Watch Out Dell and Compaq

Gateway 2000, the low-cost PC maker from the prairies, is on a high roll

P> Bill Shea, a vice president for Gateway 2000, may not be the sort of person to say I told you so, "but we honestly don't believe it was an accident."

During its first full year selling on the General Services Administration Schedule, Gateway 2000 has emerged as the company to beat in selling personal computers to large organizations. With $82 million in schedule sales last year, it blew out of the gates to the top spot among PC vendors that market directly to customers, beating perennial favorites such as Zenith Data Systems Corp., Buffalo Grove, Ill., and Dell Computer Corp., Austin, Texas. Its GSA sales skyrocketed from just $12.6 million in 1994.

As such, Gateway has moved up the computer food chain from consumers to demanding corporate and government accounts -- a feat few computer companies have managed.

Chris Goodhue, research director for the personal computing service at the Gartner Group, Stamford, Conn., attributed Gateway's GSA success largely to its rock-bottom prices -- about 10 percent cheaper than comparable Dell machines. "Historically, that's not been enough," he said.

"Past visits to Gateway and historical corporate customer feedback revealed processes and infrastructures too immature for us to comfortably recommend the company as a primary or high-volume supplier to corporate accounts," he reported.

But Gateway is turning things around.

For the last 10 years, the North Sioux City, S.D., company put a premium on the low-cost, direct sales and build-to-order business model for the consumer market, a similar model used by Dell for commercial customers. But for Gateway to become the world's leading PC provider, it couldn't ignore the corporate market to offset the seasonal nature of the consumer business and to earn better profit margins.

In mid-1993, Gateway executives quietly crafted a plan to attack corporate accounts, including Fortune 1000 companies, federal and state governments, and the education markets. But Gateway officials quickly learned that their organizational structure made it difficult to respond to these major accounts efficiently. The company managed sales, order entry, customer service and technical support as vertical divisions, requiring customers to call a different division depending on their inquiry.

Gateway officials also discovered that their product transition process would have to be altered for major accounts. Because Gateway handles all its operations, from manufacturing to sales, from its South Dakota facilities, it can make product changes almost instantly -- a blessing for consumers, but a nightmare for LAN administrators.

"We knew we weren't doing it the right way," said Shea, vice president of Gateway's major accounts program. Gateway certainly didn't want to publicize the company's attempts to correct internal problems, he explained. In fact, for a brief period in 1994, Gateway directed sales representatives to focus on existing customers, and not to recruit new ones.

The company created a brand new horizontal operations structure, integrating sales, customer service and technical support specifically for major accounts such as federal agencies. Gateway modified its product transition process to give major account clients 90 days notice of product changes, giving organizations time to assess the effect of the changes and plan for them. Finally, Gateway plans to launch a separate product line for major accounts later this year.

With its house in order, Gateway got on the GSA Schedule in April 1994, but didn't start taking orders and shipping PCs, in its famous cow-spotted boxes, until July. Despite the three-month lag and being on the schedule for only six months during fiscal 1994, Gateway managed to squeak into the elite group of top 10 schedule holders with $12.6 million in sales. "The GSA Schedule has really done great things for us. We do expect that to continue," Shea said.

Although Shea wouldn't disclose specific revenue and personnel figures for the federal business, Gateway's major accounts generate 30 percent of domestic revenues for the $3.7 billion company and employ 400 people. Thus far, Gateway's federal success has come from a dedicated sales team based in South Dakota.

But it doesn't hurt having a local presence. Last month, Gateway named Jim Connal, a 12-year veteran in the federal sales business, as the company's local point man. Connal, formerly of Government Micro Resources Inc. and CompUSA, said, "What we're offering is more than just the product. It's the customer service."

Jan Morgan, a research analyst at International Data Corp.'s Government Market Services division in Falls Church, Va., said that Gateway has done such a good job shipping low-cost products that are ready and capable, it has resulted in a low rate of return.

But Gartner Group's Goodhue said that although Gateway's major account clients are highly satisfied with the company's product and service, "most of these organizations proved to be self-maintainers with reasonably self-sufficient technical support staffs."

Nevertheless, IDC's Morgan noted, "Some other vendors are very concerned."

Commenting on Gateway's GSA success, Theresa Garza, Dell's vice president of federal sales, said, "I don't think it's a blip. I'm sure they'll continue to focus on the GSA Schedule because it fits their business model. The GSA Schedule is a very important bellwether for the industry."

In fact, schedule sales for the $5.3 billion Texas company increased 250 percent from $26.7 million in fiscal 1994 to $76.4 million in fiscal 1995, about $6 million shy of Gateway's sales.

Gateway's direct business model clearly worked well in its first federal channel, the GSA Schedule, but the company still must prove itself in other channels. Shea would like to develop more partnerships with systems integrators, such as the one it has with Electronic Data Systems Corp. of Plano, Texas, and to pursue indefinite-delivery, indefinite-quantity contracts. However, Gateway decided to sit out the highly competitive bid for the Air Force's $750 million Desktop V PC contract.

And with recent procurement reforms lifting the maximum order limits from schedule purchases, Gateway could face a manufacturing and quality control challenge to meet the federal demand.

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