Posted by: dstieglitz | December 31, 2010

CHALLENGING TIMES

     Federal contractors didn’t buy much champagne for New Years Eve because they don’t have a lot to celebrate. President Obama’s elimination of 2011 pay raises didn’t leave federal workers much to celebrate either. It took a few years, but the ailing economy finally penetrated the shield that protected the federal market from the layoffs, pay cuts, and obsession with productivity that has occurred in the private sector.  The good news is that executives in federal contracting firms who meet this challenge will emerge from these tumultuous times with bigger and stronger companies. 

The Changing Federal Market. The federal market more than doubled since 9/11 – but the boom years of doing business with the world’s largest customer are over. Pressure to cut spending is front page news, but that is just the most news-worthy among four concurrent changes affecting the federal market:

  • Analysts project that expenditures to federal contractors will fall about 5% ($30 billion) in 2011 compared to 2010, with further cuts expected in 2012.
  • Civilian agencies’ share of the market is increasing relative to Defense and Homeland Security – in part because some agencies still haven’t spent all their stimulus money.
  • A shift is occurring in the services and products that federal agencies buy, causing upheavals in traditional growth sectors like IT services.
  • Continuing resolutions, insourcing, and increased oversight make the federal market more complex, more competitive, and more risky.

The last three changes are more of a long-term threat than budget cuts. Nuclear submarines, space shuttles, and jet fighters are hard to justify; and are being replaced by purchases of health care, energy management, and smart devices. In the IT world, networks and servers are a commodity while cyber-security, telework, cloud computing, and software-as-a-service are seeing spending increases. 

Continuing Resolutions (CRs).  In a familiar ritual, the 111th Congress ended by passing another CR – this one effective until March 4th. The adverse effects of CRs are enormous. Federal agencies must operate under last year’s budget even though priorities have changed, which wreaks havoc with strategic planning and project management. Who knows how long it will take the 112th Congress to approve spending bills for the remainder of FY11. In 22 years as a federal contractor, the only year my company lost money was 1995 when President Clinton and a Republican majority in Congress fought over CRs into March – several competitors went out-of-business. That calamity may happen again! 

Insourcing. As federal agencies look for tasks to insource, friction between government and industry increases due to contract cancellations and employee poaching. To say the least, President Bush’s policy of pitting federal workers against industry under OMB Circular A-76 provisions was controversial. But the Obama administration is pushing insourcing, the flip side of A-76, because it thinks government work should be done by federal employees. While it is unlikely that significant contractor work will actually be insourced, the raging debate will slow contracting actions for the remainder of the Obama presidency and make industry-government partnerships more difficult to form and sustain.

 Increasing Oversight. In response to allegations of fraud, waste and abuse by prominent companies like KBR, Blackwater, and GTSI, a wave of new controls is being imposed on contractors. Interestingly, some high-profile companies (e.g., Apple and Microsoft) have a policy of not contracting directly with the federal government. They say they earn more by avoiding burdensome accounting systems, audits, and rules (e.g., salary caps).  Industry giants like Lockheed-Martin, General Dynamics, SAIC and Booz-Allen easily comply with new regulations via a full-time compliance staff. However, it’s not so easy for small firms. With profits near all-time highs, Congress and the Press unfairly portray federal contractors as borderline criminals who profit at taxpayer expense. On the other hand, it’s hard to argue against more oversight of spending that represents half of the federal government’s discretionary budget. 

Alternatives. Historically, federal contractors expand into the state-and-local market when federal rules tighten and budgets shrink – but the outlook in that sector is bleak. State and local governments are in such dire financial straits that analysts fear they could be the next meltdown. A few big states are particularly worrisome because their issues could increase borrowing costs for all states. For example, last year New York ran out of cash to pay contractors, California paid them with IOUs, and Illinois was delinquent in paying social service providers. Tax receipts won’t return to pre-recession levels for at least two years, so states are making painful cuts and tax increases. With expansion into state-and-local markets not a viable option, small federal contractors must think strategically to survive this crisis. 

Think Strategically. Large contractors can grow even during downturns through acquisitions, but small companies must think strategically. That means identifying agencies with pressing needs and the budget to satisfy them. Approaching those agencies may mean shifting priorities, changing teaming partners, and acquiring new skills. IT service contracts, long a growth area, probably will be flat for the new few years due to server and network consolidations. Defense spending is likely to fall as deployments are curtailed and budgets are cut.  However, small businesses have one reason to smile: agencies are introducing new competitions to meet their small business goals. Forward-thinking companies are adjusting their goals and strategies to fit the new reality. Specifically, small companies would be wise to focus on current clients, fine-tune their business development program, and cultivate strategic partnerships. 

Focus on Current Clients. In today’s environment, preserving relationships with current clients is more important than ever – so invest in recompetes as if they were new opportunities! Align your support with the client’s priorities and never ever take a client for granted.  Hold regular project reviews to assess your team, to see what (if anything) is missing from your services, to ensure your team is on top of emerging opportunities in the client’s office, and to identify competitors. Face-to-face client satisfaction interviews also are a great way obtain first-hand feedback to augment project reviews. Are you helping your client to deliver results with their current budget and justify increases when appropriate? The bottom-line: position yourself to grow your current business by winning every recomplete! 

Fine-Tune Business Development. In my experience, assigning annual business development and revenue goals to service delivery teams lead by group managers is a good way to grow current contracts. That approach works to a certain revenue level, but then growth stagnates. Satisfying existing customers’ current and emerging needs consumes enormous amounts of time so, without a corporate business development unit, the pursuit of new clients loses steam. Therefore, your service delivery staff and proposal writers should be augmented with a full-time opportunity identification, intelligence gathering, and qualification team to produce smart bid-no bid decisions and a favorable win-rate. Furthermore, implement pipeline management metrics are essential to measure performance and motivate business development behaviors that produce growth in tough times like these. 

Cultivate Relationships.  Due in part to CRs, most of the mega-contracts likely to be awarded in 2011 are recompetes where the offering agency will make multiple awards. For small companies, winning a prime or subcontract on one or more of these multi-billion dollar vehicles could produce substantial growth. Missing these opportunities could leave a company on the outside for several years relative to getting work from the agencies. This situation intensifies the need for small businesses to gather intelligence, strengthen relationships with their big-business primes, and form new strategic partnerships. Memberships in associations like the American Small Business Coalition (ASBC) are a great way to satisfy all three objectives. As a member of the ASBC Advisory Board, I have seen how the organization provides a fertile forum for small federal contractors to gather information about specific opportunities, meet teaming partners, and learn how to deal with new rules and regulations. 

Change is Hard…And Essential.  The reason for change rarely starts inside a company. More often, change is driven by extraordinary external events like the market shifts federal contractors face in 2011-2012. Such circumstances force companies to re-examine their priorities, their processes, and the commitment and skills of their people. In perilous times like these, small businesses must think strategically, focus on current clients, and build relationships to survive and grow – because they won=t be bailed out by an expanding market or another stimulus package.

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