than a stone through a clear sky, how could they have been managing profits that were triple those of companies like HP?

One part of the answer came from electronic component analysts who said that they were squeezing suppliers tight enough to suck out virtually every penny of savings the vendors could get from economies of scale. "We're making you efficient," said Dell, according to these analysts. "Get your profits from your other clients." Those other companies - sometimes even competitors of Dell - naturally took offense that they should be underwriting that company's earnings. So a growing number of suppliers began to walk away.

No problem for Dell: suppliers were a dime a dozen. But management forgot that there's more cost in a supply chain than the incremental expense of parts that you buy. There's reliability and service. Bottom feeders eventually get down into the muck, and if things go badly, their low-priced friends don't have enough capital to pull things back up into cleaner waters. Then there was the other strategy: reduce customer service, outsource technical help, anger customers, leave them on their own to solve their problems. All of these actions happened to lower Dell's costs - and another way of putting that is the company wanted to take even more money out of customers' pockets, only without being obvious about it.

And now we see that Dell had yet another strategy: stretch the truth. (It's something most of us grew up calling a lie.) Here's how the Reuter's put it:

Dell Inc. said on Thursday it would restate four years of financial results, reducing net income for the period by as much as $150 million, after a lengthy audit found that top executives sought accounting adjustments to reach quarterly performance goals.

It wasn't enough to keep trimming corners and tick off customers. To keep the stock price up, managers were prepared to play with the numbers to get the results they wanted.

It was perhaps in 2003 or 2004 that I began telling some people I knew that I expected to see front page stories, titled, "Whatever Happened to Dell?", in BusinessWeek within five years. Maybe I was a year or two optimistic. As the Reuters story further stated:

Dell, based in Round Rock, Texas, said it did not expect the restatements to have a "material" impact on its current balance sheet or on cash flows during the restatement period, which covered fiscal 2003, 2004, 2005, 2006 and the first fiscal quarter of 2007.

Not material? Of course management is going to say it's not material. Once you use the M-word, you're really SEC fodder, because the CEO and CFO are now personally responsible for having signed off on misleading financial reports. Right now the analysts are saying that the adjustments look "minor." I'm with Larry Dignan on SeekingAlpha that these reactions are annoying and, to my mind, at least, misleading:

While the restatements were small, Citigroup analyst Richard Gardner notes that Dell would have missed estimates during its first fiscal quarter of 2003, second quarter of 2003 and fourth quarter of 2005 without the accounting hijinx. That’s hardly meaningless.

What company misses multiple quarters and then sees analysts say, "Oh, that's OK, it's the thought that counts?" And that doesn't address the really big problems in supply chain and in customer service and, ultimately, customer retention. What is Dell doing? Saying everything is fine and looking for a new advertising agency. Obviously the company needs a new story. Let me suggest a lead:

After evaluating how we've treated business partners, customers, and investors, we've decided that we have to completely change the way we do business and act with respect toward the people and organizations that hold our future in their hands.

It may not be catchy, but it might actually work.