Caught in the middle

Midtier companies are facing tough competition from large and small businesses.

Executives at midtier companies say their federal contracting opportunities are being squeezed between the giant contractors that have the money and manpower to win the lion’s share of major awards and the small businesses that receive government-mandated set-aside contracts.

What many of these executives see as their salvation could be the creation of a definition of midtier and making these companies players in government procurement policies.

“We have people who are just under the small-business threshold and are scared to death of having to move beyond that because their work will either go to small businesses –- the 8(a)s -– or it will go to the primes,” said Mitchell Martin, a principal at Merrill Advisory Group. The firm, based in McLean, Va., advises small and midtier companies. 

The squeeze is real, said David Kriegman, president of TechTeam Government Solutions Inc., a division of TechTeam Global Inc. in Chantilly, Va. “The pressure is coming from two dimensions,” he said.

There are more large, midsize and small companies than ever, so competition is greater than ever, Kriegman added. “But the big problem is that the large companies are bidding on jobs they probably would not have bid on 10 years ago” because they want to grow and they need the revenue.

In addition, competing for awards is becoming harder because the government has some large contracts that specifically call for small-business participation, Kriegman said.

As examples, industry experts cite the Homeland Security Department’s new Enterprise Acquisition Gateway for Leading Edge Solutions II and its Organizational, Training and Intelligence Support contracts, which both target small companies.

A call for reform
If midtier contractors are to remain competitive in the federal marketplace, procurement policies must be improved, beginning with reaching an agreement on what constitutes a midtier company -- whether it’s based on annual revenue, number of employees or some combination of the two.

Those suggestions came from government contractors, federal procurement officials and congressional staff members who met in early December 2008 to discuss the midtier squeeze and ways to press the case for procurement reform with Congress and the Obama administration.

Stan Soloway, president and chief executive officer at the Professional Services Council, cited a 2005 survey by the Center for Strategic and International Studies that reported a 40 percent decline in midtier contractors’ market share for federal information technology services in the preceding 10 years.

The government’s recent emphasis on task-order contracting has played a major role in the decline of midtier market share, said Soloway, who is a columnist for Washington Technology. 

“We’ve also seen significant new competitive pressures grow as larger companies compete for more small work packages than ever before,” he said.

The center’s study showed that about 50 percent of federal IT services were being procured at the task-order level, an increase of almost 300 percent from just a few years earlier, Soloway added.

Furthermore, the lack of a precise definition of the midtier is “a very complex issue and one that strikes at the heart of the long-term competitiveness of our marketplace,” he said.

There is no centralized congressional policy or midtier equivalent to the House Small Business Committee that could address the needs of those companies, said Alan Chvotkin, the Professional Services Council’s executive vice president and counsel.

Al Matera, director of the General Services Administration’s Office of Acquisition Policy, agreed. “You’re pretty much left on your own if you’re a midsize company,” he said.

Where is the money going?
There is a dearth of information about midtier concerns at GSA, Matera said. The agency has no specific definition or acquisition policy for them and, as a result, cannot track the value of the contracts it awards to such companies, he added.

He said GSA’s Multiple Award Schedule program accounts for about $36 billion in annual orders for an estimated 17,000 contractors, about 80 percent of which are small businesses. The other 20 percent -- about 3,400 contractors -- are characterized as “other than small businesses,” he said. They receive about 65 percent -- or $23 billion to $24 billion -- in Multiple Award Schedule contracts.

“We know some of those [contracts] must be going to midmarket companies,” Matera said. But without a clear definition of midtier, there is no way to differentiate between large and midtier contractors, he added.

“We think the dollars are significant. But, again, we don’t know how much is going to midmarket companies,” Matera said, adding that a good first step would be to write a clear definition of such companies. “The government needs to gather data and analyze it to see what is really happening in the marketplace.” 

There is a significant absence of data even at individual agencies, said Thomas Essig, chief procurement officer at DHS.

DHS does not gather information on what happens to its contractors when they graduate from small-business status, he said, adding that he didn’t think it made sense for individual agencies to collect such data.

“I think this has to be a federalwide issue to figure out where we’re at,” Essig said. “And my recommendation is, I would have the Small Business Administration gather the data.” 

“The tricky thing with the midtier issues is: What is the appropriate response?” Soloway said. “Is it a legislative issue? Is it a policy issue, a regulatory issue, a market behavior issue? Is it an acquisition strategy issue, or is it all of the above? No one response deals with the whole issue.”

Not a disadvantage
Some industry observers don’t believe that midtier companies are at a disadvantage when it comes to government contracts.

“Having been small and midtier, let me say [that] in spite of the issues facing midtier, it’s better to be midtier than it is to be small,” said Edward Bersoff, chairman, president and CEO of ATS Corp. “You have a lot more resources at your disposal, and you can do more things.”

However, he said it is more difficult to build a midtier company now than it was 10 to 15 years ago.

He blamed the midtier squeeze on a flawed procurement system. He cited the more than two years it took GSA to award the Alliant Small Business governmentwide acquisition contract and the fact that midtier companies compete with large contractors for awards under the agency’s Millennia Lite contract.

“Those are just some examples of a system that is more responsive to the needs of the procurement officials than it is to the needs of the people for whom they were created,” Bersoff said.

But he said pushing for new laws to replace the current cumbersome procurement system with a more transparent one would not solve the problem. “The last thing I want is to go to the [Capitol] Hill and ask for favors -- or go to anybody and ask for favors -- to change the system because that potentially could do more harm than good.”

Until there is a complete overhaul of federal procurement practices, midtier companies should strive to keep their customers happy, build new business relationships and concentrate on the contracts they stand a good chance of winning, Bersoff said. “If you stick to it, then I think it’ll work.”

Kriegman agreed with that approach. “We just have to be more selective and say, ‘Okay, we have this expertise -– supply chain, modeling and best commercial practices. Who are those customers who can best benefit from that, and where can I be most competitive and focus on those customers?’ You can’t compete with Northrop [Grumman] on their turf. If you’re going to compete with them, pick the ground where you’re going to fight them. I think that’s what a midtier company has to do. Some companies can do it, and some can’t.”

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