By Steve Kelman

Blog archive

Barriers to entry in the federal marketplace -- they're not what you think

(Image: jorgen mcleman/Shutterstock)

Certainly at least since the 1990s, there has been interest in and around the contracting community in the difficulties new entrants, particularly small businesses, face in participating in the federal marketplace. The author Steven Brill, in his 2015 book on the Healthcare.gov fiasco, refers to the clique of contractors competing for federal business as "the usual suspects," which -- depending on how old one is -- denotes either the 1995 film with that name starring Kevin Spacey or a famous line from the end of Humphrey Bogart's Casablanca.

The worry is that these "usual suspects" are stodgy and overpriced, and could use a strong dose of competition from new players. In its most radical forms, this criticism is overblown, but I think it almost certainly true that not enough new blood infuses the world of government contracting.

There is also a traditional story explaining why new contractors face these barriers when trying to enter the marketplace -- I first heard it when I came into government in the early 1990s. That story has two main villains. The first is special "socio-economic" requirements imposed on government contractors that do not exist if a business did not sell to the government -- so having these requirements is a disincentive to participate in the market in the first place. The canonical example was affirmative action requirements going beyond EEO legislation imposed only on government contractors by a President Lyndon Johnson-era executive order, which required companies to develop affirmative action plans with goals and timetables that often came close to quotas. Other examples are the plethora of requirements on government contractors to promote a drug-free workplace or to prohibit the government from buying from companies that use child labor.

The second barrier was various requirements for contractors to submit to the government information about their costs that were to be used to help the government in negotiating better prices, along with provisions making contractors subject to government audits of the information submitted. If those audits identify problems with the information, criminal penalties are possible.

The narrative about the negative effects of socio-economic requirements was a mainstay of criticism of how government contracting worked coming out of the professional procurement community itself, both government and industry. Whenever organizations of contracting professionals were asked to make suggestions, in connection with government commissions or whatever, proposals to reduce "government-unique" socio-economic requirements came high on the list.

These criticisms were seldom successful, because it was always too politically attractive -- especially but not exclusively in Democratic administrations -- to add on ever-new requirements for what seemed to be such attractive causes. When I was in the government, I would always counter the call to use the "enormous buying power of the government" to promote such causes by saying that the enormous buying power of the government should be used to get a good deal for the taxpayers, which was harder if businesses refused to pursue government business because of other requirements. I was lucky enough to have enough clout in the administration to stave off many of these suggestions, but I made few friends in the process, especially among labor groups.

Contractors also endorsed the criticism of socio-economic requirements, but the real priority for them was data disclosure and auditing requirements. Again, their argument was that this was a powerful disincentive to new participants seeking federal business -- complying with these requirements was very expensive and created significant legal risk.

Back when I was in the government myself, I fully bought into both narratives and spoke about them frequently. Over time, however, I became a bit skeptical of both stories.

I wondered how many businesses would start selling to the government if only these socio-economic requirements were eliminated. And I asked to what extent these onerous disclosure/audit requirements were actually imposed if contractors were selling commercial items to the government, particularly if there was competition for the purchase. The law said these didn't apply, but industry said government frequently imposed the requirements anyway. I came to suspect that industry opposition, although framed in terms of commercial businesses that refused to sell to the government, actually related more to these requirements being imposed for military equipment or subsystems being bought sole-source from traditional defense contractors.

I recently had an opportunity to gather actual empirical data on this question, with the help of the Digital Services Coalition, a group of small non-traditional IT vendors entering the federal marketplace founded by Robert Rasmussen. With the help of Dan Levenson, a longtime Department of Health and Human Services contracting officer who now works for Rasmussen's company, a survey was sent out to the organization's founding members. They given a list of five commonly cited barriers, and asked three questions: What in their view was the most-important barrier on that list; what was the least important; and what could government do to reduce the problems pertaining to their most-important barrier?

The survey's list of potential barriers was:

  1. Socio-economic requirements
  2. Government invoicing, record keeping, and accounting/cost disclosure requirements
  3. Government IT services as a low- price, low-profit, low value-added market that is not attractive to tech talent
  4. The structure of the work (e.g. prescriptive requirements/minimal access to users) does not align with commercial best practices
  5. Having to make business decisions to partner with "traditional beltway vendors" that don't align with your values

What did we find? Fourteen companies responded. The two most-important barriers, mentioned by five and four respondents respectively, were prescriptive requirements/minimal access to users and proposal writing (which is considerably more complicated and jargon-filled than in the commercial world). Next, with three responses each, were government contracting's low-price environment and having to contract with traditional beltway vendors.

Guess what came in last: Socio-economic requirements with one vote, and disclosure/auditing with zero. I am guessing these firms have not yet been asked to provide cost data and that socio-economic requirements are more of an irritant than a deal-breaker.

How about the least-important barrier? Three respondents said a low-price environment was at the bottom of their lists, two each cited cost disclosures and socio-economic requirements, and one pointed to proposal writing. Nobody thought prescriptive requirements and pressure to work with traditional beltway vendors was the least-important barrier.

Respondents also had a number of suggestions about how to mitigate these problems. The most common was to modularize work into smaller chunks. "Modern vendors can build systems in incrementally useful ways for relatively small (10s of millions vs. 100s of millions) contracts with clear performance checkpoint."

Next-most common was to promote the U.S. Digital Service and the General Services Administration's 18F. There also was an interesting suggestion, which probably at least merits consideration (it would require a statutory change), to "create a program similar to 8a that allows regular small businesses to be directly contracted with for smaller, specialized procurements (perhaps sub-2 million in value as an example, and limit the number they can participate in)." One respondent suggested the oldie but goodie of better debriefs.

These results, I think, are fascinating, and suggest we should think differently about barriers to entry in the federal marketplace. They don't really support the narrative about this issue that has dominated many discussions.

A good piece of news here is that the two most-important barriers, in the view of respondents, are ones over which the contracting system itself has the most control. The government can choose to think more creatively about requirements and about reducing the burdens of proposal writing -- where there are indeed some moves in the right direction here through tech demos and procurement contests.

By contrast, the two barriers emphasized in the dominant narrative -- cost disclosures/audits and socio-economic requirements -- have been imposed on the system from the outside, via laws and regulations over which contracting has little control. But if those barriers are less important to today's new entrants, then agencies can make real progress without waiting on Congress or governmentwide policy.

Posted by Steve Kelman on Jan 07, 2019 at 6:14 AM


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