Consolidation Conundrum

onsolidation implies mostly positive outcomes. Unity. A coming together, often to the benefit of all parties involved.

But the kind of consolidation the Bush administration proposed recently would hardly bring harmony to the world of government procurement. The Office of Management and Budget wants to get the most out of the government's billions of dollars in IT spending by combining purchases by multiple agencies into larger, single contracts. The goal is to better manage technology by buying fewer systems and asking agencies to share them. That would cut down on redundant purchases. And by pooling their awesome buying power, agencies would get discounts. In theory, this is good business, and no shrewd procurement practitioner would argue against it.

But the concept is unpopular because of how it might take form in practice. Consolidation is likely to cause something many businesses and agencies don't want to see: fewer contracts.

Mark Forman, OMB's point man on IT, knows full well how unappealing less business is to technology companies-especially when the federal market is one of the few prospering these days. Forman floated the consolidation idea at a gathering of technology executives in February. He assured the group that they would still have plenty of opportunities to sell to the government. After all, the government wouldn't spend less on technology, it would just spend more wisely.

Sounds reasonable. But it's not true.

The government can't cut the number of contracts on the street and declare there are just as many opportunities for business. Companies will lose work as contracts are canceled and merged with others and as competition becomes fiercer. Business already is hard enough to come by. With fewer chances to hit pay dirt, consolidation is going to make the contract wilderness even colder.

Agencies might not like the scheme, either. The procurement reforms of the 1990s decentralized purchasing power, which for years had rested almost exclusively in the hands of the General Services Administration. Consolidation would put procurement authority in the hands of fewer people. The Office of Management and Budget has yet to say which agencies would handle consolidated procurements.

But to brighten this dismal picture, Forman offered a hopeful vision. The administration's continuing goal, he said, is to "redesign the lines of business of the federal government" by using technology to transform agencies into more efficient, less bureaucratic operations. This isn't new, but few agencies have achieved it in the nearly 10 years since then-Vice President Al Gore launched his reinventing government campaign. The key point Forman made to the crowd of executives was this: The pursuit of efficiency "[is] going to take a lot of work." Translation? A lot of contracts.

So, while they consolidate procurement by sharing applications and systems, agencies also will create new markets as they reinvent themselves and spend billions on IT. And in this reinvention, a different kind of consolidation will play an important role.

The government will spend most of its IT funds on services, a broad category that includes consulting, software design, systems integration and just about anything that isn't sold in a box. Selling these services is the path to long-term success for vendors, Forman thinks, because services are integral to government reforms. "The opportunities for vendors are always going to be associated with innovation and business-process improvement," Forman told the February gathering.

In 2002, agencies spent $21 billion on contracts for IT consulting and design services and more than $24 billion on outsourcing.

Of the $60 billion agencies spent on IT contracts in 2002, more than 90 percent went for services of some kind. The top companies in the market-a small, elite cadre-won half of those dollars.

These findings were part of a study released in February by technology market research firm INPUT in Chantilly, Va., whose lead federal analyst has said the demand for products is going to slow even more in the coming years.

That's important for two reasons. First, when companies provide services, they're providing vision, advice and direction. Federal officials refer to their contractors as "industry partners." Their services determine the power of technology in government far more than hardware or software ever could.

And, as services have become the most important part of the market, the development of new products has stagnated. Recent reports show that several large software manufacturers are, for the first time in five years, earning more money from maintenance services than from sales. Companies are busy providing upkeep on their software rather than developing new products. This lack of innovation comes just as agencies need new ideas and technology most.

As government deals with fewer contractors, many companies are joining forces on their own. In 2002, the ranks of the top 25 federal IT contractors shrank as a result of mergers and acquisition or bankruptcy. Federal Sources Inc., a market research firm in McLean, Va., reports that more than 70 firms merged or were purchased in 2002.

Now, more than ever, access to the federal market is dominated by the largest firms, who win most prime contracts and influence the market through their awards to subcontractors.

With the consolidation of companies, consolidation of contracts will put more technology dollars in the control of even fewer firms. In effect, government's ability to shape its future is on the line.

Federal chief information officers know that's true. A recent survey by the Information Technology Association of America, which polled 35 CIOs at more than two dozen agencies and congressional organizations, found widespread concern that agencies don't have enough skilled project managers to oversee contractors, especially as their role in agencies continues to expand. The CIOs said they feared that, if the economy improves, the government's scarce IT experts would flee for the private sector, where the pay is superior. Some might even end up working on contracts for the agencies they came from.

Forman has reinforced concerns about federal IT projects by noting that several hundred of them are failing because of poor management. But in communicating with federal contractors, he should emphasize the role of IT vendors as well as agency managers in those troubled projects. It's the vendors, after all, that are counseling agencies on what to buy and how to spend their money, in some cases guiding them so closely through the contracting process that there's little left for agency officials to do beyond signing on the dotted line. Now that's partnership.

These are the facts the government must face as it contemplates a strategy that would limit agencies' purchasing discretion and encourage fewer companies to play a larger role in designing agencies' technological future. If contract consolidation moves forward, procurement experts are adamant that agencies mustn't rely on just a few companies. Even the largest corporations can fail. It's safer to hang the government's hat on many hooks.

But the consolidation strategy may not come to fruition. Sources close to the administration say Forman is in an ideological brawl over the issue with the government's chief purchasing policy-maker, Angela Styles. She's on a mission to undo contract bundling, the practice of tying many contracts into one big deal. Bundling looks suspiciously like consolidation, and the administration is conflicted about how to resolve the dispute. Styles probably has greater support from the White House than Forman, which may help keep consolidation in check.

Company executives and agency officials aren't making a big fuss yet over Forman's proposal. They grumble only in private, letting their trade and professional associations speak for them. Some companies are publicly welcoming the idea, knowing how fortunate they'd be to end up on the winning side.

Perhaps others are quiet because they believe nothing will come of consolidation. Or maybe they believe it's the wave of the future whether it's officially endorsed or not. The consolidation effort may be another indication that the days of less restrictive IT procurement are numbered. If so, debate probably will heat up soon. And well it should, since the futures of agencies and of the market are on the line.