The government’s increasing focus on price has been “incredibly disruptive” in the IT services market, said Timothy Wickham, managing director at the consulting firm Avascent.
The Defense Department opted for “lowest price technically acceptable” bids in about 36 percent of its contract awards over $1 million in fiscal year 2013, up from 26 percent in 2009. And the trend is likely to grow as the government comes under greater pressures to cut costs, Wickham and other experts predict.
The shift to LPTA rewards lean companies even when they may not have the technical and scale advantage of other contractors, Wickham said.
“LPTA is a real killer” for firms that carry large overhead costs, he said. “It takes away from their competitive advantage in engineering or other types of performance.”
Another seismic shift in the government IT sector has been the rise of commercial players. A potential wild card, said Wickham, is whether global giants like Amazon, Google and HP will make further inroads.
But most defense contractors do not yet see existential threats on the horizon even though several large firms have moved to spin off or divest their IT businesses. The idea that traditional vendors are in danger of being overrun by newcomers has created a media feeding frenzy, but some executives do not believe the hype.
“LPTA and advanced technologies and science don’t mix,” said Kevin L. Kelly, CEO of LGS Innovations.
Low bid contracting works for commodity services but not for projects that demand cutting-edge innovation or deal with sensitive technology, he said. The growing use of LPTA has “driven companies like us to inform our customers that we won’t bid on any LPTA work going forward. It has proven internally to be an absolute money loser.”
At some point, the government has to recognize that high-end technology does not come cheap, said Kelly. It brings to mind the “no bucks, no Buck Rogers” line from the space classic The Right Stuff, he added. “That’s not to say that companies should overcharge the government. It means technology costs money. Talent, testing, security clearances are not cheap.”
To be a successful government contractor “you have to focus on efficiency,” Kelly said. “But to deliver solutions you have to focus on value.” Allegations that contractors make exorbitant fees may be true from time to time but that is not the norm, he said. “There’s a tremendous amount of oversight and scrutiny throughout the process.”
The influx of nontraditional players is welcome, Kelly said. His company has teamed with commercial firms that inject innovation into projects. “It benefits us,” he said. “It doesn’t sound like it’s that threatening.”
The defense-vs.-commercial supplier debate ignores key facts such as the government’s reliance on contractors who have security clearances, Kelly noted. When defense or intelligence agency officials talk to Silicon Valley startups, “it’s not an easy conversation to have because of the sensitive nature of government requirements. They can’t broadcast what we have or don’t have,” he said. “Technology, itself, is rarely classified. But what is being used for is what makes it classified.”
Steve Omick, president of the defense and commercial research firm Vencore Labs, said there should be a balance between cost-driven and value-driven contracting. LPTA is not typically used for applied research work, he said. “It depends on the customers. Although it has been where the pendulum has swung over the past several years.”
One advantage that government technology contractors have today is that there is growing demand in civilian industry for innovation in areas like communications, data analytics, autonomous networks and cyber security. All these disciplines are being advanced in the defense and intelligence markets, said Omick. “Those are areas that many parts of the the Defense Department and businesses are looking at.”
Amid an increasing emphasis on cost, the IT industry is rapidly adjusting, analysts said. They predict the sector soon could be dominated by low-overhead federal IT players that are positioned to win in the LPTA world.
Defense contracting giants such as Lockheed Martin Corp., BAE Systems and Computer Sciences Corp. are taking steps to separate their federal IT businesses from the rest of the company. According to industry consultant Loren Thompson of the Lexington Institute, these companies “don’t see the revenue growth or profit potential in federal services that would justify a continued commitment to the space.”
At the Defense Department, the goal is not just to cut cost but also to accelerate the procurement cycle, said David DeVries, principal deputy chief information officer. “Our acquisition policy is not changing. What is changing is budgeting, how we put contracts together, timelines, source selection,” he told an industry conference. “It takes too much time. We have to shrink that time.”
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