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Software Companies as Hardware Companies: Challenge 1: Maximizing Economies of Scale


 In an earlier blog post, I’d noted some of the inherent challenges with a software company becoming a hardware company in order to bring their innovation to market.

In that post, I outlined these challenges:

  1. Procurement and supply chain;
  2. Testing and quality assurance;
  3. Global support.

In the next three posts, I will elaborate on each of these challenges and offer solutions to mitigating or eliminating the concerns.

Software companies who choose to “go it alone” in procuring their own hardware may face substantive obstacles as small buyers in a gigantic sea where economies of scale and purchasing power are not on their side.

We have the privilege of supporting over 2200 OEM customers, from Fortune 50 giants to very small SMBs in every conceivable vertical market.

But, when it comes to procurement, even very large companies may find it tough to get their hands on the specific hardware they need to get new software-based solutions to their customers.

Maintaining “continuity of supply,” as we call it at Dell, is critical to the revenue streams of our OEM customers.

Why? Because even large companies with significant market presence may be total newbies to hardware procurement.

Without well-established supplier relationships or significant purchasing power, companies can find themselves relegated to the back of the line where orders get filled late and tough-to-get components remain tough to get.

An example of this was during the hard-drive shortage caused by the deadly Thai floods last year. Dell leveraged its relationships and volume-purchase power to procure drives while others were deprioritized.

To help mitigate risk, more software companies are looking to tier-one hardware providers with years of procurement experience and strong supplier relationships.

Value is another customer benefit. The volume of tier-one suppliers’ purchases far outpace the volume of, say, the IT components our customers purchase for their businesses. The sheer volume (and demand predictability) mean we can negotiate lower prices that get passed on to customers.

While the purchase price of any component is important, it is really only a piece of the value discussion.

Software companies seek competitive advantage by minimizing the total end-to-end cost of their solutions. Tier-one suppliers can control and improve execution throughout the value chain, using tested processes that then become available to customers.

One OEM customer who fully maximizes Dell’s economies of scale is Tripleplay Services (a digital content services provider).

Steve Rickless, CEO, says it best:

“We deliver customized platforms so specifications can change quickly. But we were operating in a world where procuring OEM servers could take weeks. (Now)We can deliver platforms to meet the specific needs of each customer thanks to our relationship with Dell OEM Solutions. Whether it’s one server or 10, there isn’t a problem.”

Click on the link to check out Tripleplay Services case study, or by clicking on the image below:

Tripleplay Services Case Study

Ensuring a streamlined procurement process and understanding the benefits of maximizing economies of scale mean faster time to market, decreased total cost of ownership and more focus on innovation.

What do you think are some of the issues companies face when it comes to economies of scale?

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