Will Sam Be VARs' Favorite Uncle In 2007?

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In the midst of an expensive war and a change of leadership, IT contracting marches on. Some might go so far as to say it prospers, even as contracting and legislative challenges burden even the savviest solution providers.

Why the optimism? While 2006 didn't break any records, most in the public-sector channel saw their revenue grow in excess of government IT spending.

In GovernmentVAR's second annual State of the Government Market survey, 227 solution providers reflected their optimism for the public-sector channel in the coming year. The results show a lot of promise, as reported in 2006 revenue growth across all government segments. Many solution providers anticipate that the good times will keep rolling.

A More Level Playing Field
Large systems integrators once focused mostly on the federal market--dedicating most of their resources to the bundled contracts--particularly the multibillion-dollar defense and homeland-security engagements that carry enormous payouts. On the same note, small solution providers tended to focus more on the neighborly opportunities at the state and local government levels. That's changed, however, as those neighborly opportunities are swallowed up by city- and statewide-contracting vehicles. With that, the distinction among channel companies is narrowing.

While large solution providers are significantly more likely to focus on federal agencies than those that report annual revenue of $1 million or less, they're nearly as likely to target state and local governments--something that would have been surprising only a few years ago.

At the same time, federal integrators experienced increases in growth--63 percent--compared to state and local VARs who witnessed growth--56 percent and 52 percent, in their respective public sectors. Most estimated the degree of growth at 5 percent to 14 percent across all segments.

Does this mean that the federal market carries more opportunity for the channel? Not necessarily.

In some cases, growth could be directly related to experience, given that respondents, on the average, had two more years of experience selling to the federal market than selling to state and local governments. That translates to additional understanding of the market and ability to focus on opportunities. And while two years' less experience may not seem terribly significant, each state and local municipality brings its own learning curve, particularly as the lower end of the public-sector market consolidates purchasing.

As noted by one respondent, some states are far more difficult to work with than others, and just trying to figure that out is the first challenge. Others noted difficulty tracking down decision-makers as a major hurdle. Respondents that said they no longer sell to state and local governments blamed their exodus on disruptive changes in strategy that came with frequent changes in leadership, combined with excessive red tape and prolonged approval processes.

"We've been doing this for 27 years, but the biggest challenge remains the contracts," says Rick Cadiz, director of sales for Custom Computer Specialists. The Hauppauge, N.Y.-based solution provider primarily focuses on state and local opportunities, recently providing project-management and quality-assurance services to the city of New York.

"Government is trying to make it better for the end user by saving money with state- and citywide contracts," he says. "But really, all it does is kill the value of services to the end user. We get squeezed out by these national providers that don't provide the hand-holding that customers require. Fortunately, we've been in this market for a while and built relationships with customers that stick with us. I don't know how a new company trying to come in can be successful; it's such an obstacle."

NEXT: Placing all eggs in the federal basket

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