GTSI shake-up signals renewed services push

Struggling to succeed, GTSI has brought in a new leader in an effort to shift focus

Dendy Young’s sudden departure from the top spot at reseller GTSI did not surprise veteran observers of the federal market. Persistent whispers that the once-leading reseller was struggling and seeking a new direction had been widespread.

But when the company’s board of directors announced earlier this month that James Leto would replace Young as president and chief executive officer of the company, the contracting community reeled anyway. Young had held those titles since 1995 but now will serve only as board chairman.

Observers say the change, given Leto’s background with integrators and consulting firms, suggests that GTSI is aiming for a strong shift to the services and high-end solutions business. Leto will assume control of the company’s daily operations. Most recently, he had been CEO at Robbins-Gioia since 2002. He previously served as chairman and CEO of PRC and earlier worked at AT&T’s federal government organizations.

At GTSI, Leto must steer a ship that recently has been taking on water, some analysts say. In the first six months of 2005, GTSI reported a net operating loss of $14 million compared with a net loss of only $3 million in the same period in 2004. In the third quarter of 2005, ending Sept. 30, the company reported an operating profit of $4.7 million, while GTSI saw a profit of more than $10 million in the same quarter the previous year. The company is set to report its latest financial news March 7.

GTSI had also recently had two rounds of layoffs.

“If they are going to survive, they have to play in this services side,” said Mark Amtower, founding partner of Amtower and Co., a federal marketing consulting firm. “If they are going to migrate to the service model, Leto is a really good choice.”

Ray Bjorklund, senior vice president and chief knowledge officer at Federal Sources, said GTSI has taken steps in recent years to pursue solutions rather than simply sell products. But Leto offers relevant experience for a company that may be looking to pursue a higher level of complexity in its offerings, he said.

GTSI’s need to take on services stems from radical changes in the reseller business. Since the mid-1990s, GTSI has battled direct sellers and catalog businesses in the government market. Competing companies, such as CDW, are leaner and have significant commercial operations to see them through times of tight government budgets.

The commercial side can also give competitors the economies of scale to obtain favorable vendor pricing, Amtower said.

The resulting market pressure called for a greater push toward services and a different executive to lead the advance, Amtower said.

“Dendy is the master of the traditional reseller channel in the government market,” he said. Leto, on the other hand, is better equipped to develop services, which calls for more business development skill and less emphasis on direct sales, Amtower said.

Some of the groundwork for GTSI’s market migration is already complete. The company has developed specialized solutions in fields that include storage and mobile computing.

The company’s recent alliance with Silicon Graphics Inc. focuses on 64-bit Linux solutions along with high-performance computing and data visualization.

But Brian Kinstlinger, an analyst at Sidoti and Co., said the solutions arena has yet to become a meaningful part of GTSI’s overall business.

Although GTSI likely has many smaller contracts that provide greater value than product reselling, they don’t amount to enough to bear significantly on the company’s financial results.

Kinstlinger said GTSI has the opportunity to cross-sell various services to the array of federal customers at its disposal.

GTSI faces hazards in its upstream migration, however. Systems integrators already provide products and services, Amtower said.

“The real issue for them is how to evolve into a services company without competing head-on with the top 20 integrators,” he said. “They have to define a new category.”

GTSI may also have to adjust its marketing stance as it pursues higher-level solutions.

As companies move in that direction, the messaging shifts from breadth of product and overnight fulfillment to thoroughness of work and the technical expertise of employees assigned to contracts, said Lisa Dezzutti, president and chief executive officer of Market Connections, a market research firm.

“The messaging shifts, and it is important [for] providers [to] make that shift in their messaging out to the market,” she said.

Past performance ranks as a major consideration for solutions providers. Customers “really want to understand the track record,” Dezzutti added.

GTSI’s changes will have an impact beyond the company. A services and solutions emphasis would likely lead the company to reduce the number of manufacturers on its roster of suppliers.

Alison Ryan, senior director of business development and channel sales at SGI Federal, said the companies’ new alliance was important for remaining on each others’ radar.

Amtower said GTSI will need to maintain relations with vendors whose products drive much of the company’s business. He listed Cisco Systems, Hewlett-Packard, Panasonic and Sun Microsystems as examples.

Robbins-Gioia has appointed Michael Sledge to succeed Leto. Sledge was formerly the company’s president of civilian agencies and homeland security.

The final days

In the four months before Dendy Young stepped down as GTSI’s top executive, the company laid off employees and tracked struggling earnings.

    2005
  • Oct. 14: GTSI cuts 10 percent of its workforce.
  • Oct. 28: Company announces September quarter revenue, featuring the first net profit of the year.
    2006
  • Feb. 13: Company announces another round of layoffs, cutting additional 10 percent of the total workforce.
  • Feb. 16: GTSI board chooses James Leto to be new president and chief executive officer. Dendy Young will stay on as board chairman.
  • March: Company slated to report fourth-quarter 2005 earnings.

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