The New Resellers: Upstarts hunger for the government pie

The New Resellers: Upstarts hunger for the government pie<@VM>Large procurement? Let us give you a hand<@VM>Helping small resellers reveals bonus to distributors

Rockin' resellers

Top resellers on the two largest governmentwide contracts focused on selling hardware, software and related services to agencies. Dollars figures cover fiscal 1999-2002.

Electronic Commodities Superstore II*

PlanetGov, $132.8 million

GTSI, $89.7 million**

Northrop Grumman, $65.3 million**

Intelligent Decision, $60.3 million

McBride & Associates, $47.5 million

 

NASA Scientific and Engineering Workstation Procurement II

Northrop Grumman, $307.3 million**

GTSI, $247.6 million

Government Micro Resources, $78.6 million

*Contract expired September 2002. ECS III is now in use.

**Includes Northrop Grumman's acquisition of Federal Data Corp., and GTSI's acquisition of BTG Inc.

Source: Federal Sources Inc.

William Shafley (center) and vice presidents Ken Grimsley and Tom Simmons, have grand plans for upstart reseller Micro Warehouse Gov/Ed. They are seeking to expand the company from about a dozen government sales people to 300 by the end of the year.

Olivier Douliery

"The federal government is not a place where you just set up a storefront and start doing business. It's the most relationship-based business you will find anywhere." ? Jim Shanks, CDW-G

Todd Buchanan

Steve Baldwin said PlanetGov, which provides high-level support on enterprisewide procurements, is more of a systems integrator than it is a pure reseller.

Henrik G. de Gyor

William Shafley overlooked row after row of empty workstations stretching across a snazzy 43,000-square-foot call center in Reston, Va. In one corner of the sunlit building, a handful of employees were taking orders and making contacts with government customers. By the end of the year, Shafley wants to fill this office, leased in December by Micro Warehouse Gov/Ed Inc., with 300 government sales and support personnel.

"The only thing holding us back is the rate at which we can train people," said Shafley, president of this subsidiary to Norwalk, Conn.-based commercial reseller Micro Warehouse Inc.

While many in the channel community are tightening their belts to ride out the recession, Micro Warehouse's government subsidiary is expanding in a big way. In three years, Shafley predicted, it will be doing $1 billion in annual IT sales, up from the $400 million in public-sector sales the company racked up in 2002, which mostly come from education and state and local government customers.

"Government is clearly the bright spot in the economy, especially on the federal side," said Anne Brennan, who as the government sales manager for the distributor D&H Distributing Company Inc., Harrisburg, Pa., follows the reseller community closely.

Consequently, Micro Warehouse is not the only reseller with ambitious plans to expand its government presence.

"Numerous companies are looking at their business, seeing a downside on the commercial side, and chasing the government a lot harder. PlanetGov, iGov, CDW have all really strengthened their business," Brennan said.

Some of these companies, such as CDW Government Inc., a subsidiary of reseller CDW Computer Centers Inc., ramped up operations in the late 1990s, and only in the past few years have gained traction in the marketplace. Others, such as Micro Warehouse, are essentially newcomers to the federal space.

[IMGCAP(2)]The government market represents unspectacular but reliable growth for a reseller, said Payton Smith, an analyst with IT research firm Input Inc. of Chantilly, Va. The Bush administration's proposed $59.3 billion federal IT budget for fiscal 2004 is an increase of more than 14 percent over fiscal 2003's $52.1 billion request.

"It is not dramatic growth, but it is steady," Smith said, noting that not once in the past 10 years has the government IT spending shrunk.

Slow, steady growth looks good for a company reeling from cyclic corporate spending. However, companies hoping to make inroads into the government market face fierce competition from veteran resellers.

Most formidable is GTSI Corp., Chantilly, Va., which appears to be increasing its share of the federal reseller pie, despite the influx of new entrants. Its 19 percent sales growth last year -- $935 million in 2002 sales compared to $784 million in 2001 -- exceeded that of the federal IT budget.

"The reason GTSI has been successful is because it understands the government customer," said John Spotila, GTSI's president and chief operating officer. "The things that we do are not easy to replicate. They involve an investment of resources and time and considerable expertise."

GTSI competitors don't discount the difficulty of expanding their government presence, saying it takes preparation, patience and an ability to forge partnerships with customers

"The federal government is not a place where you just set up a storefront and start doing business. It's the most relationship-based business you will find anywhere," said CDW-G President Jim Shanks.

 

BUILDING A BUSINESS

For CDW of Vernon Hills, Ill., the jump into the government market came in 1998, long before the commercial market began shrinking. Shanks said the company decided to focus more heavily on the government after it went through its sales numbers searching for new vertical markets.

Although the company had no dedicated government unit at the time, it found that government purchasers were going outside their routine channels and coming to CDW when they needed hardware and software orders filled quickly.

CDW opened a government subsidiary in Lansdowne, Va., concentrated on securing General Services Administration schedule contracts and getting to know agency purchasing officers.

The company has steadily expanded its government reach, striking an alliance with Science Applications International Corp. on the National Institutes of Health Electronic Commodities Store III contract vehicle. Before that, it grabbed a spot on the Air Force's $600 million IT2 Desktops, Portables and Servers Acquisition contract, awarded to five companies in 2000.

For Shanks, CDW-G's competitive advantage remains quick fulfillment -- something it can offer thanks to the size and orientation of its parent company

"We have an extremely sophisticated operational facility," Shanks said. CDW itself has a 460,000-square-foot, fully automated distribution warehouse and a logistics system that, honed by the needs of time-conscious corporate clients, can deliver orders in blazing speed.

And since the parent company does about $4 billion in business annually, it has bargaining power with vendors.

Even with such a muscular infrastructure, Shanks said the company learned a few lessons entering the government market.

"It has been a different approach for us. The public sector is so relationship-based," Shanks said. As a result, the company has ramped up an outside sales force to establish a presence in agencies -- not the usual approach for CDW, albeit one now being tried back at the corporate office.

CDW-G does not break out its federal sales, but Shanks said its public-sector sales, which include education and state and local governments, have steadily increased in recent years, from $418 million in 2000, to $681 million in 2001, to $865 million in 2002.

About the time CDW created its government unit, PlanetGov Inc. was started. In February 1998, five investors bought a small, government network service provider called Intellisys Technology Corp., and changed the focus to servicing agencywide, procurement technology-refreshment contracts.

Intellisys brought in about $7 million in revenue in 1997, while the following year it had $122 million in revenue, thanks mostly to government contract sales.

In May 2000, the company launched itself as PlanetGov.com, an Internet company providing a variety of goods and services to agencies through an e-commerce exchange. But the venture fizzled, and the company returned to its original focus as a reseller.

[IMGCAP(3)]"What we're good at is program-related business, as opposed to transactional business. Our business is more system integration than a pure reseller," said Steve Baldwin, an original investor and now CEO for the Chantilly, Va., firm.

With the government moving more toward enterprisewide procurements, the company focuses on providing the high-level support required under such contracts. Of its 300 employees, 75 percent are engineers, Baldwin said.

Unlike resellers that excel in fulfilling a wide range of miscellaneous orders, PlanetGov concentrates on exclusive, agencywide fulfillments, he said. In December, it won a three-year agreement with the Internal Revenue Service to provide up to $100 million worth of computers from Hewlett-Packard Co. In August, PlanetGov won a similar IRS award, worth up to $35 million to provide the tax agency with HP desktop and notebook computers.

Baldwin said the company this year intends to expand into agencies where its presence is relatively small, such as the departments of Agriculture, Defense and Health and Human Services. And he said government sales, an estimated $293 million in 2002, should top $400 million in 2003.

EYES ON THE PRIZE

Perhaps the company with the most ambitious plans for growing in the federal market is Micro Warehouse. Shafley said the company has a five-year plan in place that calls for it to have $1 billion in federal sales by the end of 2006.

To help hit this target, the company has aggressively recruited key players from competitors. Don Tiaga, vice president of program management, was formerly with CDW-G. Senior Vice President Burl Williams worked at CDW and GTSI, in both contract and full-employment positions. On the technical side, the company lured in Sanjay Barthakur, GTSI senior network engineer, to lead the company's telecom offerings. Shafley himself came from CDW's government unit and, before that, spent time at GTSI.

Like CDW, Micro Warehouse profits by economies of scale. The parent company does an estimated $1.9 billion in sales overall, and the government unit uses the company's distribution facility in Wilmington, Ohio, to fulfill orders.

It is a facility geared to ship product anywhere in the globe quickly, just like that of CDW. The company can get an order at midnight, custom-configure it and have it on the government customer's doorstep the next business morning, Shafley said.

Such timeliness is important to the company's growth, and can't be matched by a pure-play government reseller, Shafley said. "You can't run a transactional business with a high degree of success unless you own your own [distributor] backbone," he said.

Early results look promising. In December, two months after establishing the subsidiary, Micro Warehouse secured a placed on the NIH ECS III. Under this contract, Micro Warehouse will compete against PlanetGov, CDW and GTSI and others to sell up to $6 billion worth of IT equipment to federal agencies.

 

EASIER SAID THAN DONE

GTSI, the largest and one of the oldest federal resellers, is not going to easily cede ground to newcomers.

"There are a lot of companies out there, but most are niche players. We don't worry about what they do, we're focused on moving ahead," Spotila said.

Formed in 1983 as a software company, GTSI focused on being a government-exclusive reseller in 1988 when it began selling a line of IBM PCs. The company was one of the few to survive the shakeout of resellers during the mid-1990s.

Some competitors from that time quietly exited the business, such as General Electric Capital Corp. and Electronic Data Systems Corp. Several were swallowed up by competitors or companies playing in closely related markets, such as Cordant Inc., now owned by McBride and Associates Inc., and Sylvest, which eventually became part of Northrop Grumman Corp.

Still others, such as BTG and Falcon Microsystems, were purchased by GTSI itself.

For Spotila, GTSI differentiates itself from a company such as CDW by the level of service it provides.

"CDW has had enormous success in the commercial space. Its focus has been more on commodity selling," Spotila said. "We do that as well, but we have a much broader field presence."

The field presence is necessary to build a trust with customers, Spotila said. That's why, he said, the Pentagon called on GTSI after the Sept. 11 terrorist attack to quickly configure a line of newly shipped computers from a competitor. The vendor itself couldn't do the job because its personnel didn't have security clearances.

"They knew they hadn't bought it from us, but they also knew they needed to solve this problem, so they turned to us," Spotila said.

Commodity-focused vendors are also not as well equipped to deal with the complexities of large-contract order fulfillment, Spotila said.

When DynCorp won the 2001 $131 million Trilogy contract to modernize the FBI's computer systems, the integrator had some strict requirements about when and where partner GTSI would deliver the product, Spotila said. Entire offices filled with equipment had to be tested, integrated, loaded with software and shipped to arrive at remote locations at precise dates.

"That type of staging is much more challenging than just putting a printer in a box and shipping it out. It requires people to look at the requirements, put together a solution that is exactly what is needed and have the delivery timed correctly," Spotila said. "It is a different kind of skill set." *

Staff Writer Joab Jackson can be reached at jjackson@postnewsweektech.com.
When GTSI Corp. launched an integrator solutions group earlier this month, the government reseller acknowledged what was already a growing market for the company: helping integrators deliver on large procurement contracts.

"We see this as potentially a large area for us," said John Spotila, GTSI president and chief operating officer. "Hardware procurement is an area that integrators have to deal with, and they struggle at it. It is hard, and it is not what they do. ... It's fundamentally what we do."

Resellers can benefit by partnering with large integrators, which provide an indirect channel into the government market. According to an analysis by McLean, Va.-based Federal Sources Inc., integrators dominated the contract sales of IT-based, governmentwide acquisition contracts, or GWAC.

According to the fiscal 2001 analysis, the top five contractors -- Computer Sciences Corp., Electronic Data Systems Corp., Hughes Global Services Inc., Northrop Grumman Corp. and Science Applications International Corp. -- accounted for nearly 25 percent of all task and delivery orders. Overall, the top 10 vendors hold a third of all the sales reviewed by FSI, while 1,700 companies battled over the remaining share.

But resellers said these prime contractors also need them, because product sales remain a low-margin business for integrators, at least compared to their traditional forte of services.

"We've seen a lot of integrators get out of the hardware business," said Tom Simmons, vice president of national sales for Micro Warehouse Gov/Ed Inc., a subsidiary of corporate reseller Micro Warehouse Inc. of Norwalk, Conn. The reason: thin margins. Simmons said Unisys Corp. is an example of a company shifting emphasis from product fulfillment.

What Micro Warehouse and its ilk offer integrators is the ability to outsource that work. By drawing on an existing infrastructure geared for such thin margins, Micro Warehouse can handle the entire procurement process for a large contract holder, Simmons said.

"Why give that business up? We're more than prepared to answer the phone 'Unisys Federal' or 'EDS Federal.' We can greatly reduce your cost of sales and provide you a revenue stream," Simmons said.

Since Micro Warehouse can devote its own team to selling items off a contract, the increased revenue can more than make up for the percentage the reseller takes for the service, he said.

These partnerships work both ways. For CDW Government Inc., a subsidiary of reseller CDW Computer Centers Inc., partnering with SAIC was essential for its share of the $6 billion National Institutes of Health's Electronic Commodities Store III contract vehicle, awarded last December.

"By teaming [with SAIC], we were able to respond to every lot of the contract. We're covering everything from the product side to the service side," said Jim Shanks, president of CDW's government unit. For this contract, SAIC will focus on services, while CDW covers the products. *

Staff Writer Joab Jackson can be reached at jjackson@

postnewsweektech.com.

Distributors find that helping small businesses resell IT products to the federal government also builds business for themselves.

Case in point: Value-added network equipment distributor Comstor Inc., a division of Westcon Group Inc. of Tarrytown, N.Y. It recently launched a Small Disadvantaged Business program for its resellers that are 8(a), minority-owned, veteran-owned, women-owned or in Historically Underutilized Business zones.

Comstor will augment the capabilities of these resellers, helping them win more work in the federal and commercial marketplaces, executives said.

Through its Pro Shop professional services division, Comstor technicians will act as a noncompetitive extension of a reseller's own staff. The reseller then can pursue highly technical opportunities it might not be able to pursue otherwise. Comstor benefits from added revenue and market share, while helping small businesses, said Brett Morris, vice president of sales for Comstor.

Alan Pinto, director of sales for Panamerica Computers Inc., an 8(a) small business in Fairfax, Va., said the program will allow his company to bid on jobs it normally would not have the capability to take on.

"While we have a good understanding of the marketplace we serve, we often don't have the technical breadth or the staff to cover technologically specific opportunities that may arise," Pinto said. "Having the resources is wonderful. Paying for them only when we need them ... is of even greater benefit."

About 25 Washington-area companies are participating in Comstor's small-business program so far. The company wants 50 to 100 businesses to participate, and officials hope to meet that goal by the end of 2003, said Jeff Barenz, manager of Comstor's small disadvantaged business program.

Comstor's new program is the latest in a series of Westcon Group offerings designed to capitalize on the small-business status of some of the firms' resellers.

Westcon Inc.'s General Services Administration Agent program, for example, allows small businesses to use the company's GSA schedules to bid on jobs.

"We use the GSA Agent program to help close business," said Stuart Schwartzreich, Westcon, Inc.'s director of strategic accounts. "Many of our reseller partners don't have the resources or want to maintain their own GSA schedule. We make sure that for the products we represent, the schedules are current."

D&H Distributing Company Inc., Harrisburg, Pa., last summer started an in-house credit program to help small businesses with the financial burdens that come with fulfilling large orders. Called "Assignment of Funds," the program offers a no-fee, no-interest credit line to small resellers who have won procurements, according to Anne Brennan, government sales manager for Harrisburg, Pa.-based D&H.

Because the government payment schedule can stretch beyond the distributor's deadline for payment, resellers often must float the cost of the goods through high-interest bank loans or even credit cards. In a field where margins are thin to start with, such loans could sap any profit potential, Brennan said.

Thus far, about 100 resellers have taken advantage of D&H's program, Brennan said.

"This allows smaller resellers to play in the realm of federal government and still be competitive in pricing," she said. *

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