The United States federal government is, by its own calculation and assertion, the single largest purchaser of goods and services in the world. In 2015, its estimated annual spending was roughly $450 billion. That’s a large outlay, and many companies rely on those purchases for most or all of their revenue. Lockheed Martin, perennially one of the top recipients of that federal spend, took in more than $44 billion in 2015 alone, according to the Federal Procurement Data System’s Top 100 Contractors Report for that year.
The government spreads those purchases to a much wider range of companies than a handful of behemoths like Lockheed Martin. According to the U.S. Small Business Administration (SBA), the federal government spends roughly $100 billion per year in sales to small businesses.
With so much money at stake for so many businesses, it’s significant when the federal government contemplates shaking up its procurement process. So in early 2014, when the General Services Administration (GSA) announced a major shift in those processes toward the concept of category management, more than a few hackles were raised.
Breaking Down Category Management
As explained by the GSA in its 2014 announcement, “category management essentially looks at product or service categories the way a business might look at its own strategic business units, and then works on customizing purchase channels to better meet customer needs and market demands. Category management also provides deep-dive market analysis that addresses supply chain management.” The GSA lists five key areas of focus for category management:
- Optimizing contract vehicles and managing the landscape.
- Managing data collection and analysis.
- Leveraging supplier relationships.
- Maximizing customer relationships.
- Growing and sharing expertise.
The idea is not new. Category management has been used in the private sector for years to help manage expenditures and more closely evaluate a business’ network of suppliers. The objective is to increase efficiency and effectiveness while reducing costs and redundancies. It doesn’t make sense, for example, for a furniture manufacturer to purchase wood from 10 different suppliers providing products of varied quality and cost.
Even within the federal government, category management isn’t an entirely new concept, according to Roger Waldron, president of the Coalition for Government Procurement, which advises commercial service and product companies selling in the federal market. “To put it in context, category management is the next iteration or an evolution from what was previously the Federal Strategic Sourcing Initiative.”
“To put it in context, category management is the next iteration or an evolution from what was previously the Federal Strategic Sourcing Initiative.”
—Roger Waldron, president, Coalition for Government Procurement
“As a concept, it makes a lot of sense,” said Lisa Pafe, vice president of Lohfeld Consulting Group and 2016 president of APMP’s National Capital Area Chapter. “I don’t think people have concerns with the concept or the goals—efficiency and saving money.”
Growing Concerns
Those companies engaged in selling goods and services to the federal government have been watching the recent developments toward category management with a healthy dose of anxiety. “There are probably very few incumbent contractors of any size that would expect to benefit from category management,” said Russell Smith, APMP past president, current chair of the Presentation Committee, and president of Organizational Communications Inc.
The reason for this anxiety is simple: Fewer contracts mean fewer contractors. Smith offered a simple example: “Let’s say the government is currently buying Product A under 20 different contracts. As a result of category management being implemented, the government may purchase this product under only five contracts. So what happens to those other 15 contractors?”
The answer, of course, is that those 15 contractors are out of luck. And while most businesses would ideologically agree with the premise that those businesses that are able to provide the highest quality, best service, or lowest cost should be rewarded with contracts at the expense of their less proficient competitors, the bureaucracy and red tape necessary to implement category management on a $450 billion scale means the best companies might not necessarily win the job.
“The issue isn’t with the overall concept of category management,” said Pafe. “The issue is with how it’s being implemented. There could be contractors who get locked out either because they couldn’t qualify to compete at all due to the high bar or because they submitted a proposal and weren’t selected. They can be locked out of the market for five to 10 years. That can drive a lot of companies out of business.”
Even a seemingly small omission or failure to comply with a relatively minor provision can mean being excluded from huge parts of the procurement process. This is especially a concern for what are unofficially known as “middle tier” companies. Pafe explained that small businesses receive special treatment in the federal procurement process; according to the SBA, there is a goal that 23 percent of prime contracts for federal executive agencies are awarded to small businesses. However, determining what qualifies as a small business varies by industry.
This means that there are a large number of middle-tier companies that aren’t afforded the protections offered to small businesses but lack the resources and sophistication of large corporations like Lockheed Martin or General Electric. “It’s already very tough for mid-tier companies to compete, with the way the market is now,” said Pafe. “The larger companies have the breadth of experience and ability to put together sophisticated proposals.”
Addressing the Lack of Awareness
As potentially significant as the implementation of category management could be for businesses engaged in federal procurement, Smith has been surprised by the lack of awareness exhibited by many in the industry. “I wasn’t aware of the category management initiative until about eight months ago,” he said. “In spite of the fact that [former GSA deputy assistant commissioner and present industry consultant] Mark Day has said category management is going to be rolled out in the next three or four years, I believe industry isn’t as aware of this as much as it should be.”
Over the summer, APMP hosted a government panel to discuss these changes, and there was surprisingly little attendance by those who will be impacted, according to Smith. On the other hand, Waldron said he thinks “people start to pay attention when they see how it impacts their opportunities to compete.” He added, “The folks at the Coalition for Government Procurement are very aware of category management,” noting that his organization has hosted individuals central to category management’s implementation in the United Kingdom’s government.
Awaiting a New Administration
In the United States, category management is still in the early stages, and many in the industry are uncertain as to its future, particularly with a new administration taking office next year. Pafe doesn’t believe traditional politics will play a significant role in category management’s future. “Even if there’s a change in administration from Democrat to Republican, it’s not like category management can just go away at the snap of someone’s fingers. If someone in a new administration said, ‘We don’t want to do this anymore,’ it would take years to undo what’s already been done. People need to understand that the world of federal contracting is shifting away from individual procurements to these multiple-award contracts, and that’s not going to go away.”
While agreeing that a new administration isn’t likely to completely abandon category management, Waldron believes it will probably evolve differently. “There is going to be a whole new set of folks at the Office of Management and Budget, and the procurement leadership will be different. They will want to put their stamp on operations as well.”
Smith doesn’t see category management being abandoned with a new administration either; however, he does believe the ultimate implementation will be less robust than originally envisioned by its champions. “The more probable outcome is that category management will be barely implemented or half implemented or weakly implemented,” he said. “Over the past 16 or 17 years, there have been a couple of initiatives that were supposed to be implemented governmentwide,” offering the example of performance-based service contracting, which the federal government itself has acknowledged to be a challenging implementation. “Old hands that have been in government a long time point to initiatives like that. If you’re a fan of the whole paradigm of category management, that’s your fear—that it’ll never achieve the huge role that the proponents think it will.”
Staying Tuned In
Regardless of the ultimate extent of category management’s implementation, those with experience in government procurement agree that businesses engaged in this market need to watch the development closely. “These businesses definitely need to be informed and provide feedback and input to the government wherever they are asking for it,” said Waldron. “It seems to me the federal government is still trying to get this up and running to a large extent. That’s why you see a lot of these rules just getting finalized.”
“I think there will be change,” Waldron added. “At the end of the day, this is the age-old issue in the federal government of a more centralized approach to procurement management versus a more decentralized approach. Trying to push the various agencies and departments toward a central approach inevitably comes up against constraints, so you have the proverbial pendulum swing and a movement back to more of a decentralized focus.”
In early October, the Office of Management and Budget invited public comment on its proposed circular regarding implementing category management for common goods and services. APMP leaders are monitoring the situation closely for the opportunity to comment in a way that reflects the membership’s perspective.
Whatever the future may hold, federal contractors should pay close attention to the developments around category management in the federal procurement process and plan for a variety of scenarios. For incumbent contractors, revenue streams could disappear, and for those looking to break into the federal purchasing market, an increasingly complex procurement process could require investment in a more sophisticated proposal machine.
At the same time, change often means new opportunities for both established players and newcomers alike.
Justin Grensing is a freelance writer and attorney based in Minneapolis, Minnesota.
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