As economy slows, vendors vie for federal contracts

As economy slows, vendors vie for federal contracts

Government demand for information technology hardware, software and services remains strong despite economic downturn

BY DIPKA BHAMBHANI | GCN STAFF

The economic downturn is drawing new vendors into the federal market while securing the foothold of established contractors.

Two years ago at the height of the dot-com phenomenon, the government market seemed far less attractive. Federal information technology initiatives were perceived as unprogressive, slow and bureaucracy-ridden.

Times have changed. The president's budget proposal allots more funds for IT development in 2002 than it has for the last three years.

'What was once perceived to be bad fruit is good fruit,' said Chris Penny, senior analyst for IT services at Friedman Billings Ramsey, an investment research firm in Arlington, Va. Although government work has always been steady, it hasn't been considered dynamic, Penny said.
'I think we've done a complete 180,' he said.

More attention

Small electronic-business consultants such as Proxicom Inc. of Reston, Va., and Scient Corp. of San Francisco are spending more time bidding for government contracts than ever before, Penny said.

Meanwhile, a large vendor such as ACS Government Services, a subsidiary of Affiliated Computer Services Inc. of Dallas, is projecting government revenues of more than $1 billion for fiscal 2001, an increase of $690 million over fiscal 2000. ACS officials expect about a 20 percent annual growth in government revenue thereafter.

The company manages about 300,000 government desktop seats at large agencies.

Computer Sciences Corp. has reported a 9 percent federal revenue increase for fiscal 2000. DynCorp of Reston, Va., has stated 1999 revenue of $1.3 billion, 93 percent of it from federal contracts.

Although the amount went up, the federal percentage dropped from 95 percent in 1998, and 97 percent in 1997.

Lee Allen, ACS director of corporate communications, said government business makes up almost half of the company's total revenues. To maintain its position in the federal market against increased competition, he said, ACS has reorganized its government team and changed its name from ACS Government Solutions to ACS Government Services.

The president's fiscal 2002 proposal allocates nearly $45 billion for IT, up from $41.2 billion in 2000. Although many agencies are grappling with IT security and privacy issues, others are only beginning to work on enterprise architectures and electronic government, the document said.

'Commercial spending has fallen off a cliff,' Penny said. 'All of a sudden the piece of pie the government owns is now much bigger.'

ACS' largest federal contract, worth more than $165 million, is under the General Services Administration's Seat Management Program. Its second largest, with the Education Department, is worth about $143 million, and ACS also has nearly $57 million in Air Force contracts.

Jerry Williams, chief of the Financial Systems Branch of the Office of Management and Budget's IT office, said more vendors are entering the public marketplace, and more government money is available.

Based on estimated contract values, market researcher Input of Vienna, Va., in an August 2000 report, gave the federal IT marketplace a $38.5 billion price tag for fiscal 2000. Rising at a compound average rate of 5 percent, the market will swell to $49.1 billion by 2005, Input predicted.

Scott Spehar, vice president of federal sales for Cisco Systems Inc. of San Jose, Calif., said the company has seen steady growth in federal business, which is up 34 percent in fiscal 2001 from the previous year.

'There's no question that the private space is having troubled times, but the federal government is always here and loaded with opportunities,' he said.

One reason for so much opportunity is OMB Circular A-76, which mandates that if it costs agencies less to outsource products and services, they should. Although the latest update of the circular is nearly 20 years old, Williams said, it's not outdated. 'Folks are probably 76-ing it more,' he said.

Turning point

In the years since the government began downsizing and the market matured, agencies have looked increasingly to the commercial sector. An OMB official who asked not to be identified said the current budget proposal represents a turning point, giving vendors more flexibility in projects with performance-based contracting and cutting down on micromanagement by agencies.

Special order

'Basically, you prescribe the outcomes you want, and the contractor designs the mechanism,' he said.

Some market researchers estimate that outsourcing revenue will total $6.9 billion in the next five years because of requirements in the Federal Acquisition Streamlining Act of 1994, the Information Technology Management Reform Act and the Federal Acquisition Reform Act. The laws call for heads of federal agencies to link IT investments to what they achieve.

According to Input's Federal Electronic Government Market 2001-2005 report, e-government initiatives will account for 30 percent of the fiscal 2005 IT budget, up from 24 percent in fiscal 2001.

Larry Vale, vice president of external communications for Keane Inc. of Boston, said his company's $113 million in federal and state revenues comprise about 13 percent of its total business.

Keane recently built an online physician information system for the Veterans Affairs Department and won a $54 million contract to manage applications for the State Department under GSA's Millennia contract.

Keane's history in outsourcing and legacy systems integration, recently out of fashion as 'old economy,' has now become a competitive advantage, Vale said. More vendors are bidding for the same contracts, he said, but the larger ones thrive while the smaller ones team up to survive.

New entrants, however, face significant obstacles, Vale said. 'They tend not to have GSA or agency schedules, and you need a whole different accounting system' to do government business, he said.

Some smaller companies merge with larger ones as competition heats up. ACS in March acquired Intellisource of Vienna, Va., a $700 million desktop management company that was already working for NASA and the Federal Aviation Administration under the Outsourcing Desktop Initiative for NASA contract. ACS has also acquired other small companies.

'The smaller ones aren't able to go after the megadeals with the same kind of strength and resources,' ACS' Allen said.

Size matters

'Larger companies are in a much better position than they were a few years ago,' Vale said; for small competitors, 'it's like turning a destroyer with a motorboat.'

But Cisco's Spehar said small companies can thrive in the federal market because the government has always tried to maintain a level field for all contractors.

Small businesses could compete independently in the federal market if they weren't at the mercy of larger prime contractors, said Jere W. Glover, chief counsel for the Small Business Administration's Office of Advocacy.

A study by the advocacy office, The Impact of Contract Bundling on Small Business: FY 1992-FY 1999, calls contract bundling by large companies a trend that hurts small ones.

'Historically, small businesses have been vital participants in all sectors of government procurement, but the process of bundling reduces the number of small-business prime contractors,' Glover said in a statement.

The average bundled contract was valued at $8 million in fiscal 1999, a 21 percent increase over the previous eight years.

In fiscal 1999, large businesses received 67 percent of all prime contract dollars and 74 percent of all bundled dollars. Small companies were awarded 18.7 percent of all contract dollars and 15 percent of bundled dollars.

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