Micron positioning for services push

Montgomery, Ala.—With profit margins on personal computer sales plummeting to their lowest levels in years, one of the federal market's most successful PC vendors unveiled a dramatic business strategy this month that focuses on the burgeoning market in information technology services and support.

Joel Kocher, chairman and chief executive officer of Micron Electronics Inc., said he plans to embrace a new corporate strategy that focuses on services and life-cycle management and takes into account the shifting balance of power in the federal IT business.

"The balance of the power has shifted to the customer and away from the vendors. For years, we, along with every other PC manufacturer, sold you boxes and told you they were going to save your world," Kocher said, speaking to a packed house at the Air Force Information Technology Conference this month. "We didn't know it at the time, but it was a false promise [and] a trap that recently caught up with all of us. It's no secret that hardware has become a slim-margin business."

Although he expects his company to be one of the three top-selling PC vendors on the General Services Administration schedule this year, selling PCs has become an expensive proposition in the federal and commercial markets, Kocher said in an exclusive interview with Federal Computer Week. In fact, government discounts in some cases make profit margins in the federal market even thinner than in the commercial sector, Kocher said.

"PC sales have become a drain on the bottom line," he said. Although manufacturing high-quality PCs at attractive prices has been the bread and butter of Micron's business, "we sleepwalked into the hardware trap with everyone else," Kocher said. "Thankfully we woke up early."

The world that Ko-cher and others are waking up to is one in which IT services and support functions is a $3 billion industry.

In fact, William Gormley, assistant commissioner for acquisition at GSA, said his agency will conduct about $7 billion worth of business on its IT contracts in the fiscal year that ends Sept. 30, with service-related IT contracts accounting for $2.5 billion to $3 billion.

Kocher's plans for Micron's future are similar to the trend in the commercial market, where Internet service providers offer free PCs to customers that sign up for three years of Internet service.

In fact, two of his recent strategic acquisitions involved popular and well-positioned World Wide Web and application hosting companies that he said will help position Micron to provide PCs to government agencies when they sign up for IT services.

"The [military] only has a finite amount of resources [and] cannot afford to have their IT resources focused on things like moving one computer from one location to another," Kocher said. "They cannot afford to have people installing PCs or focused on a help desk," he said. "What I'm saying is, 'Let us do that stuff.' "Lt. Gen. William Donahue, Air Force director of communications, said his service is "very open" to outsourcing standard IT support functions as long as good, solid processes are involved.

"You can outsource a bad process, and you're going to get lousy service," Donahue said. "We need to let the commercial community do what it can and what it does very well."

Robert Guerra, president of Robert J. Guerra and Associates, said he agrees with Kocher's assumptions about the federal market and that Micron's shift in focus appears to be the right course of action.

"There haven't been margins in the product side of the business in the federal market in two years," Guerra said. "The only way to make any [profit] margin in the business is by providing solutions to customers," he said.

However, PC manufacturers and manufacturers of other products sometimes run into a brick wall when venturing out into the services world, Guerra said. "Most product providers have no concept of what solutions provisioning means," he said. "They have a fulfillment infrastructure, but they expect to use that infrastructure to provide services."

Not so, said Dell Computer Corp. services vice president Gary Cotshott, who is part of the company's Public Americas International Group.

"Dell is in the services business today," Cotshott said. "At Dell, we believe services are absolutely vital to the customer experience."

However, while Dell is "well-positioned to be a single point of accountability, [a] one-size-fits-all seat management [solution] is not the answer," Cotshott said. "We do not purse a 'build it and they will come' strategy."

Kocher said he plans to move Micron forward along the services path by relying heavily on the Internet, which he said is fueling the revolution in business affairs. "If a company is not capable of deploying a Web-based solution for everything from servicing customers to allowing customers to buy things, then very shortly they will not be in business," Kocher said. "You simply will cease to exist.

"We don't care if we ever make another dime from hardware sales," Kocher said. "Customer requirements are moving beyond the box, [and] Micron is rapidly moving beyond the box. [Government agencies] don't have to fall into the hole that industry dug for [them]." That hole, Kocher said, is a "bottomless inferno of boxes, prices and UPS trucks."