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By Nick Wakeman

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Nick Wakeman

Does low-price contracting put incumbents at risk?

When the low-price, technically acceptable contracting era – and yes, it is an era, not a phase – began, the conventional wisdom was that incumbents would be favored.

The thinking was that they would win most of these contracts, since they were entrenched with the customer and know the work intimately.

Well, it looks like the conventional wisdom is wrong.

Reports are surfacing that incumbents might actually be at a disadvantage.

Speaking at the annual Morrison & Foerster Mergers & Acquisitions Outlook conference, financial analyst Edward Caso of Wells Fargo said he’s seen data that shows the win rates plummeting for incumbents during recompetes for contracts.

Caso referred to a report from the consulting firm Wolf Den Associates that win rates for incumbents were looking more like win rates for new business, which is typically around 30 percent.

He shipped me a copy of the report and its list of Top New Federal Market Realities. It includes the warning: “Recompetes can no longer be taken for granted and, for the first time ever, incumbency is a double-edged sword.”

Why the double-edged sword? Well, because even if the incumbent wins, it has to do so with pricing that can be 20 percent to 30 percent lower than the preceding contract. Several speakers spoke about this pricing pressure on recompetes and contract extensions.

That’s a huge amount of pressure on any company.

During a later panel at the conference, which is co-sponsored by Ernst & Young and Washington Technology, Brad Antle, CEO of Salient Federal Systems described the competition for recompetes as a free-for-all.

“Incumbents are losing because they have to bid the incumbent [and more expensive] workforce,” he said. “They don’t come to the bid with a clean sheet of paper.”

The advantage has shifted to the challengers, who often can bring innovation, flexibility and new ideas that the incumbent cannot.

“The biggest challenge for incumbents is to get out of their own way,” he said.

For any company to grow in this market, they have to take business away from other companies. “You have to think that way,” Antle said. “You have to be creative.”

One area of creativity for Salient is agile development, and applying some of those principles to how it manages its employees.

“You have to be able to move people on and off work because you can’t have a standing army,” he said. “It’s a different approach to managing your workforce.”

The takeaway for me is that surviving the low-price era is going to take more than accepting lower margins. It’s going to take some creativity and some luck.

 

Posted by Nick Wakeman on Oct 25, 2012 at 7:23 PM


Reader Comments

Sun, Oct 28, 2012 Ryan

You have to be able to take the intel you've gleaned from executing on the contract and combine that with a fresh start approach to winning the work - which should start well ahead of the bidding cycle. If you haven't figured out a way to reduce costs or be more efficient or compelling in a base + four period then maybe it really is time for you to go. Granted, sometimes that's just not possible but more often than not it actually is.

Fri, Oct 26, 2012

I agree with most of the comments in the article with the exception of the notion that "innovation, flexibility, and new ideas" are the primary reasons that challengers are unseating incumbents in an LPTA environment. On the contrary, more often than not, challengers are coming in and cutting salaries drastically (as you accurately state "20-30 percent") with absolutely no differentiation under the premise "win now and worry about execution later". More often than not, the incumbent labor force is greeted by their new awardees with a "this is the offer....take it or leave it" mindset. Take a look at how many contracts have been terminated because new awardees were not able to staff at the ridiculous direct labor rates they proposed. And worse yet, the Government is encouraging this behavior by defaulting to a low price mindset (even when they state "Best Value" in the eval criteria). The Government needs to do a better job of assessing "cost realism" and throwing out bids that are unreasonably low. In the end, this trend is going to lead to a "You get what you pay for" environment, at the detriment of the quality of the products and services the Government is procuring.

Fri, Oct 26, 2012

Why would anyone inintially think an incumbent would have an advantage with the low bar that technically acceptable permits? Their intimate knowledge doesn't get them anything extra in this type of evaluation criteria. The real losers here are the incumbent employees who have to do the job for a 30% salary reduction or leave. The companies bidding low who are not incumbents do not feel the loyalty to the workforce that an incumbent naturally would(should). However, the realities of competing your backlog are forcing incumbents there and I can tell you it is not a confortable feeling for management to be forced to do this to their employees. They have no choice however because the cuts are so severe that they connot compete on price by merely reducing margins.

Fri, Oct 26, 2012 SPMayor Summit Point, WV

LPTA poses a challenge to any contractor who offers anything but medicore services or product. For the incumbents the challenge has always been to properly balance what they know with what the client asks for in the recompete. This dilemna is particulrly true in these fiscally constrained environments. The desire to continue providing the same level of service and quality runs directly counter to the client 'rethink' of what they need - what is a contractor to do? Recompetes need not sacrifice quality merely to achieve an acceptable price. Incumbents need to confront the new realities with a renewed sense of doing it differently but no less well. Yes, this does mean changing the staff plan if necessary because the 'new' does not require the mere continuation of the current Incumbents need to realize they can easily fall prey to walking into the future backwards - longing for what was but is no longer to be.

Fri, Oct 26, 2012

One of the key components in your assessment of incumbent vulnerability was the fact that the incumbent may have a higher priced workforce. The implication is that a challenger is not hampered by this. This is only true if the incumbent believes that the Government values the workforce more than the price. If the Government customer doesn't value the experienced in place workforce...then the incumbent is free to fire higher priced workers and replace them the same way a challenger would. It all comes down to value and whether the Government wants prioritizes value or just price...assuming both are technically acceptable.

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