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National Defense > Blog > Posts > Government Services Market Undergoing Sweeping Change
Government Services Market Undergoing Sweeping Change
By Sandra I. Erwin



Federal agencies' increasing reliance on technology and changing buying behaviors are shaking up the $225 billion government services market.

Contractors that provide services to the government not only have been rattled by deep cuts to federal spending in recent years but also are being challenged by changing customer demands and an influx of new competitors.

"We are seeing the beginning of a major shift in the marketplace," said Stan Soloway, president and CEO of the Professional Services Council, a group that represents the government services industry.

The most significant trends in this sector are the "convergence of technology and services and a change in government buying strategies," Soloway said June 20.

Convergence means that the traditional lines that separate the professional services and technology sectors are being obliterated, he said.

A vivid illustration of this shift is seen in the information technology business. The government is buying less hardware and becoming a huge consumer of IT services such as cloud computing. As a result, contractors are being pressed to improve their technology knowhow and develop new business strategies to compete in a crowded market, Soloway said. "Technology has always played a major role in the delivery of professional services, but never has that role been as dynamic as it is today."

How the government buys services also is changing, said Soloway. "This is a different model than what the government and industry are used to."

The Professional Services Council has reorganized its operations to deal with the market shifts, he said. It plans to advocate for wholesale changes to federal procurement rules that stifle innovation. While technology advances at a breakneck speed, federal agencies are unable to stay apace because of staid acquisition methods. "We need a transformation instead of tactical reforms," said Soloway. "We are past the point of making incremental steps."

The growing role of technology also is challenging traditional professional service contractors that see growing competition from outsiders, he said. The government has made an aggressive push to recruit Silicon Valley firms for IT work. A case in point is the General Services Administration's 18F program to accelerate innovation in "digital government." The name 18F comes from the GSA headquarters address on 18th and F streets in Washington, D.C.

Initiatives such as 18F are creating a "cultural divide" between traditional government contractors and newcomers, said Soloway. With programs like 18F, the government is "going around the market" to recruit outsiders, rather than fix the problems of the current procurement system, he said. "We're concerned that it [18F] is not going to be used as a tool to perfect the broader market."

While the government seeks to attract nontraditional firms, many commercial firms shun the federal market because of the bureaucratic barriers and high cost of complying with cost-accounting requirements. The solution is to match up established contractors with innovative upstarts, said Soloway. "The way they will come in is by partnering with the traditional firms that understand the customer and the system in depth." The vast majority of outsiders, he said, will find it faster and less expensive to come in as partners rather than trying to break through the complex maze of government acquisition rules.

Rather than pit Beltway firms against Silicon Valley, the 18F program should help to bridge the gap, he said. When an startup delivers software to an agency, for instance, the government should map the process and identify where it went wrong through the traditional acquisition process, said Soloway. These models could serve as a steppingstone to reform the market more broadly, he said. “The concept is solid, but it's not improving the broader market.”

For Defense Department suppliers, the environment is becoming tougher as the Pentagon continues to absorb budget cuts. The Pentagon is the government’s biggest spender, and accounts for about half of all federal spending on support contracts and services. According to the consulting firm Avascent, federal contract spending was $225.6 billion in 2013, down from $251.8 billion in 2012.

Soloway said the Defense Department and military agencies are indiscriminately axing support contractors before analyzing the value of their skills. “You have to be careful about making arbitrary reductions where you are getting your human capital and technical skills,” he said.

As part of its “better buying power” initiative to reduce cost, the Pentagon is seeking more efficient ways to manage service contracts and incentivize suppliers. “While much of the focus of defense acquisition has been on [major weapon systems] program acquisition, it is equally important to know how well acquired services are performing and what steps we can take to improve performance,” said Undersecretary of Defense Frank Kendall in his annual report on the performance of acquisition programs. “This effort will take time, but we continue to look for objective data to inform the performance of these contracts.”

The Pentagon, like the rest of the government, has struggled with procurements of information technology and has been unable to keep up with advances in IT. Andrew Hunter, director of the Defense Department’s joint rapid acquisition cell, said he and Kendall worry that the military is losing its technology edge. This is “blindingly obvious” in the IT arena, he said at a Brookings conference in Washington. “There is no silver bullet,” said Hunter.

A recent survey by the consulting firm Booz Allen Hamilton and the Government Business Council showed deep frustration across the industry about the federal market, and a general sense of pessimism about the future of high-tech government procurements.
 

Soloway said the dark mood in the industry is a reflection of the uncertainty about future federal spending and growing concerns about working with the government. “A lack of clarity continues to beset the marketplace. The push to low-price buying means companies that want to be innovative are not allowed to do what they do best,” he said. “That does create negativity.”

Some companies in the defense services sector are searching for new opportunities outside the United States. “Relying solely on the U.S. government I don't think is a viable growth strategy,” said Steven F. Gaffney, chairman and CEO of DynCorp International. The company provides aviation maintenance and logistics support services. “We intend to focus on commercial and international markets,” he said at an Atlantic Council forum. “In the Middle East they embrace us with open arms.”



Photo Credit: Thinkstock

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