Booming Business in Selling Services

elling supplies and equipment to the federal government is so 20th century. Welcome to the 21st century, where it is all about services. Just look at the buying patterns. Between fiscal 1990 and 2000, purchases of supplies and equipment by federal agencies fell by $25 billion, while purchases of services increased by $17 billion. Services now account for nearly 43 percent of all federal contracting, the largest spending category, according to the General Accounting Office. The shift is most evident in information technology, where service contracts grew from $3.7 billion in fiscal 1990 to $13.4 billion in 2000. Another big push has been in the area of professional services, such as administrative and management support, which catapulted from $12.3 billion in 1990 to more than $21 billion in 2000. "We are not really sure what is driving the professional services contracts," says David Cooper, director of acquisition and sourcing management at GAO. "We are seeing a number of studies being mandated by Congress, and those get contracted out." The trend in information technology is easier to understand. The market shows an insatiable appetite for new technology. Products and software are evolving at the speed of light, but the downsized federal workforce is not equipped to deal with some of the government's pressing technology needs. "We are seeing all kinds of contracts awarded to maintain things like help desks," Cooper adds. Indeed, one of last year's largest contracts fits that bill-the Navy Marine Corps Intranet project. Under the five-year, $4.1 billion contract, Electronic Data Systems will supply and maintain 350,000 desktop computers and 200 networks. EDS also will staff a help desk. That's not to say the government has stopped buying big-ticket items. During the next five years, for instance, the Air Force will spend $65 billion to buy and develop a new air fleet. Aircraft spending will account for nearly half the Air Force's $155 billion acquisition budget over that time. Overall, the federal government continued in 2000 to increase its outsourcing budget. Total expenditures on prime contracts in excess of $25,000 totaled $204 billion last year, up significantly from $185 billion in 1999 and $182 billion in 1998. The Defense Department, as usual, topped the list, accounting for 65 percent of contracts, down slightly from 67 percent in 1999. Among civilian agencies, the Energy Department held onto its title as biggest spender, shelling out nearly $17 billion to contractors. NASA was second, with almost $11 billion in spending. There was little movement among the top contractors on the list this year. Stalwarts Lockheed Martin, Boeing and Raytheon retained their positions atop the list. By acquiring Litton Industries, Northrop Grumman edged past General Dynamics and moved up to fourth on the Top 200 list. Northrop acquired Litton for $5.1 billion in cash and assumed debt earlier this year. The leapfrog may continue next year, however, as both Northrop and General Dynamics are in hot competition to buy Newport News Shipbuilding. As of early July, General Dynamics had reached a tentative all-cash deal to buy nearly 19 million shares of Newport News stock at $67.50 per share. Northrop offered a mixture of cash and its own stock. The total price for both companies' bids is $2.6 billion. The government is reviewing both bids for possible antitrust and monopoly violations.