Open market & schedules win PC buyers' business
- By Joshua Dean
- Mar 22, 1998
Because they are fast, easy and offer unlimited choices, the General Services Administration schedule and the open market are expected to remain the purchasing channels of choice for government PC buyers during the busy summer season.
The past two years have seen a marked shift in government information technology purchasing away from indefinite-delivery, indefinite-quantity (IDIQ) contracts, which offer set configurations and prices, toward blanket purchase agreements, (BPAs) which are spin-off contracts based on companies' current GSA schedule.
Last summer, BPAs sprouted like mushrooms after a rain; today the market supports hundreds of BPAs, and no central authority knows what and where they all are. However, this year it appears that agencies will place more controls on the award of BPAs. For example, the Navy and the Air Force have signed moratoriums on BPAs until they can understand and manage the agreements that are already in place.
Meanwhile, government credit cards are fueling sales on the open market. Individual buyers are allowed to spend up to $2,500— enough for a quality PC or low-end notebook— without prior approval. Companies such as Unisys Corp. and Government Technology Services Inc. are offering online and print catalogs to take advantage of booming credit card use.
At the same time, holders of traditional IDIQ vehicles such as the Air Force's Desktop V and the Army's PC-2 contracts are committed to staying competitive with the schedules and open market. New leasing and outsourcing options for desktop and notebook PCs are on the horizon.
All of this means buyers can expect to see intense competition among PC manufacturers, resellers and prime contractors, which will drive down prices in an already competitive area.
"The Wild West has returned to Washington, D.C.," said Bob Dornan, senior vice president at Federal Sources Inc. "The profit margins have always been razor thin. And vendors could deal with it if they were guaranteed business. But that's generally a thing of the past.''
Fueled by procurement reform initiatives of 1994 and 1996, government use of the GSA schedule has skyrocketed. "Last year the GSA schedule saw $3 billion worth of transactions," Dornan said. "And $4 [million] or $5 million schedule orders are more common."
In 1997 the GSA schedule accounted for 51 percent of federal IT spending, up from 20 percent in 1994, according to market researcher IDC Government, a sister company to Federal Computer Week. IDCG predicts the schedule will continue to carry the majority of IT spending in 1998.
The GSA schedule has several advantages over IDIQ contracts for buying PCs. Companies offer their entire product lines on their schedules, which are always kept up to date with the latest product announcements and price reductions. In addition, agency buyers have little paperwork to fill out when buying off a schedule and no limitations in order size. With the GSA schedule, Dornan said, "Instant gratification is the rule of the day. It's like a kid on the street with a pocket full of change standing outside the candy store."
However, schedules do not always offer the best deals for volume purchases. And it is hard for agencies to mandate standards if buyers are purchasing different configurations from various manufacturers off the GSA schedule. Still, most observers expect the schedule to remain the vehicle of choice for PC buys.
That is good news for direct manufacturers such as Dell Computer Corp., Gateway 2000 Inc. and Micron Electronics Inc., which have a logistical advantage in selling off the GSA schedule because they build PCs to order rather than stocking pre-configured systems. Led by these three powerhouses, PC manufacturers account for 54 percent of the sales among the top 10 GSA schedule holders, up from 30 percent in 1994, according to IDCG. The research firm said that between 1994 and 1996, PC manufacturers' sales grew four times as fast as resellers on GSA Schedule 70 B/C, which is for microcomputers.
"The government is a simmering cauldron of demand in computing power. Now that they are unburdened of procurement policy, they want the newest technology," said Rocky Mountain, segment marketing manager for Dell Federal. "The huge trend at Dell is a move away from IDIQs to the GSA schedule."
These trends are tough on PC resellers, whose ranks have already thinned as a result of the popularity of direct manufacturers. For example, small margins and low profitability are why BTG Inc. sold its popular and fast-growing schedule business to GTSI earlier this year.
Furthermore, GSA policies are particularly harsh to struggling resellers whose profit margins are already slight.
"The industrial funding fee (IFF), the 1 percent rebate, is blackmail. If it were a traditional business practice, it would be construed as blackmail by business," said Mark Amtower, a direct-marketing consultant specializing in government. "GSA has to find a way to find funding, yes, but this is like buying your fishing license. The only difference is that you never stop paying," he said. While direct manufacturers also have to pay the IFF, they do not get their products through middlemen, which makes their entire process more profitable.
One area of schedule business that is expected to remain strong is BPAs, which offer volume discounts on larger purchases. However, agencies are likely to assert more control over BPAs than they have in the past, as evidenced by the Air Force and Navy moratoriums.
BPAs help solve a problem that many vendors have with the GSA schedule: They need a guaranteed amount of sales in order to offer their best deals. "A lot of agencies are trying to nail down a BPA," said Ron Klevenger, director of federal sales at Micron. "They are trying to get a better price for a certain amount of commitment."
Originally designed for IT product purchases, BPAs are now being used to buy related services. For example, the Navy's Tactical Advanced Computer Enterprise Systems BPA, which is open to the Lincoln Battle Group, the Amphibious Readiness Group and other DOD agencies, offers solutions that include technical services, integrated hardware, software and logistical support.
Some observers are concerned that because the proliferation of BPAs has been so dramatic, prices are not as good as they used to be. However, others are confident that the BPA is a contracting vehicle that is here to stay. "The BPA is easy. Prices seem to take care of themselves,'' said industry consultant Robert J. Guerra. "We have a democratic marketplace; market dynamics will force price."
"There has been a bit of a shakeout," said Joel Lipkin, vice president of business development at GTSI. "People were experimenting with BPAs. The lesson has been learned, and now successful BPAs are coming out of that." Lipkin mentioned that the Army's Small Computer Program has had success with competitively awarded BPAs that offer simple low-cost access to products.
In the early 1990s, agencies often bought yesterday's technology, according to vendors. And any technology purchase worth more than $500,000 required an IDIQ to be put into place. All that changed with the 1996 repeal of the Brooks Act. "Federal customers are technology advocates, yet they were forced to buy under an outdated system," said Mountain, who added that IDIQs are "a sadomasochistic form of purchasing."
However, today's IDIQs are far more competitive against BPAs and the GSA schedule than in the past. Contracts such as the National Institutes of Health's Electronic Computer Store II and ImageWorld and NASA's Scientific and Engineering Workstation Procurement II show that IDIQs can offer the latest technology at good prices and with little overhead or paperwork. IDIQs such as these have become a haven for resellers.
"GSA is squeezing margins and driving others to make IDIQs," Amtower said. "Resellers can't afford to be on schedule alone."
Most buyers have three concerns when searching for the best route to purchase PCs: contract, price and speed of delivery. "Prices of IDIQs are still better generally than on the schedule," Dornan said. And with so many governmentwide acquisition contracts (GWACs) around, about the only things hampering IDIQs are delivery times and technology refresh rates.
IDIQs give agencies the opportunity to enforce standards and policies. "IDIQs will be significant because there are plenty out there," said Payton Smith, research analyst for IDCG. "They are still worthwhile, cost-effective procurement vehicles for government buyers."
Yet the days of government buyers using IDIQs as basic desktop fulfillment vehicles are over, and buyers and resellers both know it. Recent requests for proposals include special requirements for worldwide support and systems integration. "IDIQs allow government to have more complex requirements," Lipkin said.
The Open Market
For government buyers, the open market channel means going to the local Staples or CompUSA to buy what you need and bring it back to the office. This channel is fast and convenient for small purchases, and it has received a boost from two converging trends: the movement toward electronic commerce via the Internet and increased use of government-issued credit cards.
"Government credit cards are important for [the] open market and the GSA schedule," Smith said. "Electronic commerce is the greatest. It makes it easy to buy through the open market."
Open market purchasing is a small slice of the federal IT market, accounting for 5 percent of IT purchases in 1997, according to IDCG. But it is growing in importance.
"Open market is growing at least as fast as the schedule, and the major reason is plastic," Amtower said.
One company that has reorganized to take advantage of the growth in open market sales is Unisys, which last year unveiled its SelectIT online purchasing system. SelectIT offers $5 billion in IT products from six national distributors. It guarantees 48-hour delivery on all in-stock items. And it only accepts open-market purchases— primarily through International Merchant Purchase Authorization Cards (IMPAC). Company officials hope to take advantage of the fact that one in 20 federal employees has the credit card.
"We're anticipating a very good response this summer," said Gail Bergantino, director of marketing at SelectIT. "With our past experience, we've found that besides vehicle buying, there is a lot of open buying."
Overall, credit card use is expected to grow in 1998. Both the Army and the Navy estimate that by 1999 more than 40 percent of their IT purchases will be made on the IMPAC Visa. Total government usage of the cards is expected to reach $10 billion by 2000.
To help buyers sort through purchasing options, GTSI has announced its own catalog and World Wide Web integrated service: GTSI Express. By taking advantage of its existing GSA schedule, GWACs and the open market, GTSI Express offers buyers multiple procurement and delivery options. "Users' expectations are getting more commercial in terms of delivery and performance," said Dennis Defensor, vice president of marketing and communications at GTSI. "GTSI Express gives choice back to the end user."
Finally, forthcoming advances in processor and bus speeds, chipset architecture and graphics performance may turn the buying season topsy-turvy.
Many product announcements will hit late in the summer, so government end users and buyers will have to be aware as they go into the buying season, GTSI's Lipkin said. "The technology is going to hit everything late."
He also said people may put off making their final procurement decisions until later in the summer, when all the new technology actually hits the market.