Major moves: Agencies changing how and what they buy

Take away sequestration. Forget about partisan politics. Don’t worry about passage of the budget.

Something very fundamental is going on in the government market, and while the above factors cause pain and consternation, the shift underway will continue even after these problems are solved.

The shift I’m talking about is how government is changing the way it buys the products and services its needs to operate, from cloud computing to enterprise licenses to strategic sourcing.

I’m not sure if there is a single, neat label for these changes but the impact is only starting to be felt, and will play out over several years. This is more of an evolution than a revolution.

This change was very much on display during the presentations at Deltek’s Federal MarketView event on Thursday. Generally, this is an event that tracks the ups and downs of federal spending, but there were several items that kept popping up during the discussions that support my thesis.

Smarter Buyers, Part 1

During her opening keynote, Mary Davie, assistant commissioner of the Office of Integrated Technology Services at the General Services Administration, offered several examples of how the government is trying to become a smarter buyer.

For instance, the government is starting to pool pricing data. Not the prices bid on contracts, but the prices actually paid via individual task orders. The information can’t be released publicly, she said, but can be a powerful tool for standardizing prices when shared inside the government.

Right now, GSA is starting with commodity products – she used the example of toilet paper – but she expects it to expand into other areas.

Strategic sourcing is another example. Again, it has started with commodity items, such as wireless devices, but is now moving into simple services. You should expect it to continue to expand.

More than one speaker mentioned that agencies are creating line items in their budgets for enterprise-wide licensing agreements, particularly for software.

The Color of Money

Cloud computing, and the whole trend toward everything as a service, is shifting technology dollars from the capital expense side of the budget to operating expense side. The growth of shared services also is pushing this trend.

This distinction means that agencies don’t have fork over a large amount of money upfront to make an investment; they can pay a monthly fee, for example.

It is making room for some creativity. Lockheed Martin recently announced it won a $35 million contract for energy services for the U.S embassy in Nicaragua. Loans will be used to cover upfront costs, and the savings from the more efficient systems will cover the costs of the loans.

The government is getting an upgrade right away without having to hit its capital expense budget.

Hardware’s swan song

The amount the government is spending on hardware continues to decline. Less expensive technologies such as laptops, tablets and smartphones are pushing down the need for PCs.

Cloud computing and data center consolidation and optimization also are pushing down the demand for servers and related hardware.

Kevin Plexico, Deltek’s vice president of information solutions, estimated that spending on hardware will decline from $23.3 billion in 201X to $18.1 billion in 2018, a compound annual growth rate of minus 4.9 percent.

More Powerful CIOs

Rep. Darrell Issa’s Federal IT Reform Act, known as FITARA, has found a home in the National Defense Authorization Act, and likely will pass.

One of its major components is to give agency CIOs ultimate budget authority for IT spending. Very few have this power now.

More budget power will likely speed the pace of consolidation of IT systems. This could hurt some contractors, but might open more opportunities as funds get reprogrammed as savings are realized.

Smarter buyer Part 2

Davie spoke briefly about an “office in a box” pilot program that the Fish & Wildlife Service is going to participate in.

GSA’s Integrated Technology Services and the Public Building Service are working together to outfit everything Fish & Wildlife need in a new office building, including the technology.

“They are giving us a list of what they need and we’re going to buy it for them,” she said. “We’ll outfit the entire office environment and build the cost into the rent.”

There are still questions being worked out about who is responsible for IT support and technology refresh, “but we are trying to be creative,” she said.

Impact on contractors?

There is no single answer to that question, but we already are seeing changes as companies stand up cloud practices, for example. or offer creative financing arrangements, such as the Lockheed energy deal.

Some of the changes may mean that business for some companies will shrink, or at least some parts of their business will shrink. I’ve heard for a couple years now that the body-shop business model is over and companies are abandoning it.

Many companies are in the process of reinvention.

We’ll likely see new players in the market, and some will be non-traditional. Think Amazon Web Services or Google.

The transformation is well underway. The current fiscal environment is only speeding it along.