Resellers, manufacturers jockey for market position

Decisions by BTG Inc. and Electronic Data Systems Corp. to sell their reseller business reflect a significant shift in the way the government buys technology, according to vendors and industry observers in the federal market.

The problem stems from shrinking profit margins in the product business that are pushing more business away from resellers and toward direct manufacturers, observers said.

In fiscal 1997, PC manufacturers Dell Computer Corp. and Gateway 2000 Inc. for the first time topped reseller Government Technology Services Inc. in business on the General Services Administration's PC products schedule.

Dell and Gateway made $270 million and $233 million, respectively, in revenue, while GTSI made $200 million. Micron Computer Corp. was fourth with $118 million.

Three Big Companies

Mark Amtower, president of Amtower and Co., a federal marketing consultancy in Ashton, Md., said any further growth in GSA schedule sales will be absorbed by the three big direct-sale companies, and there will be room on top for only one broad-based reseller.

"Unless a reseller can do tons and tons of business, in all likelihood you are going to see fewer and fewer offers on schedule," Amtower said. GSA also is demanding that resellers renegotiate prices downward, and that is squeezing out a lot of resellers. "I'm sure Dell and Gateway are going to thrive in this market. They can set their own price and don't have anyone in the middle," he said.

The problems are even worse for systems integrators, such as BTG and EDS, which lack the sales and marketing infrastructure needed to support the reseller business, observers said.

BTG announced in December that it would sell its off-the-shelf product business to GTSI, and EDS confirmed earlier this month that it plans to sell its desktop computer and software business to an unidentified vendor.

Government Micro Resources Inc., Manassas, Va., has been mentioned as a likely purchaser, but EDS and GMR declined to comment.

But in both cases, company officials have said that decreasing margins on hardware and software make it difficult for integrators to sustain a profitable reseller business. BTG chairman Ed Bersoff said he decided to sell the reseller business last year after "we moved through the [summer] and saw that even in the busy season, our ability to turn substantial profit did not materialize."

When the deal was announced, GTSI chief executive officer Dendy Young said the company would be able to reap the revenues of BTG's reseller business without incurring any significant costs.

However, most industry observers see the bulk of future growth in the federal market benefiting PC manufacturers and other direct sellers.

A Buying Explosion

Dell and everyone else in the market is seeing an explosion in GSA buying that has been a natural result of the procurement reform process, according to Rocky Mountain, federal marketing manager at Dell. Procurement reform removed an "artificial lid on a real boiling cauldron of demand" for computing power, he said.

"You have to back up and think about what the government does. Their product, by and large, is information and the manipulation of information into relative formats and useful data for a vast array of people to use and leverage," Mountain said. "They are a group of users who have an intense need [for] computing power."

According to International Data Corp., Framingham, Mass., about 52 percent of the sales of hardware to the government last year were schedule buys, up from 42 percent in 1996. Indefinite-delivery, indefinite-quantity contracts represented 44 percent of the market in 1997, down from 54 percent the previous year. The open market held at 4 percent both years.

Resellers that are reshaping their strategies in light of recent changes are being encouraged to emphasize their broad product offering and the fact that they offer one-stop shopping, which covers support and services that the direct-sales model tends to handle as an afterthought.

"When you look at the federal government and the amount of downsizing they have experienced in the last four to six years, that amounts to hundreds of thousands of employees who are outsourced," said Gary Newgaard, director of federal sales and marketing at Compaq Computer Corp. "That work still has to be accomplished by someone, and there's a lot of outsourcing done through the channel."

The channel sales force— and the systems engineers working with them— are "literally down the street" from a lot of federal facilities, which is another advantage resellers can offer that direct sellers cannot match, Newgaard said. "The channel [sales force] is and will be an extremely viable partner," he said. "They fill a role no one else can do."

Compaq and Hewlett-Packard Co. both stress the value their channel partners add to the equation, but at the same time they have introduced programs that borrow from the direct-sale model to give federal buyers more options.

Compaq has initiated a build-to-order program in which the products are configured to meet customer specifications after customers call Compaq or one of its resellers. Another Compaq program expected to be launched in the second quarter provides computer parts to Compaq resellers who are authorized by Compaq to configure machines.

Refining the Model

John Guy, general manager of HP's federal sales organization, said the company has continued to refine its sales model to shorten the delivery time to market "while at the same time not giving up some of the advantages that the channel brings." The HP "top value" program has identified 20 configurations that account for 85 percent of the market stream, he said. Those PCs are available to channel partners at a discount above the standard discount to encourage them to be stocked.

"That's one way that we believe we will have what the customer wants when they go through the channel," Guy said.

HP also has a channel assembly program in which it sells components to channel partners and then configures the PCs based on what the customer orders. Either scenario enables HP to take certain costs, such as restocking and return charges, out of the channel, Guy said.

While Compaq and HP develop programs that match the direct-sales model, Dell is moving ahead with ways to capitalize on its easy-order, quick-delivery strategy, especially in light of the growing number of government buyers who hold credit cards. In April, Dell created a "GSA store" at its World Wide Web site, where ease of purchase is not the only advantage, Mountain said.

Buyers can punch in the specifications of a PC, get the quotes they need and then make adjustments to get the most for their money. Customers also are able to track their orders once they are placed, Mountain said. The 35,000 pages of content at the site are helping contracting officers eliminate the thick catalogs of equipment that usually went out of date the day they were printed.

Mountain said Dell will continue to offer the tens of thousands of federal buyers who hold credit cards an easy way to buy, and as soon as the federal government is comfortable with a paperless buying process, Dell wants to begin taking purchase orders electronically too.