Across the Digital Nation: Battle lines drawn in fed competitive environment

Rishi Sood

With the rapid growth in IT spending over the past four years, the competitive landscape in the federal government market has intensified. As I have done for previous Top 100 issues, here are some of my observations about the federal IT market.

In many respects, federal government vendors can be divided along three major lines: tier-one integrators, tier-two federal "pure plays" and tier-three federal commercial companies. These three classes of vendors face a variety of competitive issues over the next three years.

Scale of the tier-one integrator: Over the past 10 years, large systems integrators with deep roots across all major sectors of federal government have shaped the competitive landscape. Many of these vendors have made large acquisitions to create a large footprint among top agencies, scaled internal operations to better respond to landmark contracts and developed long-standing chief executive-level relationships to influence technology strategies.

These vendors face continuing pressure to protect their usual client base, generate new leads to fill the pipeline and maximize efficiencies from acquisition activities. Moreover, for some of these companies, declining parts of their organizations will place greater importance and investment in growing their IT operations. Consequently, these vendors will continue to compete fiercely for new business and guard important clients.

Rise of the tier-two player: Over the past five years, the rapid ascension of a small, robust class of federally specific vendors has transformed the competitive landscape. Many of these vendors have forged a strategy that combines going public, targeting acquisitions and growing organically to become formidable competitors. In just four years, some of these competitors have boosted their annual revenue from $150 million to more than $700 million and emerged as prime contractors for many federal procurements, creating a viable alternative to more conventional integrators.

Over the next three years, these vendors must continue to scale operations rapidly as the race to get larger continues. Many of these companies may be acquisition targets and may choose to join forces more effectively to compete with tier-one integrators.

Emergence of the tier-three federal commercial companies: The federal government has long used companies that have commercial branches, but increasingly, this feature is viewed as a competitive advantage. Companies in this category are using their commercial expertise to demonstrate more innovative ways of managing public sector technology initiatives.

These vendors have been more active in horizontal technology opportunities such as enterprise resource planning, customer relationship management and outsourcing, where commercial best practices can be important competitive advantages.

They have become a competitive threat to federally oriented companies. However, their ability to continue to penetrate mission- and program-specific areas will be key to driving future revenue.

One important question is whether these companies will make large federal acquisitions to compete in previously restricted areas.

With continued growth in the federal government IT market over the next year, the competitive threats each of these classes of vendors pose will add to the complexities of this marketplace. These vendors also must be aware increased competition from global firms, networking and telecommunications firms and defense contractors that are rebuilding IT groups.

Similarly, the role of midsize companies and 8(a) vendors are factors in the competitive landscapes, particularly in select agency segments and contract vehicles.

More important, however, the eventual slowdown in the federal market implies that taking market share will become a greater part of growing federal revenue streams. Consequently, each vendor should strategically focus on critical accounts and initiatives, develop newer competencies around emerging technologies and align around the next generation of major procurement vehicles.

Rishi Sood is research vice president with Gartner Dataquest in Mountain View, Calif. His e-mail address is rishi.sood@gartner.com.

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