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David Scruggs, Senior Fellow, CSIS Date: December 4, 2006 Time: 2:10 pm

The Evolving Structure of the U.S. Federal Professional Services Industry. David Scruggs, Senior Fellow, CSIS Date: December 4, 2006 Time: 2:10 pm. What is the Professional Services Industrial Base?.

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David Scruggs, Senior Fellow, CSIS Date: December 4, 2006 Time: 2:10 pm

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  1. The Evolving Structure of the U.S. Federal Professional Services Industry David Scruggs, Senior Fellow, CSIS Date: December 4, 2006 Time: 2:10 pm NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

  2. 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 NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

  3. 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-R&D studies and analyses, architect and engineering services, quality control, testing and inspection, technical representative services • Research and Development (R&D): 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 NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

  4. 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 000’s) Total = 725 K Total = $204 B Source: Federal Procurement Data System, CSIS Analysis *Note: 2005 figures subject to revision NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

  5. Civilian agencies contracting focused on FRS and PAMS; DoD focused on R&D and PAMS… U.S. Federal Professional Services Market 2005* (by Professional Service Category) DoD Civilian Total = $122 B Total = $82 B Source: Federal Procurement Data System, CSIS Analysis *Note: 2005 figures subject to revision NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

  6. Contract Action Distribution: 1995-2005* Distribution of Contract Actions Awarded By Size of Contract Actions • 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 Total Contract Dollars By Size of Contract Actions Source: Federal Procurement Data System, CSIS Analysis *Note: 2005 figures subject to revision NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

  7. 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 000’s) Source: Federal Procurement Data System, CSIS Analysis *Note: 2005 figures subject to revision NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

  8. 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% R&D = + 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 Source: Federal Procurement Data System, CSIS Analysis *Note: 2005 figures subject to revision NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

  9. 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 Source: Federal Procurement Data System, CSIS Analysis *Note: 2005 figures subject to revision NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

  10. 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 Source: Federal Procurement Data System, CSIS Analysis *Note: 2005 figures subject to revision NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

  11. 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 Value of Contract Actions) 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 NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

  12. 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 NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

  13. M&A activity has become an important driver of industry structure in the past five years Recent IT/Gov’t Services M&A Transactions • Value of annual M&A 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/Gov’t Acquirers (No. Deals ’00-’06) Source: Houlihan Lokey, DM&A Infobase, CSIS Analysis NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

  14. The Top players are increasingly focused on the federal sector and doing >$1B 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 (R&D 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 NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

  15. 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 NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

  16. 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 NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities CAGR = Compounded Annual Growth Rate

  17. 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, R&D, 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 NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

  18. 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 M&A activity among service contractors giving rise to captive SETA company subsidiaries. NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

  19. About CSIS For four decades, the Center for Strategic and International Studies (CSIS) has been dedicated to providing world leaders with strategic insights on—and policy solutions to—current 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. NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

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