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Channel squeezed by Government spending

Channel companies continue to be squeezed by fewer opportunites while big players dominate the market.

Channel companies continue to be squeezed by fewer opportunities and slimmer margins in State and Federal Government tenders, while big players dominate the market.

A report last week into Federal Government ICT spending by analyst group, Intermedium, shows two companies took the lion’s share of the slim pickings in the fi rst quarter of the fi nancial year: IBM and Telstra. Between them, the two companies secured three contracts worth $437 million – two for Telstra and one for IBM – with the Department of Defence.

“Apart from those two vendors, everybody else is struggling,” Intermedium head of research, Tim Conway, said. “Obviously, Telstra and IBM are reasonably happy, but from there on down and looking at our top 25 suppliers, you have IBM on top with $330 million in the fi rst quarter of 2008/2009, then Telstra with $240 million. Third is Optus at $31 million, so the third player is about a tenth of the size of the fi rst.”

The top five companies were: IBM, Telstra, Optus, EDS and PeopleBank. EDS moves up to third place when new parent company, HP, is factored into the equation. Conway expected consolidation to occur in the market and claimed over the 2008 calendar year, Federal Government spending, excluding Defence spending which is roughly nine times that of any other agency at just over $580 million, had dropped by over $1 billion.

“There is certainly going to be a rebound towards the end of the fi nancial year,” he said. “However, looking at the volume of tenders, they are sitting at a fairly low level looking at similar periods in previous years. We’ll see a slight uplift – I’d expect in the last two quarters of the year, but nothing like 2006/2007 or 2007/2008.”

The consolidation trend has tightened up opportunities for channel players. ASX-listed service providers, Oakton and ComputerCorp, have both attributed slow Federal Government spending as reasons for their poor results to December 31. ACT reseller, Datafl ex managing director, Brian Evans, agreed and claimed the exclusion of smaller players would ultimately cost the Government more.

“This is what the Government seems to not understand. As they continue to try and drive pricing further south through consolidation, they are removing competition,” he said. “And as they remove competition, they will end up paying more.”

However, other companies like ASG, Data#3, CSG and SMS all posted solid gains in the last six months.

“They have been picking up work on the back of some of the desktop refreshes that were underway prior to Gershon and prior to coordinated procurement and those types of things,” Conway said.

“And they will continue to pick up once the plug comes out of the wall because the larger companies don’t particularly want to do it themselves – they don’t want to be direct and want their channel to work. The challenge is going to be whether those smaller companies have the working capital to sustain themselves while the pause is underway.”

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Compounding the situation is the small margins on offer with many government tenders – the NSW Department of Education and Training (DET) netbook tender being a prime example. The shortlist for the tender was announced last week with ASI Solutions coming up against Acer, Asustek, Dell, HP and Lenovo on the device tender.

Seen as a key part of the digital education revolution, the tender is worth hundreds of millions of dollars and will see 197,000 year 9-12 secondary students allocated computing devices that cost less than $500. A second tender for the rollout of wireless connectivity to all schools to support the devices includes NEC, Lenovo, IBM and ASI Solutions.

ASI product manager, Craig Quinn, cited a shift towards tier-one multinational companies and more Government agencies appointing a single supplier with one backup – making it more diffi cult for the company to win contracts. Despite the tougher conditions, however, ASI is hoping to grab a slice of both tenders.

“They have eased some of the requirements in terms of the initial specifi cations and looking to keep the costs down,” Quinn said. “But they are also looking for the best bang for buck. It’s certainly not going to be a margin-rich win for whoever is successful. They won’t make a lot of money out of the margin. You’d have to weigh up why you are bidding for it, but we are quite comfortable with that.”

Conway agreed the margins would be slim and called on the Government to temper its demands for the lowest possible price in tenders.

“A lot of the main vendors – and we have seen this with Microsoft and the hardware vendors – their preferred model is channel, even Dell has taken that model,” he said. “They don’t have the arms and legs to do it and if Government squeezes they are going to be squeezing out Australian jobs if they squeeze that channel.”