This is Part I of a two-part this series about how small businesses can enter into the government contracting market. In Part II of our series, we distill some of the larger themes explored below into concise, actionable advice from experts in the field.
For entrepreneurs looking to expand their customer base in a struggling economy, finding new customers becomes critical to survival. So, why not go after what is inarguably the biggest customer of all, one that is almost guaranteed to have a need for whatever product or service a company may be selling? After all, as government contract expert Kenneth Larson points out, “There isn’t much that Uncle Sam doesn’t buy.”
Of course, it’s not just what the federal government buys that should get a small business owner’s attention, but how much and from whom. “The major reason to go after government contracts is purely the size of the market. Federal, state, and local government spending accounts for more than 30 percent of GDP,” explains Marc Amtower, author of Selling to the Government. “So, why wouldn’t small businesses want a piece of that?” And thanks to federal guidelines, that small business piece—targeted to be 23 percent of the nearly $500 billion allocated each year—is substantial, totaling $97.9 billion in newly awarded contracts in fiscal year 2010.
“The U.S. government market represents the single largest market in the world,” Amtower explains in his book. “[Anyone] can play in it. But not everyone will, and of those who do, most will not succeed. Why?”
Patience is a virtue (and a necessity)
A common reason that small businesses fail to crack into the government contract market involves lack of patience and dedication. “A lot of them think that they can somehow expedite the process of getting that first contract,” Amtower says. “But then, after they get six months in and still have nothing to show for it yet, they give up.”
For early stage entrepreneurs, six months may indeed seem like an excessively long time investment with no payoff, but most experts say that landing an initial government contract usually takes even longer. In fact, a recent survey of active small business contractors found that it took them, on average, nearly 20 months to land their first federal contract.
“It’s not for people who want a quick hit,” advises Amtower. But the payoff, once a business does get its foot in the door, can be lucrative. The same study also found that, of those small businesses listed as an approved government vendor, fully four out of five now have more than $1 million in annual revenue, with about half of that amount coming directly from federal contracts.
To build early momentum, shoot for small victories
For a small business’s first foray into the government market, jumping into a bidding war over a long-term prime contract is likely a bridge too far. So, after checking off the necessary administrative steps to sell to the government, a better first-time goal might involve getting approved for one of the General Services Administration (GSA) Schedules. Though somewhat confusing in name, the federal GSA Schedules don’t involve timelines or calendars, but instead function like vast catalogs of government-approved business vendors, broken down by products and services.
For example, federal employees in need of, say, a new office chair can pull up the appropriate GSA schedule and shop for different models by their features and prices just as he or she would at any commercial, office-supply store. To purchase, they simply charge it to their government-issued SmartPay credit card, sometimes known as a P-card. (Federal expenditures for less than $3,000 do not require bidding or prior approval—what is known as “paperless procurement.”) The main benefit of selling through the GSA Schedule is that most transactions are of the instantaneous, credit card variety.
“For a small business just starting, these micro-purchases can be a great place to get your feet wet,” Amtower explains. Though small, all these incremental purchases can add up to a staggering sum. According to the GSA, there were 98.9 million SmartPay credit card transactions in fiscal year 2010, which rang up to a total of $30.2 billion. “I’ve got a small business client right now that makes $3 million a year just from government credit card sales,” Amtower says, adding that this company’s average SmartPay transaction is only $1,500. This nickel-and-dime sales profile runs counter to many pre-conceived notions about securing multi-year, multi-million-dollar government contracts, he acknowledges, but sometimes pursuing the former instead of the latter makes more sense for entrepreneurs.
“You’ll never be a major player by doing it that way, but maybe you don’t want to be,” Amtower says. But he’s also quick to point out that getting one’s small business products or services listed on the GSA Schedule still doesn’t guarantee anything in the way of actual sales, you still have to market your business effectively. “It’s just another tool; think of it as a fishing license rather than the fish.”
Selling is selling
“Selling to the government is really no different than in the commercial world,” explains Phoenix, Arizona-based SCORE mentor Jean Jolkovski. “One, you need to establish what you’re selling and two, why they should buy it from you instead of someone else.”
This requires small businesses seeking to land a prime or even a subcontract to take an active role in marketing their products and services. To do that, Jolkovski says, entrepreneurs must thoroughly investigate which government agencies and large private contractors might make good potential customers and partners, respectively. But once these contacts have been identified, don’t assume your small business status is enough to land you the deal.
“There are 600,000 small businesses registered with the federal government,” Jolkovski points out. “So, if you begin a sales conversation by saying ‘Use me, I’m a small business’ that’s a big red flag to most government contractors, because then they think that’s the only thing you have going for you.”
Instead, he recommends using a more typical sales pitch, one that starts off with a focus on your business’s unique sales proposition. “You have to find somebody who wants what you’re selling, then get a face-to-face with the project people who will need what you’re selling.” Only after all that, Jolkovski says, do you want to bring up any certifications your small business might have.
“You don’t jump into becoming a prime contractor right away,” explains Larson, who doles out his decades of government procurement expertise on his blog smalltofeds.com. “You usually sort of ease into the business with the intent that you’re going to learn and grow. Often, small businesses position themselves with larger organizations as a Team member or subcontractor.”
“Teaming,” as it’s commonly referred to in the government contract world, can be tricky, however, and small businesses, in particular, must constantly be on their guard. But even if a small company becomes a Team member on an ultimately successful bid, Larson says this doesn’t necessarily mean they’ll reap the expected rewards. “Prime contractors are notorious for walking all over their subcontractors,” he warns. “Sometimes they’ll promise the world but then keep 95 percent of the work for themselves, giving the sub the minimum amount of work to fulfill the terms of the contract.”
In addition, Larson points out another big caveat that small businesses must consider when dealing with federal contracts. “The federal government usually contracts on a five-year basis, but it budgets on an annual basis,” he explains. So, even if a small business finally inks that lucrative multi-year contract, Congress must still allocate the necessary money every fiscal year to fund it. “If it doesn’t, you could be stuck.” As a result, most experts caution entrepreneurs to avoid putting too many of their eggs in the government contract basket.
Still, government contracts can be an excellent source of cash flow, Larson notes, providing a small business with that steady stream of income necessary for it to achieve real, sustained growth. As an example, he points to one of his former mentored companies, the California-based IT firm VSolvIt. “When they started five years ago they had nothing, but last year they landed a five-year, $14.5-million contract with the USDA,” he says. With that kind of regular income, he adds, thriving, rather than merely surviving, now becomes the goal.
“It’s really an art form,” Larson reiterates, “but once you understand the nuances of how to market and sell to the government, it can definitely be worth it.”