Lynn Smey – Director, Internal Audit and Compliance Shelly Cooper – Sr. Vice President and General Counsel

March 12, 2014

Agenda

• Why Transform from Government to

Commercial?• Current State vs. Future State• Growing a Commercial Business• Options and Infrastructure for Rates• Risks

– Audit & Compliance– Due Diligence, Contractual, Export, Global Risk

• Path Forward• Summary

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Why Transform from Government to Commercial?

• Sequestration• Deficit• Budget Cuts

• 2014 Appropriations Bill• Funding Dropped by Close to 11% from 2012-2013• Fiscal Year 2013 – Government Spent $460 Billion• Fiscal Year 2009 Peak – Government Spent $550

Billion• Government Buying Smarter• Wind Down of Wars in Afghanistan and Iraq• Impact to Large Companies vs. Small

Businesses3

Current State Characteristics (Example)

• DoD Dominates– Support infrastructure costs– Drives most aspects of the business

• Current Rate Structure– Maximizes causal-beneficial relationships; focus on direct costs– Reflects day-to-day activities

• Contract Types Shifting from “Cost” to “Firm Fixed Price” (FFP)

• Geared To Government Requirements• Program Management vs. Business

Management Orientation

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Future State Characteristics (Example)

• Highly Competitive• Many Contracts/Subcontracts of Varying Sizes and

Types• Multiple Customers and Locations (Domestic & Foreign)• More Time-and-Material (T&M) andFFP Contract Types• Shorter Periods of Performance• Shorter Response Times for RFPs/Tenders• Streamlined Proposal Reviews Process• Variety of Reporting Requirements• Multiple Bidding Entities– New Model Must be Robust and Flexible

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Potential Path Forward

• Evaluate Alternative Business Models (No Perfect Solution)• Select Business Model• Define Concept of Operations• Determine Optimal Rate Structure• Build Into Finance and Government Reporting Structures• Assess/Adjust Systems and Processes• Formulate Policies/Procedures that Work for Government

andCommercial• Inform/Educate Work Force• Enterprise Approach• Prepare Financial/Legal Documentation (including Disclosure

Statements)

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Growing a Commercial Business from a Government Business Base

• Finding commercial markets for core government businesscompetencies• Foreign Markets – more apparent opportunities• Domestic Markets – harder to break into commercial sector• Move outside comfort zone to seek new types of work

However, foreign markets pose special challenges: obtaining licenses, finding partners, establishing contacts, due diligence process, complying with local laws, avoiding any anti-corruption violations, etc.

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Rate Architecture Options

• What is a competitive rate in the governmentservices market?• How does a company get there?• Review home office allocation, current overhead

and general and administrative (G&A) rates structure

• Determine which model will be most cost effective

Consider various options:• Multiple G&A rates – government and commercial• Multiple overheads and a company-wide G&A rate

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Infrastructure and Competitive Rates

Keeping Government and Commercial BusinessTogether:1.The government benefits from lower rates by including commercial business in G&A base2.Government would share in business development (BD)and bid and proposal (B&P) costs for all opportunities3.Risk - until commercial business is separated from government work, the Defense Contract Audit Agency (DCAA) will have rights to audit BD and B&P costs – must follow Federal Acquisition Regulation (FAR) cost principles for allowability of costs

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Separating Government & Commercial:

Separating commercial business would avoid DCAA Audits and many of the restrictive provisions of FAR and Cost Accounting Standards (CAS)However:1.Standing up a commercial business too quickly could be costly.2.Company may have to solely finance commercial growth.3.Could result in higher rates for both government and commercial businesses.•To make a smooth transition means to first …Win Significant Commercial Contracts!

Infrastructure and Competitive Rates

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Rates to Bid While in Transition

Options:

•Government – low price, technically acceptable (LPTA)concerns – What is the acceptable wrap rate?•Bidding with ceiling rates•Commercial – Market concerns - What will themarkets bear?

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Risk Exposure

• Audit and Compliance a must for government business• FAR and CAS mandatory for government business – not so

forcommercial business• However, Foreign Corrupt Practices Act (FCPA) and other

anti- bribery laws, environmental laws, local labor laws, etc. are applicable to both government and commercial efforts

• Many Government requirements regarding acceptable systems (estimating, accounting, purchasing) still make sense as (best practices) in a commercial market environment

• Going commercial doesn’t mean “anything goes.”

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Potential Compliance Concerns

• Commercial attitude towards compliance

• Business systems – same systems will be used for both government and commercial so must be compliant

• FAR Cost Principles for certain types of costs

• Organizational costs• Direct selling vs. advertising• Commission-based foreign representatives• Travel

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A Few Select Challenges - Due Diligence

• Government business– System for Award Management (SAM)

• Replaced Excluded Parties List System (EPLS)– Office of Foreign Assets Control (FAC)– Specially Designated Nationals List (DNL)– Internet/Media/Public Records Search– Dun & Bradstreet (D&B)

• Commercial business– All of the above and more– Third-party investigative agency reports (e.g., Steele, Trace

Int’l)– Climate for corruption in countries and industries

• Transparency International Corruption Index• Foreign Government Officials• Third party agents/consultants/distributors

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A Few Select Challenges - Due Diligence (Cont’d)

Commercial Business (Cont’d)•Timing considerations•Language barriers•Multiple Anti-Corruption Requirements in Additionto FCPA

– UK Bribery Act (2011)– China Amended Criminal Bribery Law (2011)– Mexico and Italy - Anti-Corruption Legislation Enacted (2012)– Brazil – Anti-Corruption Legislation Enacted (2012)– Russian Legislation Criminalizing Foreign Bribery (2013)

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A Few Select Challenges - Due Diligence (Cont’d)

Challenges:1.Identification/definition of events triggering due diligence2.Application of due diligence process to different types of entities and individuals in various geographies3.Management of resources (internal and/orexternal) for vetting of subjects4.Applying uniform policies and procedures

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A Few Select Challenges – Contractual Risks

• In U.S. Government world, familiarity with FAR/DFAR and various

Agency Supplements

• Commercial – different terms and conditions for each customer and opportunity

• Potential Risks:

• Performance Bonds• Limitation on Liability• Warranties• Insurance Coverage• Compliance with Laws of Jurisdiction• Governing Law, Venue, Jurisdiction• Dispute Resolution

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A Few Select Challenges – Export Control

• Government has within its capability to arrange shipment under exemptions that are established by treaty or mutually pre-authorized arrangements.

• Government can complete foreign military sales and exchanges of military equipment through an established government program.

• Government can import/export under certain circumstanceswithout notifying import/export authorities.

• Government consignees are known as entities.

• Government can provide its own transportation or use commercial vendors.

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A Few Select Challenges – Export Control (Cont’d)

Commercial:•Must identify and report/request licenses as required byCode of Federal Regulations.

•Depending upon the type of item, licenses must be requested through Commerce/State/Nuclear Regulatory Commission depending upon jurisdiction.

•Commercial contractor must be registered as an exporter.

•Commercial requires tracking for shipment, payment and port fees, taxes, storage, and end user which may be inspected by government agency with jurisdiction.

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A Few Select Challenges – Export Control (Cont’d)

Commercial (Cont’d):•Violations of export law could result in fines, prison and lossof export authorization.

•Costs must be captured at proposal submission or addressed in the contract costs.

•Government cannot waive licensing requirements for acontractor to export controlled items.

•Contractor must maintain records, especially for controlled items that will be re-imported to the US. Failure to properly export will affect the ability to legally re-import.

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A Few Select Challenges - Global Risk Management Issues

US Government• Work Related

Incidents• Defense Base Act•

•

•

Emergency transport – US Military Emergency Care – US Military Force Protection – US Military

Commercial•Work Related Incidents

• Workers Comp (WC)Foreign Voluntary WCLocal policiesNational Scheme•Transport - Private air ambulance/commercial air (very expensive)•Force protectionLocal policePrivate Security

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Summary

•Need to Simplify Where Possible• Streamlined Process for Commercial BD/B&P• Department Structure• Allocations

•Need to Focus On:• Choosing a Model• Developing a Concept of Operations

(ReportingRelationships, Delegations of Authority, etc.)

• Assessing/Adjusting Systems and Processes• Preparing Management and Workforce (e.g.,

compliance, business acumen)

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