By Steve Charles | Contributing Writer

Over the next five years, the federal government will spend more than $175 billion on information technology (IT) -- about $35 billion each year. This makes it one of the top five vertical markets in the country.

The federal market also is extremely concentrated, with just 22 agencies accounting for over 95 percent of the sales opportunities. Among firms that sell to the public sector, government is almost always one of their largest verticals. That's because government, particularly the federal government, makes the biggest purchases -- significantly larger than even Fortune 50 companies.

Clearly, the potential for profit is incredible. Virtually every vertical market that exists in the commercial sector has its counterpart in the federal sector, so almost any technology product or service can be sold successfully to federal agencies.

Still, many firms miss out on these opportunities by avoiding the federal market. Some are intimidated by the stereotype of government bureaucracy. Others fear complex contracting requirements.

But doing business with the government is not as difficult as many technology companies believe. It simply involves different rules and regulations than are found in the commercial sector. If you approach it as you would any new market -- expecting to do business differently and hiring experts to help you master the intricacies -- you should achieve success.

COMMERCIAL IS IN

Thanks to the Federal Acquisition Streamlining Act in 1994 and the Clinger-Cohen Act in 1996, the federal government prefers commercial items over those manufactured to government specifications. As a result, the government is now deploying information systems based on commercial software solutions. This is in marked contrast to the old days when all government systems "had to be different" and were written from scratch by armies of systems integrators.

This doesn't mean that selling to the government is easy or that the path to success is obvious to the uninitiated. Entering the government market is a lot like entering an international market where there are special, localized practices that, if ignored, lead to failure. This article examines the activities that an emerging technology company should consider before hiring its first government sales representative.

WHAT IS THE GSA?

The General Services Administration (GSA) is one of the three central management agencies in the federal govern

GSA's Federal Supply Service negotiates and awards Federal Supply Schedule contracts to vendors. Federal agencies can use these contracts to buy items without negotiating pricing or terms and conditions each time they place an order. Federal Supply Schedules are considered a preferred source of supply.

GSA's Federal Technology Service acts as a buying agent, sourcing items from existing contracts that other agencies may have, and combining them to provide technology solutions for particular agencies. In effect, GSA performs a function similar to a value added reseller (VAR) for the government. It also manages most of the government's telecommunications contracts.

GSA's Public Buildings Service manages government real property -- its public land and buildings, including construction, leases and rentals.

The Federal Supply Service (FSS) and the Federal Technology Service (FTS) are key entry points for most technology companies that want to sell to the federal government. GSA exists primarily to support civilian agencies. However, because of procurement reform, Department of Defense (DoD) procurement officers have been instructed to avoid duplicating work already done by GSA and to use FSS contracts as a "preferred source of supply."

WHAT IS A GSA FSS CONTRACT?

A Federal Supply Service contract -- often called a GSA schedule contract -- is an agreement between the government and a vendor that allows anyone in the government to order items from that vendor by simply issuing a standard purchase order.

For a software company, the FSS contract is, first and foremost, the company's standard government software license agreement. Second, it is a pricing contract, against which all other government price negotiations occur. For a hardware vendor, the FSS contract also includes the terms and conditions of the warranty, maintenance and out-of-warranty repair. Representatives can be authorized as agents with the authority to accept or refer orders in the name of the contractor.

For a services company, the FSS contract can include fixed-price services as well as labor-hour rates. First, a statement of work is agreed upon between the government buyer and the contractor, and then a purchase order is issued for the amount of labor required to complete the statement of work on either a fixed-price or time-and-materials basis.

The main benefit of an FSS contract -- for both government and industry -- is that the buyer and seller need not negotiate pricing or terms and conditions every time an order is placed, nor must they engage in a formal competition process. In effect, an FSS contract is similar to a company-wide purchasing agreement where any location can reference the contract and receive national account pricing.

Many vendors of complex software wonder why the government won't sign their commercial software license agreement. The answer is that the government has specific clauses that must be included, as well as its own ways of stating license use rights, restrictions and acceptance terms. While government buyers will not sign standard commercial license agreements, a properly negotiated FSS contract can meet government licensing requirements and still reflect your standard commercial software license agreement and maintenance terms. Government licenses are then executed with the simple issuance of a purchase order referencing the FSS contract.

Remember, your FSS contract is an extremely important document. When you negotiate its terms, you are setting the conditions for every sale you will make to the federal government in the future because the government can now extend these contracts up to 20 years.

Price is the most critical component. In an FSS contract, you are effectively defining the government street price for all contracts with the federal government in terms relative to how you price commercially. Very seldom will any agency in the government or any contractor buying for the government pay more than the FSS price. And always make sure your corporate finance people understand the revenue recognition implications of the acceptance terms you negotiate with the government.

GETTING A GSA/FSS CONTRACT

An FSS contract begins with a solicitation, a request for proposal (RFP), from the govern

One of the new ways the FSS is doing business is that it now issues "standing solicitations." These solicitations are posted on the Internet, and vendors can submit an offer at any time.

The government will respond to your offer by asking for clarification of certain points, such as how the pricing and terms of sale in your proposal compare with your standard commercial practices. Once that information has been provided, GSA sets its negotiating objective. It then conducts formal negotiations with you. One unusual characteristic of the government's negotiation process is that technically it cannot counter-offer. The government can only accept or reject your offer. Your job is to position your offer so that it is acceptable under the law and achieves your business objectives.

Once the government accepts your offer, the contracting officer signs the contract award document and issues you a contract number. You are then free to distribute the contract price list and accept orders. Any FSS contract order you accept must reference the contract number.

Most FSS contracts now have a five-year term. Once the contract is in place, there are two main areas in which you must keep it in compliance: First, you must accurately report sales that occur under your FSS contract on a quarterly basis. You must also pay 1 percent of the total sales amount to GSA. This is called the Industrial Funding Fee, and it pays for the FSS program.

Next, your contract must remain synchronized with your commercial practices. Every time you add a new product, upgrade software, or change hardware model numbers you must update the contract through a formal contract modification process. You also need to notify the government every time your commercial pricing or discounting policies and practices change.

Pricing is usually the biggest compliance issue. FSS contract pricing is based on the discounts extended to the group of commercial customers buying under similar terms as the FSS contract. If a customer of that group gets a better price than the policy disclosed to the government, the government automatically claims a proportional price reduction for the rest of the term of the contract. This is how the government is assured competitive pricing for the duration of the contract.

Much like the IRS, GSA randomly audits firms for compliance with the pricing policy. However, there are triggers, such as the volume of sales, which increase the likelihood of an audit. Companies also are audited because a competitor or whistle-blower goes to the government with news of a special deal or new discount. GSA's new audit policy emphasizes audits early
in the contract term to prevent compliance problems.

OPTIONS FOR RESELLERS

Smaller resellers and VARs have a number of avenues available for selling IT solutions to federal customers. Among those options are holding an FSS contract or becoming a participating dealer either as a reseller or a commissioned agent on a manufacturer's FSS contract.

The right strategy will depend on your company's business. It's critical for resellers to understand who their government customers will be, and what they intend to buy. A company new to the market should be building a pipeline of prospects while starting the process of securing an FSS contract. As you qualify these prospects, ask them about their preferred contracting methods. Most will say they prefer using the FSS schedules, but the answer is not always the same.

Many manufacturers maintain their own FSS contracts, which are open for use by authorized resellers or agents. These can give smaller resellers and VARs an opportunity to begin doing GSA business without making the commitment to developing and maintaining their own GSA schedule contract.

Holding an FSS contract often makes sense for service-oriented VARs. Companies that already have well established pricing for their service offerings in the commercial market should be able to put those offerings on a GSA contract with relative ease. Moreover, an FSS contract for services will most likely open the door to teaming opportunities with other technology suppliers on larger government projects.

Product-oriented resellers should focus on a specific solution area, then begin talking with a few key manufacturers to obtain letters of supply. A letter of supply -- essentially a commitment from the manufacturer to supply you with necessary products -- will be required for your GSA contract. Seek these letters from manufacturers with which you already have a strong relationship, as they can be difficult to obtain for some popular product lines. Entering these negotiations with a list of potential customers also betters your odds for success. Furthermore, government programs run by several major distributors can either provide you with letters of supply or help you obtain one from the manufacturer.

Finally, do not create a huge GSA schedule catalog of products just for the sake of having one. Competition among firms offering large product-oriented catalogs is brutal and the margins are usually slim. Instead, populate your contract with products that relate to your company's services, allowing you to offer government customers a comprehensive solution in the area of your expertise.

Regardless of whether you decide to hold an FSS contract, always leverage your firm's commercial experience when seeking government business. In other words, don't try and become something you're not. Your success in the commercial market will be well received by government buyers if your solutions fit their needs.

SELLING WITHOUT A GSA CONTRACT

Procedures exist for procurements that occur outside of GSA schedules and other government-wide contract vehicles. Some of these methods, particularly those at the lower end of the price spectrum, can be very attractive for resellers and VARs seeking to create a government business. Rules for these procurements are designed to increase competition as the dollar value of the purchase grows.

• $2,500 or less (Micro-Purchase): Comparison shopping is not required when purchasing at or below the micro-purchase threshold. As a practical matter, buyers are encouraged to distribute purchases among all qualified suppliers.

• $2,500 - $100,000: Simplified Acquisition Procedures apply to these purchases. (See page 34 for details.) If the product is not available under an FSS contract, the buyer is instructed to identify three competitive products and obtain quotes from all three.
• $25,000 and $100,000: At this level, the buyer must also advertise the procurement in the Commerce Business Daily (CBD), a daily newspaper that lists federal government procurement opportunities. But today most procurement opportunities are made public by Web site postings rather than the CBD. In fact, there currently are more than 400 bulletin boards and Web sites where federal procurements are posted. (See the sidebar above for links to many of them.)
• Greater than $100,000: The government follows more formal procedures designed to boost competition for these purchases. Sealed bids and contracting by negotiation are the main competitive contracting methods used.

In a sealed bid the government writes an invitation for bid (IFB), accepts bids and awards the contract to the lowest "responsive responsible" bidder. (A responsive bidder is one who responds to the IFB completely and accurately. Responsible bidders are those who meet several criteria indicating that they are likely able to fulfill the contract.) This technique is used for commodities that can be clearly defined by specification. It may be used for computer hardware, but rarely for complex software.

Contracting by negotiation is chosen when the government seeks a solution to a problem; therefore, it is the most common technique for technology purchases.

When contracting by negotiation, the government writes an RFP and offerors respond with a proposal. Rules for contracting by negotiation have been rewritten to allow more discussion between industry and government during the process. In a negotiated procurement, the award does not necessarily go to the lowest offer. The evaluation criteria may be weighted toward past performance, innovation or lowest overall cost.

Awarding negotiated contracts is more subjective than evaluating sealed bids. As a result, this is often the type of procurement that triggers a protest. Large procurements, especially those worth more than $10 million, are particularly likely to generate protests. When a losing vendor protests, the entire contract can be put on hold while the protest is investigated.

MULTIPLE AWARD CONTRACTS

The current trend in government procurement is toward announcing multiple "winners" of indefinite delivery contracts, thereby lessening the number of protests and increasing competition at the task- or delivery-order stage. The Indefinite Delivery/Indefinite Quantity (IDIQ) contract is one of the three types of indefinite delivery contracts, and it is the most common for IT procurements. The IDIQ effectively becomes a license through which a prime contractor can market products and services from multiple vendors to a particular government market segment.

For the government, this two-step approach to contracting has the advantage of establishing a handful of prime contractors who manage many subcontractors while pushing competition all the way down to the purchase-order level (delivery orders in the case of products and task orders for services).

SOLE SOURCE CONTRACTS

Sole source contracts are an exception to the government's requirement for competition at every step of the procurement process. They require contracting officers to sign off on a "justification for other than full and open competition."

There are seven possible sole-source justifications. For technology procurements, the usual justification is that "there is only one source and no other supplies or services will satisfy agency requirements." Occasionally "unusual and compelling urgency" or "national security" may apply.

Many software companies enter the government market able to sell pilot programs using sole source justification. They expect to be able to continue selling this way when the government decides to purchase a major license for their software. However, this is not realistic. Agencies expect you to have obtained a GSA contract or other type of contract by the time the pilot is completed and they are ready to buy. If you have not done this, the government will engage in full and open competition, researching and evaluating competitive products.

Relying on sole-source as a contracting strategy is a high-risk proposition. Engaging with your customers in the acquisition phase, prior to the procurement phase, is the way to assure that you can legitimately win the business without asking your customer to take on the risk of the justification process.

TYPICAL SALES CYCLE

Sales cycles for large government deals typically stretch longer than those in private industry. Therefore, government sales managers learn to fill the 30-60-90 pipe with smaller, more predictable sales, while scanning the next 24 months for major opportunities. Maintaining both a long-range and day-to-day view is crucial, given the government's the lengthy acquisition planning process.

By law, the government must plan acquisitions in the year prior to the fiscal year in which it will spend the money. The plan includes a description of the problem the agency intends to solve, how it will find vendors with appropriate products and how it will incorporate competition into the selection process.

There is a strong benefit to companies to involve themselves in the planning process. It offers an opportunity to tell the agency about your technology direction. Procurement rules have been changed so that industry can bring forward its best ideas early. Indeed, government now relies on industry to bring it the latest solutions. So unless you take the time to understand the government's needs and effectively present your solution, you won't be part of the acquisition plan.

Once an agency decides to purchase your technology, an order can come at any time. Length of time needed to complete the sales cycle depends largely on the type of contracting vehicle used and amount of the purchase.

For micro-purchases under $2,500, buyers can order and pay by credit card that very day. Government purchase cards are widely used and account for 45 percent of all government sales transactions. If you want to shorten the sales cycle, set up a merchant account that allows you to accept credit card transactions.

FSS contract purchases can also occur in a single day if the contracting officer has two other schedules, or can check your pricing on the GSA Advantage electronic catalog system. If the order exceeds the Maximum Order Threshold, getting quotes from two other vendors could add a couple of days.

Purchases made under the government's Simplified Acquisition Procedures can stretch anywhere from one to 30 days. Orders under $10,000 can be completed in a day. Those between $10,000 and $25,000 can take several days. And orders ranging from $25,000 to $100,000 can take between 15 and 30 days.

Expect sealed bids to take anywhere from 45 days to three months. Advertising in the CBD to all responsible bidders requires 15 days lead time and 30 days to respond. Putting the bid package together can add time to the front end, while evaluating the bids will add time to the back end.

Negotiated procurements may take three to 18 months -- or longer. Writing a good RFP takes time. Then the government must advertise its existence and allow a reasonable time for offerors to prepare proposals. Evaluating the offers completely and fairly also takes time. Large procurements usually include the following steps:

• Request for Information (RFI): You may see an RFI first. This is part of the planning process, and indicates that a future procurement is possible. Make sure you understand the agency's needs before you respond with information. The RFI could be released three years before the target contract award date!

• Request for Quote (RFQ): An agency also may release an RFQ. However, this may not result in an order because quotes are often requested as part of the market survey process. The agency simply may be getting quotes to see which vendors to consider or to determine a reasonable price range. An RFQ could result in a small order tomorrow or be used against you when negotiating a year from now.
• Draft RFP: Next, you're likely to see a draft RFP, which gives vendors a chance to comment on the document and offer suggestions. If you are serious about winning a negotiated procurement, your proposal-writing team will be in full swing by the time the draft RFP is issued.
• RFP: Once the draft RFP comment period is over, the government will re-draft and issue the RFP in about a month. Vendors typically have 30 days to respond to the RFP with an offer. Amendments to the RFP may be released at any time and the offeror must address all amendments in the proposal. Today, RFPs and amendments are distributed via the Web, and it is up to you to know they are there; they are not automatically sent to all qualified vendors.

After the proposal due date, the government evaluates the offers. A contract may be awarded in as little as one month or the process may drag out to as much as nine months, depending on the size and complexity of the procurement.

• Contract Award: Systems integrators typically win these large procurements. If you plan to be a subcontractor, your job is to track the procurement from the RFI or pre-RFP stage and figure out your teaming strategy. At the pre-bid conference, where the draft RFP is discussed, you can meet the interested parties, scope out the competition and romance potential partners. Put a teaming agreement in place before beginning proposal preparation. Negotiate a subcontract after the prime contract is awarded.

OTHER LEGAL ISSUES?

The government uses its buying power to enforce its socio-economic goals. These goals include affirmative action, equal employment opportunity, and health and safety in the workplace. Any company with a contract worth more than $10,000 can be audited at any time for compliance with all existing regulations that govern the behavior of companies. Government contractors are expected to comply with regulations governing minimum wage/maximum hour laws, equal employment opportunity (EEO), affirmative action, and occupational safety and health.

The government also uses its purchasing power to support the country's industrial base. Two different statutes address this issue, and it's important to know which applies in your contracts.

The Buy American Act (1954) applies to supply contracts valued at less than $186,000. It says more than 50 percent of a product's value must come from the United States. Components may come from other countries as long as they don't represent most of the product's value, and final assembly must occur in the United States.

The Trade Agreements Act (1979) -- which applies to supply contracts valued at greater than $186,000 -- is less restrictive, saying only that items must come from "designated countries." Again, components may come from anywhere, but they must be "substantially transformed into a new and different article of commerce" in one of the listed countries. Almost every country is included in the designated-countries list except for: China, Taiwan, Thailand, North Korea, Cuba, Iran, Iraq, Libya and Sudan.

PATENTS AND COPYRIGHTS

The government respects all patent and copyright laws for items developed at a company's expense. However, it's your responsibility to ensure the government understands how your products are licensed and that your contract clearly states your rights. Your best strategy will be to define usage rights in your GSA contract and have every government purchase reference that contract. You can base those terms on your commercial practices.

If you are working under a government contract and in the course of that work discover a new process that is patentable, the government will claim rights to the process because it was developed at government expense. If you want to own the patent, there are exceptions and ways to negotiate with the government for ownership. Should you find yourself in this situation, it is best to obtain expert legal advice.

TERMINATION CLAUSES

The government, as the sovereign, reserves the right to terminate any contract at its convenience. It claims this right because it believes that if the public good is not being served by a contract, then it should be able to terminate -- no questions asked. This "termination for convenience" clause is in every contract. Although many companies object to it, there is no way to exclude the clause. However, the government exercises this clause rarely.

"Termination for default" is the government's equivalent of a breach of contract. It applies when the government believes the contractor has not lived up to its obligations. Again, terminations for default are rare. The government usually gives warnings, with ample opportunity to cure the alleged delinquency. In most cases, the contractor and the government will come to some agreement so that in the worst case, the contract is terminated for convenience instead of default. Never allow a contract to be terminated for default because it will be held against you for a very long time.

TAKING THE NEXT STEP

Now that you've read through the basic concepts of selling to the federal government, what should your next step be? Many companies believe that their first action should be hiring a sales person. Before doing so, consider the following steps. These will help him or her hit the ground running.

Determine your vehicle strategy, such as whether or not to establish your own GSA schedule contract. With your contract in place, you have more control over your government pricing and can ensure that you maintain the terms and conditions you need. You then have the basis for other contract types.

Identify a marketing focus, such as a particular application area or solution to a specific type of problem. The government market is so vast that a sales force can easily get lost chasing a multitude of opportunities. Keep in mind that the government includes many of the same vertical markets as the commercial market. Examples include heath care, logistics/transportation, and finance and banking. Identify those verticals offering the best opportunities for your products. Then do some digging to find out what agencies and which initiatives or programs can use your products or services to solve problems.

Finally, begin to think of the government market in inter-governmental terms. Structure your sales force to address the public sector as a whole: federal, state and local. With the growth of the inter-governmental movement, it makes sense to start a government group that thinks in terms of the entire public sector, and coordinates sales activities to all levels of government.

© Copyright. Government Technology Reseller 1997, 1998, 1999