You can't afford to be a vanilla contractor in today's market

The use of the word differentiation has grown over the last couple years, as budgets have tightened and the market has become intensely competitive.

A lot of companies are investing in areas that build a distinct company culture. Marketing materials tout how people are the most important asset. Executives talk to me about how they want to win important and challenging work because good employees want to do important and challenging work.

That aspect of differentiation undoubtedly helps with recruitment and retention. People want to work at a place where they do work that they enjoy, and where there is an upward career path.

But during a Washington Technology dinner last year, there was a comment made from an executive that has been stuck in the back of my head ever since. There was talk about differentiation, and one exec said there is a limit because the customers don’t get it.

“They think we are all the same,” he said.

The conversation went on to other topics, but I filed the comment away.

More recently, at the Grant Thornton seminar on its annual contractor survey, another comment on differentiation used the term “vanilla.”

In other words, government customers just don’t see any difference from one contractor to the next. From the customer perspective, contractors don’t have distinct flavors, to stick with the vanilla analogy.

Then this week, while I was interviewing former Veterans Affairs CIO Roger Baker about his new gig as the chief strategy officer at Agilex, the concept of differentiation came up again.

Baker had a four-year stint at VA, 2009 to 2013, and a three-year stint at the Commerce Department from 1998 to 2001, so he’s probably met with thousands of contractors.

He’s come up with what he calls the 10-80-10 model to describe how contractors are viewed by the government.

Ten percent of contractors are worth fighting to keep because they deliver results and are focused on making the government customer successful.

Ten percent you should fight to fire because they just don’t care about results.

But with 80 percent of the contractors, it doesn’t matter who gets the work, according to Baker.

“Awarding to one is the same as awarding to any other,” he said. “They like it if we are successful, but that’s not the first thing they think of.”

The 80 percent hire the same people, use the same program managers and ask the same thing of their program manager, which usually means they manage projects with profit and loss as their top priority.

“They may think they differentiate, but they don’t,” Baker said.

This might help explain why incumbents have found it increasingly hard to win recompetes, and why lowest price carries the day for contract awards. Customers think they are getting the same thing, so why not go with lowest price?

Baker said he’s had conversations with CEOs at some of the largest contractors in the market, and they get it. They realize if they don’t get into that upper 10 percent, they are going to lose whatever competitive advantage they have. They will be unable to differentiate themselves.

For Agilex, the focus is on customer results first, and being able to demonstrate they have delivered those results. The company claims that it has saved its government customers more money than has been paid into its coffers. That’s an impressive metric.

Baker said that, for some of the large companies, only minor changes are needed to become a results-first organization. Agilex wants to foster this shift, and plans to create an institute focused on promoting this model of contracting.

Their thinking is, the more companies that operate with this model, the better for the overall market.

I can’t help but think it will be a huge change for many companies.

The predominant model of the last 20 years has been built around billable hours and the proverbial putting butts in seats. How do grow that business? You bill more hours and put more butts in seats. The focus isn’t on results.

Changing that is no easy task. You have to look at how you reward and incentivize people. You also need to understand your customer’s needs, even when the requirements are vague and poorly written.

You have to be more sophisticated in how you do your risk-benefit analysis and qualify new opportunities.

You have to be gutsy enough to leave revenue on the table, and walk away if a project doesn’t meet the criteria for the kind of projects you think will bring long term growth to your company. In other words, balancing the short term versus the long term is critical.

This kind of shift is going to be tough for public companies which have to file quarterly results, and answer to Wall Street expectations.

But some public companies might be forced into this shift just to survive if the old way continues to erode.

And I think we are already seeing some companies going through very painful shifts with high level management changes and declarations of turnaround efforts being undertaken. I’m sure that, inside of these companies, things are getting ugly, and some hard decisions are being made.

The challenge, I think, is not just recognizing the need to change, but knowing what kind of change to make. If you can do that, you just might crack that upper 10 percent.