2 Strategies Help SMBs Secure Federal Contracts

Monday Nov 8th 2010 by Thor Olavsrud
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American Express OPEN survey: SMBs that team with other small businesses or that subcontract for larger contractors, are more likely to win Federal Government contracts.

Online Study Reveals Strategies That Lead SMBs to Government Contracts

The U.S. Government spends $500 billion or more each year on goods and services, and SMBs that use two strategies -- teaming and subcontracting -- to procure federal contracts are far more likely to win those dollars, according to a new study by American Express OPEN, the small business division of American Express.

American Express OPEN surveyed 1,500 small business owners between January 19, 2010 and February 2, 2010. All the small business owners were randomly selected from businesses listed in the Federal Procurement Data System (FPDS) and registered on the Central Contractor Registration (CCR) database.

The American Express OPEN Victory in Procurement study found that more than two-thirds (68 percent) of small business contractors that have teamed with other SMBs to pursue federal contracts have exceeded $1 million in federal contracts won to date. A further 38 percent of the same group has exceeded $10 million.

In comparison, just 46 percent of overall active small contractors have exceeded $1 million in lifetime federal contracts and only 21 percent have exceeded $10 million in federal contracts.

Subcontracting for a larger prime contractor also increases an SMB's chances of procuring a federal contract. The study found that 61 percent of SMBs that pursued subcontracting opportunities with a larger prime contractor have won in excess of $1 million in federal contracts to date, and a further 31 percent of that group has exceeded $10 million in contracts.

"The most successful small business contractors don’t go it alone," the survey said. "They are more likely to perform as subcontractors as well as prime contractors and to team up with other firms to jointly pursue federal contracts."

"Those small business owners that go after federal contracts by employing these two strategies are significantly more successful," said Julie Weeks, a research advisor with American Express OPEN. "Subcontracting seems to be something that small business owners try first, prior to teaming."

In fact, Weeks said that the point at which half or more of active SMB contractors have pursued subcontracting opportunities comes at the $250,000 revenue mark, while the 50 percent threshold for pursuing teaming comes after the $1 million mark. And teaming tends to lead to greater revenues overall, Weeks said.

Among all active SMB contractors, 36 percent reported 2009 revenues of more than $5 million, while among those that have pursued subcontracting at some point, 42 percent have revenues of $5 million or more. Among those that have pursued teaming, 45 percent have revenues at or above $5 million.

Subcontracting Helps SMBs Develop Valuable Contacts

Weeks said those results lead her to believe that subcontracting allows SMBs to develop valuable contacts -- both within government agencies and with other small firms that become potential teaming partners. But a small firm's line of business is also an important indicator.

Active small business IT contractors that provide information services are more likely than average to have pursued teaming opportunities, but less likely to have pursued subcontracting opportunities. SMB contractors that provide professional and technical services are more likely to have pursued both subcontracting and teaming. Meanwhile, goods-producing SMB contractors are less likely to pursue teaming, and they pursue subcontracting at the average rate.

While the benefits to teaming and subcontracting can be great, the study also found that the upfront cost for SMBs who pursue teaming and subcontracting opportunities is greater than it is for SMBs that don't pursue such opportunities. On average, active SMB contractors invest more than $86,000 annually in cash and staff time pursuing federal contracts. SMBs that pursue subcontracting opportunities invest an average of $122,685 annually, and those SMBs pursuing teaming invest an average of $149,317 annually.

"That investment is paying off," Weeks said. "They have much higher revenue overall."

Mentor-Protégé Programs Provide SMBs with Greater Benefits

Another path that relatively few SMBs (nine percent) pursue, according to the study, offers results that outstrip teaming and subcontracting. That path is a mentor-protégé relationship. While SMB owners that pursue such a relationship invest the most upfront -- an average of $195,706 in pursuing federal contracts in 2009 -- 58 percent of SMB owners who have pursued a mentor-protégé program say their firm's profitability increased as a direct result of federal contracting.

That's compared with 50 percent of SMB owners that have pursued teaming opportunities, 41 percent of SMB owners that have pursued subcontracting and 39 percent of all active SMB contractors.

A mentor-protégé program has other advantages as well, according to Weeks. She said that SMB owners that participate in such a program report a significant difference in back-office efficiency, including IT and ecommerce systems, proposal writing/submission and government paperwork requirements.

According to the survey, 52 percent of firms that have pursued a mentor-protégé relationship say that their back-office efficiency was improved as a direct result of federal contracting. In comparison, just 27 percent of overall SMB contractors say the same, along with 32 percent of firms that have pursued subcontracting and 39 percent of firms that have pursued teaming.

Minority SMB Owners More Likely to Use Teaming, Subcontracting

The study also found that SMBs owned by African Americans and Asian Americans are much more likely to use teaming and subcontracting to pursue federal contracts. While 56 percent of all active SMB contractors (and 54 percent of Caucasians) have pursued subcontracting, 64 percent of African American SMB contractors and 74 percent of Asian SMB contractors have done so.

As for teaming, 45 percent of all active small contractors have pursued it: 42 percent of Caucasians and 65 percent of all minorities. The study broke that number down further: 51 percent of Hispanic SMB contractors, 65 percent of African American SMB contractors and 70 percent of Asian American SMB contractors.

Weeks said that American Express OPEN found that minority business owners are more likely than the average active contractor to seek federal contracts by developing relationships: They are more likely to attend matchmaking events and meet with agency representatives. Weeks said they also use these opportunities to develop relationships with other contractors.

Thor Olavsrud is a contributor to SmallBusinessComputing.com and a former senior editor at InternetNews.com. He covers operating systems, standards and security, among other technologies.

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