The competition for the Air Force’s next-generation air-refueling tanker contract is one of the most lucrative procurements the service has ever conducted. Despite the high-profile and extensive precautions, a contracting officer still managed to mistakenly provide bidders The Boeing Co. and European Aeronautic Defence & Space Co. NV (EADS) with selected information about each other’s proposals during the typical technical exchanges between the Air Force and bidders.
Many people say what’s the big deal? Why not give competitors access to each other’s bidding information?
Well, here’s why: While some might think sharing this information will level the playing field, in reality it puts the government and all bidders in a worse position.
It is a basic tenet of the federal acquisition process that bidders must submit independent proposals and the government must evaluate each proposal only against the criteria in its solicitation. Another core principle of the acquisition system is maintaining the fairness of the process for all parties.
Companies invest significant time and money developing proprietary products and services and training their employees to sell them to the government. There are also significant costs and risks incurred simply by trying to enter the government market.
Thus, companies carefully protect these investments in the bidding process, often through elaborate steps such as isolated “war rooms” and restricted access to technical designs and pricing algorithms.
In government procurements, particularly for services or solutions, the system encourages bidders to bring their most innovative solutions and the best competitive pricing to the bid. But why invest in an innovative solution if your top competitors get a peek under the tent at your offering?
There are also long-standing statutory and regulatory requirements designed to prevent collusion to rig prices or markets, and bidders must certify they independently arrived at their bids. In numerous successful bid protests, the Government Accountability Office found that bids were not submitted independently, and dozens of criminal convictions have resulted from bidders sharing key information, particularly prices.
In addition, under a decades-old procurement integrity law, it is illegal for a contractor to improperly obtain government source selection information or another company’s proprietary information during the conduct of a federal procurement.
That same procurement integrity law prohibits government officials from improperly releasing government source selection information or any bidder’s proprietary information during the conduct of that procurement to prevent bidders from gaining an unfair competitive advantage or being put at a competitive disadvantage.
Furthermore, during the government’s evaluation of offers, if the contracting officer has any reason to believe the bids were not independently developed, the officer must refer those facts to the Justice Department or the agency’s inspector general.
In addition, after the agency’s initial award determination, each bidder is entitled to a debriefing to better understand the government’s evaluation and award decision and, under certain circumstances, may challenge those agency decisions.
Sharing bidders’ information would put this competition-preserving, innovation-fueling independence and fairness at risk.
Some companies might choose not to compete because they fear their trade secrets would be shared and their technological edge stolen. Others might simply not offer their best solutions for similar reasons. And the government could find itself the victim of bid rigging due to the release of otherwise protected data.
None of those outcomes benefits the government or the interested bidders. There is also damage to the sense of confidence that the federal bidding process is fair to all.
Providing untimely access to the bid information of competitors during a federal procurement is an idea whose time should never come.
– by Alan Chvotkin – Jan. 28, 2011 – Washington Business Journal
As the government changes its spending habits this year, the federal contracting marketplace will get more competitive.
Companies are hunting for any advantages to outdo their competitors and win more contracts. Making acquisitions has become a common tool for companies looking to gain that advantage.
“The primary reason for these types of mergers and acquisitions is to offer broader and more robust capabilities,” IDC Government Insights wrote in January in a report.
But with all the M&A activities, companies can’t lose sight of the role their customers play in the process.
First, they must interact closely with their government customers to make the transition run smoothly. A company’s representatives won’t go wrong by talking with their customers, many experts said. Poor communication is a big blunder a company can make as it acquires another business or is acquired itself.
They should explain what’s going on to keep their customers abreast of changes, said Roger Waldron, the General Services Administration’s acting senior procurement executive from 2005 to 2007 and now president of the Coalition for Government Procurement.
“They have to reassure their government customers that all will go well,” he said.
Kevin Carroll, former program executive officer of enterprise information systems at the Defense Department, said the smoothest mergers came when the new and old managers visited their customers and talked them through their plans.
“So, good-old communications has worked best,” said Carroll, who now is president of the Kevin Carroll Group LLC, an IT consulting company.
To make it go well, companies going through the changes have protocols to follow, based on regulations and security clearances.
Carroll said security is critical, particularly those companies working with DOD or other agencies related to national-security matters. It’s especially important with the large number of foreign-owned companies that have acquired U.S. government contractors. Six of the buyers on the 2010 M&A roundup are foreign owned, including CGI Group, which had the best single deal of the year.
“DOD’s security people are very tough on how the companies organize and handle their classified programs,” Carroll said. “This has led to delays in the finalization of some mergers and, on occasion, a few companies have lost their current contracts at the top-secret level.”
On a more personal level, people feel the effects of an acquisition or merger. Employees get nervous about the future of their jobs. As the newly formed company reviews its operations and business development costs, it reduces necessary overhead, Carroll said.
“So many people leave,” he said. “And the turnover does affect customers.”
However, the mergers and acquisitions within the IT industry don’t have the same major changes compared to other fields, such as the aviation industry, Carroll said. A merger or acquisition among major airplane manufacturers could change future competitions for contracts.
Recognizing that mergers and acquisitions are commonplace in the business world, regulators have laid out how government contractors should proceed . The Federal Acquisition Regulation dedicates an entire section to novations, or the process of changing the original name on a contract with the new company’s name.
According to the FAR, the company that is going through the transition needs to determine which administrative contracting officer would handle the changes. They need to send a written request to that contracting officer to recognize a successor regarding their government contracts.
“The devil is in the details, but that’s really important in contracting protocol,” Waldron said.
The company must also send three signed copies of the proposed novation agreement. It should describe the purchase or memorandum of understanding, a list of the affected contracts, and evidence that the new company can still do the work. Further, the company must submit to the contracting officer a copy of other documents, such as, for example, the bill of sale or certificate of merger, the opinion of legal counsel that the transaction meets legal requirements, and a resolution of the corporate parties’ boards of directors authorizing the transfer of assets.
If everything goes well, the responsible contracting officer will sign a novation agreement with the two sides of the acquisition.
If things don’t go well during a transition or a company forgets about its customers, it will feel the effects.
“Customer will get their revenge at recompetition time,” Carroll said.
– by Matthew Weigelt – Jan. 28, 2011 – Federal Computer Week.
An article in the November/December 2010 issue of Defense Acquisition University’s Defense AT&L magazine discussed why companies file protests against contract awards and illustrated the realities of the federal contracting environment. Budgets are tightening, competition for those shrinking dollars is ferocious, and protests have seemingly become standard operating procedure. Further exacerbating the issue are poorly trained acquisition workers and poor government communications. So what are we to do in this environment?
The issue hinges on the seemingly endless cycle of protests with no consequences or accountability on the part of government or industry. More protests mean an even higher rate of program disruption, with the result that users and warfighters will continue not getting the products and services they need to perform their missions. Industry often looks at protests in terms of return on investment and might find it worthwhile to fight a contract award that a competitor wins. Given the risk-averse nature of government, that approach can open additional revenue sources or further opportunities for a company to compete.
Nonetheless, the government does make mistakes and should be accountable because the point of a protest is to prevent the government from causing harm to the protesting firm.
There needs to be a measure of accountability on both sides. A protest should not be taken lightly. It is typically a disruptive and costly matter. Although a company expects to win and files its protest accordingly, the number of protests that are upheld remains less than 25 percent. Some firms file just to see what will happen. What if a firm loses repeatedly? We need a measure of financial accountability to recoup the costs borne by the government from repeat offenders. By holding companies accountable for fishing expeditions, agencies could ensure that the protest process is used for its intended purpose: ensuring fair competition.
The government also has gotten into the habit of not wanting to upset firms that have a history of protesting awards. Indeed, some procurement officials automatically award contracts to such companies to avoid the cost of resolving disputes if the company were to protest and the government were to lose. Procurement officials must be held accountable for that behavior. And firms should be reimbursed for protests that are upheld to help put the pressure on the government to award contracts fairly.
Protesting is a right that industry must continue to have. But it must be weighed against the real costs when accountability is finally added into the equation. Furthermore, the government must stop allowing itself to be bullied into awarding contracts to firms with a history of protests. And more importantly, the government must be held accountable for following procedures and executing sound acquisition strategies to ensure that protests don’t happen in the first place.
We can accomplish all that if reform actions match the rhetoric coming out of the 112th Congress. However, without some much-needed accountability, we can expect to see a continued rise in protests, to the detriment of all involved.
– About the Author: Jaime Gracia is president and CEO of Seville Government Consulting, a federal acquisition and program management consulting firm. This article was originally published in Federal Computer Week on Jan. 25, 2011.
1. How do you define innovation? Something different that has impact.
2. What are different types of innovation? Innovation is more than whiz-bang technology; consider different strategic intents (e.g., create a new category, extend current business) or innovation mechanisms (e.g., new product, distribution channel, marketing approach).
3. How do I spot opportunities for innovation? Go to the source: the customer you hope to target.
4. Which customers should I target? Look beyond your best customers to those who face a constraint that inhibits their ability to solve the problems they face in their life.
5. What should I look for? As Drucker said, “The customer rarely buys what the business thinks it sells him”; look for a job-to-be-done, an important problem that is not adequately solved by current solutions.
6. How should I look? Start with deep ethnographic research; avoid focus groups!
7. How do I come up with an idea? Remember the Picasso line “good artists copy, great artists steal;” seek to borrow ideas from other industries or geographies.
8. What is disruptive innovation? An innovation that transforms a market or creates a new one through simplicity, convenience, affordability, or accessibility.
9. What is the best way to disrupt a market? Embrace the power of trade-offs. Seek to be just “good enough” along historical performance dimensions but introduce new benefits related to simplicity or affordability.
10. What does “good enough” mean? Performance above a minimum threshold to adequately solve a customer’s job to be done; sacrificing performance along traditional dimensions can open up new avenues to innovate.
11. What is a business model (and how do I innovate one)? How a company creates, captures, and delivers value; codifying the current business model is the critical first step of business model innovation.
12. How can I “love the low end”? Build a business model designed around the low-end customer’s job-to-be-done.
13. How do I know if my idea is good? Let patterns guide and actions decide; remember Scott Cook’s advice that “for every failure we had we had spreadsheets that looked awesome.”
14. How can I learn more about my idea? Design and execute “high return on investment” experiments to address critical unknowns.
15. How can I get other people behind my idea? Bring the idea to life through visuals and customer testimonials.
16. How long does it take new businesses to scale? Almost always longer than initial projections; be patient for growth and impatient for profits.
17. Why is innovation so important? The “new normal” of constant change requires mastering perpetual transformation.
18. Why is innovation so hard? Most organizations are designed to execute, not to innovate.
19. Who are your influences? Academics like Clayton Christensen and Vijay Govindarajan, leading-edge innovative companies like Procter & Gamble and Cisco Systems, and thoughtful writers like Michael Mauboussin and Bill James.
20. How do I encourage innovation in my organization? Stop punishing anything that smells like failure, recognizing that failure is often a critical part of the innovation process.
21. What is “the sucking sound of the core?” The pull of the core business and business model that subtly influences new ideas so they resemble what the organization has done before.
22. What is an innovation “safe space”? An organizational mechanism that protects innovators from the sucking sound of the core.
23. How should I form and manage innovation teams? Keep deadlines tight and decision makers focused.
24. What is in a good innovation strategy? Overall goals, a target portfolio for innovation efforts, a mechanism to allocate resources to achieve that portfolio, and clearly defined goals and boundaries for innovation.
25. What is the best way to manage an innovation portfolio? Make sure you correctly capture current activities and measure and manage different kinds of innovations in different ways.
26. What does ‘prudent pruning’ mean? Recognizing that destruction is often a critical component of creation.
27. What role should senior executives play in innovation? A big one.
28. How can I personally become a better innovator? Practice – innovation is a skill that can be mastered.
29. How can I find more resources for innovation? Shut down “zombie projects” that are a drain on corporate resources.
30. How can I more quickly turn good ideas into good businesses? Remember what Edison said – genius is “1% inspiration and 99% perspiration”; get ready to sweat.
31. Has anyone built the ability to innovate at scale? An increasing number of companies, such as Google, Apple, Procter & Gamble, Amazon.com, Cisco Systems, Godrej & Boyce, and General Electric.
– Reprinted from Scott D. Anthony’s Havard Business Review blog, December 27, 2010.
Agencies have broad discretion in establishing evaluation criteria for their procurements, subject to some limitations set by federal acquisition regulations. Those criteria are often shaped by arguments that competing contractors make during the procurement’s capture phase. Here are some ideas to consider in shaping the evaluation criteria in your next must-win procurement.
Factors and subfactors
Every procurement must be evaluated based on evaluation factors and subfactors established before the release of the request for proposals. The government tailors those factors and subfactors to represent areas of importance for source selection and provide a basis for meaningful comparison among competing proposals. Agencies have broad discretion in establishing evaluation factors and subfactors and determining the relative importance of those factors. As a capture manager, you want to discuss those factors and their relative importance and offer guidance to the agency, if requested.
Technical, management and other evaluation factors
Noncost evaluation factors must be established to assess the quality of proposed solutions, services or products. Those factors can include technical approach, management capability, personnel qualifications, prior experience or small-business participation, among others. Some agencies prescribe a standard set of evaluation factors for their procurements and then add factors specific to a procurement as needed. As a capture manager, you want to know what factors are required and what optional factors the agency might consider. After an agency selects factors, it tailors subfactors for each one to outline important considerations in the procurement and provide a basis for comparing bidders. Agencies have broad discretion to set subfactors for each procurement.
Past-performance evaluation factor
Past performance is a mandatory evaluation factor, and agencies must include it in every procurement that exceeds the value of the simplified acquisition threshold, unless the contracting officer specifically excludes it. The agency describes its approach to evaluating past performance and usually requires bidders to provide past-performance contract summaries for relevant contracts of similar size, scope and complexity. Past-performance selection criteria can be defined broadly or narrowly. For example, past-performance contract references might be restricted to contracts performed or completed in the past three years. Narrow definitions can eliminate some excellent contracts from being presented as past-performance examples.
For procurements that offer a significant opportunity for subcontracting, past-performance evaluation must include an assessment of how well the bidder met applicable small-business goals in previous contracts that required subcontracting plans.
Price as an evaluation factor
Price is a mandatory evaluation factor for contracts, including best-value procurements. However, its relative importance can vary. For example, when mission success is important to the agency, the relative importance of price in the evaluation criteria can be lowered in comparison with other evaluation factors. For commodity procurements or nontechnical services, the relative importance of price could increase. In the extreme, some procurements raise the relative importance of price to such a high level that the RFP will state, “Award will be made to the technically acceptable, lowest price (TALP) offeror.” That TALP evaluation criteria should never be used for technical or professional services. The RFP will state that all evaluation factors, when taken together, are significantly more important than, equal to or significantly less important than price.
Capture manager’s role in shaping the evaluation criteria
Capture managers should not leave evaluation factors and subfactors to chance. After an agency releases an RFP, those factors and subfactors are set and cannot be changed without considerable effort on the part of the agency. Shaping evaluation factors to highlight important considerations in a procurement can make the difference between your company being a winner or a loser.
About the Author: Bob Lohfeld is the chief executive officer of the Lohfeld Consulting Group. Published in Washington Technology on Jan. 21, 2011
Nearly three-quarters (74%) of government contractors surveyed consider the government to be slow and inefficient in resolving contract issues, with 56% believing that the inefficiencies are caused by the Defense Contract Audit Agency (DCAA) and 18% saying it is caused by the contracting officer, according to Grant Thornton LLP’s 16th Annual Government Contractor Industry Survey.
“These findings were not unexpected given the changes in DCAA policy adopted in the aftermath of Government Accountability Office (GAO) reports issued in July 2008 and September 2009 that severely criticized the quality of the DCAA’s work,” noted Kerry Hall, Grant Thornton LLP’s Government Contractor practice leader. “The GAO reports and the DCAA changes that followed likely contributed to the survey findings, namely that the process of resolving contract issues is increasingly inefficient.”
More than half (55%) of government contractors reported that their revenue from federal business increased during the past year, while only 22% reported reduced revenue from federal business.
Other highlights of this year’s survey include:
Revenue from the stimulus program — 72% of respondents anticipate no significant revenue growth from the stimulus program over the next 18 months, while the remaining 28% foresee modest growth.
Identifying claims for out-of-scope work — 31% of government contractors consider their procedures for identifying out-of-scope work to be very effective, while 69% see them as being either somewhat effective or not effective. The failure to identify out-of-scope work effectively and seek related compensation may contribute to reduced profit rates.
Bid protests — A total of 22 bid protests were filed during the past year by companies surveyed, and 11 of them were sustained by the GAO or the court hearing the bid protest. This appears to be a higher sustainment rate than has historically been the case and could possibly signal an emerging trend.
– from The Financial – Jan. 18, 2011 – http://www.finchannel.com/Main_News/Business/79196_Contractors_believe_the_government_is_inefficient_in_resolving_contract_issues/
Budgets, technology give advantages to nimble government contractors over the larger competitors.
A profound and dramatic shift is underway in the government market that will dictate the type of companies that succeed and fail going forward.
We are witnessing a change from “economies of scale” to “economies of skill” as a successful business strategy in the government information technology market.
A significant share of new business will be driven by companies’ ability to adapt legacy programs to new technology and budget realities rather than capture entirely new programs.
Mergers and acquisitions will be driven by the highly differentiated capabilities of the company to be acquired rather than by the acquiring company’s objective of efficiencies through growth in market share. And if you doubt this is the case, you haven’t attended recent conferences for investors in this market.
Two key market drivers are behind this change in business strategy: budgets and technology.
The outlook for budgets is relatively flat. The implication is that there will be less spending on new program starts but relatively more spending on enhancements and improvements to existing programs. At the same time new technologies not only are being increasingly introduced but also increasingly disruptive.
Disruptive technologies and incremental enhancements are not a good match the classic “design-build-operate” paradigm. Companies in the past have leveraged their scale in the design-build-operate procurement model to win new programs. Companies in the future that can leverage their unique skills, smaller scale and agility in the new world of “adopt-insert-improve” will have a competitive advantage to capture business.
This evolution of the market negates many of the advantages of scale that have driven business strategy. Companies could gain market share and drive top-line growth through acquisitions, while at the same time achieve bottom-line growth through less than proportional increases in overhead and general and administrative costs. Disciplined engineering processes and program management practices provided additional competitive advantage to larger companies in the pursuit of new programs. As a result, many decisions to be a sub rather than prime on new program procurements were driven by the reality of being unable to “compete against the big guys.”
In contrast, just as specialized remodelers have distinct advantages over new homebuilders in renovating buildings, so too do niche companies have competitive advantages in the new adopt-insert-improve environment. Their competitive advantage can reflect specialized expertise in a technology, disciplined architectural and systems engineering capabilities for technology insertion, and subject matter expertise in mission operations.
Traditional reliance on agency relationships and domain knowledge will continue to be necessary but no longer be sufficient to win business for technology enhancements to legacy programs.
There are implications of this new environment for different segments of the market. Niche technology-driven companies will be increasingly attractive – both as teammates and potential acquisitions. Classic systems engineering and technical assistance contractors will be vulnerable if they lack technical knowledge and engineering expertise required for major enhancements to their current programs. Large primes will be on the look out for niche technology companies, and at the same time could likely divest their commodity-type service organizations.
Irrespective, we are seeing the demise of bigger is better as a successful strategy for this market.
– by Jim Kane is a senior consultant at Suss Consulting and a director of the Systems and Software Consortium, Inc., as printed in Washington Technology, Jan. 12, 2011.
First there was Motorola’s decision to split. Now ITT Corp. has made the announcement that it will break into three companies.
These moves and other evidence have me thinking that we are entering an era in which specialization rather than diversity and size might be the key to future success.
We’ve written a little about this in the past week or so — in a blog I wrote from the Raymond James investor conference last week and a column that Jim Kane wrote for us on the topic.
We’ll write more about this in the future, but I wanted to throw out a couple more facts that have come to my attention.
First, a little more from the Raymond James event. Raymond James analyst Brian Gesuale used CACI International and SRA International as examples of where size was rewarded on Wall Street earlier in the 2000s but wasn’t as the decade closed.
SRA’s revenue grew by 89 percent from 2005 to 2010, but its market capitalization fell 41 percent. CACI’s revenue grew 94 percent, but capitalization fell 14 percent.
Gesuale’s conclusion is that the era in which bulking up was the best way to build value is over. The key to creating value now is specialization around customer missions because it makes the work a company does more critical to the agency and thus a little more insulated from cutbacks. It doesn’t make you immune, though.
So it was with Gesuale’s words ringing in my ears that I started working on our annual mergers and acquisitions roundup, when we list all the closed deals from 2010.
I found that seven Top 100 companies divested units last year, and eight other deals also involve non-Top 100 companies selling parts of their businesses.
That’s a total of 15 deals out of 99 that closed last year. I can do the math — 15 percent.
To me that is significant. It shows that in this economy, companies are focusing on core capabilities. They are looking inside themselves and deciding who they are and what they want to be. That introspection is convincing many companies to sell businesses — some of them very good businesses — that aren’t central to who they are.
The other side of the coin is that you see companies making acquisitions that enhance their core capabilities and send them where they want to go in the market.
So you see a company like Vangent acquire Buccaneer Computer Systems and Services to continue to build its health care business.
How those activities will reshape the market remains to be seen. We’ll still have very large players who will win big contracts and have huge revenue numbers. But that is just one measure of success.
What might be more interesting is looking at profit margins and the type of work companies win. One indicator will be the valuations on Wall Street as several of the more focused contractors become public companies. Earlier indications are good when looking at companies, such as Global Defense Technology and Systems and KeyW Corp., that have had successful initial public offerings in the past year.
As a taxpayer, I also hope that the more nimble and specialized companies will have a higher success rate in serving their customers. That’s the real bottom line.
– by Nick Wakeman – Washington Technology – Jan 13, 2011
The Pentagon is by most measures a government contractor’s promised land. Last year it spent $400 billion on products and services.
But even in today’s struggling economy, the prospect of scoring a big defense contract is not enough for many companies to want to do business with the Defense Department. That is especially true among high-tech firms, which, coincidentally, are the ones the Pentagon is most interested in recruiting.
“We must do more to encourage commercial firms that are in the leading edge of technology to supply products to the Defense Department,” says Brett Lambert, director of industrial policy at the office of the undersecretary of defense for acquisition.
The U.S. military is saddled with aging technology and is in dire need of modernizing. Many of the innovative products the Pentagon seeks — particularly IT and electronics — are being financed by the private-sector.
“Among the companies we represent, many of them have zero interest in bidding for defense contracts,” says Patrick Wilson, director of government affairs at the Semiconductor Industry Association.
Some businesses simply don’t want to spend millions of dollars creating an in-house bureaucracy to handle government work. Others fear that their prized intellectual property will be compromised once it is turned over to the government. For many firms, the mountains of red tape are too high to climb.
“They look at the ratio of what it takes to comply with all of our procurement rules, and it’s just not a good investment,” Wilson says. In the high-tech sector, firms compete aggressively for the best engineers, who may not stick around if they have to work on plodding government programs, he adds. “You don’t want to put them on a project that’s going to require four bureaucrats for every one engineer.”
Decades of acquisition reforms have created a maze of regulations that require companies to hire expensive legal staff to help them navigate through. For large defense contractors, new rules are relatively easy to absorb. But small businesses often struggle to cope, says Rep. Jim Moran, D-Va., whose district is home to many defense contractors. “Congress has to reduce the barrier to entry for small and mid-tier commercial firms to inject needed competition and innovation into the defense base,” he says. Moran’s comments may strike many as ironic, since Congress has been blamed for piling on layers of laws that overlap with existing regulations and, not surprisingly, exacerbate the complexity of complying with the rules.
While he calls for change, Moran notes that the Pentagon’s byzantine procurement system exists for a reason. “With all the scrutiny being applied to federal spending, they’re not going to take a chance,” he says. “That’s why it’s so long and tedious and paper intensive. … It’s all about CYA. Very inefficient, but that’s the way of the world as long as there’s no pity for anyone who makes a mistake.”
What critics regard as an industry-unfriendly environment today is a product of the excesses of the post-9/11 era of unfettered military spending. A slew of procurement scandals fueled a regulatory backlash that continues to this day.
Companies that sell commercial products face a real dilemma when they must decide whether to bid on a government contract, says Louis D. Victorino, a partner at Sheppard Mullin Richter and Hampton’s government contracts practice. A perennial concern is intellectual property. In many cases, they have legitimate grounds for worrying. The risks of turning over proprietary technology to the government are high, Victorino says. For second-tier suppliers and below, the cost of complying with the regulations can bankrupt a business, he says. “Many companies realize it will cost them a fortune to set up the bureaucracy they’ll need.”
There are numerous good reasons to become a government contractor, but a company ultimately has to balance the potential gains against the drawbacks.
Rhetoric that calls for greater participation by commercial vendors clashes with the reality of what it takes to sell to the government, says Victorino. He notes that the Defense Department doesn’t speak with a single voice on this issue. While policy makers at the Pentagon support lowering the regulatory barriers, others, including senior military officials, take a much narrower view and advocate for greater government control over technical data rights, for example.
For commercial companies, higher overhead costs are minor headaches compared to the exposure to criminal charges if they screw up and get accused of fraud, he says.
Jonathan Aronie, also a partner at Sheppard Mullin, cites the two-year-old “mandatory disclosure rule” as an example of the increasing complexity of doing business with the government. The rule makes it mandatory for contractors to disclose any form of wrongdoing. Prime contractors already have hired in-house staff to handle this, he says. “What worries me are the small and mid-size companies. … They’re more at risk than the big players” because they may not have the expertise to determine what information they have to divulge. “The government is looking for its first opportunity to nab a contractor that didn’t report what it should,” he says.
Lambert agrees that for companies that have not worked with the Pentagon before, the road can, indeed, be rough. When the Pentagon does manage to recruit vendors from the commercial sector, he says, it ends up draining their innovative spirit by turning them into “defense contractors.”
- by Sandra I. Erwin - published in the Feb. 2011 issue of National Defense magazine
Is insourcing dead? Is the era of big systems integrators ruling the roost coming to a close? Will the defense cuts save the economy?
These were some of the dominant themes I heard executives and others talking about at investment bank Raymond James’ 10th Annual Government Services & Technology Summit on Thursday [Jan. 6, 2011].
A variety of public and private companies gave presentations on their strategies. Because three presentations were usually going on simultaneously in different rooms, I couldn’t hear all of them, but the ones I did hear often shared similar themes.
The easy one to explain is the death of insourcing. Several executives and other speakers commented that a year ago insourcing was a big concern, but not so much now as Defense Secretary Robert Gates has publicly admitted that the cost savings he envisioned from moving contractor jobs to government jobs did materialize.
The demographics of the government workforce make widespread insourcing untenable, several speakers said.
Joe Kampf, chairman and CEO of CoVant, a private equity group, had one of the day’s best quips: “Insourcing doesn’t bother me, until they come for my people.”
I think that was a subtle reminder that while insourcing might not be a major impact to the industry as a whole, there will still be pockets of it and when it happens to you, it’s bad, no matter what the macro trend is.
The theme that people came back to repeatedly was this idea that size and bulk are not the measures of success they once were for government contractors.
Brian Gesuale, senior vice president of Raymond James, used two leading companies of the past decade as examples.
In the mid-2000s, CACI International and SRA International both were rewarded with growing market valuations as they grew. But while they have continued to grow larger, both have seen the value of their stock decline, Gesuale said.
“The supersizing strategy is not the strategy going forward,” he said.
Instead, Gesuale and other speakers emphasized the need to build value by focusing in on niche capabilities that are close to the customer’s mission.
“We want to be close to the flagpole of the agency” is how Vangent CEO Mac Curtis described it during his presentation.
In other words, whatever your company sells, you need to be able to tie it directly to supporting the mission of the agency.
“You need to know what you are good at,” said Terry Glasgow, president of NCI Inc., another presenter.
This is particularly important in the current budget environment because as agencies look to reduce costs, they are going to stick with the contractors who know and support their mission the best.
This trend supports smaller and more nimble companies that specialize in a few critical functions and avoid being seen by their customers as a broad-based IT provider, several speakers said.
Looming over much of the talk on Thursday was the economy and the budget and the impact of attempts to rein in government spending, particularly at the Defense Department.
John Hillen, president and CEO, of Global Defense Technology and Systems, gave a convincing argument that this recovery and downsizing of defense is much different than other similar periods in U.S. history.
Unlike the end of World War II or the end of the Cold War, today’s defense spending is much smaller when compared to the federal budget and the Gross Domestic Product.
Defense cuts are not going to “move the needle” on the budget crisis, he said.
Mandatory spending on entitlements and interest payments on the debt are growing too fast for defense cuts to have much of an impact, he said.
“The math just doesn’t work anymore,” he said.
Overall, the mood at the conference was upbeat. Companies are still actively looking at acquisitions. More deals are expected to be made in 2011 as companies shore up capabilities in areas of the budget that are expected to grow.
Spirits also were buoyed by the successful IPOs of the past year by companies such as Global Defense.
The sentiment also seems to be that with Republicans in control of the House there might be more controls on spending than when the Democrats controlled all of Congress. There were several comments about gridlock perhaps being a good thing.
Borrowing a quote from Bill Gates, Kampf said, “I’m a paranoid optimist.”
The quip drew chuckles but plenty of heads nodded in agreement.
There are plenty of challenges and threats in the market, but the right strategy with a focus on the mission can yield valuable results, seemed to be what Kampf and others were saying.
– by Nick Wakeman – Jan. 07, 2011 -Washington Technology.com