Bullies On The Playground

The education market isn't what it used to be. New procurement methods are driving school districts to larger suppliers, leaving the local VAR scrambling for a piece of the pie, or even left out of deals entirely.

In the past, Mrs. Jones, a teacher in small-town America might have been able to go out and purchase software for her sixth-grade class without much red tape. Or a department head at a university could buy hardware for faculty without having to go through a centralized purchasing plan.

That's no longer the case, as more stringent procurement policies are increasingly developed at the district, regional and even state levels.

"The purchasing of technology is moving up the bureaucracy [ladder] in order to enable buying in larger quantity at a better cost, and to ensure that technology can be integrated and work together," says Nicole Engelbert, an analyst of public-sector technology at Datamonitor, a London-based global research firm.

From tightening budgets to cuts in education grants and the commoditization of IT, the education market is shifting and causing vendors to switch strategies away from reliance on the neighborhood solution providers. According to a report released by Input, a Reston, Va.-based research firm, the total education IT market hovers around $7 billion for fiscal year 2006, with only a slight increase expected for 2007.

In turn, more local VARs are finding they can't compete. The larger the account, the more product is required, and the more administrative resources are piled on the solution provider. That's fine for the larger VARs, but not those that traditionally cater to individual schools or small districts.

Compounding the situation is the trend for software and hardware vendors to steer large education customers to larger partners with deeper discounts. On a one-off basis, the smaller local VAR can't purchase volume at a lower price point. The Plano, Texas, district may offer an opportunity for 30,000 licenses of Microsoft Windows to a local VAR, for example, but will move on to another provider when Microsoft doesn't hand down the expected discount.

"I don't want to say that's the game--for us it's a purchasing strategy," says Jim Hirsch, associate superintendent for technology and CIO for the Independent School District in Plano, Texas. The district was named the top digitally advanced school board in 2004 by the Center for Digital Education and National School Boards Association. "If we don't feel we can get the price we need from the reseller, we will go direct to the manufacturer and figure out a way around those explicit distribution rights, either by buying direct or by going to a larger reseller."

Big Man On Campus

So, who does snag that opportunity for 30,000 licenses? In the case of Microsoft, it's the Large Account Reseller (LAR). The software giant's Select License program was designed for customers with 250 or more desktops and mixed product and purchasing requirements. They receive a volume price level for each pool of products selected, based on a three-year software forecast, and they're served by one of Microsoft's preauthorized LARs. Microsoft has only 22 LARs in the United States that sell the full line of license agreements.

"I certainly appreciate and can't live without the value that the small partners provide our business," says Anthony Salcito, general manager for Microsoft education. "But I also applaud the effort of schools to buy effectively, and will seek ways to accommodate that effort. In many cases, that requires a select range of larger providers."

The LARs emerge mainly as a license-selling entity, he says; they make money on volume, and then the customer gets a discount. The smaller mom-and-pop shops inevitably feel a bit of push-out because they can't sell volume, though opportunity still exists in services.

New Berlin, Wis.-based Software One focuses on the sale of volume license agreements for a variety of publishers in the education market and is an authorized Microsoft LAR.

"Licensing can be complex due to the number of products, diversity of the customer base and the complexity of the legalese tied to the agreements," says Peter Ellis, Software One's director of Microsoft business development. "A lot of VARs have a tendency to believe it's a commodity item--you just order up 10 copies of Office and sell it. That's far from the truth. They get a little frustrated, but on the other side of the coin, the VARs sometimes frustrate us because they don't understand the value that software-assurance licensing means to their customer."

Of course, the smaller VARs without LAR status can buy volume licenses through an open-license agreement, but the price won't come close to what LARs can offer.

For instance, Shawn Larsen, president of Morris, Minn.-based Morris Electronics had a $200,000 software opportunity with Microsoft, and was told point-blank by distributors not to waste his time trying to price it.

"I said, 'What are you talking about? The client wants to buy from us--even if we make half a point, it's something.' But we couldn't come close," Larsen admits.

A similar situation caused a nearby community to go from being Morris Electronics' No. 1 customer in terms of hardware and software sales to barely even on the map; IBM went direct on hardware, and SHI and Insight undercut him on software. "To me, it becomes a matter of holding the line. How much do you let the enemy in your camp? If they win the software sale they can take the other markets," Larsen says.

The Inevitable Sacrifice

Not all vendors have gone the route of pushing volume business to a select group of partners. Adobe, for one, bases authorization on a proven track record in education, a sufficient infrastructure to support the business, and marketing vehicles to ensure VARs do more than quote a price. All partners have the potential to play, and to offer the same discounts. Frequency of volume deals is not the key factor.

"[Authorizing a select group of partners for volume pricing] is a curious model; the question in my mind is, what problem is it solving and what benefits does it offer?" asks Elaine Besh, manager of Adobe's education channel. "To us, it's all about knowledge of the market and relationship both at the district level and the teacher level. Even with the more centralized purchasing, at the end of the day, there's a teacher or technology coordinator that has to implement and use the product. You need to reach both--top down and bottom up."

But trends catch on. Adobe and some other vendors may be holding off on steering high-end education business to mega resellers for now, but some wonder how long that can last.

"When you're dealing with a trend, how long can you buck the ways? It's the reality," Larsen says. "They can preach a sermon as long as they want. When the day is done, they'll have no choice but to go the way of the market."

So, in the scramble for high volume at a lower cost, what's sacrificed? After all, the reason schools historically looked in their own backyards for solution providers seemed to make sense: They were nearby, they were invested in the community and they could provide ongoing services. "Certainly, the big direct-market resellers are thrilled to pieces with this growing phenomenon," Engelbert says. "But I'm withholding judgment on whether or not the institutions will actually get the good prices and good service they're looking for. Certainly, increased competition may be helpful, but the game is still whether institutions are better served."

Others are more pessimistic. "It may just be the revolution of the market," Larsen says. "But you can't honestly tell me that when you take out the margin, they'll support that client. That's the paradox. Everybody wants what the local VAR can give to the end user, but it just doesn't make economic sense in this market anymore."

A Place At the Table

The shift, though, doesn't have to be large resellers replacing small ones for education accounts altogether. VARs can work with larger providers, handing off high-volume licensing and product sales in exchange for ongoing services.

"I, for one, am happy that they made the large reseller a part of the process," says Al Marshall, director of education sales at Boca Raton, Fla.-based PC Universe. "It changes the market a bit; but as far as I'm concerned, it's for the best. The winner in the long run is the customer."

Both vendors and the large resellers have made clear that while the commoditization of hardware and software may hurt the local VAR in the short term, the increasing sophistication and complexity of technology can make up for it. "If local VARs are smart, they can position themselves as providing niche technologies, high-end specialized skills and support," Engelbert says. "The large direct-market reseller can't be on the ground, holding the hand of the director of technology; installing cable at the school; or doing sophisticated configuration. The local VARs that can do those things are invaluable."

Software One's VARassist program reaffirms that message by encouraging local VARs to continue acting as trusted advisers to customers and view Software One as an outsourced resource handling licensing only. "We give them every advantage," says Keith Ackerman, director of sales and CIO for Software One. "We don't compete--we don't offer services, we don't sell hardware. They still own that customer relationship."

In January Software One conducted a five-month pilot program for 23 partner VARs that showed how to use licensing as a sales tool to drive incremental revenues and services. After the program, Software One tracked and measured increases in partner services at about 12 percent.

The problem is that the need for services in school districts may not be lucrative enough. Beyond installation and occasional maintenance and upgrades, infrastructures can remain intact for relatively long periods of time. Given that, some local VARs are opting out.

"Education has always been like a cult--if you're in, they're golden accounts," Larsen says. "But I'd be leery. Unless you're a big player, it's not worth your time." Aside from a contract with the local university, Larsen has exited the education market and instead focuses on state and local government.

Perhaps a recovery in the education market will return services opportunity to local VARs. Education IT spending is expected to increase by 2008, according to Input, ultimately reaching 45 percent growth and $10 billion in spending by 2010. Still, local VARs won't likely regain exclusive rights to the contracts.

"It's almost self-building," Hirsch says. "Once a large reseller gets into the arena, they partner with other resellers or customers to continue to grow that base. They get to be supersized."