Feds find a buyer's market
- By Michael Hardy
- Apr 07, 2003
A few years back, Jonathan Wolf believed he had a solid, lucrative road map for his company, Gold Wire Technology Inc. in Waltham, Mass.
The pulse of the Internet pounded dramatically then, with Internet service providers springing up almost daily. Wolf had his finger on that pulse and eagerly spread the Gold Wire gospel: ISPs that had any ambitions for growing and staying in the game would need to automate their process for signing up new customers and similar tasks.
Gold Wire signed contract after contract for its technology to handle that automation, with giants including PSINet Inc., Qwest Communications International Inc. and Teleglobe Inc. among their first-tier customers.
"We got off to a good start, and just two months after we introduced the product, our first customer filed for bankruptcy," Wolf said. Later, "We had a $1 million deal we had negotiated with Qwest, had a signed letter of intent, and just two weeks later, they fired all their contractors, just dropped the ax and that was that. That was the signal that there wasn't really any hope to continue in this vein and that we needed to find a new avenue."
For a time, Wolf wondered if Gold Wire would end up another casualty of the so-called New Economy, forced to shut down as its revenue sources dried up.
Rather than fold, the company regrouped and came up with a new business strategy, this time targeting the federal market. Having repackaged some of its technology into a hardware appliance that handles network configuration control, Gold Wire now earns half of its revenue from government agencies.
It's a move that many private-sector companies are making, some with less deliberation and, in many cases, less success. Their commercial customers have slowed or halted their technology spending, while the government, spurred by a multitude of initiatives and security needs, appears to be a more fertile field.
Indeed, federal information technology spending has been growing by double digits for the past several years — 17 percent from 2002 to 2003 — and agencies are being pushed to outsource much of their work to private-sector companies.
"The commercial IT sector has been down for some years now," said Larry Davis, president of Aronson Capital Partners in Rockville, Md. The firm specializes in mergers and acquisitions in government-focused businesses. "If you look at the government sector, you see double-digit growth. You've got a very large market growing at a decent rate."
But as elsewhere, there are no guarantees in the federal market. The first sign that even the government may be clamping down on spending came when the Bush administration requested only $59.4 billion in IT funding for 2004. That is a mere 2.2 percent increase from this year's $58.1 billion. By comparison, the Aberdeen Group predicts that large companies will increase their IT spending by about 2.7 percent during the next year.
Nevertheless, an increasing number of companies are seeking spots on the General Services Administration's Schedule 70, which includes IT products and services. The number of vendor contracts has grown from 3,000 to 3,750 in the past 18 months, said Neal Fox, assistant commissioner for commercial acquisition at GSA's Federal Supply Service.
"Five years ago, we had less than 1,000 vendors," Fox said. "We are seeing some acceleration even from that rapid pace." GSA gets an average of six IT offers a day and has more than 500 under consideration, he added.
However, some analysts warn that vendors could turn the federal market into another gold rush, like the one that led to the enormously unrealistic expectations of Internet companies in the 1990s. The federal government doesn't have as much gold as some companies may believe, said Bruce Klein, vice president of Hewlett-Packard Co.'s federal division.
"A lot of companies think [the market is vast] because they're reading in the paper that $40 million is going to homeland security," he said. "Then they find out there's not $40 million, that they're not spending much of anything. A lot of those companies are gone already. If you don't understand this marketplace, it's tough to be successful."
Fortunately, the government has taken steps to open the door to private companies by adopting commercial business practices at agencies and creating contract vehicles that are relatively easy for companies to join. It's easier now to find information than in the past, and a long line of former government procurement officials have become consultants who can help companies succeed in the federal marketplace.
Despite the inviting face, though, the government remains a very different world from the private sector, a lesson many companies learn the hard way.
"Commercial companies are stunned by sales cycles that take 18 to 24 months," said Chip Mather, senior vice president of Acquisition Solutions Inc. "Even the simplified process is really difficult. It's only easy if you know the game."
The GSA schedule system — which lists contracts with preapproved vendors — is a common starting point for companies trying to break into the federal space. Being listed on a GSA schedule or another governmentwide acquisition contract does give companies a head start, but it's only a "hunting license," consultants say.
Knowing how to hunt with the license is a challenge, especially for smaller firms, said Rita Perlman of the U.S. Chamber of Commerce. She runs a matchmaking program for small businesses, launched by the Chamber of Commerce, the Small Business Administration and HP.
"For a lot of them, it's very intimidating," she said. "They don't know how am I, a little guy, going to make an impression on the government. What they don't understand is that it's not an effort you're going to get payback on in the near term. You need to sow the seeds today to get payback six months or eight months down the road."
"It's very difficult for a small company to get exposure, to get visibility," said Thomas Bascom, founder and president of Linkspace LLC in McLean, Va. Linkspace turned to the federal sector after the Sept. 11, 2001, terrorist attacks, believing the company's software for linking and connecting related data points from different sources would be useful in the anti-terrorism effort. But he's had no success building interest in his product.
Another common mistake companies make is thinking of the government as a vertical market in the same sense as health care or manufacturing, said consultant Robert Guerra.
"Companies have to start understanding the mission focus of these agencies," he said. The Environmental Protection Agency's mission, for example, is not the same as the Drug Enforcement Administration's. "They're different entities even though they're both part of the government."
Julie Holdren, who had more federal business opportunities than she could handle at a technology company she ran in the 1990s, launched a new firm last year to sell consulting services, data management and custom software solutions to the government. But by then, the vein of gold had grown thinner, and now it's harder to find opportunities.
"All of the people who work on the commercial side are now flooding into the federal sector," said Holdren, founder of Twin-Soft Corp. in Washington, D.C. "You have people chasing business who weren't there before."
Unlike many others, Holdren brings some experience to the table. The biggest barrier facing many companies trying to break into the government market is their lack of expertise, according to consultants and federal procurement officials.
In many cases, smaller firms should not approach agencies but instead talk to systems integrators and other large companies about subcontracting, said Tom Johnson, president of Business Research Services Inc., which gathers information on contracting opportunities for small businesses.
In good economic times, he said, large companies spread their business development efforts into both the commercial and government sectors. "We come to tighter times and big companies need more of their federal business and they start coming back in," he said.
A New Openness
For its part, the government is more open than ever to new faces and innovative ideas, said Gary Krump, deputy assistant secretary for acquisition and materiel management at the Department of Veterans Affairs and vice chairman of the Procurement Executives Council. But federal buyers have little patience with companies that don't bother to learn how the system works.
"What [companies] need to do if they don't know how to do business in this sector, they need to hire somebody," Krump said. "I get people coming in all the time who don't understand the process. They have no clue how to get started. They don't know how to make the contact, and when they do make the contact, they don't know what to do with it."
The VA, like most major agencies, employs procurement counselors to help newcomers ease into the process, Krump said. However, there's no substitute for hiring some experience, if the company doesn't already have it.
William Blocher, a consultant with Access Solutions Inc. in McLean, Va., said companies that come to him looking to enter the federal market either think it is easier than it is or are frustrated by how much there is to learn.
His advice is to learn it anyway. "Government contracting is a very good business to be in, but you've got to go to school for a while," he said.
Many companies that have successfully made the move echo those sentiments. It's not as easy as it sounds, however, said Mike Barbee, president and general manager of Wam!Net Government Services Inc. in Herndon, Va. Adding a government market division to a firm that has previously only worked in the commercial space requires a tremendous change in culture.
"One thing I think is different is what I refer to as rigidity of requirements," he said. "The government wants what it wants, and there doesn't seem to be as much flexibility as there is on the commercial side. That's tough for some commercial companies to understand."
Wam!Net was focused on the commercial market when it opened its doors in 1996. It made the move to the government market earlier than many — in 1998 — and won a spot on the Navy Marine Corps Intranet project as a subcontractor to EDS.
The company hired Barbee a year later to run the NMCI project and expand the government side of its business. Barbee, who has 20 years of experience in federal contracting with Lockheed Martin Corp. and other aerospace firms, determined that the Wam!Net sales team didn't understand the government. So he hired Jay McCargo, who had worked in federal business development at Verizon and Unisys Corp., to serve as vice president of business development.
"We brought in a number of people of that caliber who understood the government market and had an existing Rolodex of experience," Barbee said. "There was a tremendous amount of resentment. There were people who resented new people coming on board, and there was a culture in Wam!Net that was a commercial culture."
Delving into the federal sector has been successful for the company. It's a subcontractor to Computer Sciences Corp. on the Groundbreaker contract at the National Security Agency. The company's government revenues have grown from one-third to one-half of its total revenue and will account for two-thirds of the company's income by the end of 2003, Barbee said. Of the company's 1,050 employees, 750 work on the federal side.
It helps to have some expertise in place from the beginning, a luxury not all firms have. Chris Westphal, Bennett McPhatter and David O'Connor brought federal experience with them in 1998 when they left United Information Systems Inc. to create Visual Analytics Inc. in Poolesville, Md. The firm's software mines databases to find related bits of information.
Because they had the experience, they knew from the beginning how to create recordkeeping and accounting systems that comply with federal rules, said Westphal, the company's chief executive officer.
The experience helped land some small government jobs early on, he added, which is important for winning future work. It builds a record of "past performance," which more and more contracts require vendors to show.
A lack of experience can be a serious liability, said Acquisition Solutions' Mather. He recalled a recent experience with a software vendor and an agency, both of which he declined to name.
"The government sent them a contract to sign, and the company's attitude was, 'I'm not going to sign that, you have to sign my contract,' " he said. "The company's attorneys took 58 exceptions to 55 provisions. If the agency hadn't been hot for that software, they would have been dropped like a hot potato. They lost a lot of goodwill in the sales process."