Integrators Revamp IDIQ
Competition in the IDIQ market is at its fiercest, but integrators remain optimistic
The integration industry's largest government contractors are remodeling their federal sales strategies as more government computer buyers turn away from indefinite-delivery, indefinite-quantity contracts and funnel more of their infotech purchases across the General Services Administration supply schedules.
"GSA multiple-award schedules are gaining momentum and IDIQs are losing," said Gary Newgaard, manager of federal sales and marketing at Compaq Computer Corp., Houston. Newgaard's thoughts may surprise those familiar with Compaq's recent IDIQ success story. Over the last 12 months, the computer maker has staked a claim inside the IDIQ market by targeting a flurry of technology-refreshment opportunities.
Still, Newgaard's thoughts today are echoed by an army of federal contractors and industry analysts, including Federal Sources Inc., McLean, Va., which now estimates GSA Schedule sales to be growing by 30 percent a year compared to IDIQ contracts now estimated to be growing by only 10 percent.
Government contractors and industry computer manufacturers both admit that large federal buyers today have a compelling reason to buy from the GSA Schedule.
"We are in the midst of a sea of change. The way customers will purchase, the degree of openness and availability, and the decision to maintain standardization are all factors that no one is any longer certain about," said Newgaard.
To help augment their IDIQ sales strategies, several contractors have begun increasing customer support services. "Increasing the level of customer service to our government customers is our No. 1 priority," said E.O. Knowles, president of Hughes Data Systems, Irvine, Calif. For its part, Hughes entered the IDIQ arena in 1992 and soon scored big by winning the Air Force's Desktop IV contract. Today, the contractor offers federal customers a schedule that guarantees delivery anywhere in the world within 10 days. "Some people are going to accept a lower margin, but people have to understand that the cost of a unit is not the total cost they will incur over the life of the product. EDS takes into account the service, including repairs when it breaks," said Gene Garlick, a program manager at Electronic Data Systems Corp., Plano, Texas.
"EDS can leverage the whole corporation to get the product or service to the customer," said Garlick. "When the government went to Bosnia, we were able to put together a solution that gave them that service. I don't know if smaller companies are capable of doing this."
Meanwhile, Unisys Federal Systems Division, Blue Bell, Pa., which was recently awarded an IDIQ contract valued at up to $850 million, is taking a similar approach to customizing its services.
"?Customerizing' ? that's when we deliver tailored solutions to our clients using all of our resources at hand to deliver services and products at a reasonable price," said Lee Cooper, director of business development at Unisys Federal Systems, McLean, Va.
"Everyone is a rookie'' when it comes to IDIQ contracts today, said Julie Hall, federal sales manager at DTK Computer Inc., City of Industry, Calif. According to Hall, DTK-Federal has worked with as many as 10 different prime contractors.
Hall said that despite a decrease in IDIQ contracts, the payoff for individual contracts has continued to grow. Awards that used to be valued at several hundred million dollars are now being valued at upward of $1 billion.
The competition for fewer but richer contracts is leading both prime contractors and their subcontracting partners to carefully weigh their costs against the contract's potential revenue. Today, bidders of IDIQ contracts will sometimes offer services or products below cost and lose money the first year or two to position themselves for a payoff as costs decline the second and third year.
"Anyone losing money on IDIQs will be out of business in a few years," said Compaq's Newgaard.
Hughes' Knowles agrees with Newgaard. "Unfortunately, the financial stability of a number of companies is in question. After working in the red, providing the next level of service can be expensive and a challenge," said Knowles, who believes given their size, players like EDS and Hughes are better suited for tackling the price-sensitive IDIQs.
The focus has shifted from the contract itself to recognizable savings. The end user of today has less regard for how a product or service got there as long as it came with a low price tag, according to Knowles.
"The margins may be thin, but if the assets are managed carefully, the return can be a profitable one," said Knowles. Experts acknowledge that lucrative awards are more difficult to come by, however.
"Before, the issue was access to purchasing vehicles. Money is the big thing now. Today, only [price] is golden," said Harry Quast, executive vice president for business development at CACI International Inc., Arlington, Va., who works extensively with integrators on simulation projects.
While IDIQs continue to offer government buyers the best unit price, new milestones in legislation have eliminated much of the GSA Schedule's red tape. For instance, end users can now make purchases valued below $2,500 with a GSA credit card. In addition, recent legislation encourages agencies to buy from each other's contracts.
"We are experiencing nothing less than the biggest reform of the procurement system in 30 years," said John Klem, vice president of Federal Sources. The Information Technology Management Reform Act of 1996 and the Federal Acquisition Streamlining Act of 1994 have revamped the administrative and legislative controls on federal information technology acquisitions. Today, individual agencies are given largely free license to make most of their own purchasing decisions. The remainder of oversight responsibility has been transferred to the Office of Management and Budget, Klem said.
Oversight has been cast to the periphery, but still remains important. In fact, industry observers say that only large program procurements are likely to receive OMB review, and only then as part of the budget process. Agencies will continue to present program justifications to OMB as part of their capital plans. Small procurements will enjoy the most liberties as agencies will have the flexibility to find the most cost-effective deals for their needs and schedules.
"There are more openings for smaller players because non-performing contractors will be weeded out. Past performance will separate the players from the has-beens," said Steve Charles, vice president of Selbre Associates, a contract management and consulting firm based in Bethesda, Md.
Past performance is the standard that is at the center of intense scrutiny. By law, the measure must comprise 25 percent or more of the entire criteria. "We need to ask what past performance means. It could be length of experience, which might exclude smaller and newer players," said William Montalto, general counsel to the House Committee on Small Business.
Federal outsourcing may boom, industry observers say, as agencies become required to justify overall programs and explain the need to keep them in-house.
Skeptics who see IDIQs as a thing of the past may have an audience among GSA proponents, but integrators aren't ready to throw in their hats just yet. In fact, they see more promising times ahead.
"Though defense spending is shrinking, it is shifting to civilian departments," said Knowles. Overall, IDIQ contracts are spiking up in quantity but are going down in value per contracts, and the budget will remain flat, said Knowles.
Knowles is not unsettled by talk of fuzzing lines with GSA Schedules.
"GSA Schedule business is going to grow, but the IDIQ contract has its place because it serves a different purpose," he said. The guarantee of services, standard components and compatibility, and less paperwork are winning points of IDIQs, said Knowles.
"We are not a GSA Schedule holder," said Knowles. Instead of hedging their bets by doing both, Hughes will instead focus on the service aspects of IDIQs. To meet that end, Hughes often partners with various subcontractors.
"In the six years since Hughes Data Systems was founded, we've had teaming relationships with four companies. We form partnerships carefully. It's not a marriage, but it's like going steady," said Knowles. Hewlett-Packard Co., IBM Corp., Micron Technologies and Digital Equipment Corp. have been in the small, but selective lineup of partners with Hughes.
"We are intensely competitive when we go after the same projects. We want to clean their clocks," said William Woodard, vice president of Computer Sciences Corp.'s Systems Engineering Division, El Segundo, Calif. "But when we work together on multiple awards, we are open and supportive."
In fact, CSC's most sweeping success to date has been the $935 million Defense Enterprise Integration Services contract awarded by the Defense Information Systems Agency in November 1993. DISA awarded contracts to six teams: CSC, EDS , Lockheed Martin Corp., BDM Federal Inc., Unisys Corp. and Boeing Information Services.
The CSC team comprised three of the five largest integration firms in the world, which include CSC, Andersen Consulting and Science Applications International Corp. Along with 14 other firms, the CSC team has been awarded 169 delivery orders valued at more than $200 million. The DEIS project went so well that the National Institutes of Health recently requested "DEIS-like" features on its request for proposals for an upcoming contract.
The trump card for IDIQ contractors may be commercial, off-the-shelf procurement. For several years, the federal government has been moving away from custom infotech solutions and replacing them with off-the-shelf procurements made through IDIQ and GSA contracts. The latest round of acquisition reform has assured off-the-shelf procurements a place at the head table. "This [off-the-shelf procurement] trend is here to stay," said Mark Meudt, director of the Federal Systems Group at Lockheed Martin, Bethesda, Md.
IDIQ vehicles have the advantage because they combine off-the-shelf product procurements with integration services, technical support, training and maintenance services. Although federal agencies will find it far easier to obtain products and services, they must still design solutions and integrate them into their information systems.
"Contractors with proven [off-the-shelf procurement] integration experience will have a real advantage in the new acquisition climate," said Federal Sources' Klem.
"The emphasis is toward smaller procurements or modular procurement," said Selbre Associates' Charles. "Oftentimes, these monster procurement vehicles left the government at the mercy of contractors who were not liable for providing products that might be out of date in a few years," said Charles.
Given the fact that most awards are often followed by heated protests, agencies see multiple awards as a solution to appease more players and thwart protests, which delay project implementation. "It's not winner take all anymore," said Charles.
The protest staged by Government Technology Services Inc., Chantilly, Va., and Sysorex Inc., Mountain View, Calif., against the award of Air Force's Desktop V contract last May had all the telltale signs that prompted protests on other large contracts. The protesters received out-of-court cash settlements from winning vendors Hughes Data Systems and Zenith Data Systems Corp., Glenview, Ill. For it part, GTSI will still enjoy a portion of the giant award as a subcontractor.
"A lot of federal government agencies are shying away from IDIQs due to the difficulty in running procurements and making the award stick without drawing protests," said Knowles. Recently, for example, the Internal Revenue Service dropped a major IDIQ contract with AT&T and opted to buy across the GSA Schedule after the original award became a target of numerous protests.
The move to multiple awards means that a company can go after more than one business prospect. Success in marketing is more critical because contractors will rely on several contracts to generate the level of revenue previously provided by one sole-source contract, which was lucrative for the single winner, said Charles.
"More awards mean more opportunities for primes and subcontractors," Charles said. "It's a misnomer. IDIQs are not indefinite. It's maximum quantity and maximum delivery. There is a definite quantity involved and delivery dates are watched closely," said Hall. "Companies are going after contracts in a new way. Their strategies have changed completely."
In the future, "contracting officers will have greater authority and autonomy as they will be pressured to get results [rather] than abiding by rules," said James O'Conner, assistant advocate for Procurement Policy at the Small Business Administration. According to O'Conner, the officer can also decide who can participate in the bid process because the officer will determine the competitive range.
Caught up with the race to offer the most appealing combination of value and price, integrators are sometimes blinded by their desire to cut costs, said Wayne Shelton, president of Hughes Information Systems, Fullerton, Calif. "Research and development will tumble and technology development forecasting will be scaled back."
"The government gets a fair price and contractors have refresh agreements that they are keen on," said Lockheed Martin's Meudt. "Before, the customer used to pay for the end product. Now it's man hours. There are no free lunches," he said.