By Matt Candy
We all know there is a lot to worry about these days if you have anything to do with the government contracting industry. With our elected leaders at an ideological impasse on resolving many critical issues, uncertainty will continue to rule the short term. Consider the following daunting schedule:
- Sequester implementation occurs on March 1st
- The Administration, Senate and House budget submission is due March 15th
- The Continuing Resolution expires, with attendant risk of a government shutdown, on March 27th
- The deadline for the Congressional budget submission is April 15th
- The Debt Ceiling suspension expires on May 18th
Every business in this industry is waiting to see what happens. Some are paralyzed by the unknown future. However, some company leaders I work with see a larger forest through the trees.
They see a future environment where an enduring government customer need is driven by several forces: a continued unstable geo-political environment, increasing government mission needs and mounting, albeit delayed, human capital challenges. They firmly believe that contractors will continue to provide the most effective and cost-efficient approach to a number of government challenges.
Some of these leaders also have the courage to act on their convictions. They are laying the groundwork for effectively competing in the current environment, as well as positioning for a less-uncertain future. A few observations from working with these visionary leaders and businesses might benefit us all:
Focus on your customer’s mission and drive short-term productivity. In other words, be relevant to your customers’ missions and organizational realities. During a time of past organizational change, a great mentor of mine once told our organization, “Stop worrying about things you can’t control. Everyone, take out your business card, read what it says and then do what you’ve read.”
Ensure your costs are aligned with the market. Many different organizational alignment strategies could be effective based on a company’s specific business situation and market positioning. Two questions I have heard my most innovative government contracting clients asking is, “What things should we be doing more of, and what should we NOT be doing?” Not bad questions for our government customers to be asking and answering, as well…
Energize business development, but in a focused way. Bid new programs and re-competes based on your core capabilities, competitive differentiators and go-to-market strategy. I see some companies trying to bid every program under the sun in an attempt to stuff their pipeline. This leads to the desired high backlog, but lowering win and capture rates, as well as misspent B&P (and more importantly), time and management attention. Most damaging is the resulting degradation of management’s credibility in the eyes of company stakeholders – shareholders, equity analysts (public companies), Boards of Directors and employees, among others.
Create an organization that attracts the best people. Some leaders are focusing on a “relentless quest for talent” despite the challenging environment. When done smartly and genuinely, this tends to create organizational momentum. It attracts other “A” players to join on. These leaders create meaningful (not always monetary) incentives. They remove stupid barriers. They communicate clearly and consistently. They develop new leaders internally. They distinguish their business from others by being a positive place to work. When there are no more costs to cut, having an organizational culture that attracts talent is a differentiator.
Utilize portfolio shaping to align your business. Some companies have decided they will generate more value by having services businesses exist separately from product businesses. I see an increasing number of incumbents losing re-competes due not only to cost, as we are all painfully aware, but actual and perceived conflicts of interest.
It’s hard to divest business – emotionally and procedurally. Its true that services businesses can and do absorb fixed costs for their parents, but in a cyclically down market where there will be winners and losers, costs matter. So the risk is that your services business atrophies when burdened with corporate or inter-divisional subsidies that customers are increasingly unwilling to pay for. Also, some unhealthy incentives still exist among many companies to retain conflicted (or non-core) businesses instead of divesting to a more natural owner. Divesting generates near-term cash for the parent, while focusing existing management bandwidth from both organizations on their respective core customers, employees and shareholders.
Similarly, for independent services businesses, the way to drive value in increasingly cost-plus Government Services environment is to scale the business without commensurately scaling overhead. In our low-growth environment, consolidation among services firms is inevitable. In a down market, companies will generally either acquire or be acquired. The good news is that at historically low valuations, acquirers’ downside risk is limited in most cases.
Most of us are not pessimistic by nature. Many believe “this, too, shall pass.” I see the best companies embracing today’s reality, preparing for the future and demonstrating the leadership necessary to act on their convictions.
Matthew Candy is the founder and a principal of Arena Capital Associates. He provides growth strategy, mergers & acquisitions, business development, integration and divestiture advisory services to corporate and private equity clients. He is the former Senior Vice President of Corporate Development at ManTech International.