Jim Kane

In today's market, the big boys should be wary

Budgets, technology give advantages to nimble government contractors over the larger competitors

A profound and dramatic shift is underway in the government market that will dictate the type of companies that succeed and fail going forward.

We are witnessing a change from “economies of scale” to “economies of skill” as a successful business strategy in the government information technology market.

A significant share of new business will be driven by companies’ ability to adapt legacy programs to new technology and budget realities rather than capture entirely new programs.


Welcome to the new era of government contracting

Mergers and acquisitions will be driven by the highly differentiated capabilities of the company to be acquired rather than by the acquiring company’s objective of efficiencies through growth in market share. And if you doubt this is the case, you haven’t attended recent conferences for investors in this market.

Two key market drivers are behind this change in business strategy: budgets and technology.

The outlook for budgets is relatively flat. The implication is that there will be less spending on new program starts but relatively more spending on enhancements and improvements to existing programs. At the same time new technologies not only are being increasingly introduced but also increasingly disruptive.

Disruptive technologies and incremental enhancements are not a good match the classic “design-build-operate” paradigm. Companies in the past have leveraged their scale in the design-build-operate procurement model to win new programs. Companies in the future that can leverage their unique skills, smaller scale and agility in the new world of “adopt-insert-improve” will have a competitive advantage to capture business.

This evolution of the market negates many of the advantages of scale that have driven business strategy. Companies could gain market share and drive top-line growth through acquisitions, while at the same time achieve bottom-line growth through less than proportional increases in overhead and general and administrative costs. Disciplined engineering processes and program management practices provided additional competitive advantage to larger companies in the pursuit of new programs. As a result, many decisions to be a sub rather than prime on new program procurements were driven by the reality of being unable to “compete against the big guys."

In contrast, just as specialized remodelers have distinct advantages over new homebuilders in renovating buildings, so too do niche companies have competitive advantages in the new adopt-insert-improve environment. Their competitive advantage can reflect specialized expertise in a technology, disciplined architectural and systems engineering capabilities for technology insertion, and subject matter expertise in mission operations.

Traditional reliance on agency relationships and domain knowledge will continue to be necessary but no longer be sufficient to win business for technology enhancements to legacy programs.

There are implications of this new environment for different segments of the market. Niche technology-driven companies will be increasingly attractive – both as teammates and potential acquisitions. Classic systems engineering and technical assistance contractors will be vulnerable if they lack technical knowledge and engineering expertise required for major enhancements to their current programs. Large primes will be on the look out for niche technology companies, and at the same time could likely divest their commodity-type service organizations.

Irrespective, we are seeing the demise of bigger is better as a successful strategy for this market.

About the Author

Jim Kane is an advisor to companies in the federal market, and former president and CEO of the Systems and Software Consortium Inc.

Reader Comments

Thu, Jan 20, 2011 Jorge Washington

I notice that a longtime purveyor of advisory services on the government market cites as key the "advice and guidance" aspiring new-entrant firms receive. Why can't the govt make it easy enough so you would not have to pay a consultant 25k-100k to take the first steps? Actually, some get along just fine without it.

Fri, Jan 14, 2011 Mark Amtower

I agree with the above comment. While the need for new tech is real, and has been for a while, there are barriers. The ability of small, innovative companies to enter the government market is heavily dependent on their skill in this arcane environment, and their patience. The advice and guidance they get is critical to their ability to enter the market successfully.

Thu, Jan 13, 2011

Totally agree with this assessment of needs. However, just as the corporate and technology markets need to adapt to the new reality, so do the government procurement processes. Smaller companies have a great deal to offer govt in the 'adopt-insert-improve' model described, but they cannot afford to deal with the beaurocracy, much of it ineffectual, that stands between small companies and the customers they wish to serve. That needs to change too.

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