Taking the Big Gamble
Manufacturers debate using exclusive reseller agreements or multiple resellers to carry their products on the GSA Schedule
P> It is one of the oldest dilemmas for manufacturers: Is it better to have one company sell your product exclusively or tap as many resellers as possible?
Increasingly, manufacturers are embracing the latter strategy, authorizing multiple resellers to carry their products on the General Services Administration Schedule, one of the government's major procurement vehicles.
"The days of exclusive agreements are gone. In most cases, manufacturers can get more sales by spreading out and using more resellers," said Joseph Corini, president of Computer Marketing Associates Inc., a Vienna, Va., consulting company.
"Put yourself in the manufacturer's position: You're banking all your business on one guy. They're really good at one or two agencies but mediocre at [covering] the rest. The government's too big a market for one" schedule holder, said Jeff Lucien of Interpro Corp., a Reston, Va., consulting firm.
Take Compaq Computer Corp. of Houston. The leading personal computer manufacturer carefully selects a number of resellers to carry Compaq GSA Schedules. In 1996, Compaq has authorized eight resellers to sell its products on GSA Schedule, two less than the previous year.
In selecting schedule holders, Compaq considers the leading schedule holders and tries to determine whether they can work well with the reseller. In 1995, Compaq gave special weight to companies with small business status, says Gary Newgaard, federal marketing and sales manager, because they continue to take a larger share of the federal infotech market. "Some selections are based on strong vendor relations" that both Compaq and the reseller have with software companies, he added. According to Newgaard, the company's GSA Schedule business last year increased 220 percent from 1994, with a strong performance by Chantilly, Va.-based Government Technology Services Inc., the leading reseller to the government.
Although Compaq and other manufacturers more frequently use multiple GSA Schedule holders now, it wasn't always that way. For several years, the leading personal computer manufacturers and resellers teamed on exclusive or semi-exclusive GSA Schedule agreements. The mid-'80s was a golden age for resellers such as Bohdan Associates Inc., Gaithersburg, Md.; Falcon Microsystems Inc., Landover, Md.; and GTSI. With relatively few competing resellers, the three companies enjoyed high profit margins and specialized in products by Compaq, Apple Computer Corp., Cupertino, Calif., and IBM Corp., Armonk, N.Y., respectively.
Falcon maintained an exclusive agreement with Apple to sell its products on GSA Schedule from 1983 to 1993, and GTSI served as IBM's exclusive federal government reseller -- but not GSA Schedule reseller, since IBM maintained its own -- from 1988 to 1993. GTSI also had similar alliances with the leading software companies through part of the 1980s. Bohdan, meanwhile, became Compaq's leading reseller to the government -- and the most focused on that market -- and enjoyed steep discounts on products by that manufacturer.
But in the early 1980s, the pendulum began to swing away from exclusive arrangements, increasing competition and contributing to lower single-digit profit margins for resellers. As a result, privately held resellers became prime targets for publicly held ones who wanted to expand. In 1994, AmeriData Technologies Inc., Stamford, Conn., purchased Bohdan, and GTSI purchased its leading competitor Falcon.
Still, even though exclusive arrangements are less popular than they once were, ending them doesn't necessarily pave the way for success. Take Apple Computer, which has had minimal success in the federal market regardless of its strategy. Apple withdrew its exclusive arrangement with Falcon in 1993, and instead authorized $80 million Government Micro Resources Inc., Manassas, Va., and $617 million GTSI to sell its products on GSA Schedule. But Apple sales did not increase. Unlike at Falcon, at GMR and GTSI, Apple simply was one desktop among several models sold. "You can't expect [resellers such as] GMR and GTSI to create demand. The manufacturer has to be proactive in driving demand," noted Corini.
What is Apple's lesson? It may be the same one Apple has had to learn corporatewide -- management instability and perennial reorganizations make it impossible to implement marketing strategies, where they even exist. So the wonder may not be that Apple has limited market share, but that it has the market share it does. Apple opened its local Reston office in 1986 with approximately 40 employees and had added nearly 100 more by 1989. Many of the employees labored vigorously to generate government demand for the Macintosh. But during that time, Apple changed federal sales managers, lacked a long-term strategy and kept shifting its federal operations headquarters between corporate headquarters and Reston. But perhaps the final insult came when the company decided to slash its government marketing budget. Now, Apple employs only six in its local office to serve the federal government market.
Contrast that approach to companies with growing federal market share such as Dell Computer Corp., Austin, Texas, or Compaq. Part of Compaq's success in the government market, according to observers, has to do with its commitment to advertising and marketing. "Having a good distribution strategy is useless unless you have good demand," Corini pointed out. "It's one of the biggest shortfalls that's occurred as a result of downsizing. Demand creation is sold short."
Still, despite present trends, some manufacturers and resellers continue to pledge themselves in an exclusive union. Bay Networks Inc., the Santa Clara, Calif., vendor of network communications products, has authorized The Presidio Corp. of Lanham, Md., as its exclusive GSA Schedule reseller. "They know we don't compete with them" or sell to their customers, commented David Steinberg, vice president of Bay Networks' federal operation. He estimates that Presidio achieved $5 million to $10 million in sales last year through its GSA contract with Bay Networks. Using a reseller that specializes in network communication products such as Presidio has proved more valuable to Bay Networks than selling through a more "generalist" reseller such as GTSI.
But Bay Networks' nine-year relationship with Presidio continues to evolve, as both companies' needs change. Presidio, an 8(a) company, will begin selling the vendor's products through 25 to 50 resellers that Bay Networks will recruit in 1996, said Steinberg. This agreement allows Bay Networks to increase its market while still giving its GSA Schedule business to $25 million Presidio. "We're especially interested in recruiting 8(a)s and smaller to midsize integrators," said Steinberg, who wants to double GSA sales this year.
Like many other manufacturers, Bay Networks rewards resellers with co-op funding for advertising, trade show participation and other sales and marketing activities. Through such a program, the manufacturer and reseller contribute to the co-op fund, with the manufacturer's contribution dependent on the reseller's sales. The reseller must get the manufacturer's permission before it can use the funds. Bay Networks tries to go even further by selectively forwarding co-op funds for resellers that have promising indefinite- delivery or indefinite-quantity contract bids pending.
Other exclusive arrangements between vendors and resellers for GSA Schedule sales include Hewlett-Packard Co., Palo Alto, Calif., and Sylvest Management Systems Corp., Lanham, Md., for HP's UNIX PA products; Netscape Communications Corp., Mountain View, Calif., and BTG Inc., Vienna, Va., for Netscape's Internet browser and server products; and Silicon Graphics Inc., Mountain View, Calif., and EdgeMark Systems Inc., Gaithersburg, Md., for SGI's UNIX desktop products.
The exclusive agreements help resellers grow their businesses. Raymond Tuchman, president of EdgeMark, projected that his $18 million company will achieve $52 million in sales for 1996, largely because of the SGI exclusive arrangement. BTG's Linda Hill, director of Internet services, said, "Sales have been much stronger than we anticipated," since the Netscape arrangement began last March. BTG had to commit money to get the agreement and Netscape set ambitious sales goals. But according to Hill, BTG exceeded Netscape's projections.
Some Exclusive Vendor Agreements for GSA Schedule Sales
Bay NetworksThe Presidio Corp.Network communication products
Hewlett-Packard Co.Sylvest Management Systems Corp.PA RISC products
Netscape Communications Corp.BTG Inc.Internet, server products
Silicon Graphics Inc.EdgeMark Systems Inc.Desktop products