By Steve Kelman

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A sobering take on government contractors: What can be done?

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In my last blog, I presented the candid observations of a long-time, senior-level industry executive in the government IT market about problems contractors have meeting agency customers' desire for innovative, cutting-edge solutions. Government contractors, my source argued, are oriented to responding to RFPs rather than seeking innovations, and are loathe to risk their own funds in developing innovative solutions from the beginning.

The post got a lot of very interesting and thoughtful comments from readers. At the risk of being unfair, I thought some posts shoed a bit too much of "don't blame contractors, it's the government's fault" for my taste -- I would have preferred if people had looked at themselves in the eye a bit more instead of saying that government wasn't interested in innovation or that auditors wouldn't allow contractors to spend serious money on R&D. My own view is that a culture of "respond to RFPs, don't think for yourselves" is not inevitable for any government contractor. Alternative success models are possible.

It is, however, correct to state, as a number of responses did, that there are real limitations to the ability of contractors to be the source of innovations for which the primary market would be commercial rather than governmental. (Cloud computing is an example, but most of what Silicon Valley does is of this type.) It is not cost-effective for a government contractor to put the necessary resources into an innovation that would serve the commercial market primarily and the government market only secondarily -- it is rational, instead, for these investments to be made by commercial firms that can spread their investments over both commercial and government sales. Cutting-edge technologies with commercial application will and should continue to come from commercial firms; what one might reasonably expect from government contractors is to have an innovation mindset. That way, they can apply to military or government-unique missions the technologies inspired by cutting-edge commercial tech.

So what is to be done to help government with cutting-edge tech?

I asked my source what he would do about this problem if he were newly appointed as CEO to a big government IT contractor. He volunteered two things: "First, I'd establish a small group of my top innovative technology, business and finance people and task them with identifying the major innovative growth market areas, the top commercial companies in each market segment, and a business plan to address how we should position to grow in each. I would also tell each of my major business unit senior managers to do the same for their own business units."

Second, he said, "I would personally visit with each of my company's top 10 customers and ask them what they need in the way of innovation to meet their specific mission needs. I would take this information back to my senior and unit executives, and begin the process of aligning our capabilities with the major innovative needs of my customers and the major growth areas for the future."

Assuming that many cutting-edge technologies will continue to come from Silicon Valley-type commercial firms, are there things the government can do to encourage more such firms otherwise reluctant to do so to sell to the government, other than exhortation. (I am probably more inclined than most to believe that appeals to patriotism are not meaningless and should be pursued as one avenue.)

I also believe that marketing to them about the government's eagerness to work with them can help. But more concrete approaches are also called for. To the extent that the hesitancy of Silicon Valley firms to sell to the government is driven by the negative reality of high costs of marketing to government and high startup costs to learn about the regulations and other peculiarities of how the government does business, there would seem to be a fairly ready solution: Silicon Valley firms can outsource these responsibilities -- most notably marketing to the government and learning about the government's procurement system -- to government contractors. In other words, the Silicon Valley companies can sell to the government as subs rather than primes.

From a number of perspectives, this is not an ideal relationship from the point of view of the Silicon Valley company, but it may often be, all things considered, the optimal one. Of course, such prime-sub relationships between government contractors and Silicon Valley companies already exist; my suggestion, both to government customers eager to get these companies to participate in the government marketplace and to the government contractor primes, is to become proactive about establishing such relationships. At a minimum, this could be a transition stage for the Silicon Valley companies to get their federal feet wet, before graduating to prime status once they have the knowledge to sell directly.

The second problem is high levels of government oversight, in the form of pre-award disclosure of one's costs, and compliance with government cost accounting standards. There is also the possibility of post-award audits, which arise when significant modifications – typically for military use -- are made to the off-the-shelf items (COTS) that the Silicon Valley companies produce. (None of this should apply when the company is selling the government COTS or COTS with small modifications, though the details of when the government imposes one or another form of compliance requirements are complicated and often not clear-cut.)

Compliance with such requirements, when imposed, is not cheap, takes a lot of startup effort, and creates legal and reputational exposure that commercial companies dread.

So one could imagine a solution whereby the Silicon Valley company sold its off-the-shelf products to a government contractor and had that contractor, acting as the prime – which has its own systems in place to comply with such requirements -- do the modifications. The prime would then, in effect, be acting like a COTS systems integrator.

The problem with this solution is that the prime will typically need access to technical information about what is inside the COTS black box in order to perform modifications on it. Yet that is part of the producer's intellectual property, which the producer typically will not want to reveal, including to a prime.

For this reason, producers typically do such modifications themselves, which is fine if they already comply with government oversight requirements. But the whole reason to consider the option of having the prime do the modifications is for situations where the COTS producer does not have the systems to comply with government oversight requirements.

As I understand it from conversations with people familiar with this problem, occasionally primes do undertake modification work on items produced by subs. I was told this is very situation-specific. My suggestion would be for the Silicon Valley companies to understand (again) that fear of sharing intellectual property may make government sales impossible when major modifications are required. Perhaps there are some kinds of modifications that create only minor intellectual property risks or where the opportunities for Silicon Valley companies are large enough to make them willing to trust intellectual property protection to a contract with the prime.

Government customers and government contractor primes should try to get a dialogue started here, based around how important it is for the government to get access to the Silicon Valley technology that would need to be modified.

Again, comments are welcome.

Posted by Steve Kelman on Sep 15, 2016 at 5:55 AM


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