Be prepared for more competition, tighter margins and big opportunities for politically savvy, nimble-footed companies
The economy — and specifically the federal market — might seem stuck in dirge mode, but it is changing, in subtle, sometimes dissonant ways. And woe to the company that doesn’t alter its step to match the new tune.
To record and distill those changes, Washington Technology talked for several hours with four federal business gurus to create a chapbook for federal contracting in 2011.
Get any group of experts together, and differences of opinion and points of agreement will arise. So it was with our four: Ray Bjorklund, senior vice president and chief knowledge officer at FedSources Inc.; Philip Kiviat, partner at Guerra Kiviat Inc.; Kevin Plexico, senior vice president of research and analysis services at Input Inc.; and Warren Suss, president of Suss Consulting Inc.
On some points, such as opportunities for the big score, they were unanimous: It ain’t happening.
“We’re definitely seeing a shift away from large-scale, single-award contracts that are intended to build, develop or integrate something,” Plexico said.
“Most of the top opportunities in this year’s [Input top 20 opportunities for 2011] were multiple-award, indefinite-delivery, indefinite-quantity vehicles,” he added.
“Many of the contracts that have driven our community in past years have been the large single-award programs that companies around the Beltway are geared up to respond to,” Suss said. But “the world is going to change, and companies will need to come up with different models to respond to a larger number of small opportunities.”
“Fiscal 2011 will be the year of the task order,” Suss said.
Our gurus also gave politics a stronger new emphasis in their calculations.
“The most important thing I can say when I talk to IT people — who tend to view IT as the most important thing in the world because it’s changing everything — is that IT is important, but it’s not immune to the influence of politics,” Kiviat said.
The recent shift of power in the House will especially bear watching, Bjorklund said. “The White House submits a budget, but Congress does the appropriating,” he added.
And with the collective Republican eye on reducing the federal budget, “everything in IT contracting is a target for political scrimping,” Kiviat said.
“We’re already seeing fewer large procurements” as a result of the Office of Management and Budget’s suspension in June of new financial systems at major agencies, he said.
In September, OMB canceled upgrades at the Small Business Administration and Veterans Affairs Department and is trimming financial IT projects at the Environmental Protection Agency and Housing and Urban Development Department.
The Army’s Enhanced Army Global Logistics Enterprise (EAGLE) contract, set for award in the second quarter of fiscal 2011, has been touted as a $30 billion opportunity, subsuming five programs and about 200 other contracts.
“But when we added up what’s being spent on the contracts it’s replacing, we came up with more like $10 billion, which is still a lot of money,” Bjorklund said. “But it’s not $30 billion.”
EAGLE has a big IT component, although its emphasis is not on conventional IT, such as networks. The contracts that EAGLE replaces have research and development projects, but the new contract has no R&D component, Bjorklund pointed out in FedSources’ Army EAGLE Reality Check report.
OMB’s system slashing is an effort “to reduce the size of large programs, make them more manageable and reduce the risk of failure,” Kiviat said. But it also will contribute to less innovation, he said.
“Whenever you do anything large or innovative, you increase risk,” he said. “Democrats did try to increase innovation, which means increasing risk-taking — what’s the saying? If you’re not failing, you’re not trying hard enough.”
However, Kiviat added, “failures could well be fodder for political grandstanding, so agencies will tend to put themselves up as targets less often, which means less innovation. That’s bad for contractors, especially those companies that are innovators. It will also take people who are interested in innovation and make them look elsewhere: in the commercial market.”
Bad, Getting Worse
To recap for a moment, we’ve got fewer single, big-dollar opportunities, politics stirring the pot more than ever before, trimmed budgets and less risk-taking. Look for those trends to alter the competitive landscape, put pressure on established federal market players and create openings for new ones.
Together with the general pinch and sag of the U.S. and global economies, “overall contract spending dropping by 4.8 percent,” Bjorklund said. “Whenever that happens, many new interests flock to federal government contracts, believing they’re going to be the saving grace for their business.”
Not all will succeed. “Particularly in the federal space, there are steep barriers to entry,” Plexico said. “But once you’re in, you have the credibility you need for agencies to spend contracting dollars.”
Many of the large IDIQ contracts, from the General Services Administration’s $65 billion Alliant to the Centers for Disease Control and Prevention’s $5 billion CDC Information Management Services, have already been awarded.
Contracts that are still to be awarded, in addition to EAGLE, include the Health and Human Services Department’s $30 billion CIO-Solutions and Partners 3 and the Defense Department’s $15 billion DOD Language Interpretation and Translation Enterprises.
Getting on those contracts guarantees nothing. But whether new to the federal market or an old hand, getting on them “is important from a positioning point of view,” Plexico said. “Take an agency like the Homeland Security Department, which may do 40 percent of its work through [DHS’ Enterprise Acquisition Gateway for Leading Edge Solutions contract]. If you’re not on EAGLE, you don’t have the opportunity to compete.”
But even when the contract is in place and the money ostensibly is there, it can disappear.
“Companies are going to have to be much more careful in qualifying prospects,” Kiviat said. “It’s not just about: Are the dollars there? But will they stay there? Some already planned procurements may be canceled because of the unknown emphasis of what Republicans will do.”
Take OMB’s halting and trimming of financial system modernization projects, he said. “That could happen to any large enterprisewide modernization project. Say an agency says it wants to modernize human resources management in all its subagencies. The question a contractor has to ask is: Will that project withstand congressional oversight, or could it get frozen?”
Agencies will be showing up not only with smaller purses but also with bigger demands, including tighter margins and greater use.
“DOD wants to avoid having military organizations develop their own systems,” Suss said. “They want to be able to invest once in a new utility or capability, then allow its use many times by all DOD users. For example, the Army, rather than go with its own enterprise e-mail systems just handed over [that acquisition] to DISA.”
The increased competition and decreased budgets will help ensure that big protests will continue. The lack of a government acquisition workforce that is large enough and experienced enough will contribute to protests.
“Take the recent protest by Google over the Interior Department contract, which mandated use of Microsoft software,” Kiviat said. “Everyone in procurement knew that protest was coming. As long as you have acquisition people who do something like that and don’t figure out how to do deal with it beforehand, you’ll continue to have protests.”
Once hardware-heavy, contracts increasingly are shifting to services — by 50 percent during the past four to five years, according to Input.
“When contracts were for hardware, all you’d have to do was deliver it. You didn’t even have to know what it did,” Kiviat said. “In services, it’s important to know what they need to have done and how to do it.”
For those companies that know that, there will be more opportunities for providing managed services at a fixed price, Suss said. A shift to cloud-based services “will drive companies to make more upfront investments in infrastructure and technology before realizing a return,” he said. “That may create a significant disequilibrium in the federal environment.”
Thinking about cloud must go beyond the hype, beyond the buzzwords to be a viable technology for government, Plexico said. “Agencies — and contractors hoping to win their business — have to ask themselves: What’s the agency’s exit strategy for dealing with sensitive data if there’s an incident?”
It’s also “going to require a different bidding model than the current [time-and-materials] model,” Suss said. “In this new environment, shops will have to deliver quick turnarounds on proposals,” a feat not all companies will be able to pull off.
More than ever before, success in the federal market will require a defined goal and an informed strategy for attaining it, our experts said.
“Big companies sometimes have a strategy,” Kiviat said. “Small companies don’t have them; they just fight each battle as it comes up. This is time for some strategic thinking, no matter what size you are.”
With so many potential pitfalls, it’s important to keep your sense of perspective, Plexico said. “The federal space is still a healthy and vibrant market as compared to the rest of the economic environment.”
Here also, our experts found agreement. The status quo is transitory, existing only for an instant and not to be confused with a promise.
“There are going to be losers,” Suss said. “Some companies that are in business now won’t be able to stay in business next year.”
But when a window closes, a door opens. “It’s going to create a fertile ground for mergers and acquisitions, and I think we’ll see an increase in that area,” Suss said.