Government Alert

In terms of where the action is, large VARs say they expect to see their highest proportion of revenue--44 percent--coming from the federal side, while midsize and small VARs see a higher percentage from local government--44 percent and 50 percent--of their revenues, respectively, the study shows.

Those are the numbers. Now here's what to look out for: Among the most watched RFPs hitting the street in Washington, D.C., in the near future are those from the Department of Homeland Security's Security Planning and Integrated Resources for Information Technology (SPIRIT) system, which could be valued at $10 billion during the next 10 years. It's safe to say there will be multiple contracts and systems integrators winning awards in the coming year. SPIRIT will be a procurement vehicle, addressing such issues as overall systems security, operations management, engineering and design, and analysis and planning.

"It's going to be a high-visibility program," says Dendy Young, chairman and CEO of GTSI, a government solution provider based in Chantilly, Va.

Another hot RFP coming out of Homeland Security is the long-awaited U.S. Visit system, a platform that will track foreigners who enter and leave the country. The system will rely on smart-card technologies and biometrics. A number of solution providers look to be players, including Unisys, which is working with Lockheed Martin to evaluate and pilot numerous biometric solutions, according to Greg Baroni, president of Unisys' Global Public Sector practice. Unisys stands a good chance of seeing a piece of that business because it is the primary contractor for the Transportation Security Administration's IT and communications architecture. And competition is expected to be healthy.

Other Challenges
GTSI's Young says government VARs could see a shift toward performance-based contracting at the federal level. The Department of Defense has mandated that all contracts be awarded based on certain performance- and service-level metrics. For example, the Pentagon awarded EDS a $258 million contract to modernize its communications infrastructure. Under the Pentagon's Command Communications Survivability Program (CCSP), EDS and its subcontractors, including Verizon, will be compensated based on service levels. The Pentagon will pick up the cost of the project, but partners will profit by as much as 12 percent or as little as nothing, depending on how well they meet those service levels.

Young says the impact of performance-based contracting remains to be seen. "If they enforce it, then it will generate some ripple effects," he says. Like what, exactly? How about a sudden clamor of companies that want to jump aboard existing performance-based contracts or else acquire their own. Such contracts benefit everyone. Contractors are incented to meet performance levels while customers receive higher service levels, but that does require them to build in certain capabilities to meet those goals, Young says.

If successful, down the road the reward system could spread into civilian agencies, and perhaps state and local government contracts. "There's more pressure on both the customer and the supplier, and, frankly, I think it's good because it forces both customer and supplier to communicate better," Young says.

Overall, government VARs plan to hire more in the coming year, according to our 2004 State of the Market study. Almost half of all VARs selling to government customers are planning to hire more personnel in 2004. Also, government VARs are likely to continue the trend of subcontracting portions of their projects. In fact, nearly nine in 10 VARs that sell to government customers are currently subcontracting with other solution providers, VARBusiness' research shows.

Max Peterson, vice president of federal sales at the government solutions division at CDW, says government customers seem to be making big-picture decisions, rather than simply replacing systems and software. By taking a more strategic approach, customers are looking to take advantage of enterprisewide discounts.

For example, in the software-licensing arena, customers would purchase whatever software they required as needed. "No one had a strong grasp of whether they were in compliance or getting a good deal at an enterprise level," Peterson says. "In the past year, we've helped a lot of customers get their arms around their real software-license requirements."

Still, there are challenges facing government contractors. For one, state and local budgets will be down in 2004, says Input analyst James Krouse. "Spending will likely be down as budgets have not rebounded, and we are facing an election year," Krouse notes.

Young says there's much business at the state and local levels despite widespread deficits. "To solve their deficits, they have to improve productivity. The only way [to do that] is through investments in IT," he says.

Many small VARs are loath to go through the government's procurement process. "You never make money the first year. You wait for the technology's process to go down; then you make money," says Bill Broyles, CEO of Nexgen Electronics.

Also, the government tends to release funds toward the end of the fiscal year in September.

"We'd like to see [senior managers] spread that out throughout the year," Young says.