The March to Consolidate

he one word that best describes the current federal technology market is "consolidation." But depending on whether that word is applied to the government-which is the largest single purchaser of information technology in the country-or to federal contractors, it means different things.

On the government side, the Office of Management and Budget has been hammering agencies to consolidate their IT spending and their use of technology systems and services. The mantra of OMB's e-government chief, Mark Forman, is "buy once, use many." This concept appears to have the most potential in the Homeland Security Department, whose managers have spent their first months on the job grappling with the vast array of IT systems housed in the nearly two dozen agencies that make up the organization. In the past, Customs Service systems didn't connect to those at the Immigration and Naturalization Service, and the Coast Guard's databases didn't "speak" to computers at U.S. ports. But now managers are looking to see whether these agencies can share common systems, even if just to perform mundane administrative tasks.

OMB also wants non-security agencies to make consolidation a habit. Not every agency needs its own payroll and personnel processing systems, officials argue. Where agencies can team up, they should, following the lead of four agencies that joined forces in January to provide governmentwide payroll processing as part of the e-Payroll initiative.

The administration also wants agencies to consolidate their contracts, taking advantage of the government's massive buying power in order to get better deals. The latest initiative on that front is the General Services Administration's SmartBUY program, which seeks to craft multi-agency software licenses. Calling government spending on software "uncoordinated . . . wasteful and ineffective," former OMB Director Mitch Daniels said in June that the program would negotiate licenses for common software used by more than 4 million government computers.

Market observers question, however, whether SmartBUY or the larger consolidation effort have much of a future. Pooling purchasing power means fewer contracts, and some vendors aren't likely to react favorably to that idea. Federal agencies already get better prices than commercial buyers, says Larry Allen, executive director of the Coalition for Government Procurement, which represents contractors on GSA's Federal Supply Schedules. Companies' profit margins are already so slim that there aren't a lot of savings left to squeeze, he says. "I don't see people getting fat, dumb and happy off of selling software to the feds."

The federal technology market isn't exactly booming, companies note. The anticipated gusher of homeland security-related spending has yet to result in more than a trickle for most firms.

On top of that, industry is dealing with its own form of consolidation. Mergers and acquisitions of technology companies-some of them giants-played large in headlines throughout the past year. In 2002, federal technology contractors were involved in more than 70 mergers or buyouts, according to research by market analysis firm Federal Sources Inc. of McLean, Va. Those transactions were all valued at $50 million or more, and most of the acquired firms were privately held.

Just among the top 20 technology contractors on this year's list, there were two major mergers-the buyouts of TRW Inc. and DynCorp by Northrop Grumman and Computer Sciences Corp., respectively. Add to that the bankruptcy and public pillorying of one of the government's largest telecommunications providers, WorldCom, and it's clear that the number of key players in the federal market is shrinking.