Mid-Tier Contractors Getting Left Out
Monday, September 3, 2007
For many years, the middle tier of companies in the $200 billion federal services industry was regarded as a source of innovation and productivity. They grew into companies that today are big names in the contracting space -- SRA, Alion, CACI and Mantech.
Despite a six-year boom in government contracting, the next generation of mid-size players is seeing its share of federal dollars erode. Larger companies increasingly dominate the service industry, which helps the government run its computers, analyze intelligence, conduct scientific research and even mop the floors.
With $50 million to more than $500 million in revenues, mid-size companies are too big to qualify for federal dollars reserved for small companies, especially those owned by women, minorities or disabled veterans or members of other disadvantaged groups
But they are too small to keep up with the largest companies, which as a result of consolidation and changing contracting practices have grown and own more of the federal marketplace. A decade ago, a federal services contractor was considered among the 20 largest if it won a few hundred million dollars in contracts. Now that figure is well over a billion dollars.
"Even though the dollars are getting bigger, the relative growth for mid-tier firms is staying put or declining," said Alan Chvotkin, senior vice president and counsel at the Professional Services Council, the trade association of services contractors.
Together, the federal services industry, the hardware industry (weapons, vehicles, etc.) and other contractors experienced an increase in the amount spent by the government to $412 billion in 2006 from $203.1 billion in 2000, according to a report by the House Oversight and Government Reform Committee. More funds now go to big defense contractors for providing hardware for the wars in Iraq and Afghanistan, and their services divisions have seen boosts as well.
In 1995, mid-tier services companies received 44 percent of government contracts, while large firms took 37 percent of the market, according to a study by the Center for Strategic and International Studies. By 2005, mid-tier companies took 33 percent of the market while large firms shared in 46 percent. Small companies' percentage stayed steady at about 20 percent.
Joseph M. Kampf, who sold Fairfax contractor Anteon last year to Falls Church's General Dynamics for $2.2 billion, is troubled by the trend.
"It's important that a market this big . . . not be owned by just a small handful of large companies and thousands of small companies," Kampf said. Many small companies aren't equipped to handle the big contracts they're awarded under the small business program, he said. At the same time, big companies don't provide the tailored service that a smaller shop does.
"You have to have a middle market . . . which are well-developed companies with long histories of service," Kampf said.
Driving the growth of big companies has been a shift in the way government does business. In the past, federal agencies would hold competitions for each project -- specific jobs for which medium-size firms could effectively compete.
Starting in the mid-1990s, government-wide contracts became more popular. Generally, the contracts are so large that only big companies can compete for them. A recent example is the $50 billion, 10-year Alliant information technology contract, awarded earlier this summer to 30 companies, all but a few of them billion-dollar-plus firms.