Same Song, Second Verse

Dell's small-and-medium-business division grew by ten percent in the fourth quarter. Its operating profit increased 17 percent. That's good news, isn't it?

Maybe not.

You see, Dell has begun offering sweet lease deals and easy financing terms to its small business customers, including interest free loans for purchases over $25,000 and, in some cases, free computers. The company now finances 22 percent of its sales to small and medium businesses, nearly a third more than it did two years ago. Dell Vice President Erik Dithmer recently admitted, "The percentage of our customers using our credit facilities is increasing much faster than our base business."

Last I checked, the economy was still fragile and small businesses were living hand-to-mouth. Many will continue to struggle for some time, making Dell's financing strategy a risky move. According to the Wall Street Journal, Dell increased its reserves to cover potential defaults, and to help minimize the risk the company "brought in long-time small-business customers to train Dell salespeople to understand a small-business balance sheet." I hope so.

What scares me is that Dell's strategy is eerily similar to a fatal mistake made by once high-flying Lucent Technologies during the last recession.

Spun off from AT&T in 1996, Lucent seemed like a can't-lose proposition, and for several years it was. The company occupied a sweet spot within the new economy, manufacturing a variety of products for the telecommunications industry. Lucent generated 1999 revenue of nearly $40 billion, employed 151,000 people, and boasted a market capitalization of a quarter of a trillion dollars as its stock traded as high as $84 per share.

But just four years later, Lucent's revenue had fallen by 75 percent, more than 100,000 of its employees were gone, and it had lost 95 percent of its market cap. The company's stock price dropped to as low at 55 cents. The dot-com bust had shut down Lucent's fountain of growth, a problem magnified by heavy discounts and risky financing terms that the company had been providing its customers to meet aggressive sales targets. Lucent was so highly leveraged that when the recession hit, it had nowhere to turn. Reflecting on that difficult time, then-Chief Financial Officer Frank D'Amello said, "We went from what was the perfect market to the perfect storm."

Let's hope Dell isn't making that same mistake. To be sure, the company is going into this with its eyes open, and it may have enough safeguards in place to prevent the worst from happening. Still, by offering credit-challenged customers discounted loans to buy depreciating products, Dell is risking its business at both ends. There's got to be a better way.

Steve McKee is president of McKee Wallwork Cleveland and author of When Growth Stalls: How It Happens, Why You're Stuck, and What to Do About It . Find him on Twitter and LinkedIn .