WASHINGTON (08/21/2000) - The federal government's love affair with the personal computer is cooling. PC manufacturers and resellers in the federal market are seeing an end to the era of large-scale computer purchases in which agencies bought and replaced PCs on a regular basis, lured by steadily falling PC prices and continuing improvements in technology.
Instead, agencies are taking a more strategic approach to desktop computers, according to federal market players. Feds are still interested in the latest technology, but they would rather upgrade their computers as needed - "refreshing" them with new chips, more memory, larger disk drives - rather than buy whole new systems.
And when they make volume purchases, they generally have a particular project in mind. "Agencies used to think that they could go buy this or that by thinking about hardware like mechanics think about parts they need," said Rebecca West, program manager for the seven-year, US$10 billion Information Technology Omnibus Procurement-II (ITOP-II) contract at the Transportation Department.
"But now, they see an information problem or a data management problem or a workflow problem and are looking for a solution," West said.
This represents a whole new way of thinking about PCs. Throughout the 1990s, agencies spent billions of dollars on PCs, putting computers on nearly every desktop, only to replace them with new and faster models several years later.
The volume of purchases increased during the years, as agencies found new ways to apply technology to long-standing problems. The PC market drove a steady increase in government IT spending throughout the decade, through both governmentwide PC contracts - such as the Air Force Desktop series - and the General Services Administration's federal supply schedule.
The change in buying strategies is not immediately apparent when looking at raw market data. IT spending continues to rise, as seen in the latest numbers from GSA. More than a dozen vendors have surpassed $100 million in GSA business for fiscal 2000, compared with just four companies in 1997.
Still, after years of exponential market growth, vendors say that spending on new PCs is beginning to flatten, while more money is being earmarked in other IT areas, including handheld devices, networking, security and e-commerce.
A PC on Every Desktop
No one is surprised by the shift in purchasing, after so many years of the PC buying frenzy. Now that the Year 2000 transition is complete and most agencies have a PC on every desk, they have begun to think of desktop computers as part of a complete IT solution. "There's no mystery in PCs; they are more and more commodity-like," said Chip Mather, senior vice president at Acquisition Solutions Inc. and a former procurement official at the Air Force. "And the machines are lasting longer, which is impacting the [sales] numbers."
Recent advances in processing power have also reduced the need for replacing desktop computers, Mather said. Agencies used to upgrade their PCs because a new software program would come along and "crunch their systems," but now the desktops are lasting longer and can be refreshed instead of replaced, he said.
Along the way, feds also have become smarter customers. PC buyers are planning their purchases to meet specific performance require-ments and are demanding refresh clauses and other added services when they purchase desktop computers.
"It's a different environment now vs. three or four years ago when we were outfitting and giving everyone a PC, basically getting as many as we can," said Tom Leahy, acting chief of the Army's small computer program, which manages contracts for PCs, portable computers and related products. "There was no replacement plan, just get one and put it on the desk."
These days, rather than make large-scale purchases, agencies are looking to refresh their desktop computers about every three or four years, said Col. Neal Fox, director of the Commercial Information Technology-Product Area Directorate at the Air Force, which manages half a dozen blanket purchase agreements for PC-related technology.
The number of government PC customers is "growing almost not at all," said Harry Heisler, vice president and general manager at Micron Government Computer Systems. "It's not that they're not buying computers, but [they're dealing with] issues of obsolescence and replacements - which is a de facto upgrade.
The government is just modernizing, not adding additional seats."
The Big Picture
The flat market for new PCs is not causing the fear one might expect from manufacturers such as Compaq Computer Corp., IBM Corp., Gateway Inc. and Micron. Instead, those vendors have changed their focus to offering PCs as part of complete solutions that include maintenance, training and a variety of other services.
Joel Lipkin, senior vice president of sales and customer support at GTSI Corp., said that because the desktop has become a critical part of federal employees' everyday job performance, agencies want t0 maximize the machines' output.
Consequently, the government is spending more on infrastructure at the enterprise level, and less in the pure PC space.
"Government is redirect-ing its IT spending, taking that existing PC base and making it a more effective piece of the pie," Lipkin said.
ITOP-II, one of the few remaining large government-wide contracts, reflects that strategy. Although primarily a services contract, ITOP-II includes hardware and software, but those purchases must be critical and related to the services to be performed, West said.
The idea of planning IT purchases also has gained favor under the Clinger-Cohen Act, said Victor Powers, acting program manager for the National Institutes of Health's Information Technology Acquisition Assessment Center, which oversees NIH's three major contracts: Chief Information Officer Solutions and Partners (CIO-SP2i), Electronic Computer Store-II and ImageWorld 2nd.
Clinger-Cohen, passed in 1996, requires agencies to treat IT spending as an investment, with an emphasis on demonstrating the impact of that investment on agency operations. The extensive planning required by the act has kept agencies in the market for PCs, Powers said.
He also noted that there was a significant increase in PC purchases during fiscal 1999 to facilitate the Year 2000 transition, but he does not expect a dip in sales on CIO-SP2i, ECS-II or ImageWorld 2nd contracts because agencies are now planning better and fighting to stay abreast of advancing technologies.
So far in this fiscal year, NIH has done internal sales of more than $22 million on ECS-II, with the two busiest months of the year still ahead. Last year, internal sales hit $33 million on ECS-II, and Powers expects this year's numbers will match that.
"We're projecting it will level off, but we've never experienced a dip," Powers said. "Through staying abreast of changes in technology and refreshment," the PC-buying market should remain strong.
PC providers have had to embrace that shift to remain competitive in the government market, said Jay Lamb-ke, vice president of government sales at Gateway.
The key to doing desktop business with federal agencies has been repackaging PCs as part of an overall solution that includes training, Internet access and other features. "The PC used to be a productivity tool. Now it's just a small portion of the productivity solution," Lambke said.
Gateway has reported some success with this approach. Last year, the company aimed to earn 10 percent of its revenue from non-PC-related products and services, and it achieved 15 percent. PC numbers remained flat while the sale of training services and peripherals has skyrocketed.
The companywide goal for this year was for 40 percent of revenue to come from nonsystems buys including peripherals, Internet access and Web hosting. Gateway surpassed that in the second quarter, Lambke said.
IBM has also seen its government PC sales level off but is not worried about the federal government getting out of the PC business. "Our desktops aren't growing as explosively as they were," but other markets, including laptops and servers, are picking up the slack, said Bill Jones, IBM's manager for business development.
Ron Ross, president of Compaq Federal LLC, acknowledged that PC buying is flat, but he has also seen a rise in revenue from other sources. "I don't see the IT market in the federal space going down. It's just a different mix of business," with more servers, storage and other applications outpacing PC buys to help offset the loss of personnel in different areas.
Micron is in the same boat. In fiscal 1999, Micron earned $229 million in GSA sales and is on track to surpass that this year, but the company has had to add services such as e-commerce, call centers and training to stay ahead of the game.
"It's really just evolution," Heisler said. "The size of the market says it's going to continue to be important and at times brisk for selling computers, but it requires more planning and more long-term objectives."
Tom Buchsbaum, vice president and general manager for Dell Federal, said he sees three areas of "dynamic" growth in the federal market: services, e-government and security.
The demand for services has been stimulated in part by the "war for talent" that's going on in all types of enterprises. It has caused agencies to outsource many services that they don't consider to be part of their core mission, such as software testing and configuration. A large percentage of the systems Dell delivers to agencies now go out with software configured and tested according to agency specifications.
E-government and security solutions build on Dell's experience in securing transactions for their own customers. Many agency officials have approached the company and asked how they can emulate Dell's success, Buchsbaum said.