Recently, Bass, Berry & Sims co-hosted (along with investment banking firm Bluestone Capital Partners and accounting firm BDO) a CEO panel discussion on “Building Shareholder Value in the Mid-Tier.” Panelists included Chris Coleman, CEO of LookingGlass Cyber Solutions. Paul Leslie, CEO of Dovel Technologies. and Julian Setian, CEO of SOS International. Tim Garnett of The Avascent Group delivered a keynote presentation. The focus of the event was to discuss strategies for middle-market government contractors to build value for shareholders.
A common perception about mid-tier players is that they are being unfairly “squeezed.” There is some truth to this notion. On one end, mid-tier companies face pressures from set-aside contractors who can bid on contracts larger companies cannot. And on the other end, giant defense contractors have the resources, access to capital and manpower to win the huge contract awards. Further, some market trends have disfavored the middle tier. One trend has been the increase in lowest price/technically acceptable (LPTA) contracting. LPTA contracting tends to favor those companies who can best afford to compete on price; that is, the ones who are large enough to have significant economies of scale. Another trend has been the government’s increased use of multiple-award vehicles over the past decade. With the reduction in single-award contract, larger contractors began to compete for smaller task orders than ever before.
However, there are strategies for the well-positioned middle tier companies. One key strategy to consider is developing “focused scale.” With fewer contract vehicles out there, winning seats on key contract vehicles has become increasingly necessary to acquiring new customers. Organic growth alone can only take you so far, though. To meet growth goals, you often need to acquire smaller companies with the desired customer relationships. This is the “scale” part. The “focus” comes in part by having a technologically differentiated solution. LPTA contracts seem to have leveled off in the past couple of years since Defense Under Secretary Kendall released a memo indicating that LPTA contracting “has a limited place in the source selection ‘best value’ continuum.” LPTA contracts are most appropriate where the customer requirements are well-defined and the risk of unsuccessful performance is minimal. Offering a differentiated technology in areas where the customer most fears performance failures is a strategy to minimize LPTA contracts. In this way, nimble middle-tier players can compete based on technological innovation, rather than price. If you are a smaller middle tier contractor looking to enhance shareholder value, these are some strategies to consider to enhance your shareholders’ value.