Vendors: It’s a New Federal IT Procurement Ball Game

The U.S. government spends tens of billions of dollars each year on information technology — by some estimates more than US$100 billion. As a result, IT is a highly visible target when the overall federal budget comes under scrutiny. Problems associated with IT operations — such as the botched launch of the Affordable Care Act — only intensify such scrutiny.

Putting the Obamacare issue aside, however, many other factors have affected the way the federal government has managed and acquired IT in the past five years. These factors now have converged to the degree that future federal procurement of IT will be conducted in a significantly different environment than in the past, according to two recent reports.

“The U.S. federal government IT market is experiencing budget, mission, and technology related changes that require vendors to immediately reassess their go-to-market strategies, and to position — or reposition — accordingly,” wrote Gartner analyst Katell Thielemann in “Market Insight: Federal Government IT Market Primer,” which was released in July.

“Even though the natural inclination of the federal market is to be risk-adverse, and to be slow to change, budgetary pressures and new commercially oriented entrants are starting to reshape the landscape,” the report notes.

5 Years of Change Affects Business

Deltek offered an extended review of multiple factors forging a much-changed federal IT environment in its report, “Federal Information Technology Market, 2014-2019,” also released in July, which highlights the need for vendors to adapt to these changes.

“Contractors must continue to adjust to this reality by ensuring that they have the strategies and tactics in place to pursue growth opportunities and protect market share,” the report advises.

The Obama administration over the last five years has launched several programs designed to improve the use and procurement of IT. They include encouraging the adoption of cloud-based IT, consolidating data centers for more efficient management, and requiring better accountability by agencies on IT procurement.

In addition, the General Services Administration has rolled out improved acquisition vehicles oriented to cloud adoption and other IT goals, with an emphasis on multiple award task order contracts, and as-a-Service configurations. All of these actions have come against a background of tighter budgets proposed by the administration and Congress.

“The procurement environment is evolving due to many factors. Some are initiatives-based, such as strategic sourcing, the use of shared services, commercial-off-the-shelf (COTS) software, and open source initiatives,” Gartner’s Thielmann told the E-Commerce Times.

“Some are budget- and austerity-based, such as low-priced technically acceptable (LPTA) procurements, contract vehicle consolidations, and trade-offs between near-term agency mission needs and long-term investment needs in the face of funding uncertainties,” she explained.

Other changes have resulted from “forward-thinking vendors offering new ways to procure their goods and services — for example, in a consumption-based model such as Infrastructure as a Service and Software as a Service,” Thielemann said.

Deltek’s analysis portrays a similar procurement scenario.

“Budgetary uncertainty will continue to cause re-scoping of current and planned programs, pushing timelines to the right and reducing the value of contract awards,” its report forecasts.

Agencies are taking several avenues for reducing commodity IT costs, such as employing strategic sourcing and increasing the use of enterprise licensing agreements. Federal IT managers also are delaying tech refresh cycles and are scavenging existing commodity-IT resources to save money.

As IT environments become more standardized, agencies increasingly are turning to shared and enterprise services to reduce spending on common capabilities.

Operations and maintenance spending will continue to rise, even as budgets become more constrained, Deltek predicted.

As part of its research, Deltek conducted a survey seeking both government and vendor opinions on federal-IT investment priorities. In some cases, views were closely aligned. For example, respondents from both sectors indicated that the highest priority software projects would be for infrastructure purposes, followed by enterprise projects and end-user applications.

However, views on spending for IT service support — a potential growth area during a time of transition — varied considerably by category. Both sectors indicated that support services for systems development and integration would be a major priority. Industry respondents expressed a high interest in services dealing with IT program management, infrastructure and outsourcing, and IT consulting and design. However, government respondents were far less interested in those types of services.

The disparity may be the result of “a disconnect between industry and government, because they are sitting in different seats,” suggested Deniece Peterson, director of federal industry analysis at Deltek.

Still the survey is a useful tool in that it can uncover areas where vendors can best direct their efforts.

“Although we have not gone back and analyzed to find out who was ‘right,’ our sense is that reality tends to fall somewhere in between the expectations of industry and government,” Peterson told the E-Commerce Times.

Outsourcing Could Reshape Market

As federal procurement trends evolve over time, a significant amount of agency IT operations could be shifted to outside providers offering cloud and various shared capabilities. However, to conclude that many current IT vendors operating in the federal space consequently will lose business is to oversimplify the situation.

“Government outsourcing to the cloud will benefit a wide variety of industry partners, large and small, capable of hosting government applications in their data centers, or capable of providing government with software capabilities on a Service basis (i.e., Software as as Service) from their own data centers. Neither of these scenarios represents a loss to vendors. They simply reflect a new way of doing business,” Deltek analyst Alex Rossino told the E-Commerce Times.

Both reports provide marketing guidance for IT vendors, with some recommendations directed at similar factors:

Budgets: “Lowest-price-technically acceptable contracts are becoming more prevalent, and in a highly competitive environment, vendors need to consider ‘price-to-win’ strategies,” Gartner’s report recommends.

“Growing fiscal pressure will drive agencies to put increasing pressure on vendors to lower prices. For better or worse expect cost to be a determining factor in a greater percentage of contract competitions,” Deltek’s report cautions.

Incumbency: Contractors already holding major IT contracts have often had an advantage in gaining additional business — but that factor is diminishing.

“Pay close attention to contract performance; competition for maintenance and technology refresh contracts is high and incumbency doesn’t grant the same advantage as it used to,” Deltek’s report observes.

“Contract longevity can now be a drawback as some agencies look for change — sometimes just for the sake of change,” Gartner’s report notes — adding that vendors need to be aware of the impact on their prices from an embedded long-term incumbent workforce.

IT Purpose: More than ever, vendors need to become acquainted with the specific uses of IT by federal agencies, including mission requirements and particular programs for supporting those missions. Gartner refers to the process as “market segmentation.”

“Given the size and diversity of the federal government marketplace, vendors cannot provide a ‘one size fits all’ approach to marketing and business development,” the firm’s report points out.

As a result of the significant range of buying characteristics across the marketplace, vendors can benefit from creating a user segmentation strategy that bundles users into more addressable markets, it notes.

“Be mindful of the type of funding associated with opportunities. Targeting mission-related and ongoing support helps to insulate market share from spending shifts related to decreasing development dollars,” Deltek’s report urges.

While the marketing challenge may become more difficult, major opportunities in the federal IT sector remain for vendors that can become more astute in pursuing government contracts.

Deltek’s analysis is drawn from a wide range of federal entities, including major cabinet departments, major agencies, Congress, the judiciary and the intelligence sectors. On that basis, annual federal IT investment will amount to $102 billion in 2014, but slide to $94 billion in 2019. That’s still a huge potential market.

Gartner’s report, which focuses on cabinet-level spending, predicts investment will drop from $74.4 billion in 2013 to $69.9 billion in 2016, before beginning a modest recovery.