Shifting priorities create a sticky competitive landscape

The government's buying habits and a greater emphasis on small-business contracts take market share from midsize companies

As the largest government contracting companies grow and small businesses get an increasingly larger share of smaller contracts, companies in the middle are seeing dwindling opportunities.

For agencies, that situation raises questions about how best to spend the taxpayers’ money. Large firms come with experience and broad expertise — and often a deep bench of partner firms — while small companies have the dual advantage of niche specialization and fulfilling government mandates.

Companies in the middle are “catching the crumbs,” said Trey Hodgkins, vice president of federal government programs  at the Information Technology Association of America’s public-sector group. The association represents technology companies of all sizes.

The midsize companies aren’t as large as the mega-contractors. Lockheed Martin handled more than $13 billion in federal business in fiscal 2007, orders of magnitude more than might come to a typical midsize firm even in a good year.

But they’re large enough to not qualify for the Small Business Administration’s contract set-aside programs or fulfill the goals that agencies have for small-business contracting. They’re in the middle tier of the federal ranks, which is becoming an uncomfortable spot.

A decline in the vitality or number of midsize businesses could have an effect on government buyers, said Anne Reed, president and chief executive officer of Acquisition Solutions. That loss would give agencies fewer options, she said, and weaken the power of competition to drive down prices.

Agencies would also lose a tier of companies that might offer broader skill sets than small companies, but with greater agility to adjust to changes than large firms have, she said.

In fiscal 2007, the top 33 companies that get the most federal dollars continued to increase their share of the market for information technology and related services, according to data from FedSources, a market research firm. Those 33 contractors received 52 percent of $149.2 billion the government awarded in contracts for products and services in fiscal 2007. It has steadily risen from 49 percent three years earlier.

Lockheed Martin remains at the top of the Washington Technology’s 2008 Top 100 list, a position it has held for years. From fiscal 2006 to 2007, it increased its incoming federal dollars to $13.4 billion, up 5.2 percent from the previous year, according to how Washington Technology, a publication of 1105 Government Information Group, rates the agencies.

In recent years, the government’s buying habits have favored large businesses, experts say. Procurements are becoming massive and complex undertakings. The Defense Department directs a large percentage of its dollars to major weapons systems, and the platform companies and biggest lead systems integrators handle that share of business because it’s so large and complex.

In addition, agencies are using indefinite-delivery, indefinite-quantity (IDIQ) contracts, such as the Homeland Security Department’s Enterprise Acquisition Gateway for Leading Edge (EAGLE) Solutions program, which by nature limit the competitive field to companies already on the contract. Similarly, the General Services Administration is ending several governmentwide technology contracts to form one massive $50 billion contract known as Alliant.

GSA already took one stab at awarding Alliant, selecting mostly large contractors and a few midtier companies. However, GSA is reviewing its awards after a federal court found problems with how the agency evaluated companies’ bids.

On the other end of the spectrum, GSA is offering agencies opportunities to work with small businesses through Alliant Small Business, an IT contract set aside for small businesses. GSA offers other governmentwide IT contracts for specific types of small businesses, including those owned by service-disabled veterans and companies in SBA’s 8(a) small-business program.

Small businesses and those small companies that the government deems as disadvantaged are getting a greater share of the IT and services contract dollars than they once did, figures show. They received 26 percent of $149.2 billion, or about $35.8 billion, in IT contracting in fiscal 2006, up 4 percent since fiscal 2004, according to FedSources’ analysis.

In overall spending in fiscal 2006, agencies awarded small businesses $77.7 billion, an increase of $8.5 billion compared to fiscal 2004, according to figures from the Small Business Administration.

Alan Chvotkin, executive vice president and counsel at the Professional Services Council, said companies without a slot on IDIQ contracts lose out on nearly two-thirds of the government’s business. Because of this, many agencies are looking to small businesses that are on such vehicles.

Midtier companies, barred from the small-business set-aside contracts, “can’t compete for a large chunk of work,” he said.

Lawmakers and agency executives are pushing their acquisition employees to send more money to small businesses. This year, the House and Senate passed several bills that affect small-business contracting, including one that requires the Small Business Administration to find veteran-owned small businesses more opportunities through outreach.

Last year, SBA proposed a program that would set aside contracts solely for woman-owned small businesses, and the agency also released a score card in 2007 on how much money agencies sent to small businesses in fiscal 2006. Half of the agencies on the score card earned the lowest score because they missed many of their small-business contracting goals.

The scores frustrated some members of Congress and concerned agency executives. At agencies, the score card grabbed their attention, SBA said. Those executives don’t want their agencies to receive low scores, especially when the scores are announced publicly. Agencies are dealing with it in different ways. The Environmental Protection Agency, for example, added small-business procurement goals as evaluation factors for its program managers’ regular performance measures.

Because of the increases for both large corporations and small businesses, the leftover market share is shrinking, and mid-tier companies are wrestling with that. In the IT market, midsize firms pocketed 28 percent of the contracting dollars in fiscal 2004, and only 22 percent in fiscal 2007, FedSources’ data shows.

“They’re being squeezed more and more,” Hodgkins said.

The three general tiers of federal contracting companies each have ways to serve agencies. Chvotkin described it as a contracting ecosystem.

Small businesses excel at responsiveness, he said. They can adjust quickly to changing needs and bring specialized expertise to niche fields.

Large corporations offer a wide span of expertise. They can tackle major projects and can manage complex organizations in numerous agencies.

Midtier companies fall in between, often offering specialized expertise in relatively narrow areas but with broader experience with at least one or two agencies. Chvotkin said those relationships can be valuable to a large company that wants to enter a certain market, making some midtier firms ideal partners.

Ray Bjorklund, chief knowledge officer and senior vice president of FedSources, said the midtier companies have been positioning themselves for such an end game, expecting to be bought by the larger firms. The larger firms, which are spreading into other sectors of the IT market, recognize that the midtier companies can help them move in.

Although a flood of such acquisitions would take many midtier firms off the playing field, the impact might not be as devastating as it could seem, Bjorklund said. Any innovators and skilled employees that might not stay through a transition would likely start new businesses or join other firms, Hodgkins said.

“In the net view of life, the government isn’t really losing anything,” Bjorklund said.

If trends continue like they have, today’s small businesses might feel a pinch soon, too. Six of the small companies on the 2007 Top 100 list outgrew the small-business size status. And one small company, which was on last year’s list, jumped to No. 35 in the rankings in 2008, from No. 65 in 2007.

Hodgkins said many midtier companies are successful as small businesses often because of the set-aside programs and contracts. But when they break the size threshold, “then they’re literally thrown into the deep end,” he said. When they outgrow the small-business programs, agencies might reconsider their contract because they won’t get credit for contracting with small businesses.

He recommends starting a post-graduate program for the companies that outgrow such programs. Companies, he said, should not feel like victims of their own success. 

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