Past Dell Fiasco Could Dog the Company's Future

Just as people might have started to forget, more news is out on the lawsuit targeting Dell (DELL) for allegedly shipping millions of bad computers with full knowledge that the units had problems. And because the story will take years to die, the fiscal improvement Dell saw last quarter could lie on a shaky foundation.

The lawsuit is three years old and the story continues. When a company makes a colossal error, it can simply make a clear breast of it, take its lumps, and recover. Or, it can try to bury the story, protect itself by claiming innocence, and prolong the pain. That's the route that Dell has taken.

In July, Dell tried to deny fault and simply ignore how it allegedly ignored customers who were having problems with computers plagued by bad parts. And some of the explanations in the past were real hoots. For example, Dell told the University of Texas math department that the machines went bad because intense calculations overtaxed them. Right, the machines were actually supposed to be coasters and were only missing the sign that said, "Warning, Don't Use For Math."

Now the lawsuit is unsealed, and, my, are the now-public records interesting:

For instance, the court documents show that the City of New York filed incident reports with Dell on 20.2 percent of a batch of 5,000 computers purchased during this period. A purchase of 2,800 computers by Microsoft resulted in issues with 11 percent of the machines; General Electric, William W. Backus Hospital, Denison University and the Montana Justice Department were among dozens of other organizations that experienced similar results.

Given that this happened between 2003 and 2005, why is it a problem now? Because Dell heavily depends on corporate sales. It's consumer sales were up only 4 percent year over year, and, at best, they're breaking even. So Dell has to keep the corporate buyers happy.

But procurement people at large corporations are smart bargainers. They will leverage this news for everything they can get -- if, indeed, they trust Dell as a vendor going forward. There's something about a company that may have knowingly screwed its customers that make corporate buyers understandably nervous. No one wants to be the person to place an order that will come back to haunt a career.

Even if they go with Dell, you can bet that many will hold out for hefty discounts, free services, and other accommodations. In fact, when you look at yesterday's announced earnings, something that sticks out is how service net revenue grew 34 percent year-over-year, but costs jumped by 42 percent. In the light of the lawsuit and potential demands by corporations, it sure does smell of giveaways.

Related:

• Dell Mobile Is Gone, a Victim of Incompetence
• Dell Earnings: Big Jump in Revenue and Profits, Consumer Sales Lag
• Dell Wants Everyone to Forget It Knowingly Saddled People With Bad PCs
• Michael Dell: It Is Time For You to Go