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Small businesses in federal technology need angels too

Everyone talks about small business innovation but no one wants to pay for it.

Large businesses say they like hiring small businesses for their development projects, because it’s cheaper to hire a small business to do these projects than it is to work with other divisions of their own firm (hard to negotiate across groups, revenue and profit sharing become issues, overruns get transferred.) With small businesses, they can easily ramp up or down, decisions can be made quickly, and if needed, the small business project could be turned off just as quickly. The first projects to be cut in a downturn are the small business subs – expendable.

Everyone says that we need to be more innovative but the federal market is completely backwards. You don’t find a customer need and try to fill it. You watch for the release of requirements through Industry briefings and expiring contracts, and you try to get on teams connected to your target agencies. Lots of time and lots of customer visits to define and shape projects, just to get in a position to eventually compete, if it matches the NAICs codes when issued and it’s not set-aside for something where you can’t compete.

So where can innovation come from? We all know people who have built their own rockets, software or robots or control panels. But with slim margins and emphasis on reducing costs, there is little room for experimentation.

You can’t fund innovation with your retirement funds when you have kids in college, and you know better than to reach out to your angel investors for more help. You can’t go to other investors unless you can find someone convinced that you have a viable product or service that is ripe for investing, and they need some level of proof that you can complete it. You can’t spend all your time developing that prototype, and you certainly can’t spend all your time trying to raise capital. You must admit if there is no resource to fund it, then you are just wasting your time and energy.

So how do we create innovation in the federal market, especially using the agility, adaptability and responsiveness of small businesses?

What are the mechanisms to respond to innovation requirements for DOD? Despite claims for planned acquisition reform, we are still in the old model of:

·      Develop requirements

·      Announce potential procurement

·      Draft RFP

·      Write RFP

·      Review industry responses

·      Award contract

·      Respond to protests

·      Begin contract execution

·      Hope that funding continues

·      Be prepared for unplanned events not priced into the bid (like health insurance increases)

For small business, the costs of going after this federal projects climbs higher and higher. They spend time and money developing relationships with the agency, tracking the RFP process, creating a team approach including all the legal expenses of setting up agreements, managing the proposal process, and then preparing and submitting the proposal. To be qualified to submit, they first must meet the technical specifications but then also support the compliance in their financial systems, contract administration, and have access to lines of credit for working capital to fund the initial contract award. How can this possibly be a viable strategy for these companies, and for our national security? And all for a shrinking profit margin, with the typical fee percentage from 5% to 8%.

I’ve run into so many companies lately with what seem to be viable technology solutions, and they are connecting to the right agencies who have needs and funding, but the mechanisms to get them under contract and into a relationship with financial sustainability are limited. It just seems like the cost and pricing approaches are no longer responsive to today’s market. Or maybe it is just that to meet the DCAA Compliance and FAR rules, they must to put in and manage monstrously complex and expensive systems, along with the cost accounting experts to run them.

Here are some examples of companies that want to innovate but have been slapped back by the acquisition process and compliance:

·      Company provides specialized software for internet surveillance. They have been told them can get an IDIQ with fixed hourly billing rates. They have substantial investment in software tools and cloud services expenses to support the contract. As they increase capabilities, they need to add more software tools and cloud services. Unless they know accurately what they’ll need so they can price it into their labor rates, they won’t be able to recover all those costs. Additionally, they have developed some software tools in-house and use those tools to support the contract work, with another group responsible for maintenance, not development, of the software tools. Whether the contract is set up using fixed billing rates (like a T&M style) or Cost Plus, determining methods to recover current and future indirect costs for software support makes it very difficult to create a cost proposal for this IDIQ. They are limited on the escalation factors they can use for pricing, even though they know that to keep their tech team together, they’ll have to increase pay rates more than the escalation supports. Of course, as a small business that is new to government contracting, they don’t know all of this, so they are losing money on the deal anyway.

·      Company with video capture products was a fixed-price subcontractor under a major prime. Contract was terminated for convenience due to funding issues that occurred with sequestration. Another agency wanted to set up this same company with a Cost-Plus contract vehicle, which makes sense because these are R&D initiatives. They needed to pass a DCAA audit for the Pre-Award Survey, which they passed with my assistance. Then, DCAA came back under the termination for convenience to do an audit of the fixed-price contract, which basically changed the fixed-price into a Cost Reimbursable contract and forced them into creating the same level of detail that would be required for an Incurred Cost Submission, but retroactively back three years to the start of the contract. The company has hundreds of thousands of dollars tied up that is not billable until the audit is complete.

·      Company wins Small Business Innovative Research grant (SBIR). They perform the work, and then must submit the annual Incurred Cost Submission. Auditors contact them from different DCAA audits to set up, cancel and reschedule the Incurred Cost Audit for 2011. Eventually, it gets around to 2016 and the audit is finally underway. Because it has taken 2 years to schedule the 2011 audit, DCAA says it wants to audit 2012 and 2013 at the same time. The DCAA Audit results conclude that the way the company submits the billing is not computing the allocation of overhead correctly, but they agree with and approve the ICE submission with final indirect rates. The online billing submission program which is online with the Air Force does not allow the company to process it using the DCAA approved overhead method. This run around has cost the company about 200 hours of their time, plus consulting cost for the support. The company may be able to recover some of the costs in subsequent years only if they have Cost Plus contracts – otherwise it just comes out of profit.

These are just a few stories of innovations attempted by companies through federal contracting, that have been stymied by complex cost accounting and compliance requirements. So many talented small businesses are just choosing to go elsewhere. And even though the DOD has sought out resources in Silicon Valley for help, there are not many companies willing to take on the federal acquisition process.

It’s time for new models for innovation. While there are successful hackathon approaches for software development, complex issues cannot be solved in a Saturday workshop where everyone contributes their time and only the winners get the prize.

Gone are the days when a top-down structure to develop products and strategies work. With the complexity of the systems and needs for specific subject matter experts, we need to take new approaches. In his book Team of Teams, General Stanley McChrystal (US Army, Retired) describes how his Task Force had to change processes and team composition in order to get results. For example, when there was a SEAL raid, the process was for the materials collected to be placed in black trash bags marked with post-it notes and sent back to the main processing center to the analysts. By the time the analysts got to it, the information was days old and useless. McChrystal also explains how silos were created to protect information with limits based on “need to know,” but that today’s approach is “shared consciousness” where it’s vital to ensure information gets to the right point fast enough. He notes that sometimes being able to take immediate action on shared information far outweighs the risk of information getting out to the wrong sources.

There have been some moves toward competitions and awards, like X-prize but on a smaller scale. But there need to be more of these, and also you can’t expect a small business to contribute key personnel with no compensation unless they win. What about creating 90-day projects that are set up like a collaboration process, with a scope of work and goal, and let companies compete to put a player on the dream team (for a fixed contract value that is the same for all “players”), with reach-back to their company teammates and resources. Or create virtual collaboration teams, that meet regularly with a core group of onsite contributors. You can’t dedicate all subject matter experts with no “worker bees” but there have to be better ways to move forward, or we risk losing talent and opportunities.

Looking at technologies that can be developed under federal contracts and grants and then later moved into the commercial market is another possible direction. Some of this could be done under tech transfer programs. There is so much wasted when we can’t connect to existing and ongoing programs, and pick up from where they left off to move forward, or try other solutions.

We can’t create innovation in the federal market without changing our approach.

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Solvability is hosting the Florida GovCon Summit on Wednesday and Thursday, March 29-30 at the DoubleTree Westshore in Tampa. Focused on helping small businesses win more federal contracts, this event brings together technologists, contracting experts, small business leaders and representatives from agencies and primes to discuss how to help “second-stage” small businesses grow, and to team for the bigger federal deals. If you want to continue the discussion – come and join us.

Click here for more information, including sponsorship and registration details.

For more information, please connect with me, Jenny W Clark, and message me through LinkedIn.