Georgia Tech Procurement Assistance Center

DoD issues rules for notifying contractors of in-sourcing decisions

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The Department of Defense (DoD) issued a memorandum on February 7, 2013 entitled “Private Sector Notification Requirements in Support of In-sourcing Actions.”

The memorandum provides implementing direction on the notification of private sector providers (contractors) when making a determination to in-source a contracted service for civilian or military performance.

This guidance can be found at: Memorandum – Private Sector Notification Requirements in Support of In-sourcing Actions (29 January 2013)

Companies lost more folks in 2011 due to insourcing

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In a recent survey of more than 100 companies, 60 percent of them reported they had lost employees to the government insourcing initiative.

It’s a 13 percent increase from 2010, according to the consulting firm Grant Thornton in its 17th Annual Government Contractor Industry Survey, which was conducted in 2011. Grant Thornton released it in 2012.

Agencies have more aggressively insourced work from companies in recent years as Congress and the Obama administration have said the government relies too much on the private sector to do its work. Spending on contracts increased greatly under the George W. Bush administration and the Barack Obama administration has proudly said it’s cut back on contract spending.

Obama’s former administrator of the Office of Federal Procurement Policy, Dan Gordon, reiterated that the government needed to “right-size” the balance between government employees and contractors. More importantly, federal employees need the in-house knowledge and expertise to handle those contractors’ jobs to release the government from an over-reliance on companies.

Government officials have also said they would save money with federal employees doing the same work instead of contractors. It’s stemmed a heated debate and both sides of the argument have generated their facts to prove their point.

From Grant Thornton’s perspective, thinking that insourcing saves money is an “unsubstantiated and frankly unimaginable belief.” In 2010, defense officials said they could find no evidence of savings from insourcing work.

In the survey report, Grant Thornton expressed some hope for those who dislike the insourcing initiative.

“Based on experience, we assume that this desire to grow government at the expense of the private sector is another initiative that will eventually be reversed, most likely when the political climate in the country changes,” wrote the author of the survey report.

In other words, the pendulum will swing back.

— by Matthew Weigelt, Federal Computer Week, on Apr. 09, 2012 at http://fcw.com/blogs/acquisitive-mind/2012/04/insourcing-companies-lose-employees.aspx?s=fcwdaily_110412.

Insourcing savings difficult to predict

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Insourcing saved the Homeland Security Department $2.3 million since mid-2010, a DHS official said, even while counterparts at the Defense Department said their initial estimates of cost savings to be had from converting contractor positions into full-time civil service jobs were overestimated.

During a March 29 hearing of the Senate Homeland Security and Governmental Affairs subcommittee on contracting oversight, Debra Tomchek, executive director of the DHS balanced workforce program management office, said efforts underway at DHS since mid-2010 to rely less on contractors and to hire more civil servants have produced about $2.3 million in savings as of January 2012.

According to Tomchek’s written testimony, DHS calculates the cost of a contractor to a civil servant using a “DHS Modular Cost Model” that includes “one-time and recurring costs associated with establishing new positions.”

During the hearing, Chuck Grimes, Office of Personnel Management chief operating officer, emphasized that savings shouldn’t be calculated by just comparing labor costs.

When the Defense Department began an insourcing initiative in 2009, then-Defense Secretary Robert Gates estimated the Army could produce $400 million worth of savings and that conversion of contractor positions would save 40 percent on employment costs.

“We had two instances over different periods of time where we achieved anywhere from about 16 to 30 percent savings. And really the percentage savings are really dependent upon the function that’s being in-sourced and the location where that’s occurring,” said Jay Aronowitz, Army deputy assistant secretary for force management, manpower and resources.

Lack of a good cost model to compare the true costs of retaining civil servants versus hiring contractors has long been an obstacle to cost transparency and decision-making. The Center for Strategic and International Studies proposed in May 2011 a cost estimation taxonomy that would permit a comparison based not on labor costs, but the costs that federal agency would incur if it tried to meet its needs by internally running the equivalent of a private sector consulting firm.

— by David Perera, Fierce Government IT, Apr. 3, 2012 at http://www.fiercegovernment.com/story/insourcing-savings-difficult-predict/2012-04-03.

Contractors brace for coming defense cuts

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As the Pentagon readies a fiscal 2013 budget expected to map out $487 billion in cuts over the next 10 years, many contractors already are bracing for a new climate of austerity, but they are heartened by the Obama administration’s pledge to preserve America’s industrial base.

At the Pentagon on Thursday (January 5, 2012) with President Obama, Defense Secretary Leon Panetta and Deputy Secretary Ashton B. Carter stressed the need for innovation and scientific progress. Both touched on the importance of innovation, maintaining the industrial base, and fostering science and technology.

“As we reduce the overall defense budget, we will protect our investments in special operations forces, new technologies like [intelligence, surveillance and reconnaissance] and unmanned systems, space and cyberspace capabilities, and our capacity to quickly mobilize,” Panetta said.

Carter said, “this guidance tells us to preserve investment, and even in some cases to increase our capabilities in key areas that are clearly important to the future — special forces in counterterrorism, countering weapons of mass destruction, building partner capacity, cyber, and aspects of our science and technology investments — making sure that we don’t simply revert to yesterday’s pre-9/11 force structure under the pressure of budget cuts.”

He offered assurance that the Defense Department does not “eat the seed corn” by making cuts that are irreversible. “As we make program changes, we want to make sure that 10 years, 15 years from now, we still have an industrial base that supports our key weapon systems even if we’re not able to buy in those areas at the rates or in the volume that we had planned before we were handed this $487 billion cut.”

The Professional Services Council, a contractors trade group, issued a statement applauding the administration for recognizing that a “strong, flexible and resilient industrial base is integral to ensuring future readiness and mission success.” But the council warned against “arbitrary cuts” to contracts, programs and personnel.

“Clearly, the planned reductions will have an impact on both the military and the industry. Those impacts could be exacerbated if the department does not pay close attention to how it can best capitalize on the capabilities of the private sector,” said PSC President and Chief Executive Officer Stan Soloway. “It is therefore more important than ever that the department buy smart and ensure it genuinely incentivizes and rewards performance and innovation rather than simply buying at the lowest price.”

The Aerospace Industries Association also was encouraged by the Pentagon’s approach, saying in a statement that officials “recognized the importance of a strong industrial base” and for planning reductions based on “a new national defense strategy … rather than simply lower numbers across-the-board.”

Richard Rector, a partner with DLA Piper who runs the law firm’s contracting practice, told Government Executive he expects “contractors’ work and the legal work to track the decline in spending, and that companies will be less willing to accept a loss on a key programs as the pie shrinks and there are fewer large programs.”

During the previous defense spending downturn, in the mid-1990s, the number of bid protests went down commensurately, he said, but companies today are apt to be “less sanguine about accepting a loss when profitability and margins are thin, and more likely to fight over things that at other times they would let slide.” That might mean more bid protests and more claims against agency contract officers for changing the scope of contract work, he added.

The American Federation of Government Employees urged the Pentagon “to take a balanced approach to spending reductions that subjects private contractors to the same cost-cutting scrutiny that has already been placed upon the civilian workforce,” AFGE President John Gage said in a statement.

“Tens of thousands of civilian jobs are slated for elimination, despite strong evidence that having civilians perform these jobs is the most cost-effective strategy,” he said. “Meanwhile, the department continues to increase spending on contractors, even though they are more costly and less accountable.”

The nonprofit Project on Government Oversight criticized both Defense officials and an advance story about the Pentagon review in The New York Times for failing to address possible savings through decreased reliance on contractors. “Beyond the secretary’s failure to provide specifics on how he’s going to achieve his budget savings, it was what he didn’t say that left us flabbergasted,” POGO Executive Director Danielle Brian said in a statement. “Not once did he mention the need to take a serious look at the more than $200 billion the Pentagon spends each year on outside service contractors.”

Brian said her group’s research shows the Pentagon spends more on service contractors than on its uniformed military and civilian employees combined, and that contractors, on average, bill the government “nearly twice as much as it would have cost federal employees to do the same jobs.”

Defense budget analysts Barry Watts and Todd Harrison of the Center for Strategic and Budgetary Assessments wrote a December 2011 op-ed in Politico underlining the importance of contractors in maintaining the industrial base and the need for a long-term Pentagon strategy that sets priorities for critical capabilities.

“For-profit companies, defense firms cannot afford to maintain a broad range of weapon design and production capabilities if there is no funding,” they warned. “In 1997, for example, the British navy wanted to develop a new class of nuclear attack submarine, only to find that the British defense industrial base no longer had the necessary design or production skills. Fortunately, the Royal Navy could turn to a U.S. firm for the lost expertise. But if the Pentagon finds itself in a similar situation, to whom would it turn?”

— by Charles S. Clark – Government Executive – January 6, 2012 at http://www.govexec.com/story_page.cfm?articleid=49718&oref=todaysnews

Contractors get insourcing warning under defense bill

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As Defense Department officials consider insourcing work, Congress wants them to notify contractors of their decision to bring the work inhouse.

The fiscal 2012 National Defense Authorization Act includes a provision requiring DOD to notify companies before insourcing particular jobs. Congress wants officials to give contractors a “timely notification” of their decision.

One expert said the timely notification is a step forward in informing companies that they are losing their contracts. But the provision’s usefulness
depends on DOD’s interpretation of the provision.

“How ‘timely’ is defined determines whether this is of any value or not,” said Robert Burton, former deputy OFPP administrator and now partner at the
Venable law firm.

Having worked with small contracting companies that lose their business because of insourcing, a timely notification may be a six-month heads-up. Still
he said the small businesses often struggle to stay afloat after a decision to insource work.

For the best option, Burton said government officials should talk with companies about the effect of insourcing on their future. Officials should then
consider it as a factor in their decision.

Also in the bill, the provision would add slightly to the blurry term of “critical function.”

A critical function is a duty “necessary to maintain sufficient government expertise and technical capabilities” and “entails operational risk associated
with contractor performance.”

The Office of Federal Procurement Policy this year defined a critical function as work that’s “necessary to the agency being able to effectively
perform and maintain control of its mission and operations.”

Congress also is telling defense officials to give special consideration in taking back these critical functions, as well as acquisition workforce functions
and even work that DOD employees have done at some point during the past decade.

Officials would need to test whether to insource certain functions based on guidance in a memo on comparing the estimated costs of civilian, military and
contractor support. Officials would also have to decide if insourcing a function would be either 10 percent lower or $10 million less expensive than the
contractor’s cost. The choice would not apply to inherently governmental functions, which should only be done by federal employees.

The authorization bill cleared Congress Dec. 15, and now awaits President Barack Obama’s signature or his veto.

About the Author: Matthew Weigelt is a senior writer covering acquisition and procurement for Federal Computer Week. This article appeared Dec.
22, 2011 at http://washingtontechnology.com/articles/2011/12/22/ndaa-timely-notification-insourcing.aspx.

Will OFPP’s new guidance be used to take jobs from contractors?

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“Critical function” is now the controversial term as agency officials interpret new regulations on what work only federal employees should be doing and could be used to increase the insourcing of contractor jobs.

“Inherently governmental function isn’t the big problem,” said Robert Burton, former deputy administrator of the Office of Federal Procurement Policy (OFPP). “It’s the broad category called ‘critical function.’”

A new policy letter from OFPP defines critical function as work that is “necessary to the agency being able to effectively perform and maintain control of its mission and operations.” Beyond that, the letter tells agency officials to decide case-by-case if work should be done by their own employees or by contractors.

If a contractor is doing the work, agencies must have employees who know the job and who would be able to manage the contractor who is doing the work, according to the policy letter, which was released officially Sept. 12.

The policy holds an agency responsible for making sure it has an adequate number of positions filled by federal employees with appropriate expertise and experience. Those employees need to understand the agency’s requirements and be able to formulate alternative options, if needed, while also monitoring any contractors supporting the federal workforce, the letter said.

“The more important the function, the more important that the agency have internal capability to maintain control of its mission and operations,” the
letter stated.

However, Burton said officials can argue that any job is critical to meeting their agency’s mission and also decide the adequate number of federal employees
they need to do it, under this policy.

“We’re missing the elephant in the room,” said Burton, now a partner at the Venable law firm. “What this policy letter does is institutionalize insourcing
in the federal government.”

He said these critical functions are the jobs agencies are already insourcing, often to the detriment of small businesses.

The policy letter goes into effect Oct. 12, and, because it came from the OFPP, it is more than guidance. It will be added to the Federal Acquisition
Regulation. These will be rules to live by.

The term “critical function” came from the fiscal 2009 National Defense Authorization Act, which told the administration to draw up a single definition of “inherently governmental function” and also lay out criteria for a critical function. OFPP drafted the definition in 75 pages.

As deputy administrator from 2001 to 2008, Burton said the issue isn’t necessarily with writing the policy. It’s how the agency officials apply it.

“The challenge of so much of this is the interpretation,” he said.

Stan Soloway, president of the Professional Services Council, said the policy must have clear guidance for interpreting the intent correctly. He has raised
concerns in the past about making agencies prove that their choice to insource work is a good deal.

“As such, it is vital that clear guidance be given to the agencies on how to conduct their cost comparisons to ensure the right outcomes for the American
taxpayer,” he said Sept. 9 in a statement.

Burton also said the OFPP missed two important points in the policy. It should have required agency officials to talk with small businesses about the effects that insourcing would have.  And it should have required agencies to share their cost comparison data with, at least, the company who faces the loss
of its work.

It’s often too late to use the Freedom of Information Act to get the data, he said. By then, the insourcing is completed.

About the Author: Matthew Weigelt is a senior writer covering acquisition and procurement for Washington Technology.  Published  Sept. 12, 2011
at http://washingtontechnology.com/articles/2011/09/12/critical-function-interpretation-ofpp.aspx?s=wtdaily_140911

OMB announces final guidance on inherently governmental functions

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Long-anticipated final guidance on “inherently governmental functions” is set for publication on Monday and should clarify confusion over blurred lines in agencies’ understanding of which types of work should be outsourced, top officials at the Office of Management and Budget told reporters on Friday.

The final policy letter, said Chief Performance Officer Jeffrey Zients, “helps agencies do better at balancing contracting out with management by federal employees. The mix was out of balance and we think this protects the public interest. Given our fiscal situation today, it is important more than ever that taxpayer money be well spent.”

With a few exceptions, the guidance, which takes effect Oct. 12, is similar to the draft released in March 2010, said Dan Gordon, administrator of the Office of Federal Procurement Policy. “But it is a milestone” that follows up on a memorandum of understanding about reducing waste in contracting issued by President Obama in March 2009.

The document includes lengthy lists of functions that are clearly inherently governmental and separate lists of “functions closely associated with the performance of inherently governmental functions” — where agencies can use more discretion.

One difference in the new guidance is a provision intended to “clarify the confusing and controversial” policy on the contracting out of military security operations, Gordon said. If a function is part of combat or could evolve into combat, then contractors can’t be used. “We benefited on this issue from public comments from the private sector, agencies, nonprofits and the Hill,” he added.

A second departure is a provision intended to help small businesses. “It places a lower priority on in-sourcing if the function is not inherently governmental,” Gordon said. “Insourcing is not a goal, but agencies need to understand that if an inherently governmental function is improperly contracted,” they can lose control of the work.

The administration “is sensitive” to realities of the current budget crunch, Gordon acknowledged. “We need to demonstrate fiscal responsibility on both sides” of the contracting process, he said. “We don’t want to dramatically increase [full-time equivalent] levels on the federal side, but in today’s fiscal world, the solution is not massive contracting out,” nor is it massive insourcing.

Zients presented the letter in the context of the administration’s two-and-a-half-year-old effort to trim waste by curbing contracting “after its uncontrolled growth under the prior administration.” One in six federal dollars is contracted out, and the rate, mostly in services, doubled since 2008, he said. But 2010 marked the first time in a decade that the level of contracting decreased, by $80 billion.

Examples of smarter contracting, Zients said, include “strategic sourcing,” such as pooling purchases of office supplies, which can save as much as 40 percent. “Rather than buying like 100 medium-sized businesses, take advantage of the fact that the United States is the world’s largest purchaser,” he said.

Another means is cutting spending on management support, which quadrupled over the past 10 years, he added. “In information technology and acquisition, management support produces many wasteful and unnecessary consultants’ reports that sit on a shelf.” That approach will reduce expenses by 15 percent, or $7 billion in fiscal 2012, he said.

Focusing on interaction with contractors, the administration also has “strengthened suspension and debarment” processes, Zients said, stressing, however, that “contractors do valuable work and will continue to do so.”

Over the past year and a half, Gordon said, the outsourcing-insourcing issue has been reviewed most thoroughly by the Defense and Homeland Security departments, a process now largely complete. Most agencies have already been working under the principles of the final guidance, he said, so its release won’t prompt major shifts.

Critical functions differ by agency, Gordon said, but the letter provides “clear direction to managers responsible for policy on the closely associated functions to make sure that the agency can control it and that the work doesn’t expand.”

The problem, he said, though “now largely corrected,” has been that some agencies, for example, would have a contractor write a statement of work and then award the contract to that same company. In managing IT functions, he added, he’s heard federal managers say that “no one in-house understands the work and that they’re completely dependent on the contractor. It’s intolerable.” The solution, he said, might be limited insourcing, adding two to three people, or simply applying more attention.

The guidance’s definition of inherently governmental, as in the draft, is based on the 1998 Federal Activities Inventory Reform Act, and Zients said the letter’s other changes, though small, would require adjusting the Federal Acquisition Regulation to conform.

Dozens of interest groups had been following the evolution of final guidance on what is inherently governmental.    “We are pleased OFPP has retained flexibilities for agencies to determine what functions are considered closely associated with inherently governmental functions or are critical functions to agency missions and to provide for these functions in a way that best meets their needs and capabilities,” said Stan Soloway, president of the industry group the Professional Services Council. “However, we are concerned that the list of closely associated functions could be misconstrued as a ‘do not contract’ list, even though it is not the case, nor OFPP’s intent. The checklist that identifies closely associated functions must not become a barrier to contracting for work where it is appropriate to do so.”

Scott Amey, general counsel of the watchdog group the Project on Government Oversight, said he is impressed with the guidance. “The policy comes clean about the government’s over-reliance on contractors and improves the categories of activities and functions that shouldn’t be performed by contractors,” he said. “Private security in combat areas was never a good policy, and OFPP’s changes will ensure that properly trained and mission-responsible government personnel conduct such work.” He wonders, however, whether agencies will actually retain or insource work that his group believes should be performed by public servants.

Steve Amitay, federal legislative counsel of the National Association of Security Companies, said on Friday that absence of any mention of “building security” in the guidance “validates the continued successful use of contract security by federal agencies. Furthermore, given the decades of effective and efficient use of contract security by federal agencies, any agency that is considering insourcing security jobs should, as the policy states, be required to conduct an in-depth, comprehensive cost-analysis of such a move.”

— by Charles S. Clark – Government Executive – September 9, 2011 – http://www.govexec.com/dailyfed/0911/090911cc1.htm?rss=getoday&oref=rss

Army suspends all ongoing insourcing plans

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In an about-face, the Army has suspended all of its ongoing insourcing activities, potentially savings thousands of private sector positions.

In a Feb. 1 memorandum, Army Secretary John McHugh announced he was halting the service’s insourcing initiative immediately in favor of a scaled-back approach in which his office would have to directly approve projects.

“In an era of significantly constrained resources, the Army must approach the insourcing of functions currently performed by contract in a well-reasoned, analytically based and systemic manner, consistent with law and prevailing presidential and Department of Defense guidance,” McHugh wrote in the memo, released on Thursday by the Professional Services Council, an industry group that has opposed plans to bring contractor jobs back in-house.

The memo suspends all ongoing insourcing transitions, but does not reverse efforts that already have been completed.

Army spokeswoman Anne Edgecomb said the memo is not intended to stop insourcing altogether but to ensure that the process is conducted responsibly and deliberately. “We are trying to make sure we do everything we can to be fiscally responsible,” Edgecomb said. “We see the writing on the wall.”

Edgecomb did not have figures immediately available on the number of contractor positions the policy change would effect.

The Defense Department’s insourcing program leader said on Thursday that the Pentagon did not direct Army to change its policy.

“The department is committed to meeting its statutory obligations under Title 10 to annually review its contracted services, identifying those that are inappropriately being performed by the private sector and should be insourced to government performance,” said Thomas Hessel, a senior manpower analyst in the Office of the Undersecretary of Defense for Personnel and Readiness, in a statement to Government Executive. “This includes services that are inherently governmental or closely associated with inherently governmental in nature; provide unauthorized personal services; or may otherwise be exempted from private sector performance … While some contracted services may be identified for insourcing, some services determined to be no longer required or of low priority may be eliminated or reduced in scope while others will continue to be provided by the private sector.”

All future insourcing proposals, McHugh wrote, must include “at minimum, a manpower requirements determination, an analysis of all potential alternatives to the establishment of permanent civilian authorizations to perform the contracted work, certification of fund availability and a comprehensive legal review.”

Thomas Lamont, assistant secretary of the Army for manpower and reserve affairs, along with Mary Sally Matiella, assistant secretary of the Army for financial management and comptroller, will be responsible for developing criteria to evaluate the efficiencies generated from the policy change, McHugh said.

Contractor groups, which have long criticized the Defense Department’s insourcing plans as driven by quotas and lacking any verifiable cost savings, applauded the development.

“Secretary McHugh is taking the right approach to insourcing,” PSC President Stan Soloway said. “We have said all along that all sourcing decisions for clearly commercial work — whether insourcing or outsourcing — must be done strategically with the best interests of the government mission and American taxpayer in mind.”

John Palatiello, president of the Business Coalition for Fair Competition, a group formed to challenge the Obama administration’s insourcing plans, said the memo is proof the initiative has been poorly executed.

“BCFC renews its call for a governmentwide moratorium on insourcing until common-sense standards and metrics for assuring that any insourcing is in the taxpayers’ interests, does not increase unemployment, and is focused on statutorily defined inherently governmental activities, not commercial activities,” Palatiello said.

The memo comes only a few weeks after the Government Accountability Office reported the Army had identified more than 4,200 full-time jobs in which contractors are performing either inherently governmental or unauthorized personal services. In both the inherently governmental and the unauthorized personal services contracts, the Army typically would be required to bring those functions back in-house.

Defense Secretary Robert Gates announced in August 2010 that the Pentagon was implementing a fiscal 2011 billet freeze and halting its insourcing plans because of a lack of cost savings. But, the plan affected only civilian agencies and offices. The military services were exempt from the freeze, allowing them to continue with their insourcing plans.

Soloway called on the other military services to follow the Army’s approach. “Through such a process the Army, DoD and the taxpayer will gain vital insight into the total life-cycle costs associated with these decisions, the degree to which they address the Army’s workforce needs, and more,” he said. “We hope, as they say, the Army leads the way.”

— by Robert Brodsky – GovExec.com – February 3, 2011

Contracting spending dips for the first time in 13 years

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For the first time in 13 years, the government has cut its annual spending on federal contracting, Obama administration officials announced on Thursday.

Federal agencies spent $535 billion to purchase private sector goods and services in fiscal 2010, compared to $550 billion in fiscal 2009, according to Jeffrey Zients, deputy director for management at the Office of Management and Budget.

“We have reversed the trend of uncontrollable growth [in federal contracting],” Zients said in a conference call with reporters. “We’re saving money and making sure every taxpayer dollar is being well-spent.”

President Obama previously had called for a combined 7 percent reduction in baseline contract spending in fiscal 2010 and fiscal 2011 for a total savings of $40 billion. The administration says it is on pace to meet those targets, since the goal of the initiative was to reduce the overall rate of procurement spending. If the government had continued at its previous pace of contract spending, it would have spent roughly $615 billion in fiscal 2010, Zients said.

The decline in contracting spending is largely a reflection of agencies buying smarter — and often less from the private sector, said Daniel Gordon, administrator of the Office of Federal Procurement Policy at OMB.

For example, the Veterans Affairs Department has reduced its purchases of new information technology systems while the Justice Department eliminated an expensive case management system. The Housing and Urban Development Department, meanwhile, saved $44 million by eliminating a financial management system.

Several agencies also have focused on consolidating their purchases through strategic sourcing, introduced enhanced competition into their acquisitions and improved their contract management oversight, Gordon said.

“We have made real measurable progress,” he added, “progress that you can measure in dollars.”

The administration, however, is not willing to link the contract savings to its governmentwide insourcing initiative. The effort to bring some contractor functions back in-house, according to Gordon, is focused on the government regaining control of its core operations and less about taxpayer savings.

“We don’t view [insourcing] as a cost saving initiative,” he said. “We view it as a cost management initiative.”

While agencies met their overall goal of spending less on contracting, they failed to hit a series of targets for reducing their expenditures in several high-risk categories. A July 2009 memo from OMB called on agencies to reduce by 10 percent their use of sole-source, cost-reimbursement, and time-and-materials contracts. Gordon acknowledged those targets have not yet been met.

The procurement chief said the percentage of sole source contracts in fiscal 2010 dipped by 6 percent, although the percentage of contracts with only one bid declined by 11 percent.

The administration also made progress in cutting its spending on time-and-materials contracts, which are considered the highest risk to taxpayers because of the potential for escalating costs. It appears, however, that most of those contracts were converted to cost-reimbursement vehicles rather than fixed-price contracts, the administration’s preferred contracting type, Gordon said.

OMB did not immediately provide details on the time-and-materials or cost-reimbursement spending figures in fiscal 2010.

Contract spending, particularly for professional and technical services, is expected to decline further in the coming years. The administration plans to call for a 10 percent reduction on spending in these two categories, which Gordon loosely defined as the work contractors provide in assisting agency acquisition shops.

Zients, who will head up an effort to reorganize federal agencies to eliminate redundancy in government operations, declined to discuss the effort on Thursday, saying it was in its early stages.

— by Robert Brodsky – GovExec.com – February 3, 2011

Welcome to a new era of government contracting

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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

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