State of the Government Market Cover Story: Advocates For Efficiency

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.