Primes drawn to product business

Prime contractors are joining traditional resellers in the product business.

Peter Romness, who manages channel sales for Hewlett-Packard Co.'s federal operation, says vendors that historically focused on services and left hardware provisioning to subcontractors or end users are changing their tunes.

"Those big primes are seeing that they've been giving up a lot of revenue and the possibility to make money," Romness said. "We're seeing all of them looking at ways to make sure they get that" business.

Northrop Grumman Corp., for example, got into product sales through the acquisition of Logicon Inc. Logicon includes such acquisitions as Federal Data Corp. — an IBM Corp. specialist over the years — and Sylvest Management Systems, a company rooted in reselling Unix machines. Among the large consulting firms, PricewaterhouseCoopers operates Technology Integration as its product arm.

What's the attraction of hardware? For one thing, product margins that have been in a free fall appear to have leveled off and may even be increasing. Resellers and solution providers see this trend reflected in the bottom line. Dendy Young, chief executive officer of GTSI Corp., says gross margins hit a low of 6 percent about five years ago. Today, margins are about 8 percent.

HP offers an agent program to accommodate contractors' budding interest in hardware. Integrators can place product orders and receive a commission, while HP handles shipping and billing responsibilities. Compaq Computer Corp. also offers an agent program.

Despite the arrival of the larger contractors, traditional resellers see little competitive threat. They say the contractors usually provide products within the context of complex integrator deals, which the resellers don't normally pursue.