New Law Favors Open-Ended Contracts

P> Large and small infotech players find themselves in a tougher game ruled by lower profit margins as the federal government tightens its belt and becomes a more astute buyer. A category of procurement known as the multiple-award, indefinite-delivery, indefinite-quantity contract, more commonly called IDIQ, is largely responsible.

"That's the trend--that the government is becoming more commercial in its buying habits," said Randy Dove, a spokesman for Plano, Texas-based Electronic Data Systems Corp., which did about 10 percent of its $12 billion business in federal infotech.

Under multiple-award IDIQs, the government narrows the field to a handful of players that compete for business within a given agency or department. It represents a license to market a pre-approved array of computer systems or infotech services. Contractors then must fight for business.

Government agencies like multiple-award IDIQs because they increase competition and lower prices. The contracts are traditionally used to purchase commodities such as hardware and software, and increasingly are being used to buy consulting services.

Now, with passage of the most significant procurement reform in 30 years, IDIQs -- not fixed-price and cost-plus contracts with guaranteed minimums -- could become even more prominent.

IDIQs irk some firms

Not all infotech players like the changes in the procurement rules, which encourage procurement practices such as multiple-award IDIQs and the use of GSA schedules because they allow agencies to purchase goods more quickly.

Austin Yerks, senior vice president of business development for PRC Inc., a systems integrator in McLean, Va., fears the government is overestimating its ability to buy products on its own and integrate them into working systems.

The use of IDIQs -- and GSA schedules for that matter -- presupposes that government agencies have the expertise to integrate products and services bought from separate contracts. It also assumes a level of interoperability among commercial products that does not yet exist -- and may never exist. So IDIQs may save money in the short run, but when some of these federal agencies want to wire together the DOS system on the third floor to the Windows system on the fourth floor and the Lotus Notes server throughout the agency, there will be problems.

One example, said Yerks, is the Treasury Department's effort to upgrade its information system. Several years ago, the department awarded AT&ampT the Treasury Multiuser Acquisition Contract. It's expected this summer that the Treasury Department will put out a multiple-award IDIQ contract to buy additional desktops and workstations for TMAC, now called Treasury Department Acquisition I.

Yerks expects several players will get sizable chunks of that new contract, but they likely won't use compatible systems. Although PRC will try to win some of that business, the company may find out five years from now that its equipment can't be integrated with systems from other contract winners.

"The government thinks it saves money when they do that, and they don't," said Yerks. "I don't care if they take the responsibility and become a systems integrator, but if the mission is to have everybody compatible, you're not going to get there."

New marketing strategy needed

The challenge for many companies adapting to multiple-award IDIQs is learning to market themselves after winning a piece of the contract pie, said Al Konvicka, vice president of business development for Reston, Va.-based DynCorp, which does nearly one-third of its $1 billion in sales in infotech.

For example, DynCorp may be on a winner's list with Computer Sciences Corp., El Segundo, Calif., and BDM International Inc., McLean, Va., to provide local area network support services for a federal agency in a 10-story building. However, DynCorp literally must have sales agents walking the halls to talk with people on different floors to let them know the contract is available.

"Why some firms don't like IDIQ contracts is because there are a lot of unknowns out there on things that you used to have a handle on," Konvicka said.

While there are still many single-vendor IDIQ contracts, it appears the government is moving toward more multiple-award IDIQ contracts, said Tom Leech, program manager at Advanced Technology Systems, a $30 million systems integrator in McLean, Va.

"These are becoming popular because of budget cuts and because [the agencies] can't afford the cost of the procurement," said Leech. The multiple-award IDIQ has the same advantages of some 8(a) contracts -- it eliminates the cost of writing a 200-page request for proposal, he said.

Some see lower profit margins

Dove, spokesman for EDS' government systems in Herndon, Va., would not say whether IDIQ contracts have cut into EDS' government profit margins, but said, "With commodities, such as personal computers, it does make it challenging. On services, it makes it very competitive, but everyone still has their own strategy for getting the right price."

Profit margins can also be affected when the government decides to stop work on a project because of budget concerns.

Bigger firms can absorb these shocks by reassigning idle employees and by using subcontractors as much as possible.

But a smaller firm could be stuck with finding work for its full-time employees. However, that's the cost of doing business for all firms in the commercial sector, said Ellen Glover, president of ATS. For Glover, the government's use of more IDIQ multiple-award contracts opens the door for her to compete in an arena traditionally dominated by larger players.

It's too early to say whether IDIQ-driven competition will decrease Glover's profit margin, but because she can compete within a multiple-award contract, it may not matter. A lower profit margin is better than none at all.