The Paradox Of Vendor Profitability

This is why buying business technology is difficult. You want your suppliers to be profitable, so that you have a reliable source of support and future products. But you don't want your suppliers to be too profitable, because that means that you are probably being rorted.

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Dell enterprise solutions group vice president Phil Davis raised the issue during the keynote presentation at the Dell Enterprise Forum in Melbourne today. He noted that profit margins on PCs are now below 10 per cent and for servers are around 20 per cent, while storage gear can enjoy margins of 50 per cent and networking equipment as much as 65 per cent. Those markets also tend to be dominated by one or two large suppliers.

"Those players have what we would consider egregious gross margins," Davis said. "Really what those vendors are focused on is locking customers in." While the names weren't mentioned, this is clearly aimed at Cisco and EMC, the dominant companies in storage and networking.

Clearly, Dell is not a disinterested party here. It would like to pick up some of that networking business from Cisco for itself, even if the margins are lower.

However, the broad issue remains the same. Choosing an untested vendor can be a risky strategy, but choosing a well-established player can also subject you to needless expense. The challenge is to strike a balance between the two: reliability without too much risk or too much rorting.

Disclosure: Angus Kidman travelled to Melbourne as a guest of Dell.


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