The Federal Government needs to fix flaws in regulations to encourage more competition in government contracting.
Core to the philosophy of U.S. federal government contracting is the assertion that the greatest competition results in the best goods and services at the best value. The Federal Government has created many paths to induce entrepreneurs to make the investment in building a government professional services business. However, the government has created complex policies and regulations that make it challenging for the entrepreneur to see this investment through the corporate lifecycle and ultimately reach liquidity. The inconsistent policies towards small business growth and the burdensome regulations for achieving liquidity reduce the investment’s expected value. Reducing the existing hurdles will result in more investors viewing this as an attractive investment opportunity.
Success that Kills the Business
As part of the efforts to stimulate competition, the government must create policies and regulations that encourage economic growth throughout a company’s lifecycle. A company that has proven its abilities to provide goods and services should be in a better position to compete for future opportunities. Such a company should be encouraged to invest in corporate infrastructure to grow in scale, which provides efficiencies to government customers. A contract award winner should have the incentive to provide continuity of services at improving costs over the long term. Currently, the government has set small business policies that run contrary to this.
Once contractors graduate from these set aside programs, they must compete for contracts with more established companies, who have more resources for business development and more past performance history. Frequently, the act of winning a large dollar contract set-aside for small businesses makes the awardee ineligible to win additional small business work (or even the future recompete of that contract). Many of these one-time small businesses find their success has made themselves too big to be considered “small”, and too small to compete effectively. These companies are essentially in a form of “no-man’s land”.
Several small businesses were awarded the Missile Defense Agency Engineering and Support Services (MiDAESS) contract, an IDIQ with a several hundred million dollar ceiling. If a small business wins more than $25m a year in task orders, the company winning the work will no longer be considered small when the recompete comes. This also hurts the government because when the contract must be renewed, either the contracting officer must make the recompete full & open or bring in a new small business and go through an unnecessary transition period. The government should be encouraging companies to grow, not incentivizing companies to stay small. One solution is to create a means by which successful contract completion allows a company to transition a small business contract to either a “mid-sized business” contract or full & open. The creation of a “mid-sized business” category would resolve much of the challenges these successful small businesses face, and encourage further investment.
Liquidity
Key to any investor is a clear path to liquidating an investment. The burdensome regulations for achieving liquidity ultimate reduce the investment’s expected value. The Federal Government has added undue restrictions on selling equity both for raising capital and for achieving liquidity. Reducing the existing hurdles towards liquidity will result in more investors viewing this as an attractive investment opportunity.
Selling a company to a strategic acquirer or financial investor represents the most realistic exit opportunity for the entrepreneur who built the business. Transactions represent the best means of realizing the value created, compared to selling to employees or ceasing operations after fulfilling the contract obligations.
Allow private equity investors to invest in non-affiliated small businesses without triggering affiliation. These companies require investment capital just as large businesses do. The current regulations create an impediment by triggering affiliation between portfolio companies. Currently a Small Business Investment Company (SBIC) is the only recognized organizational structure that can invest in multiple small businesses and the businesses remain unaffiliated. Oddly enough, in order to qualify as an SBIC, the applying entity must be a private equity group with relevant history. The regulations should consider that as long as the two businesses operate in different markets and have independent boards (similar to the requirements for foreign buyers) the operations of one should not limit the bid & proposal opportunities of the other.
Modify the small business regulations. The regulations on a business with small business contracts are vague and complex, and are not treated equally by contracting officers. The uncertainty makes strategic acquirers leery of the transaction risks associated with buying small businesses.
Hire more contract novation specialists. A transaction is in limbo while the contracting office determines if the contract can be transferred to a new owner. The contracting offices are understaffed throughout the country, which results in increased time required for novation. Increased time equates to increased transaction risk.
Thursday, November 18, 2010
Monday, May 17, 2010
BD Strategies for Building the Exit
In this month's Federal Growth Report we focus on marketing strategies for small business government contractors. The small business owner/manager has limited resources and needs to balance how they utilize their networking and relationship building time, marketing dollars and bid & proposal staff. The small business may often determine that the best strategy is to focus these resources on what has been successful in the past. Frequently this means continuing to invest in a small business/preferential strategy. This can yield short-term contracts while undermining long-term sustainability.
A business must balance the near-term requirements with the long term needs, goals and objectives. If the company uses a preferential status to compete, what happens as the company reaches its graduation from that status? How will the company compete then?
The owner/manager must invest in positioning the company to be able to compete full & open when it can no longer use its preferential status. The answer seems surprisingly obvious, but frequently companies fail to invest early enough to be prepared for the transition to full & open when that time comes.
The first step is to establish how much time remains before the company must compete full & opne. The company has visibility into the end of its tenure in the set-aside program. If the company enjoys only small business, it has a three year traveling average to manage, and should have full insight into when the revenues begin to reach critical levels. And clearly, an 8(a) knows how many years it has remaining in the program.
The second step is to know what it takes to compete full & open. These include niche capabilities, experience as a prime contractor, strong relationships with key agencies, high CPARs, and performing highly valued or mission critical solutions. Additional considerations are financial or contract in nature: holding other vehicles where the KO can move monies to, building the infrastructure that complies with DCAA standards, and having the reserve capital that allows for aggressive pricing strategies.
The third step is assessing where the business is today and what are the gaps between the current and the required future structure.
A contractor must have a growth strategy that takes the business from current operations to full & open. If not, the company falls off the cliff upon graduation. This growth plan, if done correctly, will shed light on the types of contracts and opportunities the business development team should pursue.
The resulting business development plan may require pursuing opportunities outside of the comfort zone of company. Positioning the company to compete full & open will likely be a dramatic change from the current business. The changes in corporate direction can be a harsh reality for the team currently in place, both in operations and BD. Frequently it will mean that managers will have to stretch. And often, this means that owner recognizes the need to bring in additional support to augment the current team. Sometimes it means replacing the current team.
It becomes a challenge for business owners to dedicate the energy to assessing the business, the willingness to forego current year contracts that may be easier to pursue, invest bd dollars towards lower probability but necessary wins, and the emotional burden of replacing your management team. However challenging, the alternative seems worse. Reaching the end of the preferential status with capabilities and infrastructure not positioned to win new work most frequently results in laying off significant number of employees or shutting down operations all together.
A business must balance the near-term requirements with the long term needs, goals and objectives. If the company uses a preferential status to compete, what happens as the company reaches its graduation from that status? How will the company compete then?
The owner/manager must invest in positioning the company to be able to compete full & open when it can no longer use its preferential status. The answer seems surprisingly obvious, but frequently companies fail to invest early enough to be prepared for the transition to full & open when that time comes.
The first step is to establish how much time remains before the company must compete full & opne. The company has visibility into the end of its tenure in the set-aside program. If the company enjoys only small business, it has a three year traveling average to manage, and should have full insight into when the revenues begin to reach critical levels. And clearly, an 8(a) knows how many years it has remaining in the program.
The second step is to know what it takes to compete full & open. These include niche capabilities, experience as a prime contractor, strong relationships with key agencies, high CPARs, and performing highly valued or mission critical solutions. Additional considerations are financial or contract in nature: holding other vehicles where the KO can move monies to, building the infrastructure that complies with DCAA standards, and having the reserve capital that allows for aggressive pricing strategies.
The third step is assessing where the business is today and what are the gaps between the current and the required future structure.
A contractor must have a growth strategy that takes the business from current operations to full & open. If not, the company falls off the cliff upon graduation. This growth plan, if done correctly, will shed light on the types of contracts and opportunities the business development team should pursue.
The resulting business development plan may require pursuing opportunities outside of the comfort zone of company. Positioning the company to compete full & open will likely be a dramatic change from the current business. The changes in corporate direction can be a harsh reality for the team currently in place, both in operations and BD. Frequently it will mean that managers will have to stretch. And often, this means that owner recognizes the need to bring in additional support to augment the current team. Sometimes it means replacing the current team.
It becomes a challenge for business owners to dedicate the energy to assessing the business, the willingness to forego current year contracts that may be easier to pursue, invest bd dollars towards lower probability but necessary wins, and the emotional burden of replacing your management team. However challenging, the alternative seems worse. Reaching the end of the preferential status with capabilities and infrastructure not positioned to win new work most frequently results in laying off significant number of employees or shutting down operations all together.
Friday, February 5, 2010
Is the Federal Government “Investing In” Keeping Small Business Small?
Mark Shappee, Managing Director, Venture Management, Inc.
I recently attended a conference sponsored by the National Chamber of Commerce and the Professional Services Council which was aimed at small and mid-tier companies and included among its topics to be addressed “Barriers in Federal Contracting.” The panelists and speakers included a broad cross section from both the contractor community and agencies of the federal government. The conference was informative not only from the insights offered by business and government panelists but also from the quality of the questions and concerns expressed by the attendees.
Unfortunately, the conference did not provide more information or encouragement for a “small business” owner seeking (a) to manage a transition to “other than small” or “non-preferential” status or (b) to fund a retirement through the sale of the business. The discussion appeared to confirm that there was not sufficient political impetus to drive either legislative or regulatory change that would support re-opening the "off-ramp.” (See the introduction to this blog.)
One of the most striking perspectives for me came from a Presidential appointee and expert in government procurement. I asked about recent procurement practices (e.g., OPTARS II) which appear to be aimed at preventing continued eligibility for award of small business contracts to those small businesses which are successful at growing their business to a level that exceeds NAICS code guidelines. I expressed concern about such businesses being “trapped” and forced to remain small as a result of both procurement practices and the re-registration requirement in the event of a business combination aimed at strengthening the company’s ability to compete as “other than small.”
The perspective which I did not expect was that the Federal Government’s procurement practices associated with preferential treatment and contracting goals represented an “investment in” these businesses. The result of these businesses growing to, or merging with, a “large” business results in, from this point of view, the “…loss of the federal government’s investment in the small business…..”, the larger business “taking advantage of…” the government’s investment in this business, and the federal government’s being “…charged a higher overhead and G&A rate….” for the same work than would have occurred if the business had remained small.
I do not know if the view expressed by the panelist is a widely held view. I also do not know if the statements implying a higher cost to the government for the same work are true. However, policies resulting in “keeping small businesses small” do not seem to me to be desirable public policy from either an economic or a social perspective.
I recently attended a conference sponsored by the National Chamber of Commerce and the Professional Services Council which was aimed at small and mid-tier companies and included among its topics to be addressed “Barriers in Federal Contracting.” The panelists and speakers included a broad cross section from both the contractor community and agencies of the federal government. The conference was informative not only from the insights offered by business and government panelists but also from the quality of the questions and concerns expressed by the attendees.
Unfortunately, the conference did not provide more information or encouragement for a “small business” owner seeking (a) to manage a transition to “other than small” or “non-preferential” status or (b) to fund a retirement through the sale of the business. The discussion appeared to confirm that there was not sufficient political impetus to drive either legislative or regulatory change that would support re-opening the "off-ramp.” (See the introduction to this blog.)
One of the most striking perspectives for me came from a Presidential appointee and expert in government procurement. I asked about recent procurement practices (e.g., OPTARS II) which appear to be aimed at preventing continued eligibility for award of small business contracts to those small businesses which are successful at growing their business to a level that exceeds NAICS code guidelines. I expressed concern about such businesses being “trapped” and forced to remain small as a result of both procurement practices and the re-registration requirement in the event of a business combination aimed at strengthening the company’s ability to compete as “other than small.”
The perspective which I did not expect was that the Federal Government’s procurement practices associated with preferential treatment and contracting goals represented an “investment in” these businesses. The result of these businesses growing to, or merging with, a “large” business results in, from this point of view, the “…loss of the federal government’s investment in the small business…..”, the larger business “taking advantage of…” the government’s investment in this business, and the federal government’s being “…charged a higher overhead and G&A rate….” for the same work than would have occurred if the business had remained small.
I do not know if the view expressed by the panelist is a widely held view. I also do not know if the statements implying a higher cost to the government for the same work are true. However, policies resulting in “keeping small businesses small” do not seem to me to be desirable public policy from either an economic or a social perspective.
Friday, December 4, 2009
Tony Constable - President, CAI/SISCo adds:
Something that is missing from your message.
• The use of Contractor Teaming Arrangements (CTAs) among GSA Schedule Holders is becoming a common practice within the federal procurement marketplace. The CTA is defined by the GSA as an arrangement between two or more GSA Schedule contractors to work together to meet an agency requirement. The real uniqueness to the CTA is that under such an arrangement, there is no need for a prime contractor/subcontractor relationship. The individual contractors involved use their own GSA Schedule’s labor categories and rates to develop a collective bid while allowing the ordering activity to be compliant in accordance with each contractor’s GSA Schedule terms and conditions. In addition, each contractor maintains privy of contract with the procuring agency.
• The CTA allows a group of contractors to come together to provide a total solution to a government agency while allowing all to use their individual contracts. This is a great vehicle for small businesses that maintain GSA Schedules, allowing them to form an alliance to go after work that they may not be able to capture independently. In addition, since each contractor bids using their GSA Schedule contract number and rates, they can claim sales against their individual Schedules – a practice that would not be possible under the traditional prime/sub relationship where only the prime would be able to report sales against its Schedule. For those GSA Schedule holders that are having a hard time meeting the annual minimum sales requirement of $25,000, it is especially helpful to be able to report the CTA sales against their own GSA Schedule. In order to establish a CTA, the individual contractors must develop a document called a contractor team agreement, which strictly outlines how the contractors will work together to address the government’s need.
• A typical CTA document would include, but not be limited to, the following items:
– Identification of parties
– Allocation of responsibilities among the teaming parties
– Duration of the agreement
– General terms of the agreement
– Team ordering procedures
– List of open market items (if applicable)
– Identification and responsibilities of the team lead
– Responsibilities of each team member
– Pricing and costs structures
– Statement of contractor independence and responsibility to pay their respective IFF
– Delivery responsibility
– Invoicing and payment procedures
– Warranties
– Liabilities
– Process for handling confidential information among team members
– Process for replacing team members
– General definition of the legal relationship of the team
– Copies of each team member’s GSA Schedule price list
– A team seeking a specific government opportunity would be required to file the completed CTA with the awarding agency upon their initial response to the request for proposal (RFP). The terms of the CTA should be “hammered out” and presented in the contractor teaming agreement before final submission of any solicitation proposal.
– CTAs provide flexibility and convenience to GSA Schedule Holders.
– They are a great strategy for small businesses seeking larger contracts, as well as an excellent vehicle for maintaining more autonomy while still teaming with other companies.
Regards, Tony Constable - President, CAI/SISCo
Price To Win, Business Development Consulting, and Training Services
*** Committed To Customer Success ***
E-mail: tconstable@caisisco.com
Web Site: www.caisisco.com
Mobile Phone: (301) 807 8171
Office Phone: (301) 840 5959 or (888) 840 5959
Fax: (301) 840 1859
CAI/SISCo's offices are located at:
6 West Third Street
Frederick, Maryland 21701 USA
• The use of Contractor Teaming Arrangements (CTAs) among GSA Schedule Holders is becoming a common practice within the federal procurement marketplace. The CTA is defined by the GSA as an arrangement between two or more GSA Schedule contractors to work together to meet an agency requirement. The real uniqueness to the CTA is that under such an arrangement, there is no need for a prime contractor/subcontractor relationship. The individual contractors involved use their own GSA Schedule’s labor categories and rates to develop a collective bid while allowing the ordering activity to be compliant in accordance with each contractor’s GSA Schedule terms and conditions. In addition, each contractor maintains privy of contract with the procuring agency.
• The CTA allows a group of contractors to come together to provide a total solution to a government agency while allowing all to use their individual contracts. This is a great vehicle for small businesses that maintain GSA Schedules, allowing them to form an alliance to go after work that they may not be able to capture independently. In addition, since each contractor bids using their GSA Schedule contract number and rates, they can claim sales against their individual Schedules – a practice that would not be possible under the traditional prime/sub relationship where only the prime would be able to report sales against its Schedule. For those GSA Schedule holders that are having a hard time meeting the annual minimum sales requirement of $25,000, it is especially helpful to be able to report the CTA sales against their own GSA Schedule. In order to establish a CTA, the individual contractors must develop a document called a contractor team agreement, which strictly outlines how the contractors will work together to address the government’s need.
• A typical CTA document would include, but not be limited to, the following items:
– Identification of parties
– Allocation of responsibilities among the teaming parties
– Duration of the agreement
– General terms of the agreement
– Team ordering procedures
– List of open market items (if applicable)
– Identification and responsibilities of the team lead
– Responsibilities of each team member
– Pricing and costs structures
– Statement of contractor independence and responsibility to pay their respective IFF
– Delivery responsibility
– Invoicing and payment procedures
– Warranties
– Liabilities
– Process for handling confidential information among team members
– Process for replacing team members
– General definition of the legal relationship of the team
– Copies of each team member’s GSA Schedule price list
– A team seeking a specific government opportunity would be required to file the completed CTA with the awarding agency upon their initial response to the request for proposal (RFP). The terms of the CTA should be “hammered out” and presented in the contractor teaming agreement before final submission of any solicitation proposal.
– CTAs provide flexibility and convenience to GSA Schedule Holders.
– They are a great strategy for small businesses seeking larger contracts, as well as an excellent vehicle for maintaining more autonomy while still teaming with other companies.
Regards, Tony Constable - President, CAI/SISCo
Price To Win, Business Development Consulting, and Training Services
*** Committed To Customer Success ***
E-mail: tconstable@caisisco.com
Web Site: www.caisisco.com
Mobile Phone: (301) 807 8171
Office Phone: (301) 840 5959 or (888) 840 5959
Fax: (301) 840 1859
CAI/SISCo's offices are located at:
6 West Third Street
Frederick, Maryland 21701 USA
Friday, November 6, 2009
Launch of Off Ramp Strategies
Welcome to Off Ramp Strategies, a blog and chat forum hosted by Venture Management, Inc.
Venture Management, Inc. is a boutique investment bank providing advisory services to federal service providers. To learn more about us, please visit http://www.venturemanagement.com
We developed this site to encourage the discussion surrounding the challenges among "graduating" professional services contractors in realizing the value that they have created in their business and continuing to compete in the market space.
The federal government has made many in-roads in getting entrepreneurs access to contracts and positioned to build significant professional services contracting firms. Through the use of preferential contracts in the procurement and acquisition process, the federal government has attracted various disadvantaged groups to vie for contracts. The intent had been to give disadvantaged individuals an on-ramp to government contracting. Once the company was stable and of significant size, it could transition to competing for contracts on a full & open basis. The founder could sell their company, and realize the value they created.
Winning Full & Open Prime Contracts
Recent changes in procurement practices have made it increasingly more difficult for companies to compete full & open.
As companies grow, they reach the size limits imposed on preferential contracts. The use of Government Wide Acquisition Contracts (GWACs) requires competing firms to be able to provide a full array of services. This limits competition to only the largest contractors which can offer the full gamut of services. Previously, a company could compete to prime the task that fit their niche. Now, they must sub to the industry giants, who would rather give the work to a firm that gets them preferential credits. This may mean that a $50m revenue company can't win the work as prime, and can't win the work as sub. Consequently, this practice has made it a serious challenge for a $50m revenue company to continue its successful pattern of growth.
Companies increasingly find themselves too big to compete as small, to small to compete as big.
Realizing Value
In the past, a larger company could acquire a smaller firm and fulfill the contracts. The preferential contract was awarded based on the size of the bidder at the time of proposal. If the company sold the day after the proposal was submitted, the acquirer could fulfill the contract if awarded. Now, the acquirer needs to re-represent the company's size to the contracting officer. Changes made to representation and certification requirements have made it nearly impossible for owners of a business based upon set-aside contracts to sell their small business.
Another issue for small business owners is the SBA affiliation rule. If a company forms a business combination with another (through the sale, merger or acquisition of/to a second company) the SBA requires the company to recalculate and report the past three years revenues for both companies. This can quickly disqualify a company from competing on set-aside contracts due to the trailing three years revenue being beyond the size standard.
When a company raises capital through the sale of equity or has certain debt covenants protecting lenders, the affiliation rule applied by the SBA can be triggered and disqualify the company from competing. Thus a company is limited in its ability to raise capital, to sell shares and to realize value to companies that either enjoy permanent preferential status (i.e.: tribes & ANCs), other small businesses (who have enough room under the cap not to be disqualified, and somehow enough capital to make the acquisition), or other individuals (though this can be tricky as well). All of these represent real challenges, and removes the most attractive buyers from the auction process. Private Equity Groups and larger contractors, who typically have the deepest pockets, will trigger the jump in revenue.
EXIT CLOSED
In other words, the government has done a great job creating on ramps to the highway, but the off ramps all seem to be closed.
Off Ramp Strategies Discussion
The blog and chat forum is intended to illicit participation from the entire small- and mid-sized government contracting community: the business owners, their advisers, contracting officers, strategic investors, industry advocates and more. We welcome your thoughts, and encourage you to contribute to the discussions. We wish this to be constructive board, and ask that people refrain from getting emotional in their posts.
Venture Management, Inc. is a boutique investment bank providing advisory services to federal service providers. To learn more about us, please visit http://www.venturemanagement.com
We developed this site to encourage the discussion surrounding the challenges among "graduating" professional services contractors in realizing the value that they have created in their business and continuing to compete in the market space.
The federal government has made many in-roads in getting entrepreneurs access to contracts and positioned to build significant professional services contracting firms. Through the use of preferential contracts in the procurement and acquisition process, the federal government has attracted various disadvantaged groups to vie for contracts. The intent had been to give disadvantaged individuals an on-ramp to government contracting. Once the company was stable and of significant size, it could transition to competing for contracts on a full & open basis. The founder could sell their company, and realize the value they created.
Winning Full & Open Prime Contracts
Recent changes in procurement practices have made it increasingly more difficult for companies to compete full & open.
As companies grow, they reach the size limits imposed on preferential contracts. The use of Government Wide Acquisition Contracts (GWACs) requires competing firms to be able to provide a full array of services. This limits competition to only the largest contractors which can offer the full gamut of services. Previously, a company could compete to prime the task that fit their niche. Now, they must sub to the industry giants, who would rather give the work to a firm that gets them preferential credits. This may mean that a $50m revenue company can't win the work as prime, and can't win the work as sub. Consequently, this practice has made it a serious challenge for a $50m revenue company to continue its successful pattern of growth.
Companies increasingly find themselves too big to compete as small, to small to compete as big.
Realizing Value
In the past, a larger company could acquire a smaller firm and fulfill the contracts. The preferential contract was awarded based on the size of the bidder at the time of proposal. If the company sold the day after the proposal was submitted, the acquirer could fulfill the contract if awarded. Now, the acquirer needs to re-represent the company's size to the contracting officer. Changes made to representation and certification requirements have made it nearly impossible for owners of a business based upon set-aside contracts to sell their small business.
Another issue for small business owners is the SBA affiliation rule. If a company forms a business combination with another (through the sale, merger or acquisition of/to a second company) the SBA requires the company to recalculate and report the past three years revenues for both companies. This can quickly disqualify a company from competing on set-aside contracts due to the trailing three years revenue being beyond the size standard.
When a company raises capital through the sale of equity or has certain debt covenants protecting lenders, the affiliation rule applied by the SBA can be triggered and disqualify the company from competing. Thus a company is limited in its ability to raise capital, to sell shares and to realize value to companies that either enjoy permanent preferential status (i.e.: tribes & ANCs), other small businesses (who have enough room under the cap not to be disqualified, and somehow enough capital to make the acquisition), or other individuals (though this can be tricky as well). All of these represent real challenges, and removes the most attractive buyers from the auction process. Private Equity Groups and larger contractors, who typically have the deepest pockets, will trigger the jump in revenue.
EXIT CLOSED
In other words, the government has done a great job creating on ramps to the highway, but the off ramps all seem to be closed.
Off Ramp Strategies Discussion
The blog and chat forum is intended to illicit participation from the entire small- and mid-sized government contracting community: the business owners, their advisers, contracting officers, strategic investors, industry advocates and more. We welcome your thoughts, and encourage you to contribute to the discussions. We wish this to be constructive board, and ask that people refrain from getting emotional in their posts.
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