The federal market: Is competition in the eye of the beholder?

These issues surrounding market concentration and competition, as well as the effectiveness of competition, come at an important time for the procurement commun...

This column was originally published on Roger Waldron’s blog at The Coalition for Government Procurement and was republished here with permission from the author.

Last week, the Coalition for Government Procurement was privileged to participate in the Section 809 Panel’s September stakeholder meeting, an opportunity, for which, the Coalition is grateful, as it provided for a wide-ranging conversation on current challenges and opportunities facing the federal procurement system. The Coalition also appreciates the opportunity to provide our 29 “common sense” recommendations to improve and streamline federal procurement.

Chief among the issues discussed was the role of Multiple Award IDIQ (MAIDIQ) contracts in supporting agency missions.  With regard to MAIDIQs, the conversation quickly turned to the degree, manner, and role of competition in the federal market.  It was an interesting and dynamic discussion.

The Coalition highlighted a measure of market concentration which is used by both economists and the Justice Department when evaluating anti-trust issues, the Herfindahl-Hirschman Index (HHI).  The HHI scale for measuring market concentration ranges from 0 to 10,000, with 0 representing “perfect competition,” and 10,000 representing a pure monopoly.  Based on various market concentration criteria, a market is scored along this scale.  Basically, the lower a market’s HHI score, the higher that market’s level of competition and vice-versa.  When considering the HHI, we find some interesting results.

Trends in competition

In 1983, prior to enactment of the Competition in Contracting Act (CICA), the HHI for the federal government market was 335.  The HHI for the US economy was 1250.

In 1984, Congress passed CICA with the goal of increasing competition for federal contracts.  The CICA framework created procedures, including full and open competition for contract award, which increased business opportunities in the government market.  At the time, there was, and, still remains, a steadfast belief that competition increases value, savings, and accountability in the federal procurement system.

In 2014, the HHI for the entire federal government market had improved to 60, which represents an 82 percent reduction in market concentration for that market space.  At the same time, the HHI for the entire US economy had improved slightly, from 1250 to 1150, an eight percent reduction in market concentration for the US economy.

The federal IT market

In 1983, the HHI for the federal IT market was 386, and there were approximately 2,200 firms that received contracts.  Further, the small business utilization rate in the federal IT market was 20 percent.  In 2016, the HHI for the federal IT market improved to 46, a decrease in market concentration of almost 88 percent.  There were over 17,000 firms that received contracts, and the small business utilization rate was 40 percent.

Is competition in the eye of the beholder?

These HHI numbers are thought-provoking, if for no other reason than they do not appear to square with the view of some that the current procurement system creates disincentives for commercial firms to participate/compete.  At the same time, they prompt inquiry into their meaning and whether and how they should inform policy makers seeking to improve the efficiency and effectiveness of the federal procurement system.  In particular, it would be interesting to understand whether the procurement ecosystem, at a macroscopic level, could be viewed as highly competitive, and yet unable to sustain the interest of some firms offering innovation.

These issues surrounding market concentration and competition, as well as the effectiveness of competition, come at an important time for the procurement community.  The Section 809 Panel, seeking to navigate the identification of opportunities to streamline processes and reduce regulatory burdens to increase access to innovation, must be sensitive to avoiding purported solutions that would undermine the very competition underpinning the government market.  Certainly, it will need to put the current competitive federal market into context, making strategic recommendations that build on the strengths of the current system while effectively addressing weaknesses.

By way of example, as the Coalition has addressed, MAIDIQs are a valuable tool in the acquisition toolbox, providing a competitive, streamlined, and collaborative contract mechanism for government and industry.  Adjustments to the model may be appropriate, such as mandatory on-ramping periods, but, given that the competitive MAIDIQ model has worked for government, care will need to be taken to avoid “throwing the baby out with the bathwater.”

In addition, these HHI numbers, and their meaning, have implications for the ongoing conference surrounding Section 801 of the House NDAA, the so-called online commercial marketplace provision.  As currently drafted, Section 801’s restrictive language essentially pre-selects a particular e-commerce product type and then waives CICA for contract award.  Aside from squaring this approach with the HHI numbers and the level of competition in the Federal market, in fashioning such a program, policymakers will need to assure they do not harm the competitive government market, which, ultimately, would reduce government access to innovation, and make the government captive to one purchasing channel.

The Coalition is engaged on these reform issues and will continue the dialogue across the procurement community on the nature, extent, and role of competition in the federal market.

Roger Waldron is the president of the Coalition for Government Procurement, and host of Off the Shelf on Federal News Radio.

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