NEWS ANALYSIS: Where have all the resellers gone?

The layoffs and executive shifts at GTSI Corp. are emblematic of more than just turmoil at one of the government market's most recognizable companies.

GTSI's problems are the latest in a nearly decade-long slide in the classic government reseller business. In short, no one wants to be a traditional reseller anymore.

One of the first signs was in 1998 when BTG Inc. sold its $200 million reseller business to GTSI. BTG, which was later acquired by Titan Corp., wanted to concentrate on the higher margins of its systems integration and IT services business.

Several executives with BTG bolted because they didn't want to work for GTSI, which had been their archrival. The group, led by Steve Baldwin, bought small reseller Intellisys, which became PlanetGov and now is known as Apptis Inc.

Baldwin, with the help of the private equity firm New Mountain Capital, is now in the third year of using acquisitions to move that company away from the reseller business and transform it into a services provider.

Also in the late 1990s, Electronic Data Systems Corp. tried and failed to run a successful government reseller business. The company shuttered that unit with barely a whimper.

But there were still believers in the value of a reseller business. In 2000, Northrop Grumman Corp. acquired Federal Data Corp., which had $600 million in revenue.

Company officials at the time said the reseller business was a good one to be in because of the strong cash flow and return on investment, despite the low margins.

The tune is a different one today, with the Northrop Grumman announcing that it will either sell or close the business.

Meanwhile, GTSI slogged ahead through the years. It has invested in technology practice areas so it can design and deliver solutions to customers. It has tried to become more efficient by spending on internal systems and warehouse infrastructure.

The company's revenue has grown to about $1 billion, but consistent profitability has been an issue. And even when the company has turned a profit, the margins have been low, especially when compared to other publicly traded government IT companies.

GTSI also has faced fierce competition, not just from direct sellers such as Dell, but from companies that can leverage larger commercial businesses to lower their costs in the government market.

The most notable of these is CDW Corp., which had 2005 revenue of $6.3 billion, of which $1.9 billion is in the public sector. CDW includes the federal, state and local government and education markets in its public-sector business.

CDW's success shows that there is still room for resellers in the government market, but the business model is different than it was 10 years ago. A reseller has to either draw on other parts of its business that are more profitable to balance its finances or have a strong commercial business that can give it greater economies of scale.

With GTSI's longtime chairman and CEO Dendy Young giving up the CEO title to Jim Leto, the company is bringing on a veteran of the IT services business. Leto has been on GTSI's board since 1996.

The plan for GTSI is to continue its reseller business but build a more lucrative and profitable services business.

As a publicly traded company?its stock price was $7.69, virtually unchanged?GTSI may not have the same timeframe to work that transformation as a privately held company would.

Challenging days are ahead.