Inside Octo Consulting's big 'jump'

So how does a small business make the jump from a world of set-asides to the even more vast, opaque landscape of government contracting known as the middle tier?

One word of caution often comes up: that leap halts their access to set-aside contracts and pits them against larger competitors that seem to only be getting bigger through consolidation. Companies anywhere between $25 million and $1 billion in annual revenue are in that conversation.

But it is in that middle tier where businesses have opportunity to ride the wave of next-generation IT and other modernization initiatives underway or coming in the federal government, at least in the eyes of Octo Consulting’s CEO Mehul Sanghani. That is, if their focus is right as those large-tier firms increasingly look at complex contracts of size and scale their investors expect.

Where firms like Octo come into play is in more modular or incremental IT jobs for agencies focused on specific areas like agile software development and cloud engineering and particularly on shorter time horizons versus the traditional long-term waterfall method, Sanghani says.

Those time horizons can even be a “two week or four week sprint” on an incremental software development job, Sanghani told me. That more agile approach can be an alternative versus “attacking and swallowing the whale in one fell swoop,” he said.

“There is a huge ‘Goldilocks’ effect and an opportunity for firms that bring these types of capabilities to bear,” Sanghani said. “When you’re looking at a modernization initiative you have some options.

“For firms that are mid-tier and in particular firms that have a legacy and have a long history of focusing on some of these next-gen capabilities, there is a tremendous opportunity there to take advantage of the macroeconomics going forward.”

Reston, Virginia-based Octo has made that jump, or graduation, from small business and might serve as a test case for how a firm in the middle tier can gain a firm foothold in the federal IT market. At just under $100 million in annual revenue, the company has 450 employees in Virginia, Maryland, Massachusetts, Missouri and Georgia.

This year’s award flow shows a piece of what Octo has done. The company was chosen alongside Booz Allen Hamilton for a $300 million Food and Drug Administration contract to upgrade an analytics program used to track drugs and medical devices. Octo is also working with the Defense Health Agency to refresh its traumatic brain injury directorate under a $25 million contract.

Part of how Octo made that jump includes talking “openly about the significant challenges many other businesses face in making that transition,” Sanghani said. That approach put him in front of lawmakers in April when he testified to the House Small Business Committee on that very issue.

Within Octo, Sanghani said they have remained focused on their core “niche” IT offerings but did scale their back office and proposal functions to get ready for competing against larger players. That was “to transition from a relationship-based business development model to a more capture-based business development model,” he said.

“It takes some intestinal fortitude on the part of entrepreneurs to take some of the success they’ve had as a small business but then reinvest that at a level that’s required to succeed,” Sanghani said. “I don’t think you can go against firms that are multibillion dollars and increasing at scale, and try to attack the goliaths in every single battle.

“You have to have additional depth in those (core) capabilities that allow you to compete and differentiate yourself from some of the larger, more established firms in that market.”

The macro trends of a growing defense and IT modernization spending pie have driven much of the consolidation at the market’s top end in the past two years, or what Sanghani describes as a “Walmartization” of sorts.

What consolidators see is agencies packing together contracts into larger procurements and see scale as the way to position better for those opportunities often north of $500 million over 10 years.

Count Sanghani also as among the market observers that see some benefits of scale in areas such as large call center consolidation, change management or desktop support over large IT networks with “several hundred thousands of users.”

But that also means the larger firms have to focus more energy on those opportunities and that leaves room for others, he says.

“If you look at modernization of mission systems, especially now with the more modular contracting that you’re seeing, you’re looking at modernization efforts that are between $10 million and $150 million in size.”

(EDITOR'S NOTE: A prior version of this article said Octo Consulting had $80 million in annual revenue with 372 employees.)