Our first State of the Government Market survey finds government agencies are looking for efficient, cost-saving systems. That spells opportunity for solution providers.
Once upon a time, public-sector organizations looked to internal resources or manufacturers to lead their IT initiatives; solution providers generally edged in via contract bids or vendor endorsements.
These days, agencies and institutions focus less on products and more on services, attempting to improve processes under the constant constraint of shrinking budgets. With that shift, solution providers that service the public sector are getting an opportunity to hold more of the cards.
For GovernmentVAR's inaugural State of the Government Market (SOGM) survey, more than 260 solution providers weighed in on buying trends in government and education, and how those trends are affecting selling strategies. From what VARs are saying, today's government arena has fewer windfalls but more long-term opportunities to offer those who are capable of assuming the roles of primary influencer and trusted adviser.
Doing More With Less
Conventional wisdom holds that the government market has razor-thin margins--mostly because of open-procurement processes and the tendency for the lowest qualified bidders to win the deals. But 57 percent of SOGM respondents said the public sector is equally as profitable as the commercial channel, or more so.
In our survey, nearly 90 percent of respondents said revenue from federal, state and local government, as well as education, remained steady or increased from 2004 to 2005. More than half expect even stronger growth in 2006.
"This market is bullish," says Rick Marcotte, president and CEO of Herndon, Va.-based DLT Solutions. "But agencies are saying, 'We have two choices; we need to reduce what we offer or change how we're doing things.' They're looking for ways to be smarter."
At first glance, such optimism is contrary to the state of the government market as a whole, with continuing belt-tightening at all levels. But actually, having fewer dollars to go around forces agencies to do more with less. Under those conditions, technology makes things more efficient, and we know what that means: more investment.
In the name of efficiency, government agencies generally put integration, consulting and support ahead of cutting-edge hardware or software. Some vendors find that market dynamic difficult to grasp, because it means their partners hold more influence than usual in the sales process and the returns are small--at least initially. But the reality is that government spending tends to start small and increase gradually.
"A vendor's expectation is often mass revenue, but that's the wrong way to go," says David Kriegman, COO of Fairfax, Va.-based SRA International. "The business model has to be long-term; rather than maximizing revenue on the first task order, [solution providers] need to discount and then build out. Few vendors actually own any segment of the public-sector market. They have to let [solution providers] take the lead."
Vendors are starting to come around, understanding that partners drive the deal, and encouraging the incorporation of their products into solutions through added benefits rather than demands for exclusivity.
Even Hewlett-Packard drives partner loyalty by stacking the margin available on the sale of multiple offerings. If a reseller sells an agency products A, B and C, all from HP, the margin will be multiplied accordingly. The scenario would be different for a solution provider that hollows out a server and fills it with a competitor's product. At the same time, HP works with partners that face challenges associated with particular agencies. Take Springfield, N.J.-based Westwood Computer, which landed a deal with the Department of Agriculture but was limited in terms of the number of boxes that it could ship for each system. To accommodate the VAR, HP created a customized shrink-wrapped package that incorporated more pieces of equipment.
"The agency valued the close relationship that Westwood had with HP," says Marc Fertik, vice president of federal sales at Westwood. "We invest in selling the complete product portfolio that HP offers, and HP does everything possible to help us win the opportunity and satisfy customer expectations."
NEXT: Vendors adjust their partner programs to how government buys.
New Requirements, New Offerings
Of course, a shift in how government buys requires a shift in how industry sells. Even solution providers known mainly as box-pushers are looking beyond product sales. GTSI, for example, brought in a new CEO to better serve a newfound focus on services, and CDW Government (CDW-G) is emphasizing internal systems integrator teams and leveraging alliances to meet the need for services.
"CDW-G is the best mass-market supplier out there, and that's a good thing because we can ensure continuity of operations," says Max Peterson, CDW-G's vice president of federal sales. "But we've also led the transformation in terms of vertical focus, which has driven us faster and deeper in the solution space."
And beyond providing full solutions and services, industry is increasingly taking the burden of certain IT requirements entirely out of agencies' hands. Forty-six percent of SOGM survey respondents said they offer managed services; 33 percent said they're considering it in the coming year. Network administration and management, security monitoring and disaster recovery are the most popular managed-services offerings.
Vendors, recognizing the shift toward services, are adjusting their programs accordingly, with training focused on execution, delivery and services-oriented certifications.
Symantec, for instance, is packaging managed services on the back end of products and, knowing the influence solution providers wield on customer accounts, pushing those services through the channel, regardless of whether the initial sale was made by a reseller.
"We work with some manufacturers--most notably, HP and VMware--where we sell their services and then they subcontract some or all of the services back to us," says Adam Robinson, CEO of Govplace in Irvine, Calif. "It allows us to work collaboratively and tap into the manufacturer's engineering resources as well as our own."
There's a need, in that sense, to share some intellectual property. As agencies ask contractors to build additional application layers and manage aspects of existing solutions, vendors need to be willing to share more of their knowledge base from an IT and services perspective. "We're now their front line," Robinson says. "And the way compensation happens needs to evolve substantially to allow the solution providers to serve the needs of the customer."
Changes Breed Challenges
Not surprising, government agencies' increasing reliance on contractors, combined with their insatiable need for integration and support, is providing a foundation for long-term relationships. According to the SOGM survey, the average solution provider's relationship with a customer is eight to nine years. The incumbent knows the existing infrastructure and is, therefore, best-suited for building new capabilities.
Of course, long-standing relationships with customers are an affirmation of a job well done and enable revenue to climb over time. And as solution providers extend their relationships with customers, new accounts take on less importance. Only 32 percent of respondents said they rely on new customers as a source of revenue. For vendors that want to grow their installed bases, that could be troubling.
"It's a lot harder to hunt [than it is] to farm," says Michael Coleman, HP's vice president of public-sector channels. To encourage the capture of new accounts, the vendor offers a back-end rebate that protects presales investments and awards margin to VARs that register a new opportunity. "Once partners get a foothold, they have a far easier time growing."
In the public sector, the best way to find that foothold is by snagging a contract from the multiple award schedule (MAS), the vehicle GSA uses to award contracts to multiple companies. MAS ensures competition throughout the life of a contract by divvying up work among several players, and it can often act as a solution provider's best entree to a new agency. While nine out of 10 VARs surveyed said GSA Schedule sales have remained flat or are growing, more need to leverage that contracting vehicle to gain new customers.
"The trick is to use some area of that MAS contract to bring different technology to a new customer and get them excited," Westwood's Fertik says. "Fortunately, the number of opportunities available for multiple awards is growing right now. It's definitely the year of the re-compete."
NEXT: Issue that continue to vex VARs.
As influencers, VARs face both the challenges associated with landing new business and the "gotchas" that plague those serving the public sector. According to our survey, 18 percent of respondents plan to take down their public-sector sales efforts a notch. The No. 1 reason? Difficulty navigating contract arrangements. A close second was lengthy sales cycles, and the third was trouble finding partners. "These kinds of issues are just the reality of the market," Govplace's Robinson says. "They're more barriers of entry than anything."
The easiest way to avoid contracting challenges is to seek out opportunities with seasoned primes. Focus only on the IT capabilities of a contract and leave the actual navigation and delivery requirements to the company that landed the deal. Twenty-five percent of respondents said they rely only on subcontracts for public-sector opportunities.
"A lot of times, companies fail to identify the specific skill sets they can contribute to bids," SRA's Kriegman says. "There needs to be an effort made by both the prime [contractor] and the subcontractor for relationships to work."
That's where distribution can be a valuable asset. Distributors provide an explanation of what's required. For partnering requirements, they can initiate valuable relationships.
Tech Data, for example, will focus on pairing arrangements between large solution providers and disadvantaged small businesses. That, of course, will benefit both sides.
"Everyone needs the set-asides to fill federal requirements on contracts," says Barb Miller, Tech Data's director of government and technical services. "But a lot of small companies have a hard time making the connection with primes. We can match the two according to the skills they bring."