Dell Guilty of Fraud: How Not to Make a Name for Yourself

Sometimes it's tough to top a factual roundup of what is happening to a company, and in this case, Dell's latest circumstances say a lot. Being found guilty of fraud? Just how badly does a major company have to behave when a court can rule its business practices fraudulent? It came down to deceiving people - promising technical support that it didn't delivery, and apparently didn't intend to deliver, if my understanding of the law behind fraud is accurate at all:

• The company effectively tried causing customers so much pain that they wouldn't or couldn't use the support services they purchased.


• It often didn't provide the on-site repairs it was contractually obligated to.


• People who purchased "next day" support sometimes had to wait ... an entire year to get a problem resolved.


• The company and its financial services affiliate would advertise no-interest financing and then deny it to almost everyone. It would sometimes charge people interest rates as high as 30 percent even when those people actually did qualify for the special financing.

Here's Dell's response, according to the IDG News story:

The court laid out plans for investigating how many people have been affected as a way to determine restitution. Dell hopes that the court will find that only a few people had bad experiences. "We're confident that when the proceedings are completed, the court will determine that only a relatively small number of customers have been affected," Dell said in a statement. "We believe that our customer service levels are at or above industry standards."

I know that computer companies generally have pretty bad technical support - at least, that's what I've found with a number of them. But this actually makes most of them look good. The problem is that Dell apparently sees customers as cattle waiting for slaughter. A few years ago, at the height of the company's reputation among investors and a fawning press, I predicted that one day magazines would run the major story, "What Ever Happened to Dell?" However, I was thinking in terms of how the company has tried to drain dry the money from its own supply chain. This is even more extreme.

How Stupid Can Companies Be When Dealing With Customers?

I understand that companies are under economic pressure, but, really, every time they cut important corners, the news does come out. So why are they willing to risk so much? You have Southwest Airlines with a huge black eye from trying to evade required airline maintenance and American Airlines grounding so many flights that they'd have to bring on a new fleet just to get back up to zero. Bad press, destroying any customer good will, and paying through the nose to deal with travelers who are now stranded.

It all came from not taking care of business in time, when it would have cost a lot less. And now we see Hewlett-Packard dealing with an "issue" - different industry, same hot water. According to Computerworld, the company has admitted seeing flash-floppy drives infected with viruses intended to work with its HP's ProLiant Server line.

A security analyst with the SANS Institute's Internet Storm Center (ISC) suspects that the infection originated at the factory, and was meant to target ProLiant servers. "I think it's naive to assume that these are not targeted attacks," said John Bambenek, who is also a researcher at the University of Illinois.

Think that's bad? Try Best Buy, which admitted in January that it had sold digital photo frames containing malware, but the company didn't recall them. What were all these people thinking? That they could ignore prudent action to keep customers safe, and that no one would notice.

Customer Service and Self Interest

I just received an email from the Financial Times informing me that I needed to update my credit card details to maintain my subscription. Simple enough, I thought. Ah, maybe not. The directions in the email had me click on a link and told me to update the credit card details. Unfortunately, nothing on the page mentioned credit cards. So I figured that I might try updating the account information. Fair enough, it seemed right, although I had to remember the answer to one of the security questions rather than just providing my password. (I wondered how many legitimate people were screened out and if the company ran into any poseurs.) Then I looked and there was still nothing saying credit card, though there was a link for payment details. Ah-hah! Success. This time.

But I've seen this problem many times before. A company will email a customer, asking for updated information or instructing them to do one thing or another, and then the instructions turn out to be wrong. Strategy is important, but companies gain and lose customers on the details. Those customers are rarely interested in the strategic directions. They want things done when they need them done. If a company isn't going to spend the short amount of time ensuring that instructions actually correspond to reality, then it's going to find that some number of people walk away because of frustration. This is unnecessary and it's far more expensive than the small amount of time needed to do thing correctly. A good proof reading would cost all of maybe $50, and a single subscription in this case is worth over $200 annually. A little attention to details is profitable, indeed.

PCs and Customer Disservice

Computerworld has an interesting article about just how bad call centers can be. CFI Group Worldwide LLC in Ann Arbor published a study of customer satisfaction with phone service in six industries. On the top were catalog companies - no surprise, as customer unhappiness means losing sales. And at the bottom were PC vendors. Between offshoring and having inadequately trained people to save money, the companies actually paying a heavy price:

According to the survey, nearly 73% of the people who have bad experiences with their PC companies' call centers said they will consider purchasing their next PCs from another company, while 85% of customers who had their problems resolved by calling a PC call center said they would continue doing business with the company. But only 33% of customers whose problems were not resolved said they would continue doing business with a PC company, according to CFI Group.

The PC industry is particularly bad, but many companies treat customer service as an expense. That is foolishness. Customer service and handling complaints is in reality one of the most effective forms of marketing the business can have. When you satisfy someone, you make it far more likely that they'll do business with you again. That lowers overall costs for new customer acquisition and increases the lifetime value of customers, which should translate into higher profitability. When you think you're saving costs by sending work offshore - and actually, experts say that the real savings is only about 20% of what the business function would run domestically - you're actually undercutting your own business. For gosh sakes, 25% of the callers to the PC companies hang up before they can get an issue resolved. That's a powerfully large group of people to antagonize. It's another example of short-term thinking and not seeing how the parts of a business come together.

Michael Dell Says Changes Are Necessary

According to a Financial Times article on April 28, 2007 (sorry, no free link), a leaked memo from Dell has the company's founder and current CEO stating that the company is “a defining moment in its history and in [its] relationships with customers.” Dell replaced his former hand-picked replacement, Kevin Rollins, in January because of disappointing results. The memo suggests some pretty significant changes in direction:

He said their plans were to simplify IT for business and the consumer and to innovate beyond its traditional hardware business. They would also work to fix
their core direct-selling business. “The direct model has been a revolution, but
is not a religion,” he said n the e-mail. “We will continue to improve our
business model, and go beyond it, to give our customers what they need.”

The company apparently wants to "radically simplify IT' for corporate customers and go beyond its direct sales model for consumers, which has done well but that is a limiting factor in growth.

I'd like to suggest that these changes are not what the company needs. Consumers aren't moving to HP because of store sales. Dell has developed a recipe for atrocious customer service. (Disclaimer, I once got so frustrated in trying to get a PC from the company on a timely basis that I cancelled the order.) Trying to chase expanding sales before management really fixes this problem is setting up the conditions for business calamity, because customer service that functions poorly now is only going to get worse with greater demands. And the idea that the company will change IT for companies is a level of arrogance that smart corporations won't tolerate - because they don't have the time, money, or inclination.

Then the Dell memo discussed how the company would "take our supply chain and manufacturing to the next level of efficiency." I've done some pieces on Dell's supply chain in the past and have heard from analysts who closely follow electronic manufacturing that Dell is already pushing so hard on its vendors that some are walking away from doing business with the company.

The amount of efficiency increases in the past could not explain the company's profit level growth compared to the rest of the industry. What seemed far more likely, according to the experts I've interviewed, is that it was beating up suppliers and pulling out every last penny of increased profit it can and telling suppliers to use the increased economies of scale that Dell can offer to make more money off their other clients. But those clients are reportedly starting to balk, because essentially they pay for Dell's ability to make more money.

The short prediction: within the next three to five years, major business magazines will be running "What Ever Happened to Dell?" stories, because you can only push your clients and vendors for so long, and then, as the poet W.B. Yeats noted, things fall appart.