Can Distributors Get Into the Government Game?

The distribution community,from the largest operations, such as Ingram Micro and GE Access, to the smaller, more specialized houses, including D&H Distributing,is trying to come up with a profitable answer. Distributors are betting they can pump up their businesses, which have waned for many companies as product sales and IT demand have declined during the past year. They plan to do this by offering support,

education and training in the complex and diverse government market. Whether this strategy will pay off remains to be seen.

As an example, Ingram Micro's government and education unit, which was formed in 1994, now accounts for almost

15 percent of the distributor's North American revenue. However, the lucrative government market is not without

its imposing challenges. According to Bob Laclede, vice president and general manager of Ingram Micro's government and education division, Ingram Micro handles government-focused VARs much differently than it deals with those in the commercial space.

"Commercial VARs live in a world of customer transactions, but government VARs live in a world of bidding processes that go back and forth for months on end," Laclede says. "There's completely different pricing, contracts and buying cycles in the government market."

Some distributors have displayed impressive growth in their government businesses. Nevertheless, the distribution industry is still grappling with the complicated market and searching for the right model that will best help VARs cut through the red tape and win bids. Here's how.

Bidding Battles And Pricing Perils

Bidding on contracts is the most important area for government solution providers. It is also the area in which many distributors say they can help VARs the most. D&H Distributing's Access2Government program features a support system called Government Bid Desk that helps solution providers formulate product quotes and bids. Anne Brennan, government sales manager at D&H Distributing, says Government Bid Desk is especially valuable because D&H's primary market is small-and-midsize-business VARs, not experienced global integrators.

"There's more and more government business in our end of the market these days, so the bid desk really helps smaller VARs that don't know a lot about how to sell to the government," Brennan says. "Assisting our customers with bids, government discounts and pricing is crucial, because if you can't get the right price for a bid, you're finished."

Product pricing is one of the largest obstacles for distributors. Because the federal government market is so specialized, distributors can't always offer General Services Administration (GSA) Schedule pricing for many products. Considering that many major vendors offer a fraction of their product line for federal government purchasing, imagine the headache involved in dealing with thousands of titles, brands and technologies for distributors seeking government business. Laclede says Ingram carries GSA-priced SKUs from more than 80 vendors and passes the price advantage to the solution provider. Currently, Ingram Micro's GovEd Alliance program, launched last year, offers 350 different product lines, a far cry from the 14,000 total products that the distributor offers.

There are also hurdles for distributors in building up an offering of government-authorized products they can sell. "Some vendors restrict the number of VARs and distributors they will give their special GSA pricing to, and sometimes we're allowed to pass the special pricing from the vendor onto every reseller that has a valid government end user [what is called an 'open letter of supply']," Laclede says. "Other times, the vendors' GSA pricing may be restricted to just four to six particular resellers."

Joel Kappes, co-owner of Milestone Networks, a solution provider based in Parker, Colo., has won deals with a variety of government entities, including Peterson Air Force Base in Colorado Springs, Colo., and a number of municipal governments. Kappes says that, in general, distribution hasn't been much of a factor for his government business, save one distributor. Milestone has built a successful relationship with GE Access. The Boulder, Colo.-based distributor offers government-authorized products from Extreme Networks, one of Milestone's top vendors. "GE Access has helped us with some networking deals in the federal government space," Kappes says. "It's been very aggressive in supporting us."

The distributors will also face tough competition from vendors, many of whom are now offering specially priced GSA-authorized products to their channel partners. Server Centric Computing (SCC), a St. Louis, Mo.-based solution provider specializing in Citrix technology, has a growing government business and recently won a large bid to deploy remote and mobile computing solutions for the Missouri Department of Transportation. While SCC relies on two distributors, the solution provider turns to its vendor partners for support in the government market. For example, SCC last month enrolled in Citrix's partnership Government Marketer Program, a specialized program that helps VARs sell GSA Schedule Citrix products to federal government customers.

"In our experience, the distributors haven't been much help with our government business," says Scott Miller, president of SCC. "Citrix has been much more helpful. We worked closely with them to be able to offer GSA products."

Credit Crunch

Kappes says one of the pluses of working with GE Access is that it assists Milestone in covering the costs of large government deals, which can quickly become too cumbersome for smaller and mid-tier solution providers to handle. "They've told us not to worry about pricing and costs of some of these government bids and assured us that they'll make it work," Kappes says.

D&H has made covering contracts one of its specialties in the government market. Last year it introduced a new program, Assignment of Funds, to help SMB solution providers with big government projects. "This program is designed to extend resellers' credit lines for as much as they need and for as long as they need for government business," Brennan says.

Offering virtually unlimited credit with no financing charges for government bids may sound risky. But one advantage the government market offers, Brennan says, is that government customers can't declare bankruptcy or maneuver out of contract payments like commercial customers. "We know that government always pays,it's just a question of when they pay. So we're very confident in this program," she says.

While distributors are eager to build their government businesses and follow the path companies such as Ingram Micro and D&H have paved, they're also being cautious. Because pricing is a key issue for distributors in the government market, some suspect that as more vendors and solution providers jump into the government market, the intense competition will weaken the bidding system and lead to an erosion of prices and margins.

Ingram Micro isn't out to build up the number of its customers involved in the government for this reason, Laclede says. It now has about 2,000 VARs in its GovEd Alliance program. "We don't want too many VARs getting into the government business, because then it becomes too competitive and the margins are shot," he says. "There has already been some consolidation in the government integrator market, and it will continue."

D&H Distributing has similar concerns; Brennan says there could be a price war on the horizon. "Everyone is jumping in right now, so pricing and margins are eroding," she says.

Would a price war hurt distributors? Or could it play to their strengths, like low-priced product inventory and credit and financing options? It may be too early to tell, but many say that distribution can have an imposing presence in the government market this year.

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