Buzz of the Week: Competition among industry Goliaths

It seems that every time you turn around a big company is buying another big company to become an enormous company. The latest example of that happened last week when Hewlett-Packard, one of the biggest sellers of information technology products, announced it will purchase EDS, a big integrator. The industry landscape an agency sees when starting a major IT project has suddenly changed significantly.

On its face, it seems like a perfect match — one part products, one part services. Furthermore, in the global competitive world, the union would appear to let HP go up against companies such as IBM, Lockheed Martin and Science Applications International Corp. Thom Rubel of IDC’s Government Insights, a market research firm, said the move would make HP/EDS the second-largest worldwide applications outsourcing company.

“In continuing efforts to drive down cost and improve IT investment value, governments will continue to move away from owning physical assets [such as hardware and software licenses] and move toward services outsourcing,” Rubel wrote.

The buy also is further affirmation of how agencies — and, frankly, companies — are doing business. Increasingly, they buy solutions rather than specific products. Analysts have predicted this merger could accelerate the adoption of the software-as-a-service model, in which organizations do their work in the cloud rather than in a traditional client/server mode.

Yet some see this deal as a bad move for the two companies. Mark Amtower, founding partner of Amtower and Co., said it could make HP’s products less attractive. Furthermore, anyone who has been through a mega-merger knows how difficult these marriages can be.

If nothing else, as competition grows increasingly fierce, agencies now have a bunch of Goliaths competing for their business.


#2:No fraud allowed
The House has passed legislation that closes a loophole in the Federal Acquisition Regulation. The FAR had exempted contractors working outside the United States from ethics reporting rules related to fraud. That won’t continue much longer if the legislation makes it into law.

Regulators told a congressional committee in April that the exemption was a simple oversight, not a trick in favor of contractors. Whatever - the effect is the same. Paul Denett, administrator of the Office of Federal Procurement Policy, promised Congress to hurry a new rule through the regulatory process to fix the exemption/ oversight.

#3: No A-76 competitions allowed
The fiscal 2009 Defense Authorization Act, which the House Armed Services Committee approved last week, would impose a three-year moratorium on competitive-sourcing competitions, in which private-sector contractors can compete for federal jobs.

One of the reasons is that there are at least three separate definitions of inherently governmental, the designation that makes a federal job safe from competitive sourcing. One is in Office of Management and Budget Circular A-76, which regulates the competitions. But other definitions appear in the Federal Activities Inventory Reform Act and Federal Acquisition Regulation, said Alan Chvotkin, senior vice president and counsel at the Professional Services Council.

The process is confusing enough — and scary enough for those whose jobs might be on the line — without the added ambiguities.

#4: No Networx fee changes allowed
Did you hear somewhere that the General Services Administration is planning to cut in half its 7 percent fee for Networx contract services? Well, forget about it. Karl Krumbholz, GSA’s Networx pr ogram manager, said you heard wrong.

GSA will evaluate its fee structure only after agencies have finished switching their telecommunications services from the expiring FTS 2001 vehicle onto the new Networx contracts, he said.

#5: No excessive pass-throughs allowed
The Defense Department published an interim rule last week banning contractors from charging excessive pass-through fees for work that subcontractors do.

Under the rule, contractors can charge administrative costs that they incur in managing the subcontracts and taking that duty off the government’s hands. But indirect costs and additional profit are excessive by the rule’s definition and are not allowed.

Read contractor proposals carefully for hidden costs. They’re much like cable TV bills, only without a year of free HBO service.


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