Tuesday, September 8, 2009

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:


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:


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:


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.

Tuesday, April 7, 2009

How about the new DOD budget?

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:


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!

Tuesday, March 17, 2009

What a difference a few months makes!

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:

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:


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.

Wednesday, October 8, 2008

Policy or Politics?

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?

Tuesday, August 19, 2008

SBA Revising Small Business Revenue Classifications…Not Enough?

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.

Friday, June 6, 2008

M&A: SBA small business certification rules

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.


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.

Thursday, May 8, 2008

Corporate ethics - a culture, not just a policy

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:

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.