Let vendors profit
- By Steve Kelman
- Jul 17, 2000
I recently ran into a former senior information technology official who
left the government to take a job in the private sector. I asked him whether
he had picked up any insights from his experience on the industry side.
"I'm still so recently out of the government that I feel a bit like
an outside observer on my new job," he replied. "But there's one really
interesting thing I've noticed, and it's how the people on the commercial
side of the company I work for look down on the people on the government
side of the company."
Why was that? I asked.
"Look, in industry the bottom line is the bottom line. And the problem
is that the federal government side of the business is low-margin business
compared to the commercial side — or even the state and local government
side," he said. "Now, I'm not saying that my new company doesn't have very
good people, but the low margins do mean that the government side of the
business has trouble attracting the best people from the firm. And I'm even
seeing a hesitation sometimes to bid on federal business."
If you look at the annual reports of publicly traded IT firms that separate
their federal and commercial businesses, you'll see that federal profit
margins often run about half what commercial margins run. The major reason
is lower hourly labor rates for IT services.
Government folks frequently complain — justifiably so — that vendors
often do marketing
using key commercial-side personnel who end up not working on the contract.
We're caught in a vicious cycle. The government's unwillingness to pay
what private businesses do means that the government often cannot gain access
to vendors' best personnel. The relatively poorer performance of the federal
divisions of such companies makes it difficult for the government to justify
paying vendors more. And, all too often, we end up in a lose-lose situation:
Vendors make low profits, and the government gets mediocre (or worse) results.
Is there a way out? Unfortunately, there's no big constituency pushing for
shoveling more dough into vendor pockets in the hope that performance will
improve. Instead, the government needs to do a better job of what commercial
firms typically do in exchange for higher payments to vendors: demand results.
Too often, the government pays low and doesn't demand much in return. We
should welcome higher vendor profits, but only when the vendor has delivered
excellent results for the government customer. This would boost radical
incentive-based contracting approaches, such as share-in-savings, per-transaction
deals that don't generate revenue until the vendor has gotten a system up
and running, award-term contracting and incentives for rapid deployment.
They make it possible for vendors to achieve excellent profits, if they
do well by the government. That's a trade well worth making.
— Kelman was the administrator of the Office of Federal Procurement Policy
from 1993 to 1997. He is now Weatherhead Professor of Public Management
at Harvard's Kennedy School of Government.