Stan Soloway


How 'healthy' is the GovCon industry?

Assessing health isn't just about profits and losses

In late May, I had the honor of participating in an outbrief by a class at the Industrial College of the Armed Forces (ICAF). Their study was on the government services sector, particularly that portion supporting the Defense Department, and sought to address two key issues: how important the sector is (or isn’t) to the department’s missions and whether it is healthy or not.

The class was a mix of acquisition and non-acquisition officers and also included civilians from the Homeland Security Department. On the question of the importance of the industry, this diverse and impressive group was unambiguous. Their conclusion after months of research, site visits and more, was that a healthy and vibrant services sector—cutting across the entire spectrum of capabilities—was essential to mission execution.  And on that point, I, and most people I know, would fully agree.

To assess the industry’s health they reviewed the publicly available filings of four firms, spent time meeting with top Wall Street bank officials, and studied both market analytics and Porter’s Five Forces theory. Here, their conclusion was also unambiguous. Despite the budget downturn, the industry is competitive and healthy. And while their research was sound and their conclusions logical, this is where the discussion got most interesting.

How do you define “healthy?” By some Wall Street metrics, firms that have strong profitability despite a market downturn are considered healthy.

But it’s not clear to me that the chosen metrics really tell the story.

Many experts point to companies, like Lockheed Martin, that had excellent earnings during a very difficult budget year. What is often missing from those assessments, however, is how the company achieved what they did.

In Lockheed’s case, the company was forward-thinking and spent several years preparing for a downturn they knew was on the way. They sought new market opportunities through targeted acquisitions. They eliminated thousands of jobs and dramatically cut other costs. As such, they were able to demonstrate strong profitability despite the budget reductions affecting them.

But are they really “healthy?”

How much deeper can they or other companies cut without losing key capabilities? How much longer can companies perform at a high level in a market frequently driven by low price rather than quality? After all, market volume is one thing; market quality—the ability to innovate, improve, invest and be appropriately rewarded for doing so—is an entirely different matter.

And by many measures, those quality factors are largely missing in today’s government services market.

This is not just an academic problem. It is a practical application of government policy on the market. We see it all the time with the dominance of lowest price, minimally technically acceptable, contract awards, unrealistic and deleterious employee compensation caps, and continued efforts by some inside DOD and elsewhere to both commoditize and de-commercialize the services sector.

And regrettably, because some of the financial sector’s analyses tend to focus on short-term financial results and trends, they often ignore the factors that drive long-term company health in a real way.

Beyond quality, other factors determine the relative health of a market. For example, no one argues the value of our small business programs or the great value small businesses bring to the department and to the economy.

But when the Air Force pushes as much systems engineering and technical assistance (SETA) work as possible to small businesses, even beyond the nearly 40 percent in small business awards already being achieved, principally because of the Air Force’s poor performance on small business awards in virtually every other segment of its spending, it’s hard to define that market as “healthy.”

Similarly, in program management and acquisition support, small business awards across the government have grown by nearly 200 percent in just three years—strongly suggesting that a priori decisions based on numeric goals rather than strategic thinking are driving the market, thereby creating significant challenges for the bulk of the firms competing.

Is that a healthy market?

Such strategies not only disproportionately impact “other than small businesses” that specialize in certain types of work, but also pose a risk to the very small businesses that are winning work today. What happens to them tomorrow when they can no longer compete in their specialty because they have outgrown the small business size standard and work continues to be set-aside exclusively for small business? Is that a healthy economic or market model?

Services today account for over half of all DoD contract spending and over 60 percent of all government contract spending. Yet, real understanding of the dynamics of this diverse industrial base, and the impacts of a range of government policies and behaviors, remains sadly limited, both in the acquisition schools (ICAF’s efforts aside) and in the operational components.

Indeed, as my fellow panelists and I made clear to the ICAF students, it is not even “an industry;” rather, it is an amalgam of industries cutting across numerous areas of capability. And each segment is experiencing different, and at time conflicting, dynamics.

Is it a “healthy” sector?  By some measures, definitely. It continues to play numerous vital roles across government missions, is growing is some key areas, and as government missions become ever more complex, will necessarily continue to grow. By other measures, however, the answer is far less clear. In the end, the government, like any customer, benefits from a truly healthy supplier base. Thus, it’s time to pay attention to the measures of health that matter most, in both the near and long term.

Reader Comments

Thu, Jun 19, 2014 Drayton

Stan--thoughtful rejoinder. Am glad you acknowledge commodity element. We'd disagree on how much of services is commodity. I'd say virtually all butts-in-seats, many operational services, fac. mgt services, and even a lot of analytical work and problem-solving. I'd say way more than half is commodity--but the firms would like to posture it as (more costly) customized work. The rejection of the commodity label and indeed, lack of agreement on what makes a service a commodity explains in part why "Best Value" rings so hollow. We can't expect the government to honestly employ BV methods when the typical Fed, even experienced SESers, cannot recognize substantive professional services for what they are and acknowledge the govt does not have the capabilities. As for the small business thing--small/middle size vs. large really is a zero-sum game, but no one wants to admit that. Further, teaming of small w large obscures what is really happening to the revenue--which really requires some more transparency and enforcement, because SBs usually get the shaft, whether they are primes or subs. And the retro. change in size standards, while it makes sense in principle, is being implemented in the worst possible way. SBA remains an embarrassment for the government, but the clueless OMB and WH advisers won't do what is necessary.

Mon, Jun 16, 2014 Stan Soloway

I appreciate the thoiughtful comments but do think it important to clarify a couple of things that were apparently misunderstood. First, to Drayton M.'s comment. In no way was my column even a veiled swipe at small business or the govenment's small business programs. My point very simply is about implementation of the goals and the ways in which that often indiscriminate implementation impacts the sector. The programs are designed appropriately to be implemented across the entire spectrum of government requirements. So, when they are shoehorned into targeted segments merely because it's easy to do, that's a disservice to both the govt and small businesses more generally, let alone the companies that are no longer eligible to compete for work they've already been doing, And to Mel O's comment about innovation, I agree to so e extent. But as with the small business question, let's not overstate it. Sure, some services work is in effect a commodity. But not all is. And in the tech world of today the continuum of development to commodity is both faster and more circular in nature than ever. Moreover, even when the govt wants innovation the buying strategies used are often the same as those more appropriate for commodities. But where I strongly disagree is when you say it's all a sham (like best value) and that the govt doesn't need innovation. As to the former, it's not a sham at all; it's about being a sophisticated buyer,. As to the latter, I do think the government needs innovation. Badly,

Sat, Jun 7, 2014 Drayton Morepharct

I know where Mr. Soloway's heart is regarding government contracting, and it is good. He wants the govt to get what it needs and he would like the industry to thrive, or at least get compensated fairly and to grow. But this pawn (his account of the panel) has the acrid odor of a War on Small Business. He's implying strongly that small businesses have insufficient capacity (and also read: the skill) to do various kinds of work. And, oh my gosh, if they get the work, they may bust the size standards and be set up for a big let down when they just can'd do those bigger jobs. What's a small business to do, eh? Please, Mr. Soloway, tell us that the answer is to poor money on the Other than Small Business firms. Is this correct logic. We know your assn. has plenty of small businesses, but not most of them or of middle size firms. But it has almost all of the big ones, and they desperately need the work. Stan, you know this business like no one else, and it is rather hard for you to put over a point like the one you have. We can see it in facial expression and tone, or even words on a screen. Retardless, thanks for supporting and boosting the industry, even if not in a fully balanced way. That is understandable.

Sat, Jun 7, 2014 Jake Mishbuccha

Interestingly, in Stan's last paragraph, if you substitute "healthcare" for "services" industry in his closing assertions, the sentence still makes sense. One can ask, then, what attributes of the healthcare industry are "healthy" in the same way as the amalgam of industries called government services. Finally, Stan might restrain himself a bit batting away the term and concept of commoditization. Commodities, including commodity labor in various categories are truly important to our economy and our world. Being a commodity has many good points. When one allows, though phony posturing of differentiation, to appear to offer something different, the games begin, with the government making poor choices and the suppliers taking indecent liberties (business ones) with the customers. Make sense?

Fri, Jun 6, 2014 Mel Ostrow

Stan--Most of us, and probably you, when we are candid recognize that the government rarely calls for innovation. Yes, the term is bandied about, like, for example, best value. But it is a sham. Just look at the SOWs covering the vast majority of the Federal funds spent on services. It is for turning the crank, basic blocking and tackling. No innovation is needed, and the supplier, more often than not, can provide commodity-like labor, even for so-called professional services. Quality is great, but if it is just turning the crank, we don't need higher-priced labor than needed. And we definitely do not need innovation. Timely, cost-efficient staffing would be nice, but innovation, just for the occasional piece of work. Make sense?

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