Government contracts: big budgets and tricky customers

Governments, already backstopping private sector salaries in this pandemic, are increasingly stepping up to the plate as customers, too. Take Microsoft, which has managed to flog 120,000 augmented-reality headsets to the US army. The contract, worth as much as $21.9bn over 10 years, would add about 1.5 per cent to its current annual sales.

For certain industries, the state has long been the biggest game in town. Defence is one. Some 90 per cent of BAE Systems’ sales, for example, count government entities as the end buyers. Peter Thiel’s Palantir, for all the pre-IPO talk of commercial clients, still relied on governments for more than half of revenues in the fourth quarter. That is not all military contracts: the US data analytics group also snatched a controversial £23m contract from Britain’s NHS.

More sectors are joining in. The pandemic means that even the US government has ponied up funding for vaccines, striking deals to purchase jabs that are free of charge to everyone living in the country. China, where lines between the public and private sector frequently blur, took an early lead. Think smart cities and online courts — Justice as a Service, if you will.

Government research funds supported the development of computing. Tech companies that already ply B2B and B2C models are targeting the B2G (business to government) one, too. Top areas include cloud, cyber security, digitisation and automation. Not for nothing did China’s Tencent, which was trailing rival Alibaba in cloud computing services, bid a fraction of a renminbi for a city-level cloud contract in 2017.

Governments preside over large procurement budgets. But gross margins frequently lag behind those on commercial contracts. Risks are higher: government projects have been scuppered by employees, taxpayers, civil society and rivals.

Google was forced to scrap its Project Maven contract to provide surveillance technology to the US defence department. A deal expected to lead to more military contract wins ended after a backlash from employees.

Two other US projects have been beset by delays. The Department of Defence’s Joint Enterprise Defense Infrastructure $10bn cloud computing contract has been fraught with legal battles both before and after being awarded to Microsoft in 2019. Lawsuits have dogged award of the Navy’s Next Generation Enterprise Network, one of the government’s biggest IT contracts.

Snappy as it sounds, B2G carries a risky load.

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