What stands in the way of a more mature GovCon market?

The services industry in the government contracting market ended its first half century facing the challenges of 2012’s sequestration and other federal budget imbroglios. But, regardless of those dynamics that stalled economic growth in the size of the market (which peaked in 2009 at $340 billion in annual contracted services but was still close to $300 billion in 2012), the GovCon services market is not going away.

It would be a great mistake to think that the GovCon market we know now is a temporary phenomenon created by a reaction to the Sept. 11 terrorist attacks and without that sense of urgency, the market itself disappears or recedes.

No – this market has very much turned a corner on too many trends in technology, governance, expertise, work force management, and service delivery to think of GovCon like a war market that goes up and down with U.S. military conflicts.

Trends in technology demanded by the government for their own citizen services, the demographics of the government work force (rapidly aging and facing a huge deficit in technical expertise), the desire for workforce management flexibility in government agencies, and the rapidly shifting nature of missions itself supports research which holds that despite the overall federal budget dipping of late, the market for contracted services (especially technology) will continue to rise – especially in hot areas such as cyber, data analytics, health care management, and others.

If one accepts that the market will continue to be huge, diverse (hundreds of thousands of contractors and tens of thousands of government buyers), and important, then the continued maturation of the GovCon market – with competition, innovation, sophistication, and liquidity driving better market choices and more effective solutions – is good for the country.

But, the bad news is that not only are there no guarantees of continued market maturation, there is a very good chance that the market could very purposefully stagnate for a decade or longer.

Two sets of market participants could, consciously and unconsciously, help create this stagnation.

From the buyers’ side of the market, there should be concern that government buyers, acquisition regulations, and procurement methodologies are rapidly distorting market rules and conditions. In the medium and long run these distortions will force out good competition, stymie innovation, empower rule-following but under-performing partners, discourage capital investments, and dissuade new entrants – especially commercial companies or even talented individuals.

On the sellers’ side of the market, industry must confront the fact that likely a good third of the current GovCon market is composed of leaders and companies that would welcome this chilling effect on market maturation and dynamism precisely because it would protect their franchises and incumbency from new competition or the need for investment.

In other words, it’s not just the government – if you’re a contractor, as the saying goes, we may have met the enemy and it is us.

Let’s look first at the government as a buyer and where its actions could arrest market maturity.

Now, many market purists insist that the only way some problems get fixed is if the government acts more like a business. Naturally, there is some sense to this on certain issues.

But, I’ve spent three different tours of duty in government and ultimately I came to understand that it is futile to ask a government not to be…..a government. Institutions have a fundamentally different character from one another - and one cannot ask a government, or school, or company, or church choir, or any other institution, to outrun its own character.

Legendary Supreme Court Justice Louis Brandeis told us that government was designed to be inefficient so that power could never be concentrated and used against a free citizenry. No doubt.

But what resonates with my experiences as both a government and industry leader is what my mentor the late Phil Merrill said, “If as a business leader you want to understand government, you have to understand that its purpose is not to be efficient, but to be representative and accountable.”

Our government will always have procurement rules that make the process less effective – but they may be tied to other goals of government procurement that can contradict pure business rationale.

Let’s look at a recent episode of a mid-sized GovCon company that I know. After submitting $4 million of invoices to their government customer, it turns out that there was a 12-cent difference due to a rounding error between the contractor and customer. An efficient process would have a reconciliation process for this tiny difference that would correspond to the size of the issue – quick and painless.

Instead, the process really defaulted to the core government value (an important one no doubt) of accountability and the reconciliation took 3 months and cost both sides tens of thousands of dollars. To find 12 cents!

Unfortunately, there are hundreds of stories like this in the GovCon community.  For its part, a company can have a low level official just look past the 12 cents and move on quickly. A government bent on full accountability at the expense of efficiency will move heaven and earth to prove those pennies have been found.

So the character of our government, bent as it is on accountability and representation, is not likely to change.

On the other hand though, the government can still be itself and be a smarter buyer. Especially insomuch as being a smart buyer serves the greater end of creating a mature market that provides the buyer with choice, innovation, quality, and professionalism.

Unfortunately, too many not-smart moves are being made. Contracts are being written that discourage innovation from new entrants in favor of government past performance.

Regulatory requirements are important, but some are almost impossible to fulfill (such as the disabled workers minimum) and so become ignored. The integrity of the system and the noble intention of the laws are undermined as a result.

Small business and 8(a) goals are great in conception and give an evergreen dynamic to the GovCon market in general but they are also shamelessly gamed in practice (as we’ve seen from too many recent headlines) by both government customers and contractors.

Compensation caps and wage floors distort both ends of the labor market, a set of tactics that reduces the ability of contractors to attract commercial and cutting edge talent. Wage controls also reduce the flexibility and cost effectiveness of a contracted workforce. That leaves government managers with two very similar and inflexible workforces – their federal employees and equally bounded- by-labor-cost contractors.

Unimaginative requirements processes in government agencies that reward the known, rather than the possible tend to freeze in place last generation or second best technological solutions.

One agency recently broke out of this cycle with the decision to award their cloud services contract to Amazon Web Services but that is very much the exception. Moreover, too many government procurement methods these days are prompting a race to the bottom on price with the inevitable resulting dip in service and talent an advantage to the company that wins the bid in the full knowledge that they’ll try to claw back the lost profit over time through loopholes and contract management gimmicks. 

Finally, oversight is absolutely necessary, but too many government oversight regimes have become predatory and prosecutorial in nature – rather than serving their true purpose of guarding against fraud and abuse. It is a rare GovCon company these days that does not have an Office of Federal Contract Compliance Program horror story.

There is not enough space here to talk about the many more compelling examples of these dynamics from the government buyers, but let us recognize the total effect is to pull the market backwards in terms of maturity – making it less competitive, discouraging investment, innovation, and new entrants – especially commercial ones, and ultimately leaving the buyer with a lesser set of procurement savvy contractors willing to endure the byzantine nature of the acquisition system.

As to the sins of the sellers, any reasonable market observer has to admit that in times of a flat or shrinking federal budget there is contractor resistance to market maturation as well. If the forces of maturation possibly bring new competition, more effective services, and more innovative solutions to the government customer then those benefitting from the status quo feel threatened.

This is absolutely not meant to imply that new is synonymous with better or that all commercial entrants are great and innovative, and all GovCon-only companies are static and reactive. Not the case. In the intelligence world right now a much hyped commercial product is judged by most of the intelligence professionals and users I’ve talked to as inferior to what their GovCon partners have produced.  So, newer and commercial is definitely not always better.

What do contractors do to slow maturation in order to protect their franchises?

Many of them encourage government buyers to use labyrinthine procurement methods that only they can navigate. We’ve all seen companies that actually don’t really have a solution but they are the prime contractor (the subs provide the solutions) just because they know how to work the most complex procurement and requirements drills.

Other status quo oriented companies encourage sole source awards, insider-shaped RFP’s, odd requirements that (surprise!) only one company can fulfill, pricing methods that might appear on the surface to affect everyone but are a veneer for those that know how to play the go-low-now-and-make-it-up-later game, and other requirements that can be manipulated in someone’s favor.

Some use Congress, lobbyists, or even associations to freeze out potential competition. In the end, I’ve observed that there is a whole set of contractors who prefer the GovCon sales cycle to be defined mostly as a political process, not a market competition.

The old saw that competition is good for the customer but bad for the competitors is true in the short run, but I would maintain not true in the long run.

Competition makes the market grow for everyone. I think the past 50 years of the GovCon market maturity support my premise.

The GovCon market faces a confidence gap from political leaders and the public at large. And that won’t improve if the market does not continue to mature.

A liquid, innovative, dynamic market with competition and choice on multiple levels ultimately serves everyone’s interest by creating a market that is legitimate, enduring, above simplistic criticism, and poised for growth. GovCon companies must accept change and competition as ultimately good for themselves and their market.

So how real is this market now? And how much of it is still a necessary process affected by political forces? Let’s turn to that next.