Perspective

2009-09-08T14:01:00.001-04:00

The State of Small Business Contracting

There has been a lot of rhetoric in the press lately regarding the state of small business contracting in the Federal Government contracting space. According to the White House, “It is essential that we provide our Nation’s small businesses with maximum practicable opportunity to participate in Federal Government contracting.” As part of this effort the SBA is going to hold 200 outreach events in the next 90 days:

http://www.sba.gov/idc/groups/public/documents/sba_homepage/news_release_09-58.pdf

I’ll need to dust off my good suit since I’m going to be busy attending all of these events! Well actually, I doubt I’ll spend much time doing that. Why? Because as the recent article in Washington Technology points out, I’ve never seen anyone walk out of an outreach event with anything more than a business card. I think this article by Matthew Weigelt makes a number of good points:

http://washingtontechnology.com/Articles/2009/08/31/Small-Biz-Trends.aspx

Some of these points are excellent – network, find mentor companies, develop your value proposition, register in required databases, such as CCR. With a limited amount of resources, small businesses need to focus their business development efforts. The Washington Post carried a related story on how small businesses are disappointed with the Federal Governments efforts in this area:

http://www.washingtonpost.com/wp-dyn/content/article/2009/04/06/AR2009040604049.html?hpid%3Dtopnews&sub=AR

This is a variant of a theme I’ve always heard in this industry – “the Government doesn’t do enough for small businesses, fails to meet goals, etc.”. Having worked for, and with, small government contractors, I can empathize with their frustrations. Companies like Altron can’t afford to pay $25,000 or $50,000 in business development costs – we simply don’t have the resources. Large businesses become frustrated as well – often they view their small business subcontracting plans as just another compliance “tax” so they can continue to work with the Government.

How about a new approach?

My old boss used to say – “everybody pays attention to their own rice bowl”. His point – most people make decisions based on their own personal economic situation. How about a recent example from our friends on Capitol Hill? The Government wants people to drive more fuel efficient cars – energy independence, less green house gases – all admirable goals. They’ve been arguing with the auto manufacturers for years about mileage (CAFÉ) standards. This hasn’t really changed anything. Now they introduce the cash for clunkers program - if you trade in your gas guzzler we’ll give you a $4500 credit – this is so popular, the program quickly runs out of money. What’s my point? People (and companies) act in their own self interest.

Currently the Government sets small business goals for themselves and for their large contractors. They have a hard time meeting them and so do their large vendors. My experience over a decade at a large company – never saw a contract terminated, fined or an option not renewed because the company didn’t meet it’s small business goals. Many large companies do a great job with their small business partners, some don’t, but in the final analysis there really hasn’t been a penalty or reward either way.

I suggest the Government take their “cash for clunkers” approach to their contractor community. What about paying a 1 or 2% fee premium to large firms for exceeding SBA goals on their contracts? I think our large publicly traded contractors would jump at the chance to increase their margins. You would quickly have an aggressive small business program at most of the large business contractors!

Maybe then the SBA could cut back on their 200 outreach events.

How about the new DOD budget?

2009-04-07T14:54:00.001-04:00

Secretary of Defense Robert M. Gates just laid out his proposed 2010 budget yesterday. Based on the synopsis in The Washington Post and The Wall Street Journal, I’m not too surprised. It’s a pretty brave step and takes on several cold-war era platforms. If you’re building planes, helicopters or ships it’s going to be a tough period for the next few years. I do agree with many of the “experts” here in town that with all the job losses in the economy this year – don’t take any bets – this budget may look a lot different when congress gets done with it!

One of the key parts of his proposed budget is a substantial increase in the government acquisition workforce. Over 50% of this recommended hiring over the next five years will be focused in this area. The Washington Post had a front page article on this today:

http://www.washingtonpost.com/wp-dyn/content/article/2009/04/06/AR2009040604049.html?hpid%3Dtopnews&sub=AR

If you are a service provider, what do you take away from all this?

The Government is making acquisition support an inherent Government function. For most service providers this is a positive development. I always prefer dealing with a sharp, knowledgeable professional – even if they don’t agree with me – than dealing with someone lacking the needed training or skills. My last DOD opportunity - announced in December, with nine amendments was subsequently cancelled so the Government could ultimately re-issue it. This kind of stopping and starting costs small businesses like Altron money – limited resources we could deploy on other opportunities. I’m looking forward to the Government’s investment in this area!

According to the headline in The Washington Post – “Contracting Boom Could Fizzle Out” – you might think the future for our industry is grim. I’ll have to politely disagree. If you’re a small business focused solely on providing procurement expertise – well – it’s time to re-think your strategic plan. Larger, well diversified service providers are going to continue to thrive and find opportunities in this market. Those companies that help the Government leverage technology, provide process improvement and enable Uncle Sam to do more for less are going to continue to thrive!

What a difference a few months makes!

2009-03-17T12:48:00.001-04:00

It’s been just over five months since I posted my last blog. What’s different? A few things – a new year, a new President and lots of bad economic news (1.8 million job losses in the last three months, the Dow Jones Industrials down approximately 45% since the end of September, major bank rescues and the auto industry on life support and another “Ponzi” scheme scandal). We certainly live in interesting times.

What does all this mean for the Government contract industry? Lots. However, I think a little optimism is in order.

Government spending: The federal government is going to spend nearly $1.5 trillion dollars between TARP and the economic stimulus package just signed – $1,500,000,000,000 – that’s a lot of zeros. Certainly the largest chunk of this spending is not going to be contracted out. OK – how about 10%? That’s $150 billion dollars! A quick look at the stimulus package “American Recovery and Reinvestment Act of 2009” provides a short roadmap - $19B for Health Information Technology, $7B for environmental cleanup, $0.9B for Government Technology Improvements, etc. In order to deploy these funds quickly, the Congress and the Administration are going to need the support of the government contracting industry.

It will take time to deploy all those federals funds and the effect of that spending will not produce an immediate up-tick in the economy. Stan Soloway of the Professional Services Council (PSC) was recently quoted in the Washington Post about the effect on contacting:
(http://www.washingtonpost.com/wp-dyn/content/article/2009/02/24/AR2009022403504.html)

Stan’s comments are on point concerning the need for a robust government procurement workforce and how critical that is for both Government and Industry.

A cautionary note:

Government contracting and outsourcing has never been popular, but the economy is putting more political pressure on our market. Just last week President Obama ordered a review of contracting practices:

(http://www.washingtonpost.com/wp-dyn/content/article/2009/03/04/AR2009030401690.html?sub=AR)

Clearly the environment for contractors has shifted. You need to ensure all your internal controls are operating and continue to train and educate your staff on the regulatory environment.

Keeping forging ahead:

I’m very optimistic – once the wheels in the procurement process get turning, there is a bright future for this market.

Policy or Politics?

2008-10-08T11:11:00.000-04:00

Last week, John McCain proposed making government contracts exclusively fixed price contracts.

Barack Obama, meanwhile, has pledged to cut down on federal contract spending by 10 percent after our government spent $412 billion on such contracts in fiscal 2007. An Obama White House would also “end abusive no-bid contracts and minimize 'cost-plus' contracts, while hiring more contracting officers and increasing their training,” according to a supporting Obama campaign statement.

Just like Wall Street, the government contracting industry hates uncertainty. The real question is how much of this rhetoric is the politics of getting elected and how much will end up as procurement policy?

Senator McCain -

Can we contract for everything of a fixed price basis? From a Government buyer perspective, it is a more efficient contract, a known cost for the taxpayer and passes both performance and financial risk to the contractor. For contractors, since there is a higher risk profile in the contract, they should price in a higher profit margin. Sounds like a good deal all around, however, A fixed price contract is really only appropriate when there’s a clear scope of work. If I call a contractor to build a deck in my backyard, I want a fixed price, but the contractor still needs to know the design/dimensions of the deck, the timeframe it needs to be done and the materials I’d like him to use before he can give me a fixed price. However, when the scope of work changes after I’ve signed the contract, it leads to change orders driving up the final cost and defeating the very purpose of a fixed price contract. The Government has the same issue, if an agency wants to build a IT network and changes key elements – for example decides it needs to be run on Oracle versus Microsoft SQL Server, then it can expect to pay more money.

Senator Obama -

“End abusive no-bid contracts” – that’s a little too hokey for me – akin to saying “I’ll stop kicking my dog”. What is meant by that? No directed awards? Fewer contracts set aside for social policy reasons - veterans, minorities and women? I doubt the first African American president is going to offer less social contracting. He may, however, be on to something with his proposal to hire more federal contracting officers and train them better. Having specialized knowledge and talent within the Government community is essential to writing tight statements of work, managing contracts and protecting the Government’s interests.

Both candidates seem to pick on cost-type contracts – either indirectly or directly. Cost reimbursable contracting can work very well for many procurements to contain costs, limit contractor profitability, manage ambiguous statement of works and ensure the work gets completed satisfactorily. In addition, these contracts can also be audited - leading to more cost transparency and limiting the “unallowable” costs incurred by contractors.

In these uncertain economic times, I hope cool heads prevail. Clearly, taxpayers can’t afford government contactors to be the profit leaders in the economy, however a healthy and vibrant contracting community is one key to helping the Government operate in the most responsive and cost-efficient manner. Time will tell, but it should be an interesting few years.

What do you think about the proposed reforms of government contracting? Which stand the greatest prospects for success?

SBA Revising Small Business Revenue Classifications…Not Enough?

2008-08-19T16:40:00.001-04:00

On August 18, 2008, the Small Business Administration (SBA) increased all revenue-based small business size standards. The new rule finalizes the Agency’s December 2005 interim final rule that also amended monetary-based small business size standards for inflation. These size standards will be increased 8.7 percent, which I argue is not nearly enough.

In a recent article in Washington Technology, Jerry Grossman advocates an increase in the revenue cap for small businesses – allowing companies “time to mature” and “expand their infrastructure”.

Both the government and the contractors they use have a legal, moral and ethical responsibility to safeguard taxpayers’ funds that are contracted out for services. In this regulatory environment, small contractors need to invest in systems and training to protect the government and to protect themselves. This year alone, Altron has already spent over $150,000 training our staff, updating our audit services and installing a new accounting system. While these types of expenditures may be of little significance for a large company, they are considerable for small firms like Altron. .

This is not a complaint -- Firms like mine must make these kinds of investments if we are committed to staying and growing in the government market.. However, I argue that allowing small companies a few more years of growth under the umbrella of small business programs would facilitate the necessary investments in internal controls. This would benefit companies like Altron, this market, government customers and the U.S. taxpayer.

M&A: SBA small business certification rules

2008-06-06T13:01:00.000-04:00

Last July 1st, a significant change in the Small Business Administration regulations became effective. If a small businesses merges or is acquired it now must now re-certify that it still a small business within 30 days of closing. One of the drivers for the SBA rule change was to ensure that small business goals were accurately reported under long-term, GWACs, GSA and MAS contracts. While this certainly seems fair on the surface, this may not work in the favor of small businesses in the long term.

Just to simplify - When a large government contractor evaluates a target (usually smaller) company, one of the key economic metrics is the type, length and profitability of their contact base. Many of these small firms have grown up and graduated from the small business program. Many times they are still performing contracts that were awarded to them as small businesses.

What value does an acquiring firm put on these? In the old days (pre-July 1, 2007), there was no clear answer to this question. It depended on many factors such as technical or niche capabilities, mission critical services or people, company tenure with the buying agency, etc.

What’s the value of these small contracts to an acquiring firm now? My guess is not much. A small business now has to immediately notify the procuring agency that they no longer qualify as a small company. So what? Well, now the agency can no longer credit that work toward their small business goals. This will put pressure on the government procurement folks to meet their small business goals some other way – new set asides, re-visit upcoming options – does the government not exercise contract options? Do they re-compete the contract as a set aside? Obviously these scenarios are not going to benefit the existing target company.

Jerry Grossman wrote an article for Washington Technology about a month ago on government M&A deals.

http://www.washingtontechnology.com/print/23_08/32744-1.html

I thought it was a great article. Toward the end of his piece, he notes that two thirds of the deals are sub $50M in revenue and indicates that pricing on these deals has softened. I would add that given the new regulatory environment, this price softening is likely to remain a reality for the average small business owner for some time to come.

For large businesses, from a practical perspective, this pool of small business acquisition targets is now off the table. For small business contractor owners looking for an exit strategy – I expect they’ll need to adjust to lowered valuation expectations.

If you are a small business with a good management team, I think there is opportunity here. The well-run small businesses trying to grow may have opportunities to grow through acquisition. Available financial resources will always be an issue, but decreasing valuations should increase potential acquisition targets.

Let me know what you are seeing in the federal market as a result of the SBA small business certification rule change. I welcome your comments.

Corporate ethics - a culture, not just a policy

2008-05-08T15:08:00.003-04:00

There has been a lot of press lately on the final FAR rule (3.1003-3.1004) requiring contractors with $five million-plus of government business to have a written code of ethics. A former colleague used to say that contracting might be the most heavily-regulated business outside of healthcare. I’m not sure if that’s true, but if you manage proposals or accounting at a mid-sized to large company with DoD contracts, you’ll see your fair share of examiners – financial statement auditors, workers comp insurance, bank auditors, sales & use tax, DOL, IRS, DCAA, GSA, OFCCP, etc. Clearly, with this number of stakeholders, a clear set of corporate ethics, rules and policies is vital.

Established ethical policies do exist. One of the strengths of the Washington business community is the depth of talent and knowledge surrounding government procurement and its associated rules and regulations. Many of the professional services organizations in town regularly boil these complex issues down for their clients. Our audit firm, Argy, Wiltse & Robinson, put out a nice synopsis in their “Spring 2008 Business Insights” publication. Obviously, it is vital that contractors know the policies of the offices and agencies with whom they regularly do business and develop their own systems to ensure compliance.

Of the recent articles and guidance I’ve been reading on the subject, the one hit that hit closest to the mark is from Darrell Crapps at Sentel Corporation in Washington Technology:
http://www.washingtontechnology.com/print/23_07/32631-1.html

His core premise is that contractor executives must lead by example when it comes to ethical behavior. For me, that is the heart of the issue – public trust and a responsibility to the US taxpayer is a duty above and beyond the fiduciary responsibilities of most corporate officers. In short, our business needs to embrace the spirit of these rules and not approach them as simply a “check the box” compliance issue.

During my 15 years at Stanley, my bosses, Larry Gallagher and Phil Nolan, exemplified that very spirit, long before there was a formal ethics policy. Whenever I encountered an ethical dilemma, their guidance was always – “What’s the right thing to do?” Not the right thing for the shareholders, me, Stanley or the client – simply, what was the RIGHT thing to do. Once you reduce an issue to this core consideration, the answer becomes straightforward. This culture of integrity - a core guiding principle for Stanley - is a similar priority as we build our culture here at Altron.

Moving forward, we are striving to marry this ethical culture with a policy of transparency in all our dealings. As we continue to grow the business, we need to increase the clarity in all our business dealings. This includes all of our stakeholders - customers, partners, employees and regulators. What is clarity? It means being clear about the challenges and opportunities with your employees, bringing up and talking about the company “warts” with your regulators, and putting more of the “company’s cards” on the table with your business partners. Will this cost me some competitive advantage? Maybe. But when I add up all the experiences I’ve had after nearly 20 years in this business, I think it’s the only way to run a business.

Firms Big and Small, Growing Together

2008-04-21T09:45:00.001-04:00

In honor of National Small Business Week, here’s a link to Shiv Krishnan’s story in today’s Washington Post about coming to this country with $500 in his pocket and a desire for higher education and better opportunities.

Fifteen years after founding Indus Corp., he’s built a successful $100 million government contractor. His comments about what small business subcontractors can bring to a teaming relationship interested me, and I like what he wrote about focus and the general “Culture of Opportunity” theme to his story.

http://www.washingtonpost.com/wp-dyn/content/article/2008/04/20/AR2008042001791.html

“Dynamic of Bitterness”?

2008-04-04T16:00:00.001-04:00

A few weeks back, in one of my initial postings of Perspective, I reflected on how important the “Culture of Opportunity” was to my professional development over the course of a 15-year career at Stanley. In fact, this concept is one of the key building blocks I’m focusing on to help take Altron to its next stage of growth.

Now that I’ve taken a role with Altron, a company that is primarily a subcontractor, I have a unique view of the relationship interaction between prime contractor and subcontractors - an interaction that could be described as a “Dynamic of Bitterness.” This apparent love-hate relationship between prime contractors and their teaming partners can be more constructive than destructive if the partners work on it together. Most larger vendors and their smaller, more specialized subcontractors such as Altron typically see contract opportunities only through their own lenses without fully appreciating the views or needs of their partners.

As a large prime contractor, what value does a team add? Primes often feel figuratively handcuffed by what they see as the onerous teaming provisions mandated by many RFPs, which entail foregoing revenue in the interest of securing the bid. This “lost” revenue and the complexity of managing large teams of subcontractors can create a jaded view of teaming relationships.

What are the frustrations for a small subcontractor? For their part, many of these teammates become frustrated over perceived slights from their partners, feeling they are not afforded the respect or visibility to the government customer they deserve. The prime’s failure to recognize the sub’s outstanding technical or service achievements to the end client leads to feelings of exploitation and bitterness.

Is this a hopeless paradigm – absolutely not!

Prime contractors have a right to expect their subcontractors to work through them, to help the overall team deliver outstanding service and help the prime successfully manage contract to meet the customer’s mission requirements. In addition, the prime contractor should expect their teammates to track new opportunities that the team can pursue together. How can they help their subs? One way is to set business expectations beyond the language of the teaming agreement or scope of work in the contract. Clear expectations regarding business development opportunities and information flow. – What does the prime expect the subs to do regarding chasing new business opportunities? Where does the line between internal customer intelligence end and where knowledge needs to be shared with the team?

Subcontractors have an obligation to expand the teaming relationship and bring new business to the team. A smaller firm may be more interested and responsive for smaller or more technical opportunities - ones that a large prime may not be interested in - that could bring new service offerings or client relationships to the team. Also, the prime is the customer - subs have an obligation to see the prime contractor and not just the end-user government client as “customer”. How can subs help their primes? Look for new opportunities, treat the prime like the end client and manage the information flow! Subcontractors need to speak up - a well timed phone call does more good that twenty email explanations!

These concepts don’t require a Ph.D. in management, and while they are simple ideas, they’re hard to implement. You need to communicate, communicate and communicate. While I’ve labeled this piece the “Dynamic of Bitterness” it is more about managing the interactions between two organizations. For Altron, it’s another aspect for us to improve in our company culture. This culture change is hard to do but incredibly important.

Diversity lacking in government contracting, corporate America

2008-03-17T15:59:00.003-04:00

I’ve been thinking about the recent proposed SBA rule change that would limit the women-owned small business set-aside program to four areas where SBA thinks that women are underrepresented and the resulting political backlash. The government services contractor I work for, Altron Inc., is a woman-owned, small business.

I’ve attended industry events, such as the Professional Services Council and the Association for Corporate Growth where the lack of diversity is painfully evident in our government contractor leadership ranks. I get great value out of attending events sponsored by ACG, PSC and other groups and don’t intend this as a criticism.

The problem is not limited to the government contractor community, apparently. A “Deal Journal” blog story last week in the Wall Street Journal illustrated that we’re at a time of inertia with women making it in the boardroom, with the number of Fortune 500 companies with no females on their boards nearly equaling the number who have female representation, according to a recent survey by the women’s financial organization, InterOrganization Network (ION).

The zinger in that WSJ story is the following: “ION cites data that shows that companies with more women on their boards performed better than average; in data provided by research firm Catalyst, Fortune 500 companies who had the biggest percentage of female directors also outperformed the companies with the lowest percentages by 53% in terms of return on equity, and 66% in terms of return on invested capital.” Interesting.

President Gerald Ford signed Public Law 94-106 in 1975, which opened up the military service academies to women, who began to enroll in 1976. With the first co-ed classes graduating from the U.S. military academies in 1980, we may soon start seeing a significant increase in the number of women leaders with 20 or 25 years of military experience joining the government contractor ranks. I think that’s good news for the contractor community, the government and the taxpayer.

Please tell me what you think of the SBA’s proposed rule change for women-owned small business contractors -Do you think there’s a level playing field for women in our industry? If you think there is inequity, How should government policy, when it contracts for goods and services from the private sector, adjust for this?

Culture of Opportunity

2008-03-03T16:45:00.002-05:00

Eleven months after finishing my graduate degree at the University of Maryland and one month after getting married, I was introduced to Larry Gallagher. Larry was part-owner and President of a small federal contractor in Alexandria, VA. The company had about 120 employees and had less than $10M in annual revenues. The company was struggling to make payroll and needed accounting help. The job paid $35,000 per year and oh, and by the way, since I was indirect I would have to start at $17,500 because the position was not billable. I took the job anyway.

Fast-forward 15 years. By the time I left Stanley Inc. last year as a senior VP and CFO, I had helped take the company public in 2006 on the NYSE (SXE), and put them on growth path toward over $400 million in revenues. Prior to the public offering the company was entirely employee owned with all full-time employees covered by an employee stock ownership plan (ESOP). Because I took a chance on what I’ll call Stanley’s “culture of opportunity,” and they on me, I was able to grow professionally with the company in a way that most employers in our segment simply aren’t able to match. In short, at Stanley, the associated financial rewards only tell part of the larger story.

I was attracted to Altron for many of the same reasons. In fact, one of my primary, longer-term goals in my new post there is to tap into some of the dynamics from Stanley to try to replicate that environment. As at Stanley, our own culture of opportunity will not only reward top performers, although that is certainly a key element. More importantly, I hope to foster a willingness among our employees to take certain calculated risks on behalf of both Altron and themselves. Without this ongoing individual commitment to identifying and taking full advantage of innovative ways to improve their performance, a job just becomes a way-station en route to something else, usually with someone else.

With a far-flung workforce in places across the country like Charleston, Laguna Niguel, and Portsmouth, I’ve seen already that not everyone is a ready believer in this concept, but we’re working to change that mindset. I think it’s human nature to have a healthy skepticism and I think most are more willing to believe bad new rumors than good news rumors. We’re going to continue to provide more opportunities and more employee focused programs – we’ll re-visit this concept next year – I confident we’ll have all A’s on our report card!

If we accomplish our goal at Altron, we’ll create a culture of opportunity that rewards those who are truly committed to continuous performance improvement, helping them to grow as we grow. We want both our business partners and our government customers to see the true difference in our employees.

Mike Zaramba
Strategic Communications Group, on behalf of Altron