The Future of Government Procurement

Introduction

Over the last several years I’ve been watching the market change. I don’t have a crystal ball and like anyone else, I can’t see the future. However. . . this article is about predicting the direction of government procurement, patterns, and changes that are taking place.

Due to length (4,500 words), if you would rather "listen" to this article via a podcast, we've released it on Game Changers for Government Contractors. We already have more than 55,000 listeners so you may want to add yourself!

At the end of this article I provide recommendations on what government contractors can do to prepare for the changes taking place in federal acquisition.

Current Challenges

Government Spend vs. Size of Acquisition Work Force

The acquisition workforce, which includes contracting officers, specialists, and others has decreased over the years from approximately 100,000 to somewhere between 30,000 and 40,000. Additionally, appropriations have steadily increased over the last couple decades. Look at the Defense Authorization Act recently signed at Fort Drum. It was for $717 Billion. So we're looking at a third of the resources to manage contracts and in the case of the Department of Defense, appropriations have tripled.

I'll plant a seed that will grow throughout this article: This is why strategic sourcing is so valuable to the government.

Less Communication / Interaction Between Government and Industry

This is not blanket statement and some programs do this extremely well. Cyber Security and construction industries come to mind. Emily Hartman, who I’ve never met but greatly respect, is the Director of the Navy’s Small Business Program and I’ve been watching her on LinkedIn. Her program and her staff is one of the exceptions where I see extensive communication between government and industry.

But because of the size of the acquisition workforce (contracting officers, contracting specialists, etc.) and the extensive increase in programs and requirements, it’s a simple matter of arithmetic. There’s just not enough time to maintain the necessary level of interaction and communication with industry. 

The Protest

This ties into the second issue. One of the reasons there’s less communication is because unlike 20 years ago, companies that sell to the government have added the “Protest” as a core activity every time they lose a bid. This has forced the government to put up walls between themselves and government contractors.

The government employees I interviewed for this article said they are cautious of every single word they say to a government contractor because everyone now protests everything. I should add that the GAO is going to / has already started charging companies for protests, and that’s based on thresholds . . . but that doesn’t resolve the underlying issues.

Lack of Balance Between the Needs of Industry (especially the small business community) and the Current Focus of Government Strategic Sourcing Initiatives

My LinkedIn network is now close to 4,500 but probably no more than half have seen me present at a national conferences. If you know me, you know I love going off on tangents. So just a quick note on reverse auctions. For all the value that the government gets from reverse auctions, reverse auctions are terrible for industry.

Reverse Auctions

• By their very nature they magnify the effects of what we often refer to as low price technically acceptable (LPTA).
• In the last month or so, one defense contractor announced their contract with the government to run reverse auctions was not renewed.
• Reverse auctions are still taking place but I predict that various strategic sourcing initiatives will replace reverse auctions over the coming years.

GSA Schedules

Continuing on tangent, let’s also discuss GSA Schedules. They are one of the most common and recognizable contract vehicles in the government market. For the newbies, a GSA Schedule is simply a contract vehicle that gives you license to hunt. You don’t win anything or make any money unless you market your schedule and get the government to use it and buy from you.

And I’ll go off on another tangent (if you're following, that's a tangent off another tangent). All those GSA Schedule application service companies, companies that will help you get a GSA Schedule, often don’t give you all the facts.

• Currently ~17,300 companies have GSA Schedules and ~50% fail to make money. Yes. Really.
• If you look at the total number of SAM registrations (System for Award Management), there are ~600,000 companies. Thus, only 2.9% of companies have a GSA Schedule.

So. . . make sure you know how to sell to the government and how to apply what you've learned (includes a combination of resources from PTACs, consultants, books, conferences, webinars, etc.) before you get a schedule.

GSA Schedules are De-Facto Strategic Sourcing and Category Management

Category management and strategic sourcing are not new to government acquisition. In fact, I was told there's a pilot taking place to test a possible replacement for GSA schedules. The average schedule purchase, especially for commodities, has been reported to be at or less than $25,000. I was told the government is building an online shopping portal. I would guess it has similar capabilities as other government eCommerce platforms.

Interestingly, I also heard that the government is considering / testing an increase in the micro-purchase to $25,000 . . . specifically on this pilot platform. Not necessarily tied to the above, based on discussions with several government folks, they also said they are evaluating whether the GSA Schedule program can be improved, modified, or should it, based on technology and current industry best practices, become obsolete.

Should they simply increase micro-purchases to $25,000 and simply on-board vendors into the new system? Regardless of the pilot, the value of a GSA Schedule is not going away. GSA Schedules ensure that:

• You’ve been in business for a couple years or if you have highly desired cutting edge technology or solutions, that your office is not a houseboat in the Florida Keys. (I can't tell you how many of our clients have used Google Earth to locate a winning bidder and then forward a picture of a houseboat to the contracting officer. Almost every time the award is cancelled. . . but I digress).
• You can prove you have a viable business model
• Your rates are competitive

Everything that a GSA Schedules provides can also be provided with an online system – which they’ve already proven is viable with other acquisition solutions.

If You Have a GSA Schedule - Don't Freak Out

Whether it’s five years or ten years, I believe that we’re going to see the capability, functionality, and value of the GSA Schedule program morphed into an online system that is capable of more strongly supporting industry best practices for category management and strategic sourcing. I anticipate it’ll be similar to what happened with companies that fought for space on GSA FSSI contracts. I predict GSA Schedule holders will be invited to compete for space in the new online eCommerce portal (or other future system) and if you don’t make it on the contract, your GSA Schedule will be worth very little because no one will be able to buy from it. And then GSA will probably just let these schedules expire.

So today, GSA Schedules are safe. But the writing is on the wall. I anticipate the GSA Schedule program morphing into a more strategically sourced online tool. I don’t know what that tool will be but I believe GSA Schedules are moving towards end-of-life.

*** December 2018 Update ***

Well, I was wrong about GSA Schedules. I originally published this article in September 2018. In December of 2018, the General Services Administration (GSA) notified industry that the GSA Schedule program would consolidate into a single GSA Schedule. Sometime in 2019, GSA will shut-down the schedule program to new contractors as they migrate to the single schedule. Then in 2020, companies that have a GSA Schedule will be migrated to the new schedule. Yes! This falls under strategic sourcing and category management. If you want to keep up to date on this, be sure to connect with me on LinkedIn.

Procurement Mechanisms

Okay - so I’ve touched on reverse auctions and GSA Schedules, but I haven’t touched on MATOCs, MACs, and other IDIQs. But before I do, I want to make sure we’re all on the same sheet of music when it comes to the basics of government procurement and delve deeper into strategic sourcing.

In the procurement system, the government's goal is to obtain best-value products and services for agency missions and for taxpayers. The objective is to avoid waste, fraud and abuse, while focusing on innovative acquisition methods.

Here are several of the more common acquisition models and methods (in no specific order):

• GSA Schedules; Blanket Purchase Agreements (BPA); Full and open competition; Simplified Acquisitions; Multiple and Single Award Task Order Contracts (MATOC / SATOC) and Indefinite Delivery Indefinite Quantity (IDIQ) Contracts; Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR); Purchase Card (micro-purchases); Set-Asides; A-76; Complementary Contracts for Small and Large; Reverse Auctions

ALL of these mechanisms and acquisition models are based on strategic sourcing and category management.

Strategic Sourcing

A little history. At its core, strategic sourcing is leveraging purchasing power. But by its very nature and how it is able to provide value, it requires that less vendors / contractors will supply a given product or service. It means the government can be heavy-handed and say, “If you want to be on this contract, you’ll be one of very few which will have guaranteed revenue, but you have to drop your price."

What they’re not saying but is clearly the case – you must lower your margins. From a business perspective, that makes perfect sense.

Of course, there’s a tradeoff. Because if you lower your margins but greatly increase your sales volume, you’re still likely to make more money overall, albeit at a lower margin. As a government contractor, if you don’t get on the strategic sourcing contract, you’re pretty much shut-out of the market.

As a tax payer, strategic sourcing and category management is critical to future cost control and for a better streamlined acquisition process. On the other hand, strategic sourcing does not take into account the full impact to the business community; or attempt to achieve the necessary balance required by both sides of the supply chain.

"Yes, strategic sourcing will help to better leverage the government’s buying power, but current government strategy does not take into account the full impact to the business community or attempt to achieve the necessary balance required by both sides of the supply chain."

Strategic Sourcing - Small Business Impact

Okay, some quick background. Almost every acquisition strategy and model used by the government is some form of strategic sourcing or category management. Let's use GSA's Federal Strategic Sourcing Initiative (FSSI) Program as an example. FSSI currently has five programs: Building & Maintenance Operations; Wireless; Janitorial; Office Supplies; and MRO - Maintenance Repair and Operations

Back in August 2016, I sat down with Congressman Luetkemeyer and Senator McCaskill’s staff – representing the House of Representatives and the US Senate, Republican and Democrat. I walked through the numbers of what happened to small businesses when Office Supplies fell under strategic sourcing via the FSSI program.

The government put a great spin on it and said it was an acquisition like any other and that they were taking advantage of strategic sourcing principles. Of course Congress and the community at large, was never told that the individual GSA hired to roll-out the FSSI program had just tested it on the state level. The states of California and Pennsylvania both rolled out strategic sourcing programs. For multiple reasons, including a failure to properly balance both sides of the supply chain, both states rolled back and terminated their strategic sourcing programs. I won't rehash what I published in the Federal Register but I'll republish as an article in the months ahead.

So, back on point - the government put a great spin on the value of FSSI. But this was different. No matter what, if you weren’t selected to be on the office supply FSSI contract – it would be highly difficult to sell office supplies in volume.

Hundreds of companies with GSA Schedules that didn’t get on the contract were told, "you can keep your schedule but agencies will not purchase from you like they have in the past. You’ll still get some micro-purchase buys . . ."

Hundreds of small office supply companies went out of business overnight.

Small Business Regulations vs. Strategic Sourcing

I’ve been a champion for small business my entire career. I’ve been supporting Public Sector, the government market, for 28 years. I’ve been watching and listening to various consultants, advisors, counselors, and small business offices talking about the various updates to small business regulations and how great they are for small business. But one of our clients recently asked a very interesting question. She asked, “But don’t small business regulations protect against the impacts of strategic sourcing?”

And that’s a great question . . . because small business regulations are a double-edged sword! What I want everyone to understand is that regulations, including small business regulations, in the sphere of strategic sourcing, are short-term solutions that must be integrated with the government’s overall encompassing acquisition strategy.

Let me outline with some background and examples.

Strongest Updates to Small Business Regulations in 20 Years

Yes, there have been important changes to small business regulations. The All Small Business Mentor Protégé Program is one. But now they’re rolling back some of the value and limiting how and how often small businesses can use it. There's also the the Limitations on Subcontracting where similar type entities counts towards the prime's 51% requirement. We've also seen mixed type contracts where the larger value, product or service, gets the assigned NAICS (North American Industrial Classification System) code. And stronger affiliation rules are cracking down to protect small businesses from unscrupulous companies.

Small Business Regulations vs. Strategic Sourcing

As hard as the SBA and other agencies have worked to protect the small business community, there's a gap in the government's overall small business strategy. You have to look at small business regulations from a bigger picture.

The Small Business community is excited, and rightfully so about these changes. These changes are very beneficial but will become less and less beneficial as the government moves increasingly more towards strategic sourcing and category management.

What do I mean? Here's an example.

Example - Small Business Regulations Lose Value Under Strategic Sourcing

Let’s use office supplies and go back a couple decades. Let's assume there were 3,000 companies that sold office supplies to the government. This includes Office Max, Staples, other large brick-n-mortar, and thousands of small businesses. At the time, there were no GSA Schedules. But then GSA Schedules start being used and while all 3,000 companies “can” sell to the government, GSA Schedules, which are a form of strategic sourcing, are awarded to 650 companies.

The government told federal agencies, "You can still buy open-market BUT we’ve negotiated competitive rates on this new GSA Schedule program."

So agencies start using GSA schedules more and more and now instead of having 3,000 companies making money, it’s down to 650 companies (22%).

Now jump forward to the last ten years. GSA says, "We want lower pricing. We’ll get lower pricing if we leverage the market." So we’re going to create a program called the Federal Strategic Sourcing Initiative or FSSI. The FSSI program office puts out a strategic sourcing solicitation for office supplies and asks companies to submit proposals. GSA awarded 20 contracts for the 3rd generation, of which 19 are small business.

And GSA says:

“Wow, look at this! 95% of the companies we gave awards to are small business! Isn’t this awesome! Look how we’re supporting our small business goals!”

But we need to look at the bigger picture. Now we’ve dropped from 3,000 companies down to 650. . . and now down to 20. When the government started using GSA Schedules, 22% of of the 3,000 companies selling to the government were then making money at a volume that drives business growth. Now, only 20 companies are being used by federal agencies. We’ve dropped again. . . from 22% to less than 1% of office supply companies making large volume sales to the government with consistent results.

"We have outstanding progress on small business regulations, regulations that are truly beneficial to small business, but what good are these regulations when the government is maximizing its leverage and only allowing a handful of companies to sell to the government anyway?"

"Negative Market Leverage"

In the above example, I call this negative market leverage. The government is enacting, touting, and promoting extensive regulation updates for small business. But the government is also moving at light speed to facilitate a massive shift in strategic sourcing and category management.

The problem is that small business regulations and the shifts in strategic sourcing and category management are being enacted under separate initiatives, separate regulations, and the government is not taking this into account.

However, the government is doing what taxpayers and agencies want: they’re leveraging the market by saying, “If you want to be one of the 20 companies that all agencies will buy from, then you must compete and by nature of these type of competitions, lower your price.”

That’s the objective of strategic sourcing – to leverage vendors and get lowest possible pricing. But if there’s only 20 companies in the world that agencies will buy from, that’s negative leverage because it eliminates the majority of the market.

All the federal and Defense small business regulations will mean nothing to companies, especially small businesses, when agencies are no longer allowed to buy from them. That's negative market leverage.

"All the recent updates to small business regulations are excellent. But many will be superseded and overcome by the larger shifts in strategic sourcing and category management."

Who cares if small business regulations provide for more set-asides; force contracting officers to release more bids to small companies; or carve out more spend for 8a, WOSB, VOSB, SDVOSB, HUBZone, or other set-asides?

If the government continues down the road it’s going, only a fraction of current government contractors will be selling to the government anyway. At that point, the small business regulations will only apply to a handful of companies.

Whether there are 3,000 companies selling office supplies to the government or 20, the government will still be able to say, “Look at our small business numbers! We’re still meeting federally mandated small business percentages."

They just won’t say they're meeting their numbers with a pool of only 20 companies.

Think about that. . .

Balancing Strategic Sourcing with Protection of the Small Business Community

Strategic sourcing is transforming government procurement strategy faster than most realize. You you might be asking, “Why aren’t we hearing more about this?”

Well, it’s a combination of 1) the current political climate and 2) federal agencies being more laissez-faire and less transparent. Has anyone else noticed that federal agencies seem to be much more flexible and autonomous the last four or five years? If they want to do something, they pretty do much do it. As a manager, I get this! It makes sense.

It’s a lot easier to say, “Well, we’ve already implemented this new procurement process and see? . . . it works.” Agencies are no different than corporate America. You can pretty much interpret the data any way you want.

On top of this, while there are committees in the House and Senate that oversee small business, they’ve been more focused, the last several years, on partisan politics, party preservation, not rocking the boat, and other bills that are easier to get signed. Again, I get it. It makes sense. All of this allows agencies to be more autonomous in their decisions. Yes, there’s still congressional oversight, but I would argue that the oversight is 'clouded.'

Federal agencies are focused on doing the right thing. They are protecting their appropriations, leveraging the market, and being fiscally responsible.

However, one of Congress' jobs is supposed to be protecting the interests of the small business community but the various partisan politics are taking up much of their time.

"Congress’ job is to help create a balance between protecting the small business community and the fiduciary responsibility of protecting taxpayer dollars."

In other words, compared to years past, there’s less of a check and balance between federal acquisition strategy and congressional oversight. As a result, fewer small businesses will be selling to the federal government once more and more strategic sourcing programs are in place.

All of the excellent updates to small business regulations will provide less impact because the regulations will be for a much smaller number of government contractors.

"We’re losing the balance between regulation, strategic sourcing, and protecting the needs of the small business community."

It's a Done Deal

Yes, this all sounds somewhat philosophical. You really have to look at this from a strategic perspective and most companies can’t do that because they’re focused on making the next sale. So by the time strategic sourcing has expanded across the government, it’ll be too late for many companies. This is especially true for small businesses.

It’ll already be a done deal. 

What Can You Do?

So what can you do as a government contractor or a small business advocate?

And don’t think for a minute that strategic sourcing only impacts small business. It impacts large businesses at the same level. There’s just so many more small companies and many don’t have the cash flow or reserves to protect against losing an entire market. That’s the road that the government is moving down if we don't get balance.

"There needs to be more of a balance between government acquisition strategy and protecting industry opportunity."

Engage Your Congressional Representatives

Because I am a champion for the small business community, there’s one primary way that the small business community can protect itself. We must engage our Representatives and Senators and convince them that there must be a balance to both sides of the supply chain.

Yes, the government should leverage pricing to get goods and services at competitive rates. As a taxpayer, of course I agree with that. But there also needs to be a balance where the small business community is protected as well.

Neither the federal agencies nor Congress are working together on this. The government is definitely not working with the small business community from a balance perspective.

This has to be a grass-roots effort. A handful of companies are not going to influence congressional focus. We need tens of thousands of companies and business owners to engage their representatives and demand that we slow down strategic sourcing until we put processes in place to balance the needs of the small business community.

We also need the media to pick this up. . .

Use The Federal Register

If you don’t know what the Federal Register is, when agencies or DoD want to change regulations, they post their pending regulation updates to the Federal Register and you have the opportunity to respond with feedback.

If you don’t have a free account, make one and make your voice heard. From my own experience, responding with comments on the Federal Register is not enough. It's important but your comments are forwarded to the same individuals who are responsible for the changes. A bit of an over simplification, but that's the fox guarding the hen-house.

The primary check and balance is Congress and there are very few companies that understand the challenges and lack of balance or have spoken with their Representatives.

A Small Business Coalition?

I’ve been thinking about standing up a coalition to take this head-on. But it’s a lost cause if the small business community doesn’t understand the challenge and come together to influence acquisition strategy.

How I wish the small business offices for each agency and the Armed Services would stand up and support. Perhaps that's not fair. I've spoken with small business offices all over the country and they have nothing but the best interests for small business. But we also have to be realistic and asking small business Directors to pick up this mantle is like asking them to commit career suicide. It's only fair to consider their political ramifications. This is why it's important to talk with your Representatives and Senators.

If I get enough feedback from the podcast and this post, I’ll stand up a coalition. I really hope this discussion on the future of government procurement helps you better understand how fast the government is moving, how fast the acquisition landscape is changing, and how important it is for the small business community to come together, with one voice, and ask for balance.

"Most companies think, “Eh, someone else will give me a voice. I don’t have time to make myself heard. I have sales to make.”

But many companies don’t realize that their sales will disappear if a balance is not struck. Sure, you’re making sales today but it’s entirely possible that your market will disappear in several years.

Keep an eye on what’s happening. Stay informed. 

4 Core Recommendations 

Based on what’s happening in the government space, how can you, whether you’re small or large business, prepare for a more strategically sourced market?

Recommendation #1 - Multiple Award Contracts. Start focusing on adding MATOCs, MACs, IDIQs, and GWACs to your sales strategy. This includes getting a GSA Schedule if you’ve done the research and your research confirms that you should get one. The research to validate if you should get a GSA Schedule is not as simple as confirming if agencies use GSA Schedules. We have a step-by-step outline, as part of Federal Access, that helps you do this by yourself. I would say if anyone is interested in figuring out if they should have a schedule, just reach out to Mike or myself. We’ll point you in the right direction.

Every MAC you’re on helps you better position in the market. There's less competition; higher probability of contract wins; and they help weather the storm of continuing resolutions, government shutdowns, the changes taking place, and what is coming down the road. I predict the continued and accelerated use of existing and new MACs as the future of strategic sourcing.

Recommendation #2 - Ask Your Targeted Agencies About Future Acquisition Strategy. Whichever agencies you currently target or have contracts with. . . don’t simply focus on winning more contracts. Start asking questions about future acquisition direction. Take the Department of Veterans Affairs for example. Before the Prime Vendor program was competed, there were many more companies selling medical supplies to the VA. When Prime Vendor was awarded, the number of companies with direct access was made much smaller.

Most of the companies that made it onto Prime Vendor knew that the VA was moving towards strategic sourcing and category management before Prime Vendor was competed. They knew it was coming. They knew that if they wanted to maintain and grow their business, they had to get on the contract. It didn’t matter how much they sold before, how strong their relationships were, or what contracts they held.

"If they didn’t make it onto Prime Vendor, they were likely shut out of the market or would have to subcontract to those that won (a highly competitive endeavor)"

Most companies that were not aware of Prime Vendor, before the acquisition took place, didn’t make it onto the contract.  

This process, the process of strategic sourcing, is taking place today across the government. So whether you’re new to government sales or your company has $50 Million in sales, you need to understand the direction for acquisition that your agencies are taking. If you’re talking to a contract manager with FDA and they say, “Yes, we’re looking at possibly moving our buys to a government wide contract. . . or we’re looking at streamlining our buys and will be releasing an RFP in the next year. . .” then collecting intelligence and information on this becomes one of your company’s most strategic initiatives. 

Recommendation #3 - Develop and Maintain a Strong Teaming Strategy. Keep focusing on building relationships. Relationships are the key to everything. A teaming strategy is much more than picking companies to team with, talking on the phone, and signing teaming agreements. If you need help on this, there are dozens of step-by-step strategies within Federal Access. Take a look.

A strong teaming strategy is likely how you are consistently winning contracts today and it’s how you’ll be prepared for when the government shifts more and more towards strategic sourcing. 

Recommendation #4 - Contact Your Representatives and Senators. Tell them that we’ve lost some of the checks and balances between strategic sourcing initiatives and the needs of the small business community.

Help me help you. Forward a link to the Game Changers episode or this article to your representatives, to your senators, and to the media.

Summary

So I’ll close with one final thought. If you’re a government contractor, you have to assume, at least strategically, that in the coming years strategic sourcing is going to extensively transform the market. So start competing, as a prime or subcontractor, on various contract vehicles. Ask questions. Collect information. Find out what your targeted agencies are doing for strategic sourcing. And make sure that your capture / sales strategy is heavily focused on building relationships, not simply responding on FBO.

And finally, if you’re a member of Congress or the media, and you’d like to talk with me about strategic sourcing and its impact to the small business community, please reach out.

What are your thoughts?

Joshua Frank