Procurement trends reshape federal market

When Dave Zeppieri joined the Office of Justice Programs last March as its chief information officer, he knew almost immediately that he needed help putting together budget plans that would pass muster with the Office of Management and Budget. So he turned to Robbins-Gioia LLC to help his Justice Department organization put together the "business cases" that OMB officials are using to evaluate agency information technology programs."I have staff who are good at technical issues, but they are not well-rounded in the business skills needed to justify the business cases," Zeppieri said. "We needed some means of prioritizing IT projects, understanding how to document return on investment and the financial background from an accounting perspective."Robbins-Gioia staff, which had provided program management services to Zeppieri at the Defense Logistics Agency, helped develop business cases for Office of Justice Programs' grants management and financial management information systems ? and got OMB's approval on the first try. "We were very excited to score [so well] out of the gate. This was basically unheard of from an OJP perspective," said Rod Turk, Robbins-Gioia's management principal working on the project.OMB's increasing reliance on business cases to determine funding for agencies' IT programs is just one of several recent changes in the federal procurement landscape that is affecting how contractors do business with government. And like Alexandria, Va.-based Robbins-Gioia, many companies have found these changes are presenting opportunities to solidify relationships with government customers and garner new business. Efforts by the administration and Congress to expand the use of performance-based contracts, increase public-private competitions and boost small-business participation are forcing IT contractors to closely monitor new policies and legislation so they can react swiftly to changes in the competitive government marketplace. For this report, Washington Technology talked with experts in both industry and government to identify the five top procurement trends and find out what companies can do to avoid surprises and capitalize on these changes.TREND NO. 1: Business casesOMB will increase its use of business cases to determine IT winners and losers in its annual budget analysis. Wise contractors will help agency customers develop solid business cases for programs under contract or ones they intend to pursue.More than half of 1,400 business cases that OMB assessed for fiscal 2004 funding ? about $21 billion in IT projects ? were labeled "at risk" because of inadequate security, project management or alignment with agency mission, said Mark Forman, associate director for information technology and government. These projects "will not receive funding until they are off the at-risk list," Forman said last month. Business cases are detailed analyses that justify spending or investment. A business case must show that the project would provide significant value to the agency mission, has a reasonable likelihood of meeting goals and objectives, incorporates sufficient IT security, does not duplicate other investments and helps achieve the President's Management Agenda, including expanded e-government. It must demonstrate good project management and include accurate cost estimates. Like the Office of Justice Programs, many federal agencies have struggled to put together acceptable business cases. Part of the problem is that agency information systems often are not set up to give staff the information they need to develop business cases, said Anne Reed, president of consulting firm Acquisition Solutions Inc. in Oakton, Va., and a former IT executive in government and industry.Agencies will "need help from an analytical perspective. There are fewer and fewer people in government that have this expertise," Reed said. Consequently, agency officials such as Zeppieri are calling upon industry for help. There is enough business-case work that firms such as SRA International Inc. of Fairfax, Va., have developed standard methodologies that can be used in multiple agencies."It falls in an area we call consulting, and tends to be neither time nor people intensive, but if the customer needs that type of work, we will provide it," said Ernst Volgenau, president and chief executive officer of SRA. The firm's business case clients include offices in the Environmental Protection Agency."It all goes into establishing our reputation and being responsive to customer needs," he said.Reed and Volgenau said companies are motivated by more than just a desire to keep money flowing to their federal contracts. "Companies really want to be associated with successful projects. Programs that have strong business cases are more likely to be stable and successful," Reed said.TREND NO. 2: Performance-based contractingFederal agencies increasingly will push performance-based contracts, which tie contractor compensation to results. These arrangements provide opportunities for contractors to introduce innovative solutions but require them to share risks with their customers.The Bush administration wants federal agencies to use performance-based methods in 30 percent of their contracts, up from 20 percent last year. The goal increases to 50 percent by 2005."That is going to be a very positive thing, because it allows the customer to get lots of innovation," said Ed Naro, vice president of GSA and IDIQ programs at Northrop Grumman Information Technology in Herndon, Va.With performance-based contracting, the agency doesn't define a specific solution; rather, officials describe their problem and ask industry to propose ways to solve it. "It's defining end-state outcomes: 'I have these reports to put out and this data, what can you do for me?' " said Corey Rindner, procurement executive at the Treasury Department. That's different from traditional government contracting, where the agency lays out the solution it wants, and contractors bid to meet precise specifications. And with performance-based contracting, the contractor is judged by its ability to meet a set of specific requirements, such as on-time, on-budget delivery or system uptime. If the contractor meets or beats its requirements, it is rewarded financially. If it doesn't succeed, it is penalized. Federal officials are pushing performance-based contracting because they are buying more services than in the past, said Deidre Lee, director of defense procurement and acquisition policy. In the past, agencies would buy their IT products and hire a firm to integrate them. Now, agencies are calling upon industry to design entire solutions."The challenge is being able to articulate what we want and then being open to accepting industry's way of accomplishing it," Lee said.Many IT contractors and government officials point to the Transportation Security Agency's $1 billion IT infrastructure task order with Unisys Corp. of Blue Bell, Pa., as a successful use of performance-based contracting. Unisys built its proposal with line items of products or services that TSA could order when it needed them. "It's analogous to a utility bill: As you use electricity, you pay for it, and when you don't use it, you pay less," said Ira Kirsch, president of the company's U.S. Federal Government Group. The company included in its bid a series of service-level agreements and a set of incentives and disincentives. To get its incentive pay, Unisys has to meet the contract requirements and help the agency fulfill its goals."It was our demonstration to TSA that we wanted to put our own skin in the game," Kirsch said. So far, the arrangement has paid off for TSA and Unisys, which received incentive pay after meeting two critical deadlines in November and December for having the infrastructure in place for passenger and baggage screening at 429 U.S. airports. To do well at performance-based contracting, both industry and government need training, experts said. In the government, most training has been focused on procurement staff. But government staff that oversees the programs need to be trained too, said Angela Styles, administrator of the Office of Federal Procurement Policy. "Until they get a few [contracts] under their belt, they are not always comfortable with it," Styles said. "There is a slow recognition that [program staff] needs to be trained."Acquisition Solutions, which provides procurement consulting services to government clients, next month will begin offering its training in performance-based contracting to industry as well. The training will be provided in an open forum, not for individual companies, to avoid conflicts of interest with government clients, officials said.If major programs are to succeed, government and industry must develop a partnership during the process, said Bob Dickson, a principal with Acquisition Solutions."The performance metrics of the contractor and government personnel should mirror each other. The program managers on the government and industry sides should share the same goals and objectives and be motivated to succeed in essentially equal ways," he said.TREND NO. 3: Public-private competitionsThe Bush administration is pushing federal agencies to hold more public-private competitions for government work under its new A-76 process. The proposed policy will provide IT contractors with more outsourcing opportunities, but skeptical industry executives still expect a less-than-level playing field opposite agency bidders.The Bush administration has proposed significant changes to the A-76 process as part of its effort to increase the number of public-private competitions. The White House said it wants agencies to meet a governmentwide goal of subjecting 15 percent of 850,000 federal jobs to competition between the public and private sector by the end of fiscal 2003. Those 850,000 jobs are commercial in nature and have never been subject to competition, officials said.Government and industry officials have long complained that the A-76 process took too long, was too costly and unfair. Government employee unions attack the process as a ploy to outsource more jobs to the private sector, while industry executives contend the competitions are not worth the effort because they are rigged in favor of government workers.The new Circular A-76 process for holding competitions for federal work attempts to overcome these objections. Proposed changes, which await final OMB approval, include a time frame for public-private competitions shortened to 12 months and permission to consider factors other than lowest cost when picking a winner. "The changes should be very positive for industry, and enlarge the number of opportunities for the contracting community while not abandoning the federal work force," said Jean Stack, a vice president at investment banking firm Houlihan Lokey Howard and Zukin in McLean, Va.Federal officials said they hope the new rules encourage industry to participate in the competitions, because the government wants the most capable party to do the work."Industry is looking for fairness and transparency and the opportunity to participate. If they see this process as doing that, I am optimistic they will participate fully," Lee said. However, some contracting experts are skeptical whether the new process will work. Agencies may not be able to recompete contracts awarded under A-76 every three to five years as required, said Bob Welch, an Acquisition Solutions partner and former senior procurement executive at the Treasury and Commerce departments."The capacity to do these master-level procurements does not exist in most civilian agency procurement organizations. The requirement is a failure to recognize how agencies work," he said. In addition, the government doesn't measure an agency's past performance on a job, a critical evaluation factor in private-sector bids on IT jobs, said Stan Soloway, president of the Professional Services Council in Arlington, Va., which represents technical and professional services firms.Styles said she thinks it will be easier for contractors to participate under the new A-76 process because they will be committing bid and proposal money for 12 months instead of years. OFPP will assess the process quarterly with every agency, she said, and is poised to make changes if necessary. "There will be a little trial and error on the front end," she said. "They will have to trust us a little bit."TREND NO. 4: GSA schedules and multiple-award contractsAs federal agencies expand their use of General Services Administration schedules and other multiple-award contracts, it becomes more important than ever for IT contractors to win positions on these vehicles. In addition, state and local governments are now allowed to buy IT products off GSA Schedule 70, which gives contractors new opportunities to build business. David Drabkin, the GSA's senior procurement executive, expects a huge jump in activity this year on the GSA schedules. Agencies will purchase about $25 billion in goods and services from companies on the schedules in fiscal 2003, up from $21.1 billion in 2002, he said.The advantages that agencies derive from using GSA schedules and multiple-award contracts are clear: Agencies save both time and money because qualified companies are vetted and selected in advance. "The administrative cost of running a competition is large. You're talking about tens of thousands of dollars, depending on the size of procurement. To save a large portion of that allows people do to more work with the same amount of people," Drabkin said. Companies that win spots on GSA schedules and multiple-award contracts also benefit. "Most companies report they spend between 1 percent and 2 percent of the price of the contract to compete for it," Drabkin said. "The [GSA] schedules allow them to reduce the amount they spend on bids and proposals because it is a less formal type of contract. That allows them to compete for more business."Unisys is one company that saw growth in the use of multiple-award contracts. The company pursued ? and won ? positions on nearly every available vehicle."We want to be in the strongest position to serve [agency] needs. Having all these contract vehicles in place gives us a lot of flexibility, so when they have a preferred way they want to do business with us, we can," Kirsch said.Companies that have not made such an effort sometimes can't pursue a prime contracting job, said Kirsch, who occasionally gets requests from other large IT contractors to take over the prime position on a contract recompete because the current prime doesn't have a position on the vehicle the agency is using.The opening of Schedule 70 to state and local governments could be a big opportunity, said Alan Kraft, vice president of the federal government unit of Informatica Corp., Redwood City, Calif. State agencies want homeland-security related technologies, but they don't have time to analyze all of the available offerings. They want the federal government to do that, Kraft said."States have been desperately trying to buy our products, but they haven't had a contract vehicle to do it," Kraft said. However, Kraft and other industry officials said they expect state and local government use of the schedule to grow slowly, because those governments' procurement rules may need to be modified to allow use of the federal vehicle.TREND NO. 5: Small businessThe White House is pursuing a multipronged strategy for boosting small business participation in federal contracts. New policies could force large prime contractors to put into place measures guaranteeing that sufficient subcontracting dollars are going to small companies. The number of small businesses receiving new federal contracts declined precipitously during the last decade, from a high of 26,506 in 1991 to a low of 11,651 in 2000, according to OMB.A chief cause, White House officials said, is the government's growing practice of bundling together small contracts into one large contract. While contract bundling makes good business sense, especially for large IT projects that require a prime contractor to integrate numerous systems and networks, the practice has served to limit opportunities for small businesses, which don't have the resources to bid as primes on such projects. "The negative effects of contract bundling over the last 10 years cannot be underestimated," Styles said. To reverse this trend, the Bush administration has proposed numerous changes to help rebuild the base of small-business government contractors. Officials have recommended a policy that requires vendors with spots on governmentwide acquisition contracts to recertify their size annually, so that companies that have grown large cannot receive contracts reserved only for small businesses.They also have proposed a procurement rule that requires agencies to unbundle contracts where possible and to mitigate the effects of necessary bundling on small businesses. This rule also includes a provision that would increase the government's oversight of a prime contractor's subcontracting plans to ensure that the requirements for small-business participation are achieved for each contract. Prime contractors that don't follow through on subcontracting goals could jeopardize future government work. Currently, prime contractors aren't given incentives to achieve the small-business subcontracting goals that go with large contracts, and government oversight is minimal. Some small-business owners said they have been used by primes, who put them on teams in order to win bids but then don't give them any subcontracts after the contract is awarded. For example, Eric Adolphe, chief executive officer of Optimus Corp., a small, public-safety technology company in Silver Spring, Md., complained that a large contractor was awarded an option year on a Environmental Protection Agency bundled contract for software development based in part on its offer of a subcontract to Optimus. "After the option was exercised, we never heard from them again. The EPA said there wasn't much they could do," Adolphe said at a March 18 hearing before the Senate Committee on Small Business and Entrepreneurship.For their part, many large contractors complain that government procurement figures, which only track prime contracting dollars, don't accurately measure the level of small-business participation in government contracts. They say small businesses get their fair share of contract dollars, much of it as subcontractors.Styles agreed that the government could do a better job of tracking spending. "There are times when bundled contracts are appropriate, and the prime contractor follows through on its subcontracting goals. But that doesn't get counted," she said.Styles said the government could create incentives for prime contractors to subcontract to small businesses and make sure primes meet their subcontracting goals. After Circular A-76 is published, the White House intends to create working groups and hold discussions with large and small businesses about "how to make the system work better in the subcontracting arena," Styles said. The impact of the administration's small-business push remains unclear. Because federal officials are emphasizing the purchase of total IT solutions, contracts continue to get bigger, making it more difficult for small- or medium-size firms to win prime contracts."Certainly, the small-business community is concerned about solutions contracting and larger contracts, [making it] even more important for them to develop relationships with larger companies" that will be the primes, said Payton Smith, an analyst with Input Inc. of Chantilly, Va.Staff Writer Gail Repsher Emery can be reached at gemery@postnewsweektech.com.XXXSPLITXXX-Will new procurement rules slow the government's buying cycle? Industry experts say it's too soon to tell.The procurement cycle, from the request for proposal to contract award, has shrunk by more than half since the mid-1990s, falling from about nine months in 1995 to four months in 2001, according to market research firm Input Inc. of Chantilly, Va. But some government and IT industry executives speculate that recent and pending regulatory and policy changes could reverse this trend. For example, proposed rules that mandate contract reviews with an eye toward unbundling requirements could increase procurement cycles, said Larry Allen, executive director of the Coalition for Government Procurement, a Washington nonprofit association of Federal Supply Schedules contractors. Proponents of unbundling say the practice will give small- and medium-sized businesses more opportunities to win federal work. But longer procurements would especially hurt small businesses, because they are most dependent on steady work, Allen said.Another new rule mandates that Pentagon procurement officials solicit at least three bids on defense service contracts worth more than $100,000. Government and industry officials said the provision merely mandates a practice that was already required, although sometimes not heeded. Consequently, they said that the new rule probably won't slow procurement cycles.Deidre Lee, director of defense procurement and acquisition policy, said the Defense Department's efforts to reduce purchase-card fraud by curtailing some card use also could slow the procurement process slightly, but would have other, positive results."If we get the right product at the right price, and it takes a day longer, and we get competition or make sure small businesses participate, that could be a good thing," Lee said.