Column: Best practices for the growing government contractor
by Michael Smigocki, CPA, CVA
Senior managing director, Federal Strategies Group LLC
Every young and entrepreneurial organization strives for growth. The old adage of “If you are not growing, you are dying a slow death,” certainly has applicability to the government contracting market.
However, many companies struggle with achieving growth, managing it and sustaining it over long periods of time. It’s not about achieving growth for growth’s sake, but about achieving profitable growth.
This article will describe some of the best practices that growing contractors have employed to gain success.
Business life cycle
To start, it is important to know where you are in an organization’s life cycle. I like to categorize the life cycle of a typical company into three distinct phases:
Phase 1 – Survival
This is the typical start-up phase of a company. The focus is on revenue and revenue growth. The founder is typically the driver of this growth but also wears many other hats such as marketing/business development, client/customer relations, operational/contractual management and financial oversight. The company has very little, if any, infrastructure. The management style is reactive, putting out fires everywhere, as opposed to being proactive and anticipating issues.
Phase 2 – Expansion
Once an organization has been able to achieve a revenue and cash flow level that will ensure its survivability it reaches a new stage. While this stage is still very entrepreneurial, and the focus continues to be on revenue growth, functional areas and infrastructure are starting to be developed. Project and program management duties are established. Business development and capture management processes are put in place. Employees are hired or the effort is outsourced in areas such as accounting, human resources and contract management. This stage lays the foundation for entering the stage that every organization strives to achieve.
Phase 3 – Professionally-Managed Organization
It is at this stage that a company has prepared itself for sustainability over the long term or has made itself into an attractive acquisition candidate. In this phase a complete management infrastructure is put into place and is functioning. The focus shifts to sustainable growth and increasing profitability. The company is no longer identified just with the owner. Formal performance measures are established to address the key constituents of the organization – its customers, its employees, and its shareholders.
Strategies for each phase
At each phase of its life cycle, there are strategies that companies can employ to be successful in that phase and to advance into the next phase.
Phase 1 Strategies
With survival as its focus, many of the Phase 1 strategies deal with revenue creation. These include:
- Acquiring a multitude of contract vehicles (GSA Schedule or Agency equivalents, GWACs, etc) and set-aside designations (8a, woman-owned, veteran-owned, etc.) to make it easier for the customer to get to your organization;
- Developing working relationships with Agency SADBOs (Small and Disadvantaged Business Officers;
- Establishing strong relationships with larger primes; and
- Performing whatever work is possible, whether prime or sub, set-aside or non set-aside to achieve relationships and capabilities.
While revenue is generally the focus at this Phase, the company also should:
- Develop a financing arrangement with a bank, factor or other form of lender;
- Establish a formal accounting system; and
- Develop a team of advisors including banking, legal, accounting, insurance, etc.
Phase 2 Strategies
The strategies related to phase 2 deal with laying the foundation for continued growth and management of this growth. From a revenue perspective, companies typically will:
- Develop niche areas in their service or product offering;
- Develop long-lasting relationships with their customers and agencies they are servicing and attempt to cross sell other offerings to them;
- Develop strong past performance ratings to ensure continued contract opportunities, and;
- Develop a strong contract backlog and opportunities pipeline.
In addition, from an operational standpoint, the company should:
- Develop a leadership structure in its various functional areas;
- Establish a financing arrangement that can provide liquidity not only for today’s activities but also for anticipated growth; and
- Formalize policies and procedures for accounting, HR, contracts, and the organization as a whole.
Phase 3 Strategies
As a company moves to become a phase 3 organization, it will:
- Develop a formalized strategic planning process;
- Develop a formalized bid and proposal shop with functional costing and pricing objectives;
- Establish profit centers to track operational and financial performance; and
- Establish a strong compliance functionality.
In addition, a phase 3 company attempts to maximize the value of the organization for possible sale in the future. Strategies in this area include:
- Developing as strong a contract backlog as possible;
- Striving for profitability above industry averages; and
- Ensuring legal protection of its intellectual property.
Knowing where your organization is in its life cycle and employing these strategies can help to ensure its survivability and maximize its value in the marketplace.
Michael Smigocki, CPA, CVA is the Senior Managing Director of Federal Strategies Group LLC. He provides government contract and management consulting, M&A advisory, litigation support and expert testimony. He can be reached via email at MikeS@FedStrat.com.
