Today’s times represent an ongoing shift in the federal services marketplace. The changes are broad and include shifts in technology; acquisition methods; and the economics of being a contractor with significant hurdles and barriers to success. These market dynamics will play out over the coming months and years – here’s a rundown of the most significant of those changes now well underway.
1. Cloud Computing Continues to Absorb IT Services Opportunities
Federal agencies have moved beyond the 2010 Cloud-First mandate to adopt cloud computing, and have begun embracing the cloud to support their business and mission objectives. Cloud computing represents a significant change to the way that the federal government had done business. Cloud computing permits the customer to spend less time managing complex IT resources and more time investing in core mission work. Companies that have cloud-based offerings are winning significant business away from providers that have historically supported “in-house” solutions.
An estimated $20 billion of the federal government’s $80 billion in IT spending is a potential target for migration to cloud computing solutions, according to the White House’s Federal Cloud Computing Strategy. The size and scope of cloud programs are becoming larger, driven in part by the success of smaller projects, and by the manifestation of supporting policies, including FedRAMP, a security “stamp of approval” that lets government agencies know a solution has an appropriate and detailed security plan in place. To date, 48 systems have been authorized FedRAMP compliant. With the cost of a FedRAMP certification reaching as high as $300,000 and authorizations taking 9 to15 months, gaining certification is a major commitment for any company. As a result, many firms, especially small businesses, may be locked out of this segment of the market.
Firms that choose not to become FedRAMP certified should look beyond infrastructure to data management and analytics as new areas for growth. Companies focused on the collection, analysis and integration of data into meaningful information will likely benefit from the shift in customer focus away from infrastructure and toward mission support.
2. Expanded Use of Multiple Award and Government-Wide (GWAC) IDIQ Contracts
Multiple Award Contracts (MACs) are a key component of a successful portfolio. Serving as an access point within many customer agencies, MACs drive business, as evidenced by the $115 billion in FY 2014 that were acquired through MACs (Bloomberg, 2015). This represents more than a quarter of all prime contract spending. While MAC usage in DoD has fluctuated over time, within the civilian agencies MACs have accounted for a growing share of contract dollars since fiscal 2007.
Contractors can expect greater utilization of MAC vehicles as the government pushes to curb contract duplication and eliminate overlapping scopes. For example, DHS issued a special announcement June 17 stating that it will not recompete its TABSS MAC contract in favor of utilizing GSA OASIS for future requirements. On the defense side, the Army CECOM is currently in source selection on the Responsive Strategic Sourcing for Services (RS3) initiative, a consolidation of five existing Army MAC contracts. New MAC contracts are also appearing, with NOAA moving forward once again with its Professional and Technical (PRO-TECH) acquisition, and the Department of Labor OCIO office issuing a new MAC solicitation on September 10 for IT engineering services.
The largest of the new MACs is the GSA’s One Acquisition Solution for Integrated Services (OASIS) Contract. This contract expands the traditional scope of GSA GWACS beyond IT into other professional services. The Air Force and the Army have signed memorandums of understanding to use OASIS extensively for professional services needs. To date, the contract has achieved an estimated ceiling value of over $900 million, according to Jim Ghiloni, executive program officer for OASIS. Civilian agencies account for $160 million of these obligations, making it a truly government-wide vehicle. This trend toward professional services MACs, such as PRO-TEC and OASIS, is likely to continue.
Also keep an eye out for GSA and OFPP led initiatives in Category Management (formerly called Strategic Sourcing) that attempts to help the federal government buy smarter and more like a single enterprise by eliminating redundancies, increasing efficiencies, and delivering more value and savings from the government’s acquisition programs. This could significantly impact future acquisition approaches.
3. Increase in Small Business/Socioeconomic Set-Aside Opportunities
Small business continues to be big business in the federal services market. Small business prime contract awards have increased for the last three fiscal years and in FY 2014 accounted for $91.7 billion, nearly one-fourth of all federal contracts awarded. In addition, large business prime contractors subcontracted an additional 33% to small business.
MACs have also proven solid ground for small businesses, which capture more than 40 percent of all MAC dollars in fiscal 2014 (Bloomberg, 2015). One aspect supporting this market share growth has been a rule change permitting contracting officers to set-aside contracts under the GSA Schedule program. Another is the small business companion contracts awarded as part of large MACs, including GSA Alliant, GSA OASIS and NIH CIOSP. For example, in FY14 CIO-SP3 awarded $849 million in contract awards. Over 54 percent, or $461 million, went to the Small Business contracts. Similar trends are also appearing under the GSA OASIS contract.
Keep any eye out for the SBA Small Business Mentor-Protégé Program. SBA issued a proposed rule in February to create a small business Mentor-Protégé Program covering Service-Disabled Veteran-Owned (SDVO), HUBZone and Women-Owned Small Business (WOSB) participants. The program is modeled after the existing mentor-protégé program for 8(a) program participants. This was done to implement provisions of the Small Business Jobs Act of 2010 and the National Defense Authorization Act for Fiscal Year 2013. The program offers benefits for both small and large businesses alike.
4. Reshaping of Market Players in the Federal Services Arena
The federal services market is under transition as a result of multiple factors including: reduced operating profit due to a hyper-competitive market; continued use of contracting strategies that emphasize price over technical proficiency; softening demand for federal services (primarily driven by drawdowns in military zones); congressionally mandated spending caps; and increased spending in vertical markets such as health care and cybersecurity.
As a result, we see increased volatility and changing market focus among companies. Firms are looking at ways to create value and differentiate themselves in the marketplace, and for public companies in particular, ways to increase operating profit in a maturing federal services marketplace.
The largest shift has been the separation of IT services from other core business segments among large firms. This shift started in 2013 when SAIC split into two segments creating two separate companies: an IT and technical services unit (SAIC) with a low-cost structure, and a science and technology solutions unit (Leidos) to focus on national security, engineering and health. Following not far behind, CSC in June announced its intention to split its federal business from its commercial business, and later announced a merger with SRA to create one of the largest pure play IT services firms in the market. Even bigger news came in July when Lockheed Martin, the largest federal contractor, announced the planned divestiture of its Information Systems & Global Solutions (IS&GS) business unit with annual revenues of $6 billion. Lockheed indicated in its statement that following recent shifts in market dynamics they will explore whether the businesses can achieve greater growth and create more value for customers and shareholders outside of the corporation. These actions may be a harbinger of things to come.
We cannot know what the future will hold. But we can be sure that in the federal services marketplace, times are changing. And firms that want to grow and succeed will need to embrace and adapt to those changes to remain relevant and profitable going forward.
About the Author: Mark Abel is the Founder & CEO of Castlemar Consulting, a marketing strategy firm that helps federal contractors by delivering industry proven marketing and business development services to achieve new business growth. To learn more about Castlemar, visit www.castlemar.com.
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