2012 is fast approaching, and with it comes big changes in the Federal IT industry. WashingtonExec is giving local executives the opportu nity to share their thoughts on where they see the government contracting industry headed. Leaders of the industry were asked a series of predictions questions focused on challenging issues such as cloud computing, healthcare IT, defense and so forth.
Barry Landew, Managing Director at Wolf Den Associates, discussed his outlook for 2012: more M&A activity due to “anemic organic growth,” successful companies will have large “brand awareness” and the contract protest environment is in need of a change.
“For the first time in memory, I suspect that at least 1/3 of federal contractors will shrink organically,” said Landew.
Barry Landew: Another difficult year – tight budgets, race to the bottom given Government’s increasing tendency toward Technically Acceptable Low Cost (TALC) procurements, fewer new starts, more onerous restrictions on fee/profit, continued in-sourcing in the intel and SETA markets, increased protest activity, and continued personnel turbulence as companies strive to reduce costs and eliminate “nice to have” staff functions. These headwinds are immutable in today’s budget environment and will likely last for a few more years. Companies with bureaucratic, process-oriented cultures might as well give up now. Companies will need to be lean (perhaps even ultra-lean) to hit the price points needed to win and maintain respectable margins. As if this wasn’t enough, industry will continue to be vilified on Capitol Hill as the excesses and mistakes of a few are assumed to apply to all contractors. For the first time in memory, I suspect that at least 1/3 of federal contractors will shrink organically.
WashingtonExec: More M&A Activity? More IT budget cuts?
Barry Landew: The need to do more with less (not to be confused with “less for less” which is the unmentioned reality of many recently awarded, low cost programs) will drive capital for labor substitution and will cushion IT budgets from severe cuts. But the national debt and current deficit problems are so acute that IT spending is likely to decline, in absolute terms, for the first time in 50 years. The declines will be modest, but will cause most contractors to struggle to grow organically. This in turn will sustain a high rate of M&A activity as companies leverage their balance sheets and resort to acquisitive growth to compensate for anemic organic growth.
WashingtonExec: What shape will collaboration take between industry and government in addressing tough issues: Healthcare, Defense, Cloud, etc?
Barry Landew: Virtually every Agency talks the talk when it comes to partnering with industry, but few walk the walk. The record is spotty when it comes to true collaboration of Government program and procurement officials with industry. The mindset that industry only cares about maximizing their revenue and profit – not about delivering value at a fair price – persists, with Contracting Officers focused more on protecting the Government than on structuring procurements and selecting contractors who can deliver the best services and solutions.
There is a compelling need for sharply differentiated offerings to stand out among peers. It won’t be enough to just rebadge incumbents or rely on past performance. The future belongs to companies that have sharply differentiated offerings based on brand awareness, deep partnerships, innovative delivery models, unquestioned thought leadership via in-house luminaries, and superior proposal skills. Solutions that can demonstrably reduce lifecycle costs will be especially attractive. Companies will need to be known for something…ideally offerings/solutions that directly respond to customer pain points.
WashingtonExec: Do you have a New Year’s Resolution for what Government should do differently next year to improve contractor support?
Barry Landew: The current protest environment is corrosive to competition and industry/Government partnership. While there are certainly situations that deserve redress via protest, the current asymmetric risk/reward invites frivolous protests that serve no one’s interests. A few common sense changes to GAO’s protest regs will go a long way – new awards should not be subject to stays (so that incumbents lose the incentive to protest on any grounds to preserve their revenue stream), a losing protester should be liable for the winner’s cost of defending their protest to discourage frivolous protests (up to a stipulated ceiling), agencies should be precluded from adding protesters to multi-award ID/IQ and GWAC contracts unless a dispositive determination of agency error has been made, and the current 100 day GAO timetable should be replaced by an expedited 30-day timetable with limited discovery if all parties with standing concur. In less than a month, a small committee composed of reps from the Federal CIO Council, GAO, OMB, and industry could recommend tangible changes to protest rules that would inure to the benefit of the Government and industry alike. It’s no different than the collaborative process with industry that works well in developing and codifying standards.