Eye on the States

E-Store to Lift Local Buying Power

Thomas Davies

By Thomas Davies

The Holy Grail of selling to local government always has been market aggregation. Local governments in the United States spend more than $20 billion on information technology annually, about the same amount spent by state governments.

Yet very few information technology companies have been able to capture a large share of what is becoming the fastest-growing segment of the public-sector market. Why? Because the local government market is so fragmented.

The challenge for many IT companies is how to overcome a market made up of more than 80,000 separate and independent jurisdictions. The cost of doing business in such a fragmented market has sidelined many IT suppliers.

Formidable barriers, such as geographical distance, complex channels of distribution, diverse purchasing regulations and local politics, have insulated this market and made it difficult to penetrate. In this way, local governments are very similar to other highly fragmented and locally controlled markets, for example health care, which has tens of thousands of individual physicians, hospitals, labs and providers.

Tapping the potential of the local government market always has been in many companies' sights, if not within their reach. As the IT industry came into contact with local governments, companies could see opportunities for being on the receiving end of individual buyers' dollars.

Even the General Services Administration could see the benefits of extending its reach to the buying power of local governments. This was one driver behind GSA's attempt to expand its buying schedules to include state and local governments. Hamstrung by the need to get the approval of Congress, the agency has been unable to realize this goal.

For local governments, the driver behind aggregation primarily has been how to get more bang for the buck. As individual buyers, most local governments have little leverage over sellers. For example, only several hundred local governments actually spend more than $100 million annually on IT. To counter that limitation, local governments have long recognized that they could gain market power by acting in concert.

On behalf of their members, local government associations, such as the National Association of Counties and Public Technology Inc., have promoted partnerships within industry to consolidate IT buying. Yet these national partnerships have had only limited success. The barriers to market aggregation that frustrate IT companies do the same to local government associations.

So what is new that could change these realities and put market aggregation within reach of both the buyers and sellers? The Internet.

This month, GovStoreUSA, an online government store which aims to boost the purchasing power of local governments across the country, makes its debut.The GovStoreUSA site (www.govstoreusa.com) is being designed to process thousands of orders via the Internet. It initially will offer local governments more than 100,000 hardware, software and networking products, such as PCs, printers, storage devices, switches and routers. Such products will come from more than 50 manufacturers; distributors such as Ingram Micro Inc. and Tech Data Corp. will do fulfillment.

But GovStoreUSA has even bigger plans. The division of Interlink Communication Systems, a privately held company in Clearwater, Fla., eventually plans to offer public safety, public works and transportation products.

Building on the business model pioneered by other e-commerce sites, GovStoreUSA is a members-only buying service. There is no cost to join. Membership entitles local governments to take advantage of favorable pricing and special discounts. The International City and County Managers Association has endorsed the service as part of its corporate partner program.

The site allows local governments to buy IT products much as consumers purchase books online. Buyers can create a market basket of products, track orders and review account status. In addition, they can issue requests for quotations as well as receive responses to these solicitations.

Perhaps more importantly, the service allows local governments to obtain special pricing from IT companies on a real-time, minute-by-minute basis. This opens up the possibility of auctions for IT products, with local governments leveraging their collective buying power.

GovStoreUSA represents a completely new channel for local governments, and establishing a new channel is not a quick undertaking. As with any e-purchasing innovation, such centralized e-commerce sites will create winners and losers. Undoubtedly, there will be strong competitive responses from local resellers that have grown up servicing the needs of small local governments.

Some sales organizations will need to shift their focus to more value-added services that cannot be sold readily via the Internet, at least not today. And state governments, which benefit by having local jurisdictions purchase from state schedules and contracts, could see their market power drop significantly.

The model has a way to go before its viability is proven, but clearly it is not "your father's Oldsmobile." GovStoreUSA is a precursor of what lies ahead for state and local governments and the companies that serve this market.

Thomas Davies is senior vice president at Current Analysis Inc., a competitive intelligence and analysis company in Sterling, Va.

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