Dell and the ‘Intel cookie jar’

Just caught up with this via Spend Matters.  As the Economist report says,

"For years, Dell’s seemingly magical power to squeeze efficiencies out of its supply chain and drive down costs made it a darling of the financial markets."

It is now clear that this was in no small measure achieved by using payments from Intel to smooth earnings,  without disclosing to investors that this was being done.   Those payments were made to Dell in return for shutting out AMD, Intel's big rival, from Dell's chip purchases. The SEC says Dell should have come clean and explained this; they claim that, at their peak, the exclusivity payments represented 76% of Dell’s quarterly operating income!  When the payments stopped in 2007 (Dell started buying from AMD), this accounted for most of Dell's declared earnings fall in that quarter; again, this was not explained.

On July 22nd Dell agreed to pay a $100m penalty to settle allegations by America’s Securities and Exchange Commission (SEC). Michael Dell and other senior executives were also personally fined.

Dell were such a game changing company when they first emerged.  I was an early corporate adopter and they made my savings figures look great; machines that worked and were half the price of Compaq or IBM. So I'm sad to see this blow to Dell's reputation; but it is a reminder that supplier rebates, special payments, discounts and so on need to be accounted for VERY carefully.  In my time as a CPO, I would often have a few thousand dollars / pounds of end of year rebate 'stashed away' in case we needed them for budgetary contingency.  I guess you're probably OK with that; but Dell may have been stretching it by getting to 76% of income!


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