October 10, 2006

CSIS Snapshot Of Government Services Industry Tees Up Critical Issues

Last month we summarized highlights from the recently published study of the federal government services "industrial base" by the Center for Strategic and International Studies. We continue to think the study is invaluable to get your arms around a large ($167 B in FY04) and ungainly (83,000 firms, according to CSIS) and to spot trends that may trigger some strategic thinking on your part.

The study is almost entirely a factual snapshot based on somewhat shaky GSA data that have been painstakingly cleansed and massaged and categorized. For Insider readers, in this issue we summarize some thoughts on what the facts mean. That said, we still recommend taking some time at least skim or read selectively the report.

We also pick a few bones with the study's methodology. That said, the report remains a valuable and unique framework for assessing where your company is and where you want to be in the industry.

Further, we consider some facts about the top companies in both the IT and professional, administrative, and management support services categories, as defined by CSIS.

Finally, when you look at the list of top firms in both categories, you'll recognize the Pentagon's best. The distinctions between the top firms building defense hardware and those providing IT systems and management and administrative services are becoming nil.

Issues Raised By	Impact of Issue	Outlook	Potential
Spending/revenue squeeze on mid-size firms.	Mid-size firms' growth is stunted. They find it harder to compete for both smaller jobs and large contracts. Suffer collateral staff drain, too.	Further concentration of spending on big firms, plus perennial government efforts to meet small-business spending targets. Subject to lackluster growth, attractive midsize firms will continue to be snapped up, but also find it hard to compete for acquisitions themselves. Large-firm lust for acquisitions has moved down to smaller firms.	Government could provide preferences, for example, designating certain work for which only midsize firms can prime.
Concentration of spending on large firms.	Larger firms tend to crowd out others for business, as well as staff, and, if money is tight (not the present case), for investment.	Reduction in competition and perhaps innovation in services; mirrors DoD's bind with only five firms of consequence for hardware/systems. Political pressure to unbundle mega-contracts may rise, this time with both small business and mid-size firms in support.	Unbundling would provide the appearance of a solution, but might multiply the fragile and often weak government oversight of contractors.
Ten percent of contract actions accounted for about 85 percent of total federal spending on professional services-with the" sweet spot" for contracts in the $1M to $25M range.	The industry is concentrated.	There is a clear possibility of a homogenization of firms-culture, processes, labor pools, and strategies. To the extent the top firms are viewed as being an excessively concentrated set, forms of additional regulation may occur. This will be exaggerated to the extent M&A activity reaches new heights.	Being differentiated and distinctive is more a plus than ever.
Population of industry-82 thousand firms, but the bulk of recent additions with only perfunctory amounts of federal revenue for their size.	Not only are the ranks of small business swelling, but the proportion of firms with a small stake in the industry is growing.	Reduces ability to wield industry clout, e.g., in lobbying, competing for budget dollars. Confuses government customers, and the firms themselves. Confounds small-business size-standards framework.	CSIS should continue its research to find a more certain census of actively participating firms-certainly a much smaller group than 82,000.
Expansion of the federal professional services market was "lumpy" until the spikes due to Y2K spending and the fallout from the September 11 attacks.	Federal spending is mainly responsible for growth. Technology may be a stimulant-a secondary factor.	Demand is not readily stimulated. Global events, e.g., political and health-related, and technology seem to drive spending increases. Companies will not in and of themselves stimulate demand. Rather, they need to look far ahead to understand what offerings and resources to marshal.	More than ever, there's a premium on looking far ahead and being agile. Companies need to equip themselves with constantly renewing information and analysis sources if they want to plan beyond the tactical opportunities in the next fiscal year.
Modifications to existing contracts account for on the order of 60 percent of contract spending (as of FY03, latest year).	Incumbency is still the greatest single assist to revenue sustenance. However, at 5 percent annual growth over 9 years, mods are outclassed by the 57 percent and 235 percent growth of federal schedule contract spending and multi[le-award contracts in the same period.	Continued growth of schedules, and GWACs, including the recent trend to shift away from GSA vehicles to home-grown ones in the agencies, will whittle away at mod spending. In the longer term, the trend is going to be for more competition. The remixing of the universe of contract vehicles will require constant rethinking and re-establishment of teaming and other alliances with other firms.	Companies need to continue to increase the speed and quality of their opportunity-seeking (in marketing), successful pursuit of new task order vehicles, and ability to respond with speed and effect. For companies finding value in enduring teaming alliances, the need to review and adjust them more frequently is clear.