The Renewed Middlemen

Distributors are pushing a new approach to government IT sales: use their government expertise and infrastructure to expand sales and revenue opportunities. Distributors remain an underutilized resource in the government space. Vendors and solution providers are often inclined to go direct to preserve margins and remain competitive in a market where hotly contested contracts most times go to the lowest bidder. "Distribution is probably used less in a government-based business than commercial," says Barry Culman, vice president of operations at Chantilly, Va.-based GTSI. "A lot of vendors have government programs that are offered through resellers, with many of the bigger deals incorporating special pricing. In that sense, you often get pushed direct."

But the reality of the market makes that strategy difficult, with the billions in government IT contracts all but reserved for those with deep connections to purchasing agents, the inside track on emerging projects and the ability to navigate the purchasing system. Those are attributes that many vendors do not possess, and many VARs can use a little help with.

Here's where distributors see opportunity: acting as a clearinghouse of goods, a facilitator of new relationships on behalf of vendors and solution providers, and an insurance policy ensuring contracts are not lost on the gotchas associated with the government business.

Difficult Starting Point

id
unit-1659132512259
type
Sponsored post

Gauging distributors' penetration into the government market is difficult, mainly because contracts are signed with vendors or solution providers. While distributors are never entirely absent from the government channel, vendors often calculate that the big money to be made from government contracts is worth keeping in their own coffers--either by fielding their own sales forces or by working directly with government VARs.

"Until recently, the enterprise partners that we deal with were not particularly progressive in the area of channels when it came to the government sector, wanting to keep government business close to the vest, and looking at the large solution integrators as the primary route to market in the federal space," says Eileen Gibson, vice president of marketing at Avnet. "We still have some work to do to encourage the companies that have a hybrid approach to focus on their own differentiators and partner for what's not core to their business."

That can be difficult, because the very nature of selling to government results in reduced margins. A system where the lowest bid frequently wins, forces vendors to keep their prices low. Having distributors in the mix is another layer of cost.

"I wouldn't say there's a one-size-fits-all," says Bob Laclede, vice president and general manager of Ingram Micro's government and education division. "Each vendor has a different strategy. Some vendors are typically very friendly to the channel, but see their federal business as a direct model. Others don't know how to do federal business at all, so they run that totally through the channel and play different games for the commercial sector. It depends on how the vendor wants to approach that segment."

Driving the transition, however, is a growing realization by vendors that tapping the $60 billion federal-government IT market is a daunting challenge. A slightly lower margin, more and more vendors figure, is a small price to pay in exchange for more contract wins that distributors can help land. Specialized programs that broker relationships between vendors and government solution providers and support systems for assisting solution providers with contract fulfillment is how distributors are proving their value.

Ingram Micro, which has 2,500 VARs in its Gov/Ed Alliance, grew its 2005 federal-government revenues by 11 percent, state by 22 percent and local by 14 percent. Given that government IT spending--state and local as well as federal--was relatively flat compared to 2004, at least some of the growth can be attributed to increased support of suppliers. Other distributors either don't break out government business or don't release growth numbers, but most affirm healthy revenues.

Double-Edged Challenge

To successfully augment vendors' government sales, the distributors need to more fully serve their VARs by building out their infrastructures and expanding their government expertise.

"Very often, people look at government business overall and see this as a $60 billion marketplace," Laclede says. "They say, 'Boy, if I only had 5 percent market share, I'd be rich.' If it were all that easy, we'd all be rich."

There's more to government, however. Distributors must understand the numerous government programs--from the Defense Priorities and Allocations System to Small Disadvantaged Business set-asides--and cope with lengthy procurement schedules, stringent standards and endless tracking regulations. Some distributors currently don't have that insight or reach.

A big challenge is also time. Government contracts can take up to six months to close, compared with 30 days on the commercial side. For instance, it's not unusual for a reseller to call about an opportunity with the Navy for 100 monitors; the distributor then offers a quote but doesn't hear back for three months or more.

"Imagine what the vendor can do to pricing in that time," Laclede says. "It could go up, it could go down, the model number could go away entirely. You have to go back to government and say, 'Sorry, I can't get model XYZ that I quoted.' This is the stuff that drives people nuts in this business--evaluating the risk, taking the risk and figuring out how to reduce the risk as much as possible."

Distributors have to juggle the different government pricing programs available from multiple vendors--which change frequently--and ensure the products recommended meet specifications. They often need to offer specialized financing and leasing options, understand terms and conditions and ensure trade compliance.

"There's all kinds of tracking involved to ensure strict regulations are met," says Barb Miller, director of Tech Data's Government and Technical Services divisions. "We're required to maintain detailed data for every individual order--from whom the product is sold to, to what government promotion was incorporated into pricing."

Another challenge in the government market: a more crowded playing field. The government market is equated by many with the systems integrators (SIs) and mega-resellers that dominate much of the space--from Lockheed Martin and Northrop Grumman, to GTSI and CDW Government (CDW-G). SIs can stockpile products and offer full solutions, or large VARs can independently play distributor.

"What you don't see in the commercial world is a big contract standing between you and the customer," Culman says. Recognizing that complication, GTSI, with more than 1,500 partners, takes on the role of distributor for a portion of its business. "We like to consider ourselves as a solution aggregate for the majority of the business; but if you define distribution as selling to the reseller who then sells to the end user, there is a small portion of our business that works that way."

Value For VARs

The good news for VARs is that the more distributors take on the challenge of the government market, the less they need to worry about inventorying and distributing product. "Distribution has the ability to draw on multiple vendors and product lines in a relatively short period of time, provide specific technical expertise, meet specifications and take on the burden of a large back-office infrastructure to collect rebates," Miller says.

And more are opting to do exactly that. Avnet decided to refocus its government program in response to partner requests. Network Appliance was the most vocal in encouraging the company to take a hard look at the market, but more have since joined in.

"Company XYZ may be a $4 billion consulting and integration firm, but they still struggle to maximize profitability, preserve the customer base and improve efficiency with the supply chain," says Carmen Alameno, director of federal sales at Avnet. "Distributors that understand that part of the channel can help."

In addition, Alternative Technology, a specialty distributor of thin-client/server-based computing, edge infrastructure, security and wireless solutions, launched an agent program for VARs looking to bid on General Services Administration (GSA) contracts. Alternative Technology bids on contracts that are fulfilled by solution providers.

Comstor, a division of Westcon Group, offers a similar service through its GOVx channel program. Announced in August, the program is designed to help Comstor's Cisco Systems resellers compete in the federal, state and local government markets. Among the benefits included with program participation is access to a GSA Schedule--a resource that Comstor has offered to its resellers since the late 1990s.

"Some use it solely as their way to get into government opportunities," says Dave Ambrose, federal business manager at Comstor. "Others use it as another vehicle in their arsenal. The [GSA] Schedule is there strictly for the benefit of the resellers. While we hold it, we don't sell through it."

Following Ingram Micro and Tech Data's lead, Comstor also matches prime contractors with resellers that have small-business set-aside status--from programs for women-owned businesses to veteran-owned companies. For example, if an agency requires telecommunications products and services for an urban-renewal project goes to a minority-owned business, distributors like Comstor can instantly find appropriate matches.

"To continue to provide that value-add, we just have to watch what's going on," Laclede says. "Changes to e-Rate, acts of Congress and reorganization of GSA; [distributors] are there to educate the VAR about the issues out there and why something can or can't work."

For more in-depth information on distribution and a complete listing of the Top 25 Distributors check out VARBusiness' annual State of Distribution special report on VARBusiness' Web site. The research features distributors' fastest-growing product segments, growth strategies, trends and more for a complete view of the distribution landscape.