Government becomes America's hottest technology market
When the World Trade Center and part of the Pentagon came crashing down on Sept. 11, what was left of an ailing commercial technology market collapsed with them. Already suffering as the national economy headed for recession, the information technology market slumped even further in late September. By October, IDC, a technology industry analysis firm in Framingham, Mass., predicted that revenue from technology would shrink in North America this year for the first time ever. Even before Sept. 11, thousands of technology companies had eyed the federal market as one of their best remaining bets for rescuing declining sales. After the September assaults ignited a war on terrorism, the federal market became the only game in town.
Estimated to be worth at least $45 billion in fiscal 2002, the federal technology market will grow by 65 percent in the next five years, according to an October report by INPUT, an IT analysis and marketing firm in Chantilly, Va. Payton Smith, INPUT's lead analyst for strategic market research, says the September attacks made information security, data recovery and interagency information-sharing top spend- ing priorities. John Gantz, chief research officer at IDC, and Rishi Sood, principal analyst for technology market research firm Gartner, headquartered in Stamford, Conn., agree that battling terrorism will increase Defense and intelligence agency technology spending.
Meanwhile, the private sector technology market, expected to grow an anemic 10 percent before Sept. 11, has cratered since the attacks. IDC now predicts that sales of servers, personal computers and printers will drop off in 2002. Corporate technology managers expect their budgets to grow by a paltry 3.7 percent in 2002, according to a September poll of chief information officers and other high-level managers by CIO magazine and online financial adviser Yardeni.com.
The stark contrast between predicted growth in government sales and the flat-lined commercial market has turned what, before Sept. 11, was a modest shift toward the federal sector into a stampede. EMC Corp. of Hopkinton, Mass., the world's leading manufacturer of data-storage systems used by banks and airlines, is targeting the federal technology market to boost its plummeting sales. "The government has been a reasonable customer," EMC executive chairman Michael Ruettgers said in a speech to business leaders in Boston. "I think the federal government will be a better customer in the future." EMC's fortunes may depend on sales to the FBI and other agencies as information-sharing becomes crucial. The company reported a net loss of nearly $1 billion in the third quarter of 2001.
Companies with a firm federal foothold before Sept. 11 have seen a rush of new orders. "At least in the near term, the business is going to go to the companies who the government regards as trusted partners and with whom the government already has contract vehicles in place," says James Kane, president of Federal Sources Inc. (FSI), a McLean, Va., technology market research firm.
Oracle, the leading seller of database technology to federal agencies, always has relied on the government as its biggest customer. On Sept. 11, Chief Executive Officer Larry Ellison told his federal team to redouble its efforts to get agencies whatever they wanted, says Kevin Fitzgerald, general manager of Oracle's public sector division. After Sept. 11, Integic, a Chantilly, Va., manufacturer of Web-based business tools such as portals and messaging systems, went into overdrive, working around the clock, seven days a week, as federal customers, especially in the Defense Department, demanded immediate attention, says Norman Hubbs, vice president of the company's e-government practice.
New companies also are being invited to the government table. In late October, the Defense Department issued an open call to companies and inventors to submit concepts and technologies for monitoring military and civilian targets, discovering whether suspected terrorists have worked with weapons of mass destruction, and conducting long-term military operations in remote locations.
In the weeks after the attacks, requests for wireless and security technologies soared. Terri Allen, senior vice president for technology reseller GTSI, says orders poured in for ruggedized laptop computers capable of providing high-speed wireless Internet access. Ross Pickus, vice president of business development for software manufacturer Computer Associates, says the company saw numerous orders for its information security software and higher demand for data storage and disaster recovery products. Defense and intelligence agencies constitute a major portion of the company's customer base.
The recent growth of the federal market stems from a revolution in information technology procurement. Throughout the 1980s, government agencies were so behind the commercial sector in their ability to buy technology that the federal market was of little or no interest to companies other than old-school government contractors. The story of the federal market's recovery and much of its current strength and popularity, centers on procurement reforms born of those frustrations.
Past is Prologue
By the mid-1980s, information technology was the fastest evolving industry in America. The government couldn't take advantage of it, however, because of its slow, rule-bound purchasing process. To write a contract, hold a competition and ultimately purchase products routinely took as long as two years and rarely less than six months. By the time agencies finally got their merchandise, the technology was obsolete. Government was in danger of missing the technology revolution altogether.
Spurred by the Defense Department, which had become desperate to catch up with fast, flexible private sector buyers, and goaded by Vice President Al Gore's reinventing government crusade, the Clinton administration began dismantling the Byzantine federal procurement system in the early 1990s. Chief among the reformers was Steven Kelman, named by President Clinton in 1993 to head the Office of Federal Procurement Policy. Kelman set out to correct what he called an "utterly absurd situation" and speed up the technology purchasing process.
Reforms designed to reduce purchase time and increase flexibility included:
- Eliminating detailed government specifications and encouraging the use of commercial products.
- Increasing interaction between buyers and sellers.
- Paring down paperwork.
- Using purchase cards (government-issued credit cards) to make most small buys.
- Making past performance as important as low prices in evaluating bidders.
- Telling vendors what they're expected to accomplish rather than how to do the work.
- Creating fast, easy-to-use, prenegotiated contracts with multiple vendors.
More than a dozen agencies operate similar governmentwide acquisition contracts (GWACs) for information technology on a fee-for-service basis. An August FSI study of 60 GWACs, including the GSA technology schedules, found that government-wide contracts accounted for $13.3 billion in fiscal 2000 information technology sales, more than 30 percent of the $41 billion budgeted by agencies that year. The schedules and other GSA contracts accounted for more than 80 percent of the sales of the 60 GWACs studied. GSA manages five of the 10 largest governmentwide contracts.
Because they depend on fees rather than congressional appropriations and because they must compete for agency customers, GWAC operators have become some of government's most savvy technology market experts. They are choosy about which companies win places on their contracts, carefully cobbling together packages of the best firms in areas of the greatest interest to agency buyers. GWAC operators bargain hard to keep prices low and therefore alluring to agency shoppers. They police companies' commercial prices to make sure government customers are paying rock-bottom rates.
Contracting officer Millicent Carr-Manning runs the National Institutes of Health's Electronic Computer Store II contract for commercial, off-the-shelf hardware and software. Her team keeps tabs on fluctuating prices by paying regular visits to the Web sites of ECS II's 47 vendors. There they confirm that the prices offered to agencies are equal to or below commercial market rates, as ECS II requires. If there's a price discrepancy-and there usually isn't-Manning corrects the prices.
Blanket purchase agreements (BPAs) negotiated with companies on the GSA schedules have become popular as agencies buy from reliable vendors without having to conduct a full-blown competition for each order. BPAs are like charge accounts, allowing agencies to form agreements with one or more schedule holders to take orders over time. The Air Force's Commercial Information Technology Product Area Directorate (CIT-PAD), runs BPAs for a fee-1.54 percent of each order this year-through its "IT Superstore." CIT-PAD has made a science of price monitoring to ensure that the Superstore's prices are below market rates. The Air Force is the Superstore's biggest customer. Col. Neal Fox, CIT-PAD's director and a 22-year acquisition veteran, carefully assembled the Superstore's IT retailers by checking to see how prospective vendors stacked up on technology research firm Gartner's "Magic Quadrant," which assesses a firm's business plan against its financial strengths and weaknesses. Such rankings give Fox an idea of which firms are strongest in the market. "We try to get the best of the best," he says. "We don't let just anyone come play." Fox pits companies of equal strength in particular sectors-such as desktop computers or software-against one another in competition. New kids on the block aren't thrown into combat with industry giants. Once a competition starts, Fox sits back and watches the vendors clash. "We get Dell, Micron and Gateway all going hard at each other to bring our customers the best prices they can get," says Fox. Once vendors beat prices down to their lowest level, the Superstore team locks in those rates.
Fox says his methods are radically different from those of the old days. "You were going to die if you tried to go out there and do something different in the past," he says. But today, driving hard-nosed bargains is simply business as usual, and it's keeping the Superstore sitting pretty. Fox estimates the store sold $600 million worth of technology products in fiscal 2001.
GWAC operators take pains to make their stable of vendors attractive to agency customers. Leamon Lee, director of the National Institutes of Health's Technology Acquisition and Assessment Center (NITAAC), oversees seven GWACs for technology goods and services, including ECS-II. When Lee negotiated the second version of the Chief Information Officer Solutions and Partners contract (CIO-SP2i) for hardware, software, systems and services, he wanted to get bids not only from the strongest technology companies, but also from small businesses. It wasn't just altruism that prompted Lee to give smaller firms entree to the booming market. He knew that by offering agencies an easy way to buy from well-qualified small, disadvantaged, minority- and women-owned companies, he was making his contract more appealing. Agencies are required by section 8 (a) of the Small Business Act to purchase a certain amount of goods and services from these vendors. Of the 54 companies on CIO-SP2i, 22 qualify as 8(a) firms. To qualify for competition, most companies had to meet nine technical requirements, ranging from the ability to create customized software to offering a complete information security package. But 8(a)s only had to be proficient in one or more of those nine categories.
Feet On The Street
The explosion in agency purchasing options was the result of a radical shift in thinking about procurement policy that has prodded buyers to dramatically alter their approaches. But the market revolution has had an equally profound impact on the companies that sell to the government. These firms have evolved and changed their practices to take advantage of the new rules of business. Companies have learned to keep in touch with their government customers by sending salespeople to the agencies. Prior to reform, finding business opportunities meant reading Commerce Business Daily, the government's public announcement for new requests for proposal (RFPs), and then deciding whether to bid. Today, companies must anticipate the thoughts, wishes and needs of agency program managers long before they appear in formal solicitations. "If you're not tracking programs in an agency, you're on your way out of business," says Ron Ross, president of Compaq Federal LLC, a leading hardware manufacturer.
Chip Mather, an early contracting innovator at the Air Force and co-founder of Acquisition Solutions Inc., an acquisition consulting firm, says the key to success in today's federal technology market is "relationship sales." Face time equals credibility, he says. Agencies have very long memories and are required by the 1996 Clinger-Cohen Act to consider the past performance of vendors when deciding whether to throw business their way. A good reputation among federal agencies is something no company can leave to chance. GWACs and schedules don't eliminate the need for face-to-face interaction. Far from being a guaranteed source of revenue, governmentwide contracts merely gave companies "a license to hunt" for the business of GWAC customers, says Jeffrey Bolletino, a vice president at consulting firm Booz Allen & Hamilton.
To stay connected to agencies' needs, companies have developed strategies to drive business rather than react to it. Traditionally, companies measured the cost of doing business with agencies in terms of the expense of winning a contract. They allocated significant funds to bid and proposal costs, paying employees to spend hundreds of hours meticulously responding to every specification in a government proposal. Companies were willing to go through such torment because huge, single-agency contracts guaranteed business for years to come. This encouraged the formation of a small number of large contractors that dominated the government market.
But as the number of less complicated technology contracts grew, firms no longer needed to devote the bulk of their resources to dotting "I"s and crossing "T"s. Today, marketing is the focus. Contractors seek to win customers and solidify their relationships with agencies by pitching their current and future offerings directly to the program managers who decide what to buy, rather than just to the contracting officers charged with executing purchases. Reform legislation, particularly the Clinger-Cohen Act, required agencies to justify their technology purchases based on what they hoped to gain. Therefore, the decision on what to buy became a management prerogative. Purchasing decisions moved out of the technology department and the contracting office and into the board room. In the new, faster and more flexible market, reputation rules. Bruce Leinster, director of contract negotiations and acquisition policy for IBM Global Services, says he won't waste his bid and proposal funds going after a contract held by a company with which an agency is pleased. Most corporate executives agree that it's better to build an image through marketing rather than try to dethrone incumbents on every contract.
Federal technology marketing tactics differ from those companies use to win other government business. For example, Lockheed Martin doesn't spend much time or money going after business person-by-person in its federal aerospace sector, says Arthur Johnson, vice president of corporate strategic development. But when it comes to selling technology, he says, "to be competitive on contracts, we market." The company has hired people whose job is to deal directly with agency program managers and CIOs to form close personal contacts. Driving business also means making it easy for buyers to reach a company's products and services. Hughes Global Services, a satellite communications provider based in El Segundo, Calif., runs a banner ad on Web sites frequented by government purchasers. A click on the ad takes visitors to links for the most popular government contracts through which agencies can buy from Hughes. The nature of a deal dictates the right point of contact, says Robert Woods, president of business applications solutions at ACS Government Solutions Group Inc., a Rockville, Md., provider of technology services, and the former commissioner of GSA's Federal Technology Service, a leading GWAC operator. If an agency solicits bids with an RFP, Woods seeks out the program managers who know the ins and outs of the RFP's requirements. If a contract is born in the technology office, then Woods finds the technology experts. Some agencies still focus more on contracting than forming an acquisition plan, says Woods. For instance, few Defense Department program managers invite prospective contractors over to their offices to talk shop. They tend to devise solutions on their own. In that case, Woods quizzes buyers on whether they really need to go the route they've chosen and tries to steer them to other avenues where his company might be able to provide a better alternative. Being inside the agency and in front of decision-makers can make repeat business likely.
"Companies also have to convince agencies that the capability to do what they want exists," says Jeff Holmes, senior vice president for government at supply chain management software manufacturer Manugistics, based in Rockville, Md. No product is a 100 percent fit, he says.
Compaq's Ross concurs and says he tries to get his employees to meet procurement and contracting officers in every agency where Compaq wants to do business. Companies that try to storm their way into an agency with an argument about why they should be chosen won't get anywhere, Ross says. But if a firm can tell a buyer it understands the agency's mission, "it will get in every time." The same shift has taken hold in government operations. David Sutfin, chief of GovWorks, the fee-for-service procurement arm of the Interior Department's Minerals Management Service, says that when his team is looking for new agency clients for its buying services, he follows a simple four-step process that shows he's speaking the customer's language. First, Sutfin pulls out copies of the legislation that created the new contracting game-some buyers don't even know that reform laws were enacted, he says. Next, he refers to guidance from the Office of Management and Budget giving agencies the green light to use new contracts. Moving quickly to a copy of a relevant court decision that proves the rules have been upheld for agency buyers, Sutfin finishes the pitch with a testimonial from a satisfied GovWorks customer. The routine appears to be working. In just five years, GovWorks has gone from a tiny procurement shop with a handful of employees to a more than 25-person acquisition services seller armed with a high-profile branding campaign and an extensive list of Defense and civilian customers.
Simple cost analysis tells some companies that chasing every piece of business will only run them ragged. Large companies have big bottom lines and need big contract wins. The cost to bid a $20 million job is not much less than to go after a $500 million job, observes Pat Ways, senior vice president for federal sector at systems integrator Computer Sciences Corp. So CSC targets larger GWACs and lucrative single-agency contracts like the National Security Agency's Groundbreaker, an outsourcing and modernization pact for the agency's telecommunications and desktop computing systems. CSC, in an alliance with Northrop Grumman, won that 10-year contract, potentially worth $5 billion, in August after nearly a year of legwork.
Increasingly, firms build alliances to bid on federal business. Most governmentwide contracts allow unlimited partnerships and many have grown too big for one company to handle alone. Companies seek to add extra capabilities to their proposals or to bring on agency-favored firms or small or disadvantaged businesses. Companies also team up to minimize the cost of chasing business. Smaller firms seek partnerships with larger ones in order to win a piece of a contract they never could have competed for alone. Compaq Federal sometimes finds the cost of hunting solo too high, says Ross, so it finds a partner. Compaq and CSC often form an exclusive relationship on a bid. CSC gets Compaq's expertise in quickly delivering respected products, and Compaq gets to piggyback on the efforts of a giant company with a wider range of capabilities than its own.
However, this strategy is risky. When a firm puts all its eggs in one partner's basket, it gambles everything that its new best friend will win the bid. If not, any chance of getting back onto the contract could be dashed. On the other hand, the payoff can be huge, as it has been for Compaq, a CSC partner on the NSA Groundbreaker contract.
Companies also have learned to pick their battles carefully. Robert LaRose, CEO and president of e-commerce firm Integic, says different playing fields require different strategies. Rather than go head-to-head with competitors over huge single-agency contracts, Integic sticks mainly to smaller contracts, schedule orders and the GWACs. In those arenas, as well as in the purchase card market, LaRose's company has experienced its strongest growth.
Agencies work closely with companies to shape solicitations and evaluate their past performance and therefore exert tremendous influence over which firms win business. That has caused some procurement policy-makers to wonder whether government needs to put the brakes on acquisition reform. White House officials and lawmakers want to ensure that all vendors have an equal chance to compete. Angela Styles, administrator of the Office of Federal Procurement Policy, recognizes that orders against GWACs and the technology schedules are vastly popular largely because of their speed and simplicity. But she worries that these methods are so fast precisely because they cut corners on competition, once the very gospel of government contracting.
To buy off the GSA schedules, agencies must solicit bids from at least three schedule holders for every purchase. All contractors on a GWAC theoretically can bid on each task or delivery order. But typically, critics charge, agencies steer their business by soliciting bids from a favorite source and a few other companies likely to be uninterested or unqualified. The "competitors" may be aced out by the cost of doing the work by the fact that it's outside their bailiwick, or they simply may not want to compete against a favored incumbent. "I think it's fair to say," says former OFPP chief Kelman, "that there's a general feeling around town that if you're inclined to award IT services work noncompetitively, sort of in the dead of night, the way you do it is through the GSA schedules." Styles believes that with too little competition, the promise of GWACs and the GSA schedules to deliver better overall deals often goes unrealized. Styles has focused her staff on leading agencies back to the "acquisition basics" by improving regulatory guidance and encouraging procurement officials to take their time before placing orders.
Some worry that the shortcomings of acquisition reform lie not in favoritism, but in a basic misunderstanding on the part of the procurement workforce of how to buy technology in a new market. In a November 2000 report, the General Accounting Office revealed that many Defense contracting officers had failed repeatedly to seek competitive offers from multiple GSA schedule-holders because they were not even aware of GSA's requirements to do so. Concerned observers throughout the market are skeptical that anything will change without a concerted effort by Congress and the administration to re-educate the workforce. As one technology industry attorney bluntly puts it, "Even a reformed idiot is still an idiot."
To help the procurement corps catch up with reform, Rep. Tom Davis, R-Va., chairman of the House Government Reform Subcommittee on Technology and Procurement Policy, has introduced legislation to mandate new acquisition training guidelines for government purchasing officials.
But even as procurement professionals and program managers get up to speed on the reforms of the 1990s, some technology vendors argue that broader changes are needed. James Miller, co-chief executive officer of Avue, a Tacoma, Wash., human resources technology provider, says reform has created new bureaucracies that "encourage a monolithic approach to technology decision-making." Specifically, Miller points to the establishment under the Clinger-Cohen Act of information technology investment review boards within agencies to approve major technology purchases-the kinds of buys for which agencies wouldn't use GWACs, schedules or blanket purchase agreements. Miller and his co-CEO Linda Brooks-Rix say one agency's review board cost an Avue customer $40 million to $50 million in operating expenses by dallying for a year before meeting to review the purchase of Avue's human resources management product.
Most observers agree that though acquisition utopia is far off, the clock shouldn't be turned back on reforms. "Contracting has been fixed," says ASI's Mather. "Acquisition is still screwed up." He refers to the need for more upfront planning of purchases tied to their role in achieving an agency's strategic plan and performance goals. In order to unlock the full potential of reform, government buyers need to better grasp the personal freedom and power to innovate they have today, Mather believes. There's still a tendency for agencies to get lazy and not talk to companies about what they need, says Woods. "That's not smart. . . . The government needs to have more business dialogues, then move toward their acquisition solution." And if the industry has any say in the matter, Woods says, the acquisition workforce will become more involved in business planning than it already is.
But even with concerns over the state of reform, the future of the federal market is bright. The Government Electronics and Information Technology Association, which represents technology contractors, says the Sept. 11 attacks completely changed agency spending priorities for years to come. In October, GEIA predicted that civilian and Defense agencies will spend more than $55 billion on technology in 2004 and nearly $65 billion by 2007. The association has advised its members to be prepared for "fast track" procurements and more sole-source awards to trusted contractors. As FSI President James Kane confidently asserts, while the commercial market withers, "the federal technology market is holding."