Category Management: The Holy Grail of Federal Procurement

Wednesday, January 16, 2019

Co-authored by The Pulse and The War Room Group

“I must ride with my knights to defend what was, and the dream of what could be.” -Excalibur (1981)

The quote above encapsulates the constant struggle of Federal employees – defending outdated levels of bureaucracy and red tape while still halfheartedly daring to dream of a more efficient future. This concept of efficiency is as alluring as it is elusive. It’s an intangible motivator that both excites GovCon with its possibilities while also evoking fear from the absolutism of its power.

Let us paint you a desolate picture. Imagine the crushing weight of managing, tracking, and reconciling ~$561B spent across 41,657,932 individual actions executed by 500 departments and Agencies every year. Heavy weighs the crown alright.

And Acquisition shops aren’t just buying one specific thing over and over again. No, they are purchasing goods, services, and products from over 23,227 vendors. Their departments are made up of dynamic workforce of every shape and size with varying buying preferences, options, regulations, and resources. The people are rarely trained on how to buy under their own vehicles, and the processes, regulations, and procedures vary by agency. Do they at least have technology or tracking methodologies that are interoperable, managed properly, and are updated to keep up with the speed of innovation? Merlin’s beard, no.

These might sound like the details of a brutality theme in Arthurian lore, but in reality this was just Fiscal Year 2018. Oh, and 22.1% of your records are still unreported so…opps.

This is the war-torn landscape of Federal Procurement. Experts consistently answer the call to battle and have admirably faced this challenge head on for many years. They have claimed a number of small victories, but have been altogether unable to move as one towards a common solution. Then lo! Government came riding in on its white horse with its “Best-In-Class!” war-cry and a promise for the GovCon equivalent to eternal procurement happiness. Which leads us to beg the question: Is category management the holy grail we’ve all been waiting for?

Category Management

What is Category Management? In 2014, the Category Management initiative was launched to eliminate redundancies, increase efficiency, and deliver more value and savings from the Government’s acquisition programs. The strategic and systematic approach to purchasing has just three simple goals in plans to achieve by 2020: reduce duplicative contracts by 50,000, reach $18B in savings for taxpayers, and achieve 60% of common spend. We’ve already covered the details on the logistics of Category Management, so we’re just going to jump to the current state.

The members of the round table responsible for this agenda are the Office of Management and Budget (OMB) and the Category Management Leadership Council (CMLC) – which is comprised of representatives from heavy spending agencies – along with their trusty sidekick, the General Services Administration (GSA). With the Acquisition Gateway, President’s Management Agenda, Federal Acquisition Regulations (FAR) Part 8 and many OMB Category Management Memorandums – we can see that our fearless Federal Knights are armed and lying in wait.

Best-In-Class (BIC) Contracts

If category management is the holy grail, then BIC is the map to find it.

What is a best in class contract? Therein lies the overwhelming problem with the management of this initiative: one concrete, straightforward route to category management doesn’t exist. Instead, industry is relying on Government blog postings, examples of pre-existing contracts, and general hearsay. As such a crucial part of Category Management, the BIC contract has no formal definition in the FAR… and that is a problem.

Unofficially, a “BIC Contract” means that a specific contract (or vehicle) has been designated by the OMB as a preferred Government-wide solution. A majority of the 37 BIC vehicles include terms and conditions, data collection, and reporting requirements that support more transparent transactional data, facilitating an increase in accurate analysis of buying behavior. This is critical to implementing, driving and sustaining Category Management initiatives. Another important distinction for BIC vehicles is that it must have Government-wide or multi-agency availability. This is a change from the original BIC process and criteria released in 2014.

The message of BIC is promising yet riddled with issues. The process of determining whether something is BIC is noted from GSA as being objective, yet no criteria has been provided. That seems pretty subjective to us. Regardless, the Government has forged ahead – without a FAR definition or quantifiable selection metrics – by evaluating and selecting from their personal collection Multiple Award vehicles. By not starting from scratch, the Government has left industry-at-large in a lurch since a majority of these BICs have long periods of performance (some 10 years!) with limited opportunities to on-ramp. Another issue is that some BIC designations were given after an on-ramp session closed aka NITAAC CIO-SP3 SB.

Simply put: if you didn’t see the writing on the wall, then you are potentially out of luck on some Government opportunities for 10 long years.

The details of how BICs are selected and communicated is important because it looks like the procurement strategy is sticking. According to the Executive Summary Report released September 2018, BIC obligations exceeded their FY18 goal. This was later confirmed by the Performance.gov FY18 Q4 Category Management report put out in December 2018, which showed BIC usage Government-wide had increased by 2% in FY18 (24% FY17, 26% FY18).

Categorization and BIC management isn’t just a FedCiv thing either. The goal of spend under management (SUM), strategic sourcing, and category management are concepts that are also gaining momentum within the Department of Defense, as noted in Section 809 Panel’s third installment of their Final report. But that’s a conversation for another blog post.

Being competitive in GovCon is about three things: understanding the rules of the road, developing meaningful relationships, and being able to read the tea leaves. The concept of Category Management and BIC contracts span across each one of those three things by re-shaping the larger GovCon tapestry – and that is why the breakdown of Category Management and its influence is so important.

BICs and Multi-Billion, Multi-Year Contracts

In FY19, Federal Agencies will be held accountable for funneling 37% of “BIC-addressable” spending through BIC contracts. This may seem like a lofty goal for those not paying attention, but the Federal Government made some substantial moves in FY18, which could set them up for success.

Mega Telecom Contracts Gets Best-In-Class Designation. In April 2018, GSA announced that its $50B Enterprise Infrastructure Solutions (EIS) contract passed OMB’s sniff test to receive a “Best-In-Class” designation. What does this mean? In theory only 10 companies will be able to compete and win Federal opportunities that require modern telecommunications solutions until EIS onboards new vendors. Even better? There is a Federal requirement for all agencies to transition to the new EIS portfolio by 2023, almost guaranteeing limited competition.

Creation of ALAS. In August 2018, GSA announced that it was in the process of creating a new GWAC for services related to manned and unmanned systems, potentially consolidating billions of dollars and reducing hundreds of contracts (sound familiar?). “ATLAS”, which is spearheaded by GSA’s Federal Systems Integration Management Center (FEDSIM), could potentially support the Government’s entire fleet of civilian and military land vehicles, as well as ships and aircrafts. Although not named a BIC (yet), the impacts of ATLAS could be huge.

GSA IT-70 Cloud SINS and DISA DEOS. In September 2018, GSA announced its plan to update Cloud SIN 132-40 to include IT professional services for cloud migration and adoption. Shortly after that, DISA handed over the procurement keys of its $8.2B crown jewel, Defense Enterprise Office Solution (DEOS), to GSA with the announcement that DEOS will be competed under GSA Schedule IT-70. DISA stated that by letting GSA drive the ordering process for the entire Federal Government will be more standardized. Now there are over 12K vendors under GSA IT-70 so competition is guaranteed, but if we filter that down to just SIN 132-40, you are left with just 9% of that pool with just 110 vendors with over 46% categorized as Large Businesses.

DHS EAGLE III. The $20B EAGLE will be landing in September 2020. In a written statement released in December 2018, Soraya Correa, DHS Chief Procurement Officer (CPO), announced that DHS will not be pursuing its third iteration of EAGLE. Rather, DHS will be educating their IT procurement workforce on GSA and NITAAC GWACs (i.e. Alliant, STARS II, VETS 2, CIO-SP3) in order to comply with category management initiatives (i.e. Best-In-Class).

Recent DoD ESI Awards. DoD ESI has been around since 1999, but grew in power in when it expanded into information technology services and hardware (2002) and became the OMB/GSA model for the Federal-wide SmartBUY initiative (2003). The history of ESI is long, but its recent $1.760B single award to Microsoft sends a reminder to industry that only a few have access to the big DoD re-seller bucks.

Consolidation and Emerging GovCons

As anyone who’s been to an industry day can tell you, Small and Mid-Tier GovCons (or “Emerging GovCons”) aren’t shy about expressing their concerns. The same trends goes for raising BIC-related red flags. Emerging GovCons, and those who advocate for them, have valid and addressable concerns with the current state of the move to Category Management.

When you ask them to point to the real danger, they immediately call attention to the 20% reduction in the Small Business Industrial Base over the past decade. Consolidation and the unintended consequences of Category Management for businesses of all sizes impact the critical elements that sustain GovCon – competition, innovation, and economic stimulus.

Plain and simple, BICs restrict competition and reduce the opportunity for Emerging GovCons. Reduced competition may sound great in theory, but the further the pools shrink, the closer we get to an unfair game of Monopoly.

We have to keep in mind that in GovCon we have decades of lessons learned on why keeping a diverse competitive industrial base serves both the taxpayers and industry. Cut to the Competition in Contracting Act (CICA) of 1984, which is one of the more important laws for our marketplace. CICA establishes competition as the norm for Federal contracts, and sends the clear message to industry and Federal procurement personnel that, in buying goods and services, the Government will obtain them through competition. CICA sites some benefits of competition as:

Cost savings/competitive prices
Higher quality leading to better service
Enhanced solutions, which are the best solutions industry has to offer
Diversity of ideas as they exist in the marketplace
Promotion of fairness and openness, which is the key to earning the public trust

The current process for designating BICs has created a different barrier of entry that could lock non-traditional and future startups out of GovCon. These sentiments are directly echoed by HUBZone National Council Chair Shirley Bailey’s testimony before the House Small Business Committee in June 2018 where she presented some staggering numbers:

Trends are showing that most BIC spending is going to a small number of companies. In FY17 4.3% if BIC contractors took 80% of all BIC dollars.
BIC vehicles are seeing larger, consolidated task orders. A BIC task order is now worth an average of $610,000, up 147% over 5 years.
The longer you’ve been on a BIC, the more you win. In FY17 63.5% of FY13 Incumbents recieved 93.7% of BIC spending.

GSA Schedule Consolidation and e-Commerce Portal

In March of 2018, GSA and OMB issued their Joint Implementation plan for the 2018 National Defense Authorization Act (NDAA). As a refresher, the 2018 NDAA includes Section 846 “Procurement Through Commercial e-Commerce Portals”, which seeks to move the procurement of “commercial products” to commercial e-Commerce portals. This section directs GSA to work with OMB to determine the best path forward in procuring the portals and determining which purchases should be conducted on them and under what circumstances. It’s a big job, to say the very least.

In short, the proposed “Commercial e-Commerce Platform” is like an upgraded hybrid of GSA e-Buy, DoD emall, and the other platforms we currently have in place for micro-purchasing. So far, GSA/OMB have issued two RFIs outlining Phases I and II of their approach to implementation. Phase I, released in March of 2018, laid out their initial recommendations for legislative changes to accomplish the following goals: increase micro-purchase threshold to $25k (through the portals), empower GSA to develop modernized competition requirements for the program, authorize GSA to take advantage of contractual arrangements that maximize efficiency for buyers, portal providers, and sellers, and clarify and broaden the definition of “commercial e-commerce portals” to take advantage of both current and future business models.

The taskforce has recently moved into Phase II. As described in a December 2018 RFI package, this phase will include movement toward a Proof of Concept. GSA/OMB solicited feedback on their current progress and future plans from both industry and commercial e-Commerce platform providers, which was due December 21, 2018. The taskforce is set to present their Phase II findings and recommendations to congress in March.

As they announced at their Industry day on December 12th, the taskforce is currently at a phase in the project where identifying the “unknown, unknowns” is of paramount importance. Whatever that means…

The biggest “unknown unknown” was asked (loudly) at the December 12th Industry Day: “How will adding a third party layer to manage the Government’s access to industry, and the other way around, effect fair and open competition?”

This is (literally) the billion dollar question, and the silence from the other end has been deafening. Hopefully GSA/OMB can take some lessons learned from the Air Force’s run in with FedBid and avoid those pitfalls.

Mergers and Acquisitions

You may remember when The Pulse dove into GovCon M&A and how “Vehicle Valuation” was going to further impact the M&A landscape. As Federal procurement officials increasingly face pressure to contracts to BIC vehicles, and as BICs become favored, contract portfolios are becoming more important.

In response, some GovCons have explored the transfer or selling of a contract to a third party in order to generate revenue. 41 U.S.C. § 6305, better known as the “Contract Act”, essentially prohibits such activity from occurring…unless it is in the Government’s best interest. As though the risks inherent in a M&A were not enough to turn any BD professional prematurely gray, when one or both of the entities in play are GovCons, the risks become even greater. One of the primary sources of these additional risks is the Federal Government’s novation rules.

The contract novation process is guided by FAR Subpart 42.12 (specifically FAR 42.1204) and can only be done under certain circumstances (i.e., the sale of all the contractor’s assets) per US Code Title 41. Therefore, the method of sale such as an asset, must be for stock, the company or a division, i.e. selling all capabilities that got you to the award. As such, the cost of a contract might be the invested costs which include past performances, key personnel, certifications, and the work in managing and capturing the contract.

In short, and not in any legal terms whatsoever, this basically means you could work your BD & proposal shop to death to get on a game-changing contract with 80+ companies just like you (size, capability, etc.) — and then [insert giant multi-million dollar contractor name in here] could essentially end being your competitor because they paid the person sitting next to you for their seat.

Where Do We Go From Here?

Federal Procurement is challenging and complex and those that have tried to tame it often walk away with more questions than answers. The U.S. Government is the largest buyer on the planet, yet they operate like 500 disparate companies. The sheer complexity of available offerings in the acquisition landscape and lack of communication is enough to make your head spin. To assist with the dizziness, The Pulse and The War Room Group teamed up to brainstorm a few on ideas on how to address the concerns of emerging GovCons and how to adjust your capture strategy as a GovCon Business Owner.

Addressing Concerns of Emerging GovCons

As we all charge forward in our quest to Category Management, Government and industry must be careful not to throw out the baby with the bathwater. Category Management can bring positive change to acquisition, but it must not be used as an excuse to step away from the Federal commitment of supporting emerging GovCons. So what’s the easiest path to success here? The War Room Group sees four easy wins, right out of the gate:

#1 – Standardization. Standardize the criteria for what a BIC is, how it’s managed, and how GovCons get a spot – and individually define those for the FedCiv and the Defense markets. The current BICs are all over the map when it comes to important Small Business factors like size standard recertification, on/off-ramp timelines and procedures, and how the set asides are tracked. Standardizing this gives predictability and lowers the barriers of entry by lowering the tuition for “GovCon 101”.

#2 – Stop Using Fake Numbers. Stop the practice of counting set-aside dollars in every category the awardee is eligible for and start counting them based on the original set aside category for each solicitation. This will give us the precious data we need to ensure that we are actually meeting our set-aside goals.

#3 – Talk to the People Doing the Work. Involve industry, SBA, and actual Procurement and K/Contracting Officers in the consolidation activities and development of BICs and empower them to not only be the voice of emerging GovCons, but also to share the realities and limitations in enforcing set-aside requirements.

#4 – Re-Evaluate the Small Business Size Standards. We are already seeing moves in this direction. In fact, in December 2018 we saw the Small Business Runway Extension Act (H.R. 6330) change the criteria to calculate revenue-based size standards to a five-year rolling average from a three-year rolling average. Disappointingly, this was quickly stopped in its tracks by SBA with their December 21 Information Notice number 6000-180022, which observes that the “Runway Extension Act does not include an effective date” (although we would argue that any law is effective when it is, you know, signed) and so the Act “is not presently effective and therefore is not applicable to present contracts, offers, or bids until implemented through the standard rule making process.” Shortly after issuing this notice everything was stopped in its tracks by the Partial Shutdown, so the timeline and legality here remains fuzzy. One thing is clear though; this change, and other changes to size standards, create run-room that may be critical for existing smalls to navigate future changes successfully, and we need to continue down that path.

Adjusting your Capture Strategy as a GovCon Business Owner

To reiterate, being competitive in GovCon is about three main things: understanding the rules of the road, developing meaningful relationships, and timely prognostication. It’s about being strategically persistent down the right hallways (physical and digital). In order to be truly strategic you need to understand the impacts of these procurement initiatives to anticipate how your contracts are going to be released. That is why it is so important for the GovCon Business Owner to understand the influences of Category Management.

Know the Rules. The reality of contracting has always gone well beyond the FAR and its supplements. Category management is part of a larger effort to revolutionize the way procurement is being done – focusing on a data-oriented approach. The approaches that will become regulations are more in-flux now than they’ve been since the 2001 sea change when contractors took over a majority of Government man hours. However, not knowing the law is no excuse. Contractors must start by closely following the continuous evolutions and stay ahead of the game.

Develop Meaningful Relationships. The Government is actively looking for industry participation to determine the way things go moving forward. It seems like a closed process, with large announcements appearing seemingly from thin air, but activity within industry organizations (such as ACT-IAC, AFCEA) is strong and engagement high. Be involved and show FedGov change-makers that you are helping them accomplish their mission. In times of change, true relationships produce high returns. Don’t ever forget the meaningful relationships that happen on the Hill. Participating in campaigns and interacting with Congress, especially the Appropriations and Small Business committees, can help shape the future.

Read the Tea Leaves. Prognostication in GovCon is often about looking at what has worked in the past and taking advantage of those trends while also looking to the future. In particular, a trend GovCon can’t afford to ignore includes simplified procedures. Spending through simplified acquisition procedures (SAP) has inched up each year since FY14. According to Bloomberg Government, SAP spending in FY18 reached the highest amount ever reported. The increase can be attributed to both threshold increases and the fact that SAP allows agencies to cut through some cumbersome red tape.

Like the holy grail, the narrative behind Category Management is often exaggerated and romanticized. FedGov has been using the term to describe the pinnacle, the unobtainable – a concept with no clearly definitive construct. It’s open to interpretation, and that’s a problem. The shift to managing spending by category won’t just change how common goods and services are bought, it will impact why they are being bought – making the two main elements to watch in the next fiscal year(s): why and demand. As part of industry, we have accepted that procurement will continue to change with Category Management and that resources on duplicative contracts might be scratched from your pipeline. Category Management is going to require that the FedGov and GovCon understands the minutia of program operations to manage demands – otherwise your company could become nothing more than a legendary relic of the past.