What is Happening?  On Monday, Dell Computer announced its planned purchase of Quest Software for $2.4 billion. Quest had been reported in talks with several potential buyers since at least the first quarter of this year.

In its announcement, Dell said that it plans to establish Quest as the core of Dell’s software group, which it expects to grow into a $2 billion-a-year business over the next three years – a planned total revenue growth of about 500 percent based on Dell’s current software business.

From Saugatuck’s point of view, the acquisition is relatively unsurprising, as Dell had been known to be in the bidding for Quest for months, and Quest fills an obvious need for Dell in its accelerating push into the data center.

But we also see this acquisition as being about much more than a need to move from SMB servers and laptops into enterprise software. Should Dell be able to integrate and efficiently manage its string of recent data center management software acquisitions – including Quest along with security management providers AppAssure and SonicWall – Dell will be positioned as a viable provider of core Cloud technology, infrastructure, and management capabilities for user enterprises and for Cloud-based providers of software and business services.

Why is it Happening? The focus of most accounts of the Dell/Quest deal has been on Dell’s need to build business beyond its traditional PC-focused offerings into the huge, still-highly-profitable, enterprise software and services market. And Dell’s acquisition strategy has certainly focused on those types of providers, from consulting to storage to networking to security and now, with Quest, to data center management. With hardware margins shrinking ever smaller, Dell had to make strong, significant moves that change its business model, and these are the types of moves that enable that (read “The ‘New’ Dell – Reshaping Toward Full-line Positioning”).

The company’s own positioning strongly supports this. In announcing the Quest deal, John Swainson, president of Dell’s software group, said “The addition of Quest will enable Dell to deliver more competitive server, storage, networking and end user computing solutions and services to customers.”

But in order to succeed in enterprise-class IT over the long term, Saugatuck believes that Dell will need to position itself to take advantage of two simultaneous needs and desires by enterprise IT leaders:

Coordinate, consolidate, and efficiently manage the increasingly complex sprawl and reach of enterprise IT as it explodes beyond traditional boundaries; and

Never build another data center.

Saugatuck research shows that while most enterprise executives prefer that their new business software and systems be Cloud-based by YE2014, the vast installed base of enterprise IT isn’t going away for several years at best. It is going to continue to become more complex, architecture(s) and operating structures are going to become more complex and likely fragmented, and someone is going to need to manage all of it – whether together or in parts (read “Change, and Change Again: The Shape of IT Orgs to Come”).

What Cloud does is allow some, and eventually most, of that wad of complexity to be shifted into multiple off-premises data centers – enabling significant increases in operating efficiencies, while also increasing the need for comprehensive and effective technology and services management. This is where we see Dell making some very solid moves with its business focus and acquisition approach.

As the “center” part of “data center” fades into the Clouds, Dell’s software acquisitions, including Quest, enable it to build, adapt, extend, and offer a broad collection of management offerings for all aspects of data center management – whether on premises, in Clouds, or in hybridized environments, including those that stretch outside of enterprise business boundaries and structures.

But as noted above, Saugatuck sees the technologies, skills, and services being acquired by Dell help to position it as a provider of critical capabilities for Cloud services providers as well. Our Cloud EcoStack™ model, presented in Figure 1, lays out the basic hierarchy of Cloud technologies and functions, building from foundational IT up through complex and sophisticated Cloud-based business services. Dell’s new business model and resulting acquisitions enable it to compete viably at each layer – a much stronger position for Dell that enables significantly greater revenue opportunities for the company.

Dell had competed longest and most visibly at the Cloud Technologies layer, which is profitable at a volume/commodity level. Through acquisitions like Boomi, Dell improved its ability to compete at higher, more profitable layers of the EcoStack™. The acquisitions of Quest and other management providers’ enables Dell to compete effectively at all layers, vastly increasing its opportunities along with its ecosystem.

For an extended version of this Research Alert, visit Saugatuck Technology.

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