Survival in competitive IT environment demands teaming deals
- By Kevin R. English
- Jul 14, 1996
Having good, strong teaming relationships has never been more important in the federal information technology market than it is today, especially for smaller companies. Most of us understand this, but we've never really looked closely at why it is happening or at the long-term implications. A quick review of the numbers reveals some compelling trends.
The federal IT market is about $20 billion. Of this, 70 percent is controlled by the 100 largest industry players. Of the remaining 30 percent, 8(a) businesses account for about 10 percent. So if you're not one of the big guys or an 8(a), you're left with 20 percent of the total pie. Still, at $4 billion, it's a pretty big pie - that is, until you start to break it down further.
There has been an increasing trend for the government to award technology contracts on a fixed-price basis. That's great for large companies, which can capitalize on economies of scale to drive down their overhead. But smaller companies - the ones in that 20 percent of the pie - generally don't have that advantage and often prefer the less-risky cost-plus contract option. Of the contracts being awarded, only about 15 percent are falling into the cost-plus category.
What that means for smaller companies unwilling to enter into teaming relationships - or unable to bid fixed-price contracts with a competitive cost structure - is very clear: The pie just got a lot smaller. What is left is only 15 percent of the $4 billion slice, or $600 million. Looking at the competition in this segment should give any small business pause. Why? Because of the simple fact that competition is increasing, not decreasing. The 8(a) program alone graduates almost 200 new technology companies a year, and there are many hundreds more non-8(a) firms. Even given the high failure rate of small high-tech companies, conservatively, the number of companies competing in this small piece of the federal IT market exceeds 1,500. Some simple math shows that each one has an average market share available to it of about $400,000. These are not the numbers on which a strong business plan is based.
The answer? Companies must change the way they approach federal business opportunities - and do it soon. As the full impact of recent changes in the procurement regulations sinks in, additional opportunities may open up for small businesses, but for now, if you do not fall into the top 100 or the 8(a) program, you have some fundamental decisions to make. To access the largest part of the market - that 70 percent slice - strong relationships will need to be established with the industry's largest players. That means good inter-organizational relationships, strong business development skills and a focus on program marketing. In addition, companies that are averse to giving up the control associated with being a subcontractor - and that still want to prime - need to get very competitive in that 20 percent of the market. That means the obvious things, such as reducing fixed costs and associated overhead expenses and accepting smaller margins in an increasingly competitive environment. To be successful with this strategy, a focus needs to be put on engaging more fixed-priced efforts, which probably means more risk. You'll need to make sure that you understand your costs of doing business, have creative pricing methodologies and, most importantly, can effectively evaluate the risks associated with each opportunity.
If you aren't one of the big guys, you need to change the way you do business. A focus on teaming and establishing long-term strategic relationships has never been more important. Winning selected prime contracts in your areas of strength may be possible, but the lion's share of the market opportunities will only be open to companies that are willing to establish teaming relationships with their industry peers.
English is a federal program manager for a Virginia-based information technology consulting firm.