Vertical markets - Forces for courses

Getting into the military market can involve some tricky manoeuvres. But the rewards are great for resellers that keep up the assault. Pete Morris reports from the frontline.

The military and heavy industry vertical markets may not at firstes. But the rewards are great for resellers that keep up the assault. Pete Morris reports from the frontline. seem connected, but there are several similarities and product crossovers, especially when it comes to specialised products like ruggedised systems.

The largest thread between the two, however, is that they both prove intimidating for a standard reseller. The conventional wisdom is that military contracts - often subsumed into the wider sphere of government purchasing - are long, drawn-out affairs (deliberately designed to limit the potential for corruption) which by their very nature work against the smaller dealers.

While the heavy industrial market presents other problems for resellers, it is no less intimidating. Here the specific problem is that customers want very specific product. As Miles Kelvin, general manager of specialised notebook manufacturer Dolch, says: 'If the customer has enough knowledge to know that a specialised product exists, they will have enough knowledge to know where to get it.'

The problem, then, for resellers, is that it is not enough just to supply specialised product to industrial customers - they need to add something to the product to make it unique.

Despite the well documented decline in Britain's manufacturing base, a market has been developing for certain types of specialised PCs for use in the industrial environment - principally flatbed display PCs as network analysers and for harsh environments.

In the military market, there has been a massive increase in reliance on IT, coupled with large-scale moves to outsourcing. The winner in all this is the US-owned EDS, which now accounts for around eight per cent of all the UK government's PC business.

LOVE ME TENDER

EDS is involved in running the government's GCat PC procurement service.

A more specialised version of the catalogue is run for UK military government buyers, called DGits and run by Computacenter and Software Box.

Despite the attention of so many large suppliers in this potentially lucrative market, there are opportunities - albeit limited - for smaller Vars. 'The military is a market like any other,' says Peter Edgeler, company secretary of security distributor Portcullis. 'But their procurement policies make it hard to get to them.'

Large military accounts - #150,000 plus, including support costs - have to be advertised for tender through the European Journal, like any other large public sector accounts. These tenders attract the same suppliers again and again. 'There is a lengthy process,' says Edgeler. 'But once you get on the shortlist it is like joining a club.' The lucky suppliers get to see up close how the purchasing decision are made and what products fit the mark.

When considering military procurement, a differentiation has to be made between 'ordinary' computer products and more military-specific ones - which include high-strength encryption. The buying process here is largely controlled by the government's communications security agency CESG, which, through its ITsec scheme, validates security products which are strong enough for military use. The role of CESG is examined below, but the key point is that the massive cost of ITsec accreditation can deter smaller Vars from entering the market.

MODS AND ROCKERS

'The government is the biggest user of IT in the country,' says Edgeler.

'And any purchasing for the military is overseen by the Ministry of Defence Procurement Executive.' The executive, as with other such public procurement bodies, is accountable to Parliament and has responsibility for all military procurement from paper clips to tanks. Much of its IT responsibilities are being curtailed, though, as an increasing number of contracts are outsourced to EDS and other large service companies.

Becoming an accredited supplier to the MoD requires a check on the stability of the potential supplier and an examination of whether it could meet the support obligations of its product. But the basic problem for a small Var that wants to supply product into the military is certification.

Although there are moves towards global certification of security products (the so-called common criterion), UK Vars could not just go to a US trade show, pick up a security product and try and sell it in the UK - at least not to the military.

CAMOUFLAGE THE COSTS

Although the MoD is moving towards Commercial Off The Shelf (Cots) systems from large and well known suppliers, smaller specialised Vars with a security product would still need to put it through ITsec evaluation, at a potential cost of around #100,000. 'The cost of ITsec accreditation is high,' says Edgeler. 'But you have to put your money down if you want to play. It's like a horrendous game of poker.'

Twice a year the CESG issues a list of ITsec-approved security products.

The list is broken down into two parts - commercially available products and government use only. For commercially available products the ITsec stamp is mainly a marketing tool, showing that the code and engineering of the product have been tested to a high level.

SECURITY COUNSEL

With government users, the ITsec stamp is far more important, and at certain levels only products that have reached the standard can be used to transfer classified information, or for a particularly high level of encryption.

The ITsec classification for product testing is very tight and only confirms that a product will work effectively within the narrowest confines of its testing. This level of caution is doubtless what is required by users that want the highest level of reassurance, but it unquestionably works against smaller suppliers since there is no reduction in the costs of testing products (done by third parties) for small Vars; they have to pay the same as the largest military suppliers in the world.

Of all the large suppliers that have forged close relationships with the military, the most successful appears to be outsourcing pioneer EDS.

As well as winning a number of straight outsourcing contracts, EDS - with a consortium that includes Novell, SCO, Zergo and Spyrus - has been running tests that combine off-the-shelf software with packaged security tools in a bid to bring down the spiralling costs of IT security in the MoD.

BERET'D ALIVE

The Cots initiative would make it easier for large suppliers to provide more mass-market products to the military and possibly increase the size of the outsourcing contracts for the MoD, which are already quite mouthwatering.

Consultancy group Kable estimates that #2.35 billion is spent annually by the government on computing, of which #330 million goes on PCs.

In October for example, EDS won a #450 million contract to manage the computer services for the Armed Forces Personnel Administration Agency (AFPAA). The 12-year contract involves installing and maintaining a system to process the records of around 300,000 armed forces personnel, including those for top secret units such as the SAS. The other main bid for the contract came from Siemens Business Services.

EDS has won other lucrative military contracts, including a 10-year deal commencing January 1998, for handling the pay and pension of 215,000 armed service personnel.

SHORE THING

The leading IT supplier to the UK military, however, is not EDS but ICL.

Last summer, ICL won a massive contract to redesign and modernise the Royal Navy's operational message handling system, with a scalable system that could be run via the Navy's existing Naval Shore Telecommunications Network (NSTN). The military has many such large contracts, but they tend to stay 'within the club'.

The industrial market, by contrast, is much smaller - at least for specialised systems - but tends to offer a higher margin. Dolch, for instance, one of the UK's leading manufacturers of high-end, industrial-use portables, sells only around 500 such units a year - but at a cost of up to #12,000 each, that is still reasonable business and considerably better margin than on an ordinary PC. Dolch sells around 70 per cent of its product through resellers, mostly OEMs, and the remainder direct.

The typical sale involves the Var adding bespoke boards to the portable, for instance, to turn it into a network analyser. 'There is not much of a market to resell specialised systems as they are,' says Miles Kelvin at Dolch. 'The reseller needs to be a specialist and to configure the system exactly for the customer.'

Kelvin says there is no such thing as a typical PC for heavy industry.

Some companies use standard, rack-mounted systems, others embed flatbed display units for harsh conditions. Each configuration depends heavily on the conditions in which the customer wishes to use it.

As with the military, another problem for the small reseller is that many large manufacturers put all their purchasing through one large reseller. Although this reseller may not hold specialised product or even configure it, it would still know where to get the kit from and hence be in a position to make the sale.

TANKS FOR THE MEMORY

According to Kelvin, the answer for resellers is to make use of the markets they are already in and the customers they already have.

For instance, resellers which are currently selling standard PCs to automotive assemblers and garages might be able to expand through the provision of specialised industrial PCs for testing purposes.

It is frequently easier to expand sales to existing customers, particularly when you are branching out in a different direction, than to start from scratch with a totally new customer. This also gives the dealer a chance to take things slowly and build on the existing relationship.

The trouble with sales to the military is that they go too slowly for a small reseller, and the suppliers that deal with the military are the ones that take, and can afford to take, a very long-term approach to contracts and sales.

There are opportunities for specialist resellers to get on the electronic sales catalogues such as GCat, provided they can prove they are offering something that no one else can. The majority of products used by the military are the same as in any other business - MS Office is very popular for example.

The difference comes from the environment in which the products are being used. The transmission of information within and between sites requires far greater security, which means that high-level encryption and access products are needed as the glue for military systems.

WAR ARE YOU LOOKING AT

The reseller's best hope is that the use of an online catalogue and the decisions to open up IT purchasing - for example through the Public Finance Initiative - will make military IT procurement less of an old boy's club, which is what it has been hitherto. It does seem to have opened up, but typically the resellers that have rushed to fill the gap have been - as elsewhere - the largest.