For FY18, It's Halftime; What Have We Learned?

From Washington Technology

As we move into the second half of the fiscal year, what can we take away from the last six months?

As most analysts have pointed out, we can say with some confidence that despite the budget chaos and uncertainty, the market continues to be strong. Both professional and IT services showed meaningful growth in the first quarter of fiscal 2018 and it is reasonable to expect that trend continued in the second quarter.

In addition, we now have a spending agreement that relieves the unnatural and problematic budget caps, at least for a few years. And that likely means even more growth.

And, of course, the long discussed consolidation of our industry appears to be upon us; a spate of deals has escalated talk about a restructuring of the industry.

But beyond those evident trends, there are other dynamics well worth considering. Indeed, a careful assessment of today’s market would be incomplete without recognizing an apparent undercurrent of customer dissatisfaction. And the two are inextricably linked.

This is not to say that companies have not, in the main, delivered as promised. Most have.

But customers are increasingly asking whether the choices they are presented with in a competition are really the best and most robust possible. This is a subtle but important change.

Instead of assuming, as has been too often true in recent years, that traditional contractors cannot be innovative, there is a growing sense that the core problem, as many of us have argued for a long time, lies in acquisition strategies, which rarely allow for any variation, let alone real innovation.

Put another way, there is a growing recognition that innovation -- be it from traditional or non-traditional providers -- is a product and reflection of the system under which solutions are procured. As such, more and more customers are looking for ways around that system.

Nowhere is this more evident than in the dramatic growth in the use of Other Transaction Authorities. Designed to enable the government to access new and emerging technologies through contract vehicles not subject to the Federal Acquisition Regulation, their use has grown some 500 percent over the last few years, with more significant growth likely this year.

Moreover, where OTAs have traditionally been focused on emerging, mission-related technology, increasing numbers of them are targeting proven and scalable operational support and business system applications.

For example, U.S. Transportation Command has itself issued four OTAs in recent months, all of them focused on helping the command improve its service delivery.

Some argue that while OTA growth has been significant, it still remains only a fraction of federal contract spending.

And that is true. At last count, the total spent on OTAs was only a little over $2 billion.

However, focusing just on the absolute dollar figure misses the broader market implication: Many current and expected OTAs are intended to attack big challenges and are likely only the first step in major overhauls of, for example, core business systems.

In other words, the long-term value of seemingly modest, current OTAs could be very substantial. Moreover, change generally happens when the customer takes charge. And it is not unreasonable to see this trend as just that.

Finally, in recent years, various studies have documented a drop in average incumbent win rates, from something over 90 percent to closer to 80 percent.

But our research suggests yet another dimension: Incumbent win rates appear to be measurably higher for small and mid-tier firms and lower for large companies.

Of course, the data is imperfect, and, among other things, doesn’t always take into account the impacts of mergers and acquisitions. Nonetheless, that alone does not explain the differences.

 Concerns about “vendor lock” are not new. And one cannot ignore the ways in which agile or modular strategies significantly change the role of integrators, or how these strategies and the emergence of what might be called the “app economy” open doors for smaller and mid-tier firms to be funnels for the kinds of innovations or solutions, at scale, in ways not previously possible.

In other words, while bulk still has its advantages, there are countervailing pressures that make others who lack similar bulk increasingly competitive and which enable different types of partnerships and business models. And the data suggests that those pressures are growing.

In the end, this confluence of factors not only has the potential to significantly change the competitive landscape, it is already doing so. And the implications are not insignificant.

For individual companies defining their current and future place in the market, it is important to recognize and account for shifting dynamics such as these.

To do otherwise could well be perilous.