New Commercial Players Look To Enter Government Space

New Commercial Players Look To Enter Government Space

John Allen

The lure of the world's largest information technology market ? the U.S. government ? is attracting more and more companies that have primarily played in the commercial marketplace.

These companies are drawn in part because of the sheer volume of federal spending on IT, expected to hit $45 billion this year, and because of the market's image as a refuge in volatile economic times, according to industry analysts.

While the government as a safe haven is not a new concept, market experts said the trend appears to be more pronounced, because the procurement reforms of recent years have made purchasing much easier for federal agencies that are actively seeking commercial products and services.

"It's an enormous, target-rich environment," said Paul Brubaker, just named to the new position of president of e-government solutions at Commerce One Inc., a relative newcomer to the federal market. Brubaker is the former deputy chief information officer at the Defense Department. "The government is recession-proof, and when the economy gets cooler, it [seems like] a safe harbor."

Each week brings new announcements from tech firms that have created public-sector units, hired former federal officials such as Brubaker to lead a push into the government market, or secured their first General Services Administration schedule contract.

Among the companies seeking a new or wider footprint in this market are i2 Technologies Inc. of Dallas; Cedar Enterprise Solutions Inc. of Baltimore; XO Communications Inc. of Reston, Va.; Ezenia Inc. of Burlington, Mass.; Vignette Corp. of Austin, Texas; BroadVision Inc. of Redwood City, Calif.; and Commerce One of Pleasanton, Calif.

"Certainly, if you look at the federal IT market, clearly more commercially oriented companies have come into the space over the past few years," said Jim Kane, president and chief executive officer of market research firm Federal Sources Inc., McLean, Va., which also helps companies break into the government market. "The federal market is simply a very large market, [and] very hard for many companies to ignore."

While this means that systems integrators specializing in federal contracts may encounter increasing competition for some opportunities, they also will have a broader pool of prospective partners to team with, Kane said. Much of the influx is by software companies specializing in Web-enabling applications.

John Allen, managing director of the investment bank Quarterdeck Investment Partners Inc., Los Angeles, said the trend represents a win-win situation for both government and industry.

On the government side, agencies will have access to companies with broader commercial experience in areas such as outsourcing. For industry, the trend will make the federal sector more valuable as a market, and thus raise the value of companies already competing in that market.

Allen said the growing interest in the federal sector started on the heels of the April 2000 downturn in the stock market, leading to the shakeout of many dot-coms and growing pessimism over the condition of the national economy.

"Commercial companies I might have talked to a couple of years ago were less excited to talk about the federal marketplace, because they believed all the value they wanted to create for shareholders came out of the commercial sector," Allen said. Now there is "the perception of some pockets of very attractive growth in federal spending, such as outsourcing, the [Navy-Marine Corps Intranet] project, information assurance, e-government, the Groundbreaker contract."

The same phenomenon happened in 1992-93, the last time there was a recession, said Steve Charles, executive vice president and co-founder of immixGroup Inc., McLean, Va., a firm that works with companies looking to enter the federal market.

Charles, who has seen companies come and go in the public sector, said the ones looking for quick action don't survive. "The good companies that had the resources, who entered the market and had the [commitment], stayed," he said.

While there are plenty of ways to enter the federal market, getting on a GSA schedule is the first step for many companies.

"Our GSA schedule was just awarded two weeks ago," said Jim Martin, director of business development and alliances for i2, a provider of supply chain and management solutions. "I think that's a starting point for companies, just getting into" federal opportunities.

Another way to get into the government's business space is through acquisition. Robert Rubin of AFW Capital Partners LLC, Rockville, Md., said his firm is representing a couple of companies looking to make purchases that will help them enter the government market.

"I think a lot of them are looking to acquire their way into the marketplace, because there are still differences [between commercial and government markets]. By acquiring the companies ... you can buy that experience," he said.

Ezenia was one of those companies that took this route, purchasing InfoWorkSpace, a unit of General Dynamics Corp. of Falls Church, Va. InfoWorkSpace created a real-time collaboration product ? also called InfoWorkSpace ? for geographically dispersed participants that was designed by General Dynamics for some of its customers in the intelligence and government communities.

While Ezenia already sells its off-the-shelf products to federal agencies through its resellers, the company hopes InfoWorkSpace's reputation in the federal market will help create pull for its commercial products into agencies, said Art Souza, Ezenia's vice president of worldwide marketing and business development.

Procurement reform and the government's emphasis on purchasing off-the-shelf technology has also helped draw companies to the federal arena.

Commerce One's Brubaker is quite familiar with these changes. Earlier in his career, Brubaker was an aide to then-Sen. William Cohen, R-Maine, where he helped draft the Clinger-Cohen Act of 1996, implementing significant procurement reform. Before joining Commerce One, he was deputy chief information officer at the Defense Department when Cohen served as defense secretary.

"I think the reforms we passed in 1996 are really becoming part of the government culture," Brubaker said. "It's much easier to do business in the government than it used to be."

Procurement reform notwithstanding, entering the federal marketplace is not like taking on any other vertical market, experts said.

Allen, for example, said it requires a long-term commitment, partly because the sales cycle is extended and partly because agencies frequently evaluate companies on the basis of past performance, so it takes time to build up a track record.

Kane concurred, saying that Federal Sources frequently conducts corporate briefings explaining the differences between public- and private-sector markets.

"Corporate education has to take place, so headquarters understands that while the government market is very attractive because of its size ... it may take longer to evolve, with different kinds of expenses than they're used to seeing," he said.

While government buying practices have become more commercial-like, they are still unique, Kane said. "You can't just take a commercial sales force and say tomorrow you're going to sell to the federal government," he said.

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