Seek Niches to Survive
By Mike Wiebner
Surviving the rough-and-tumble federal market has not gotten any easier for value-added resellers the last few years. But, then again, what market segment has not been affected by competition?
Strategies differ among the industry giants and the smaller niche players. Vendors, value-added distributors, systems integrators and VARs are all competing - and often partnering - to get a piece of the annual $23 billion federal information technology market.
The Biggest Get Bigger The big fish in the pond just grew a few pounds. Government Technology Services Inc. recently acquired rival BTG's $200 million reselling business. GTSI has spent the past few months integrating BTG's technology product reselling operations and its 150 employees into its operation.
"We have made a serious investment in training and educating these folks," says Dendy Young, president and chief executive officer of Government Technology Services Inc. of Chantilly, Va. "We all have to be automated to be efficient and make sure information is available to employees.
"We have made a serious investment in training and educating these folks. We all have to be automated to be efficient and make sure information is available to employees."
- Dendy Young, Government Technology Services Inc.
GTSI executives are hopeful that the acquisition can help the reseller grow its revenue and return to profitability. The company does almost all of its reselling with the federal government; the Army, Navy and Air Force are its largest customers. The company, which is publicly traded, reported a net loss of $5.1 million on sales of $486 million in 1997.
Using the PC II contract with the Army, GTSI now will supply desktop computers to defense and civilian agencies. The new contract is in addition to its existing work supplying laptops through the Army's Portables II contract and a variety of computers and peripherals through the Standard Management Information Systems contract.
GTSI has scored numerous indefinite-delivery, indefinite quantity contracts over the last several years, including NASA's Scientific and Engineering Workstation Procurement and the Electronic Computer Store II deal with the National Institutes of Health. GTSI offers a wide range of products over numerous contract vehicles.
However, unlike the well-established commercial marketplace, the federal government's procurement practices make it difficult to fashion the information supply chain, says Young. Since government customers are very open and buy from a large number of vendors, the process creates inefficiencies.
VARs always face two sets of customers, the end user and the vendor. Marketing is absolutely critical to success. "We can take any product and quickly and clearly communicate its worth to a highly focused group of people," says Young, who points to GTSI's large, up-to-date database of customers.
As always, the pressure to grow remains strong. "To some extent, [recent mergers] have also depended on the age and stage of these companies," says Young. "When you've been owner or CEO of a company for 10, 12, 15 years, often it's time to move on."
To Jump or Not
For many VARs, the federal market's maze of contracting procedures, albeit recently reduced, has proven to be daunting, says Bob Berghell of Newport Beach, Calif.-based VAR Berghell & Associates, which works with the Air Force and a variety of aerospace contractors. The privately held company does not release its revenue figures.
"You really have to have either a background or work extremely hard to grasp all the contract nuances, forms and regulations," says Berghell. "You need serious staying power for these bids."
VARs have to look at the risk/reward ratio to determine if the gold at the end of the rainbow - a lucrative, long-term contract - is worth the trouble.
"A contract might be several times larger than what they might expect in commercial sector," says Berghell. "But the procurement cycle, in our experience, takes up to twice as long on average as the commercial side."
A lot of VARs don't want to risk that amount of time and energy.
"If you're merely responding to an RFQ [request for quotation] at the 11th hour, it's going to be tough," says Berghell. "Everyone else has already had a chance to shape its contents.
"If you lose that kind of investment spread over a number of bids, that can be an expensive gamble," says Berghell. "Yet if you get it, it can be profitable, perhaps even more stable than a commercial contract over the long run."
Sometimes overly ambitious (read: unrealistic) consultants can cloud the picture for smaller VARs.
"They will ask for any and every technology that sounds good," says Berghell. "This can discourage smaller VARs. While larger systems integrators might know it's impossible, they also know they can negotiate around it later."
"Our strategy has been to participate in as many of those vehicles as possible, such as the National Institutes of Health's Electronic Computer Store and also the GSA schedule."
-Lawrence Hamm, Intelligent Decisions
As many government contractors know too well, working with the federal government is not for the faint of heart.
"You really have to know the ins and outs of the regulations," says Peter Niremberg, president of Image Architects, a 9-year-old, 20-employee VAR based in Manhattan. "Just understanding the [General Services Administration] schedule is difficult."
Certainly there is still room for the smaller VARs, especially 8(a)s - certified small, disadvantaged businesses - or firms that "know the ropes, all the little gotchas," says Niremberg. "But unless you're a Grumman or a really big company, it is tough to make money. The pricing structure that the government uses for labor is just very low. You can make money, but unless you live it every day, it's pretty challenging."
Syscom, a Silver Spring, Md.-based VAR, entered the market 12 years ago by offering MCI e-mail services to government customers. The 25-employee company's niche focus has shifted to fax on-demand and fax servers for agencies that need to send out information to large groups of people.
"Our [Internal Revenue Service] fax on-demand is a heavily taxed system," says Lee Weinstein, president of Syscom. "We also have done a great deal of work for the [Food and Drug Administration]."
A strong niche focus is essential to any smaller VAR's success.
"Of course, maybe it's easier for us because our products are very cost-justifiable," says Weinstein. "The savings is relatively clear."
Getting on Contract Vehicles
The client roster for Intelligent Decisions of Chantilly, Va., features the Defense Logistics Agency, the Department of State, several IDIQs, and, of course, the Department of Defense.
The VAR is both a manufacturer of PCs and servers, as well as a reseller for companies such as Compaq Computer Corp., Houston; Dell Computer Corp., Round Rock, Texas; and 3Com Corp., Santa Clara, Calif.
Getting on board as many contracts as possible has greatly helped Intelligent Decisions' business.
"Our strategy has been to participate in as many of those vehicles as possible, such as the National Institute of Health's Electronic Computer Store II and also the GSA schedule," says Lawrence Hamm, vice president of marketing and contracts for Intelligent Decisions.
Sounding a contrary note is Jorge Diaz, director of sales for VITGroup, a division of Vredenburg, a Reston, Va.-based VAR. Getting onto specific contracts has become less important, Diaz says.
His company, which saw revenues of $21 million in 1997 and employs more than 250 people, has relied more on referrals and word-of-mouth to help line up deals with the Environmental Protection Agency and the intelligence community, in addition to the usual IDIQ route.
"Five years ago, contract vehicles were the almighty grail - the thing everyone needed to have," says Diaz. "With the advent of [governmentwide acquisition] contracts and the GSA schedule, almost any reseller can be gotten to by any federal agency."
Competing directly with manufacturers on the GSA schedule will remain a tough proposition, points out Payton Smith, an analyst with IDC Government, Falls Church, Va.
"It will be very hard to make money just reselling at this point," says Smith. "In many cases, it's very easy to buy direct from the manufacturer ... Manufacturers can always beat VARs on price. [VARs] have to find a way around this advantage."
As always, a strong services component is necessary for VARs to compete with - or complement - direct vendors.
GTSI will continue boosting its IT infrastructure to streamline its organization. According to Young, the information supply chain extends from the manufacturer to GTSI, its partners and, of course, its customer base.
To increase efficiency, Young and his management team have implemented a new "one call, one person" mandate.
"Each transaction is to be handled by one person at one time," says Young. "This is the standard by which we measure progress in handling transactions. Do they go to the right person the first time? Can he completely deal with it? We've made a lot of progress, but we still have a way to go."
Sometimes the people who know how to put deals together for the federal government do not necessarily cover all the technology areas, reports Rich Schmelz, Syscom's general manager.
"They're using the expertise of VARs and manufacturers," says Schmelz. "In fact, manufacturers are telling the Booz-Allen Hamiltons and EDSes to come to us when they want that part of the deal [fax on-demand services] done correctly."
Working that direct relationship with manufacturers has also proven a boon for Syscom.
"We deal 100 percent with the manufacturer," says Schmelz. "It is easier and a great source of leads. Besides, why should I pay a distributor in the middle? In our case, the distributor is not adding value for us."
On the other hand, the distinction between systems integrators and VARs has been blurring for years as VARs up their integration expertise.
However, the integrators still generally offer better-rounded skill sets, technology expertise and the ability to manage large-scale projects, Smith says.
"An integrator like Lockheed Martin can manage an entire project from soup to nuts," says Smith.
VARs take a variety of approaches to ensure their customers get the best value for their bucks and not just a box with a set of instructions.
GTSI marshals its resources by forming teams around certain technologies and vendors, with groups assigned to Sun products, Hewlett-Packard products, Cisco and so on.
"It will be very hard to make money just reselling at this point. In many cases, it's very easy to buy direct from the manufacturer. "
-Payton Smith, IDC Government
"Serious vendor certification gives us the capability to solve not only questions about a Microsoft server, but also how it would interface with other products out there," says Young.
This cross-platform integration capability fills in the skills and knowledge base that most customers understandably lack.
Integrating and configuring PCs so they provide a very similar environment for users is another Intelligent Decisions' calling card.
The company takes the systems, components and software from different manufacturers and configures them into a system designed to meet particular customers' needs, says Hamm.
"Since we have partnership relationships with virtually all the major manufacturers, we're able to deliver a customer's preferred product set in a timely manner," says Hamm. "We make it very close to turnkey, so its very close to working with the system customers used before."
A few trends around the corner for VARs include the continuing momentum behind the Windows NT product and strategy and the growing demand for faster, more robust servers in the local-area network environment.
"I also expect some increase in network computing, but the 'fat client' will enjoy popularity for some time," says Hamm. "Individuals are rather comfortable with storing certain types of information locally.
"When you can get a reasonably robust computer in the $1,200 range, the network computer doesn't offer the same price performance as when it was first introduced onto the scene," says Hamm.
Diaz says that he can see a continuing move toward all things Windows on the desktop, including Windows 95, 98 and NT.
"You will still see some Unix, but in a much more niche role, like at the Department of Defense," says Diaz.
VARs need to develop specialties to stay viable in the market today, Diaz says.
"Know what makes you different," Diaz says. "You need to make sure you can translate that to a crisp and clear message."
Many federal customers are starting to look into leasing equipment, mainly to reduce their capital investment and to avoid the perils of technological obsolescence. However, the distinction between leasing and outsourcing does occasionally get blurred.
"Outsourcing is leasing with services, where leasing is just a straight financing package," says Smith. "VARs are suppliers of equipment and software just like anyone else ... Leasing is one of the directions I see the government headed in."
In fact, Intelligent Decisions recently won a three-year leasing deal, including technology refresh clauses, with the Marine Corps.
"We were fortunate to have that on our GSA schedule," says Hamm. "Leasing has gained in popularity because the technology moves so quickly.
"When you make an investment in hardware, you can be guaranteed that within 30 days, you'll no longer be sure you'll have the latest and greatest," he says. "Leasing lets you manage assets in a more efficient way. You won't have to make the same capital expenditure."
It's clear that competition has forced VARs to take a variety of measures to get ahead, or even to stay afloat.
Only a strong IT infrastructure and close customer and, often, manufacturer relationships will keep a company in the black.
Whatever the roadblocks, however, the companies that have proactively invested in their sales, marketing and technical prowess are competing - and winning - the new contracts.