Small Business Graduation Challenges

Ed Harrington – ClientView Partner, Brigadier General US Army (Retired), former Director, Defense Contract Management Agency and Deputy Assistant Secretary of the Army (Procurement) – presents the first of a multi-part series addressing the challenges of growing/preparing a Small Business to enter or “graduate” into a “full and open” competitive business environment. 

Objective of this ClientView (CV) Conversation series

I spent almost one-third of my 35 years as a government servant in what is now called “Federal Acquisition” (yes, based on the Federal Acquisition Regulation or FAR). I dealt, on a daily basis, with private industry, ranging from international corporations to single-person Small Businesses (SBs). I was often responsible for policy development that directed how businesses would have to comply with government requirements. One of my job functions was to oversee the efforts (policy and process improvements) at helping SBs both mature as business entities and grow their work with the government. Much of my experience with SB during my government service taught me a lot about techniques and practices that succeeded, as well as those that caused failure or stalled growth. Occasionally, I saw SBs that had purposely identified and prepared for what was required for growth beyond the realm of the SB environment of preferential, “set aside” contracts.

Since retiring eight years ago, I have been working for and consulting to mostly SBs. During this time, I confirmed what I had learned previously about how to win business and establish a definite growth path –  as well as what results in loss of business, poor performance, stalled growth, or eventual closing the doors. I’m also a SB owner (Service Disabled Veteran Owned Small Business).

In this CV conversation, I’ll provide insights from my experiences on critical decision actions SB leaders need to think through – whether they’re just starting out or have been in business long enough to have a past performance record and are seeking expanded growth opportunities. My experiences with SBs, both from a government point of view and from working with SBs after I retired, have shown that the majority that succeed initially have focused intently on winning small dollar contracts and partnering as sub-contractors to larger primes. This is a model for early success, but this intense focus almost always draws the leader’s attention away from deliberately addressing future actions that have to be initiated early to successfully pass the SB threshold and “graduate” into the world of “full and open” competition. This is a world with businesses of every size from the international “big dog” level to other SBs that are similarly graduating. This series of articles is intended help you understand what it takes to be successful when your company graduates from SB status.  My insights and recommendations in these articles are based on my experiences, a survey of company CEOs who have successfully graduated from being a SB, and the professional experiences of my partners in ClientView Consulting.

SB Graduation

I use the term “graduation” to describe the time or dollar revenue milestone point a SB passes that will remove its SB classification. This applies to SBs that fall under the regulatory provisions for preferential contract awards, such as Women Owned, Veteran, Service Disabled Veteran, Alaskan Native, Native American, and the U.S. Small Business Administration’s 8(a) Small Disadvantaged Business program “Set-Asides.” The Federal government uses these designations to give SBs certain advantages when competing for government contracts, a method used to foster SB development and growth. For those 8(a)’s, “graduation” has a specific meaning, as 8(a)’s must graduate not later than nine years after entry into the 8(a) program. As other SBs noted above (and even those not in any preferential category) succeed and grow, they will surpass revenue thresholds that propel them beyond the realm of SB preferential treatment. At either the time- or revenue-specific graduation point, SBs will enter a “full and open” intensely competitive environment.

Overview of this SB Graduation Series 

  • Part I – I’ve written this Part I for you, the leader of your SB. My intent is to convince you of your need to take time, now, and focus on the future of your firm to prepare it for growth beyond what you are familiar with in the “Set Aside,” sub-contracting environment bringing you success today.  Part I is about transforming your business systems and processes to be able to manage much more complex government work requirements. It’s really about how you, as the leader, must act now to make these changes and implement a culture different from the one that gained success for you to this point. You, as the leader, will need the time to develop action plans in each of your firm’s functional areas much sooner than you may have anticipated. A factor in this urgency is that changing each of these areas depends on the people involved thinking differently about their business processes and make themselves into change agents first and foremost. It’s hard.  You better be ready.
  • Part II – In the next issue of ClientView Conversations, I’ll review how business systems are evaluated and discuss the government’s “source selection process” as it becomes more detailed when addressing more complex work requirements.
  • Part III – Finally, I’ll wrap up this series with insights on 1) how the government is implementing policies that impact doing contracting business, 2) considerations for business development, 3) doing more “prime” contracting as a newly graduated, former SB, and 4) related topics.

Part I – Preparing for Graduation

Comply with Government Requirements, Business Systems

During my government service I saw many evaluations of what are called “business systems” – i.e., Accounting, Billing, Estimating, Purchasing, Earned Value, and Quality Management.  Firms that implemented disciplined business systems and supporting processes always “passed with flying colors,” which meant the government rated them as “approved” or “adequate.” Those companies, large or small that did not train, monitor, manage, and continuously improve these systems, received an “inadequate” rating (disapproval). I’ve observed many SB leaders who showed they had been the action agent for transforming their people, systems, and culture to be able to manage much more complex work requirements, and, as a result, always achieved approvals.

You, as the leader, will need to set conditions to develop, implement, and continuously assess and improve your firm’s business processes. Success will require you to be conversant and knowledgeable in every one of your systems and personally involved in their day-to-day management. You must be able to describe the internal actions/metrics you have put in place that ensure contract compliance and the ability of your company to steadily progress and become leaner and more efficient. Your grasp of the metrics you use and your decisions and actions based on those metrics will be a fundamental evaluation element. Compliance means your business systems will need to meet or surpass the government’s standards, e.g., Cost Accounting Standards, Quality Management Standards (ISO), and FAR requirements. The bottom line is that the government will assess you, your direct reports, employees, and infrastructure to determine whether your firm has adapted to a leaner, cost efficient, measured way of doing business.

Government auditors will visit you and conduct inspections and evaluations. The primary focus of these is to determine whether you’re delivering a quality product or service, and also whether or not you have the disciplined business systems and processes in place and are working to manage the complex functions and resources (money) provided under your contract(s). As noted above, you will achieve findings of “approved,” “disapproved,” “adequate,” or “inadequate,” and you will need to take corrective action on any of findings presented. Disapproved or inadequate business systems may cause the government to withhold full payments on your invoices and insert comments in your performance records noting your deficiencies; these comments will lead to past performance ratings that will directly and negatively impact your ability to win future contracts. You likely know much of this if you have been a SB contractor, but the significance of a failure in past performance is much more critical in a full and open competitive environment.

Develop Your Company’s Infrastructure 

You must demonstrate how you and your firm can manage larger and more complex contracts. In the start-up mode, your firm’s leadership may have performed multiple management and administrative functions such as human resources, company operations, accounting, etc., and also booked hours on tasks in your contracts. Now you’ll need to remove yourself and likely others in your firm’s headquarters from “billable” work so that you can more intensely focus on implementing more robust management functions: processes to manage more sophisticated financial management, business development, human resources, operations management and strategic leadership while growing, expanding, and improving the scope of your firm’s core capabilities.

Your operations, human resources, and financial function must have reliable, integrated processes to plan and manage more complex and often multiple task order contracts with teams more extensive than you have managed previously. Important here is that you also demonstrate how you’re quality-focused in selecting team members. For example, you’ll need to develop your SB outreach and portray that in a SB Participation Plan (a recent government requirement) presented in your proposals and linked with your Management and Technical Volumes. As many Requests for Proposals demonstrate by their requirements, the government values a company that creates business relationships with SB/Small Disadvantaged Businesses.

Your business development function will need to be fully engaged in a process that identifies, qualifies (go/no-go), collects, assesses, distributes, and acts on the business intelligence needed to develop and manage winning proposals. Success in revenue growth will require you to define, create, and implement your business development funnel, go/no-go decision gates, task and responsibility structure, pricing system, and proposal creation and production process.

Your strategic leadership must have an overarching framework that guides the direction of the business, understands the government buying procedures and objectives, and appreciates that today’s strategic decision may require three years to produce the first dollar of new revenue.

Transition from Sub-Contractor to Prime

I’ve worked with and observed many SBs that continue to pursue sub-contracts as their primary method of generating revenue – even after they’ve graduated. I’ve also been involved with SBs that have aggressively pursued and won an increasing number of prime contracts. Becoming a prime contractor is generally accepted as the best way to continue to grow, and, from the government’s perspective, demonstrates that you’re able to manage much more complex work requirements. Prime contracting, in my experience, also brings with it much more government oversight. Success as a sub-contractor is always a plus when establishing a reputation for performance; success as prime contractor provides the benefit of the government formally recording strong past performance for other government contracting activities.

  • Prime Contracting and Government Oversight – You’ll need to start well in advance of your graduation to prepare for increased government oversight/surveillance regarding your sub-contracting. This oversight/surveillance will be what is termed “contract administration” from the Defense Contract Management Agency (DCMA) if you have DoD contracts. An “Administrative Contracting Officer” (ACO) will team with finance, quality, engineering (if needed), and contract specialists to manage the execution of your contract on behalf of the “Procuring Contracting Officer” (PCO or KO, both acronyms denote the Procuring Contracting Officer) who awarded your contract. The government program manager and staff – the people that defined the requirement for your product or service – will support the PCO in this oversight.The ACO will engage an audit team from the Defense Contract Audit Agency (DCAA) to provide data about the costs and accounting for costs on your contract. The DCAA Audit Team (sometimes a single auditor) will audit your costs and evaluate many of your “business systems” either in collaboration with the ACO Team or separately. The goal of the business system audits is to determine whether or not your company is managing the government’s money on your contract adequately enough to be fully accountable for all costs executed in accordance with the government’s “Generally Accepted Government Accounting Standards” (GAGAS).
  • Business systems evaluation – DCAA and DCMA will provide ratings that state your systems (Accounting, including related functions such as Billing and Labor, Estimating, Materiel Management and Accounting, Earned Value Management, Property, and Purchasing) are “approved” or “adequate,” or “not approved;” in the latter case, DCAA and DCNA will identify deficiencies you must correct. Starting as soon as possible to establish adequate business systems is important because proposal evaluation criteria for more complex contracts will include a financial capability factor that requires an assessment of an offeror’s business systems.
  • Consequences of Negative Findings – Having an inadequate/disapproved business system will often result in a lost opportunity, meaning your proposal will be rejected. In addition, if you do win, the FAR now requires a clause to be included in every contract that specifies a contracting officer may withhold up to 5% of an invoice payment for a single business system that is disapproved, or up to 10% of an invoice if more than one business system is disapproved. Receiving a negative report during the performance of a contract shows the government that a business has become complacent about maintaining its business systems.
  • Consequences of Positive Findings – On the positive side, if the financial analysis team on the source selection evaluation board reports your company as financially responsible, it will be a significant plus in your proposal evaluation. In my experience, financial responsibility has often been the factor that has identified the winner.

Ask Yourself this Essential Question 

My company is in the SBA 8(a) program, what is the mandatory date of graduation?

  1. a)    If you have been doing business as a company in the U.S. SBA  8(a) Business Development Program, you likely know that the SBA has a requirement that your firm graduate from the 8(a) program to be able to do further business with the Federal government.
    b)    Participation in the 8(a) program is divided into two phases over nine years: a four-year developmental stage and a five-year transition stage. If you have not already calculated your graduation date, then take a few minutes to confirm that date. Using the graduation date as a critical milestone from which to back-plan your actions is helpful in preparing your firm for graduation.
    c)    The end of nine-years, your critical graduation milestone, will become the starting point at which you must be ready to compete in the “full and open” Federal marketplace without the advantages of being awarded contracts due to your 8(a) Small Disadvantaged Business status.

Next Issue
In the next issue of ClientView Conversations, I’ll review how business systems are evaluated and discuss the government’s “source selection process” as it becomes more detailed when addressing more complex work requirements.

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