Tuesday, February 21, 2006

The unique world of federal contracting

Ellen McCarthy, The Washington Post

In its eight years of existence, St. Louis-based Savvis Inc. has patched together a global network of 25 data centers and taken on the information technology work of major companies including Reuters and Microsoft Corp. But as it made a plan for breaking into federal contracting, the company decided, for now, to avoid the government itself.

Direct contracts might mean more revenue but would also mean government inspectors, government auditors and government rules. It would mean drafting affirmative-action plans, drug-free-workplace plans and small-business set-aside plans, and meeting a host of other requirements of the Federal Acquisition Regulation -- work that would preoccupy the company's new six-person federal division with little prospect of immediate return.

... Washington area firms earned an estimated $52.6 billion from federal contracts in 2004 -- a figure that has prompted the formation of countless small start-ups and lured many commercial companies to try to win federal contracts. But selling to the government is neither cost- nor trouble-free, and even experienced companies can be surprised by a market that operates with its own language and rules, where business is done more by committee than by handshake.

Actually most IT selling is more by committee than handshake, but peculiarly so of federal contracting. Selling cycles, from first contact to close, can easily last for two years, advanced systems can take as long as five years. The costs of maintaining the account are much higher and the profit margin is far lower than the private market.

So why would anyone bother? Because of repeat business, once you win a contract and establish a good relationship with your federal customer, it is unlikely that any competitor will take that contract away from you. Also the federal government is recession resistant (although not recession proof). Federal work will often get companies through lean times; that is one reason why the dot.com crash did not hit this area as hard as the West Coast.

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