The Washington Connection
A Washington presence has never been more important for prime contractors
P> In theory, the information highway eliminates geographic boundaries. People from opposite sides of the globe can communicate as easily as if they were next door to each other.
But as with many other things, reality defies theory. So, too, in the federal contracting world. If you want to deal in the federal market, you have to play here. Companies don't have to set up their headquarters in Washington, but successful federal primes maintain sizable operations in the nation's capital -- engineering, lobbying and contract management. There's just something about the personal contact that no T-1 connection can ever replace.
So how significant is the Washington connection? Just take a look at this year's Top 20 federal prime contractors. Thirteen of them also happen to be on Washington Technology's Top 25 high-tech employers in the D.C., Maryland, Virginia region, employing more than 73,000 people.
In the Washington region, Bell Atlantic has 11,500 employees, Westinghouse Electronic Systems has 8,000 (now Northrop Grumman), Lockheed Martin Corp. has 7,500, Computer Sciences Corp. has 7,325 and AT&T has 6,000.
In fact, the Netplex is home to the No. 1 federal prime contractor, Lockheed Martin Corp. of Bethesda, Md. And after the completion of its $9.1 billion purchase of Loral Corp.'s defense electronics and systems integration business, the Maryland giant may once again dominate next year's list.
Although $2.1 billion Science Applications International Corp. keeps its headquarters in San Diego, it might as well call the Netplex home. After all, the company has more of its 21,000 employees in the Washington area than in any other geographic region -- 5,300 to be more precise.
With billions of dollars at stake, large companies will spend to support lobbying and sales and marketing operations in Washington. The General Accounting Office estimates that federal agencies spend at least $25 billion annually on information technology. And that's just infotech expenses that agencies must report to the Office of Management and Budget.
For example, agencies do not have to report infotech expenses under $50 million, and the legislative and judicial branches do not have to provide infotech data to OMB. Infotech spending on embedded weapons and federally funded research on computers also do not have to be reported. For embedded software alone, the Defense Department estimates that it spends $24 billion to $32 billion annually.
And as Congress accelerates its systematic dismantling of the allegedly outdated, counterproductive procurement system, the Washington connection becomes even more critical. As federal agencies gain greater freedom and independence from rules handed down by Congress, they can exercise greater liberties in the way they make infotech purchases.
This tips the scale in favor of large companies that can afford to assemble an extensive network of Washington power brokers -- from former congressional staffers to agency policymakers, the savviest marketers and most experienced sales teams. These well-oiled political machines worked overtime last year during heated debates -- among legislators and infotech companies -- over procurement reform. It should come as no surprise then that Electronic Data Systems Corp. sponsored a lunch for Sen. William Cohen, R-Maine, the author of one of last year's procurement reform bills.
Lockheed Martin, a $23 billion company -- and soon to be $30 billion, asked its subcontractors to support the various reform measures under consideration by Congress last year, because what's good for the largest federal infotech contractor ostensibly is good for its smaller partners.
As the federal government desperately tries to operate more like a commercial organization, it has started awarding more and more multimillion dollar contracts to multiple vendors -- all in the spirit of competition. It began with contracts for commodities as a way for agencies to get better prices, and pretty soon, the trend caught on for buying services.
Because these contracts are awarded to multiple bidders with no guarantees of billable sales or services, the winning companies still have to compete for federal agency business even after they get the contract. After all, they win only an opportunity to sell. Exploiting that opportunity requires significant personnel and financial resources to do the necessary marketing. And no one can afford to provide both better than the elite group of Top 20 federal prime contractors.
There is also another factor at work. Government downsizing has prompted a consolidation among agencies around Washington operations, largely at the expense of operations elsewhere in the nation. But one could argue that this consolidation has benefited the economy around Washington as agencies and their contracting activities retreat to the center. This happened following the end of the Cold War with defense contracting, and civilian agency contracting is now showing a similar trend. According to data from the Federal Procurement Data Center, the amount of government contract spending with Washington area companies has nearly doubled since 1989 -- with Northern Virginia-based companies accounting for most of that increase.
LOOKING AHEAD: FEDERAL AGENCY
InfoTech SPENDING (FY 1996)
Other Defense agencies$3.2B
Health & Human Services $2.3B
Other civilian agencies$5.1B
Source: Office of Management and Budget