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.
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