NCMA 25th Annual Government Contract Management Conference

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(No Transcript)
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The Evolving Structure of the U.S. Federal
Professional Services Industry
David Scruggs, Senior Fellow, CSIS Date
December 4, 2006 Time 210 pm
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What is the Professional Services Industrial Base?

• Working definition all companies and
  individuals providing contract services to
  departments and agencies of the U.S. federal
  government. Contract services include all types
  of services except those that are
• Tied directly to delivery of weapons and other
  hardware systems
• Related to facilities construction or
  construction management
• For delivery of patient-related medical or
  healthcare services

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Methodology

• Data derived from FPDS government contracts
  database
• 11 years (1995-2005)
• Analysis of 4.2 million contract actions for
  professional services
• In-depth analysis of five primary categories of
  professional services
• Information and Communications Technology (ICT)
  services IT services and telecommunications
• Professional, Administrative, Management Support
  (PAMS) non-RD studies and analyses, architect
  and engineering services, quality control,
  testing and inspection, technical representative
  services
• Research and Development (RD) basic an applied
  research, experimental and advanced development,
  engineering and operational systems development
• Facilities Related Services (FRS) purchase,
  lease/rental, operation and maintenance of
  facilities
• Equipment Related Services (ERS) installation,
  lease/rental, maintenance, repair, rebuilding and
  modification of equipment

Some services (e.g. IT) are coded under more
than one category
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DoD is the largest user of professional
services U.S. Federal Professional Services
Market 2005 Demand by Customer
By Value (Billions)
By No. Contract Actions (in 000s)
Total 725 K
Total 204 B
Note 2005 figures subject to revision
Source Federal Procurement Data System, CSIS
Analysis
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Civilian agencies contracting focused on FRS and
PAMS DoD focused on RD and PAMS
U.S. Federal Professional Services Market 2005
(by Professional Service Category)
Civilian
DoD
Total 82 B
Total 122 B
Note 2005 figures subject to revision
Source Federal Procurement Data System, CSIS
Analysis
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Contract Action Distribution 1995-2005

• In the last decade, 80 of all contract actions
  were worth 250,000 or less but these contract
  actions accounted for under 10 of the total
  dollars awarded
• About 20 of all contract dollars awarded went to
  90 of the contract actions
• Just under 10 of contract actions received about
  75 of total federal dollars spent on
  professional services

Distribution of Contract Actions Awarded By Size
of Contract Actions
Distribution of Total Contract Dollars By Size of
Contract Actions
Note 2005 figures subject to revision
Source Federal Procurement Data System, CSIS
Analysis
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The professional services market has seen
significant growth during the last 5 years
Overall Market Growth 1995-2005
11-year CAGR of Value 7.2 11-year CAGR in
No. Awards 10.6
CAGR Compounded Annual Growth Rate
Total Professional ServicesContract Action
Values (in billions)
Number of Total Professional Services Contract
Actions (in 000s)
Source Federal Procurement Data System, CSIS
Analysis
Note 2005 figures subject to revision
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ICT and PAMS Categories have grown two to three
times faster than all other categories
10-Yr CAGRs Information and Communications
Technologies Services 13 Professional
Administrative and Management 11 RD
6 Equipment-Related Services
5 Facilities-Related Services 4
Market Growth Trends by Service Category
1995-2005
Total Professional ServicesContract Action
Values (in billions)
CAGR Compounded Annual Growth Rate
Note 2005 figures subject to revision
Source Federal Procurement Data System, CSIS
Analysis
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While the total number of Professional Services
firms has grown dramatically, the core base has
expanded only modestly
Number of Services Contractors 1995-2005(000s)
115 Increase
16 Increase
Note 2005 figures subject to revision
Source Federal Procurement Data System, CSIS
Analysis
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Three-fifths of small and two-fifths of medium
size firms only execute contracts under 25k

Distribution of Large, Medium and Small Firms
No. of large companies with total sales 1B
229
229
No. of medium companies undertaking contract
actions worth less than 25k
10,444
24,288
13,844
No. of medium size firms only undertaking
contract actions worth more than 25k
199
Number of Companies
No. of small companies undertaking contract
actions worth less than 25k
40,309
176
175
69,307
No. of small companies only undertaking contract
actions worth more than 25k
28,998
Note 2005 figures subject to revision
Source Federal Procurement Data System, CSIS
Analysis
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Market Shares by Large, Medium and Small Firms
(By Value of Contract Actions)
In terms of share, the mid-tier of the industry
has been squeezed from above and below
Market Shares by Large, Medium and Small Firms
(By Number of Contract Actions)
of Total Contract Action Value Awarded
of Aggregate Contract Actions Awarded
Source Federal Procurement Data System, CSIS
Analysis
Note 2005 figures subject to revision
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In a trend very similar to the defense hardware
industry
The Rest 37 of 2003 DoD Prime Contract
of DoD Prime Contract s
Third Tier
Third Tier Defense Hardware Firms
6-100 28 of 2003 DoD Prime Contract
Second Tier
Second Tier / Mezzanine
First Tier
Big 5 35 of 2003 DoD Prime Contract
Big 5 Defense Hardware Contractors(LMT, BA, NOC,
GD, RTN)
Source DoD DD350s, CSIS Analysis
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MA activity has become an important driver of
industry structure in the past five years
Recent IT/Govt Services MA Transactions

• Value of annual MA activity has tripled since
  2001
• Transaction volume has doubled
• Median deal size still around 50M
• Activity centered on 25M - 60M companies
• Intensely competitive zone just above government
  set-aside levels and at bottom of mid-tier
• Several of the most active acquirers have been
  from top 20 firms in this sector

No. of Closed Deals
Annual Value (Billions)
Selected Top IT/Govt Acquirers (No. Deals
00-06)
Source Houlihan Lokey, DMA Infobase, CSIS
Analysis
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The Top players are increasingly focused on the
federal sector and doing gt1B in services business
1995
2005
Top 5 19 oftotal market
Top 5 19 oftotal market
(Heavy Engineering)
(Heavy Engineering)
Top 20 31 oftotal market
Top 20 36 oftotal market
(Heavy Engineering)
(Heavy Engineering)
(Heavy Engineering)

• One-third fewer commercial conglomerates in top
  20 in 2005 vs in 1995
• Defense platform companies remain leaders in
  federal professional services (RD bias)
• Market concentrating over time top 20 31 of
  total market in 1995 vs 36 of total in 2005
• New entrants are heavy engineering firms with 1
  of top 20 in 1995 and 4 of top 20 in 2005

Source FPDS Database, CSIS Analysis
Note 2005 figures subject to revision
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3/5s of market value is mods to existing
contracts, while the fastest growing areas
are the new vehicles
Type of Contract Actions 1995-2005(Share of
Contract Action Values)

• CAGR
• 193
• 6
• 51
• -7
• 10
• 59
• 1
• -13
• 6

Source Federal Procurement Data System, CSIS
analysis
Note 2005 figures subject to revision
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Over 1/3 of contract actions are now multiple
award, Federal schedule and simplified
contracts...
Type of Contract Actions 1995-2005(Share of
Number of Contract Actions)

• CAGR
• 169
• 9
• 36
• 8
• 7
• 31
• 4
• -20
• 35

Source Federal Procurement Data System, CSIS
analysis
Note 2005 figures subject to revision
CAGR Compounded Annual Growth Rate
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Summary

• 200 Billion market
• Over 700,000 contract actions awarded annually
• Value of federal services contract actions has
  increased at a rate of over 7 annually in past
  10 years
• Number of contract actions has grown faster, at
  over 10 annually over the past decade
• DoD is biggest customer at 60 of total contract
  actions by value
• DoD, DoE, and NASA make up over three-quarters of
  the market value
• Largest segments are PAMS, RD, and FRS
• Fastest growing segments are ICT and PAMS
• Overall professional services market has doubled
  since 1995
• Use of Multiple Award and Federal Schedule
  Contracts has increased significantly over the
  past decade
• Industrial base remained unchanged until 2001,
  then witnessed a 12 growth in number of major
  players and a 100 growth in the total number of
  players

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Key policy questions raised

• What are the natural limits to government
  outsourcing of services?
• Are the existing federal procurement rules
  appropriate for procurement of services?
• Should oversight of services acquisition be
  treated in a fundamentally different way than
  procurement of goods and weapons?
• Are the newer contract vehicles really saving the
  government time and money or are they just
  allowing more task orders to be written?
• What effect is the increasing volume of services
  contracts having on the federal government
  contracts management workforce?
• What should USG policy be toward the shrinking
  share of mid-tier companies?
• How should guidelines be set to avoid
  organizational conflicts of interest (OCGs)
  resulting from MA activity among service
  contractors giving rise to captive SETA company
  subsidiaries.

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About CSIS For four decades, the Center for
Strategic and International Studies (CSIS) has
been dedicated to providing world leaders with
strategic insights onand policy solutions
tocurrent and emerging global issues. CSIS is
led by John J. Hamre, formerly deputy secretary
of defense, who has been president and CEO since
April 2000. It is guided by a board of trustees
chaired by former senator Sam Nunn and consisting
of prominent individuals from both the public and
private sectors. The CSIS staff of 190
researchers and support staff focus primarily on
three subject areas. First, CSIS addresses the
full spectrum of new challenges to national and
international security. The Defense Industrial
Initiatives Group (DIIG) is part of the CSIS
International Security Program and focused on
issues related to the global defense-industrial
enterprise. Second, we maintain resident experts
on all of the world's major geographical regions.
Third, we are committed to helping to develop new
methods of governance for the global age to this
end, CSIS has programs on technology and public
policy, international trade and finance, and
energy. CSIS is private, nonpartisan, and
tax-exempt. CSIS receives funding from public
and private entities. CSIS does not take policy
positions, the views in this presentation are
those of the author.