Inacom retreats from fed market

Computer reseller Inacom Corp.'s decision last week to sell its federal government business shows just how tight the federal IT market has become since the advent of direct sales and procurement reform, forces that market watchers say are squeezing profit margins and toughening competition in the channel.

Inacom's parent company on Dec. 14 announced a corporate restructuring that included eliminating 1,000 positions and selling off its $140 million Inacom Government Systems Inc. subsidiary. The move throws into question the fate of several contracts held by the company, including a recent 70,000-seat Marine Corps deal for Microsoft products.

In positioning the announcement, Inacom vice president Mark O'Donnell said the company "decided to focus on [its] core component...which is commercial business with Fortune 500 companies. [Inacom is] going to change from being a direct presence to an indirect presence by selling to government resellers."

To some, the move underscores the difficulties large commercial companies have adapting their business practices for the federal procurement arena. "It is too costly for a large company like Inacom to meet the government's model when it deviates so far from [the company's] standard practices," said industry consultant Robert Guerra. Companies must be "dedicated and committed to the federal government standards" to survive.

Inacom, like other resellers, was also facing pressure from companies that offer direct sales via the Internet, which has drastically squeezed profit margins and eaten away at the need for resellers.

"The federal government was once willing to pay a reseller to buy equipment because it could purchase Compaq one day, Hewlett-Packard another and IBM the next, all on the same purchase order," said Maryann Hirsch, vice president of consulting for Federal Sources Inc. "Now with the ability to order items on the Web, with a click here and a click there, they can order whatever they need with little or no effort."

In the past, government agencies used integrators and resellers to obtain specialized equipment and configurations. Now, an agency can specify and buy the same products directly from the manufacturer. "Companies are offering configure-to-order products, which can be shipped in 24 hours for the same price," Hirsch said.

Since the introduction of the Internet, government agencies have also learned how they can lower their costs by going directly to the manufacturer. "I am surprised that resellers have survived this long with profit margins so incredibly small," said Chip Mather, senior vice president of Acquisitions Solutions Inc., a consulting firm.

Federal sales accounted for less than 2 percent of Inacom's annual revenue, making the federal market a small contributor to the company's bottom line. Several resellers have expressed interest in buying the unit, which made the company's decision to quit the market easier, O'Donnel said.

Inacom would not disclose the names of any companies it is negotiating with to sell the government unit. But companies such as GTSI, Intelligent Decisions Inc. and Federal Data Corp. would be likely suitors, according to industry experts. Inacom said it expects to complete purchase negotiations by the end of March.

The company said its decision to exit the federal market would not affect its support of several contracts it now holds. In addition to the Navy deal, Inacom was one of eight corporations awarded a BPA from the Defense Intelligence Agency in April to supply desktop and networking gear. The company is also a subcontractor to Litton/PRC Inc. on the General Services Administration's Seat Management desktop outsourcing contract.

Agencies with Inacom contracts said they expect the company to maintain warranty and service commitments.