Top 100 disruptions just beginning

A recent Washington Technology article highlights some big moves in its annual Top 100 list, which ranks the largest government contractors in the federal market based on prime contract obligations during the previous fiscal year. A few of these big moves are thanks to acquisitions such as United Technologies jumping from No. 57 in the 2018 ranking to No. 27 after it acquired Rockwell Collins.

If you look in between the lines at the type of sales and acquisitions, you’ll be able to identify a subtle but increasingly disruptive influence: the commercial technology market.

Emerging technology areas such as machine learning and artificial intelligence are advancing faster than it takes to land a meeting inside a government building. But you already know that the private sector tech market is outpacing the government. What might be less obvious is the impact on incumbent government contractors.

As margins become lower and keeping up with the pace of innovation becomes harder, you can be sure the shift of business models in the government contractor community has only just begun.

Government’s appetite for commercial tech

Last year venture capital investment in U.S. companies hit $130.9 billion, surpassing that of the dot-com years. Now, the federal budget for 2019 has $118.1 billion allotted for R&D. Evidently, the government has noticed how far behind it is technologically compared to the private sector.

Federal agencies — including the Department of Homeland Security, the Department of Defense, and many in the intelligence community — have offices in major tech hubs such as San Francisco, Boston, and Austin. Even the U.S. Geological Service has an innovation shop out west.

DOD alone awarded over 179 contracts in 2018 to non-traditional technologies leveraging the Other Transaction Authority (OTA) contracting method. The government also awarded millions through challenges it launched in search of non-traditional technologies to support objectives such as the Air Force’s multi-domain operations. NASA has also shifted its focus to companies such as SpaceX instead of building capabilities in house.

We are witnessing this shift in government firsthand at Dcode. In just the last three years, we’ve worked with 70 private sector tech companies and dozens of government organizations, driving 52 new implementations of commercial technology in government. Having hosted cumulatively more than 500 government leaders at our accelerator and innovation training programs, we see that the government is hungry for something different and increasingly willing to take chances on emerging tech solutions.

The government leaders who come in for our three- or four-day innovation training program also tell us that they are less and less interested in paying contractors to build solutions from scratch that already exist in the private sector for a fraction of the cost and at exponentially higher quality.

We hear war stories of antiquated technology solutions holding federal agencies hostage, and government leaders are motivated to find new ways to improve the way their agencies operate.

Not lost on the contractor community

Just as the government has taken notice, so have federal contractors.

The evidence is in the analysis of the Washington Technology Top 100. Deloitte has a newly reinvented innovation office and a new chief innovation officer. Booz Allen Hamilton is investing in artificial intelligence. BAE and Accenture have commercial tech plans. Lockheed Martin has a venture capital arm.

Federal contractors now understand what we know to be true: Finding private sector tech companies that can address government needs and that also know how to work in the federal market is easier said than done.

The growing number of prime contractors calling us to connect with emerging tech companies also indicates growing awareness and concern over the shifting dynamics. More than 50 systems integrators and technology partners engaged with our accelerator cohort of advanced analytics tech companies, and we have facilitated partnerships for dozens of OTA calls.

New business models on the block

A new type of prime contractors is also on the rise.

For example, Anduril, which successful Silicon Valley entrepreneurs and venture capitalists founded, touts the ability to “move fast and fix things.” Tackling interesting AI and UAS problems at agencies such as U.S. Customs and Border Protection, Anduril leverages existing commercial products to build defense solutions swiftly.

Referred to as the Defense Innovation Base, these new types of systems integrators and product companies are on a mission to disrupt the existing primes and industrial base. The existing prime contracts business model will have to shift from the traditional “butts-in-seats” approach to revenue models centered around private sector technologies if they want to stay competitive.

While the legacy powerhouses will likely continue to dominate the large industrial market of building plants, tanks, and heavy artillery for the foreseeable future, they will not be immune to this shift either.

For instance, in our accelerator cohort of space tech companies, we worked with cube satellite company Kepler Communications that went from napkin to orbit in under $1 million dollars and is already pushing live commercial data. For those still operating in the world where a satellite runs in the hundreds of millions of dollars to build, commercial alternatives like Kepler Communications should be a wake-up call.

For now, the traditional culture, bureaucracy, and incentives around contracting remain within the large incumbents, even those with budding in-house innovation groups. The change might not come suddenly overnight or even in the next year, but we will see a shift in the Top 100 list. The contractors that embrace new business models and the changing needs of government will thrive, and those who don’t will face an uphill battle.