THE MID-TIER PARADOX - Bloomberg Professional … · THE MID-TIER PARADOX: ... Over the past five...

THE MID-TIER PARADOX: TOO SMALL TO COMPETE, TOO LARGE TO SURVIVE?

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FY 2015

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SLIGHT INCREASE IN MID-TIER SHARE

Sector performance has remained steady for the last five years. Mid-tier companies’ market share increased slightly since fiscal 2011 despite a decline in federal contract obligations from fiscal 2014 through 2015.

Market share in the last five years

MID-TIER FEDERAL VENDORS: KEY TRENDS, MARKETS, ISSUES

Midsize federal contractors that grow out of their small business size standards don’t qualify for small business set-asides, yet are forced to compete against large businesses that have extensive past performance qualifications and a broad array of professional certifications and security clearances.

Bloomberg Government has analyzed the market. Check out this data to help you frame your business strategy.

By Paul Murphy

FY 2011

Source: Bloomberg Government data

FY 2012 FY 2013 FY 2014

59.8% 59.0% 58.7% 54.5%

15.3%

24.9% 26.0% 25.5% 28.4%

15.0% 15.8% 17.1%

Small companies

Medium-sized companies

Large companies

55.1%

27.5%

17.4%

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MID-TIER COMPANIES ARE USING MACS

We see steady utilization of the top five mid-tier MACs, but some unrestricted MACs like OASIS and Alliant show relatively low utilization by mid-tier vendors.

Steady Utilization of Top Five Mid-Tier MACs

Contract Title FY 2011 FY2012 FY2013 FY2014 FY2015 Total

Schedule 70 $3,636 $3,921 $3,406 $3,320 $3,335 $17,616SEWP IV $1,408 $1,657 $2,005 $2,117 $1,006 $8,192Seaport-e $1,494 $1,211 $1,010 $1,469 $1,375 $6,558FABS (now PSS) $622 $645 $1,228 $1,700 $1,160 $5,355MOBIS (now PSS) $1,210 $1,066 $848 $1,005 $865 $4,994

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AGGRESSIVE BIDDING & CHOICE OF CONTRACT VEHICLES ARE KEYS TO SUCCESS

The overall five-year growth in mid-tier market share combined with a decline in mid-tier dollars and company revenues means vendors must be opportunistic to avoid a “mid-tier stall.”

Fiscal year Size Company Count

Contract Obligations (in billions) Market Share

Avg. Company Contract Revenue (in millions)

FY 2011 Large 129 $324.4 59.8% $2,515.028Medium 1,538 $135.2 24.9% $87.876Small 147,339 $83.2 15.3% $0.592






Dollars in millions

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“Overall contract spending declined 19%. . . contract dollars for mid-tier companies decreased by only 10 percent”

ARE MID-TIER CONTRACTORS AT A DISADVANTAGE?

Midsize federal contractors – excluded from set-asides for small businesses and facing stringent past performance criteria favoring large businesses – would like federal policy support that hasn’t yet been formulated. But is it necessary?

A Bloomberg Government analysis of recent years’ contract data doesn’t reveal a consistent pattern of discrimination toward mid-tier companies. However, existing data may require some interpretation to fully understand what is going on.

Mid-tier companies occupy a unique position in the federal marketplace. Some are scrappy and innovative contractors that outgrew Small Business Administration (SBA) size standards, making them ineligible for small-business preferences on contracts and solicitations. Mid-tier contractors have no special procurement incentives and must compete against the largest vendors, which often have greater financial and personnel resources, strong agency ties and sometimes decades of past performance.

Should mid-tier contractors get special policy support? The answer is unclear. While overall federal contract spending declined 19 percent from fiscal years 2011 through 2015, contract dollars for mid-tier companies – those with annual prime contract revenue between $25 million and $500 million – decreased by only 10 percent.

Over the past five years, average annual prime contract revenue for mid-tier and large companies shrank steadily, so that by fiscal 2015 both sectors experienced their smallest growth since fiscal 2011. Yet mid-tier companies grew their market share during that period – from 24.9 percent in fiscal 2011 to 27.5 percent in fiscal 2015.

The number of mid-tier contractors has declined by only 4 percent over the past five years, to 1,479 in fiscal 2015 from 1,538 in fiscal 2011.

At large companies, contract spending declined by 25 percent while spending with small vendors dropped by just 8 percent, so each of the two smaller tiers beat the overall market trend.

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TOP MID-TIERS BOUNCE BETWEEN MID AND LARGE

Nearly all of the top FY2015 mid-tier contractors bounced between size classifications over the last five years.

WHO’S UP? WHO’S DOWN?

Fiscal year Size FY 2011 FY 2012 FY 2013 FY 2014 FY 2015Sunshine Minting Inc. L $1295 $705 $856 $629

M $478Anham Fzco L $682 $986

M $235 $179 $479Iron Bow Holdings Inc. L $553 $550

M $437 $392 $489Chenega Corp. L $513

M $383 $363 $407 $468Management & Training Corp. L $621

M $348 $389 $291 $471World Wide Technology Holding Co. M $469 $403 $324 $357 $499Great Lakes Dredge & Dock Corp. L $579

M $324 $238 $361 $500Research Triangle Institute M $391 $419 $351 $356 $471Carahsoft Technology Corp. M $299 $314 $340 $420 $498A-Mark Precious Metals Inc. L $594

M $232 $391 $485S $13

Top 10 mid-tier contractors in FY2015


Dollars in millions

BOTTOM MID-TIERS RISE FROM SMALL STATUS

Of the bottom 10 mid-tier contractors, all had recently grown out of the small-business classification.

Smaller mid-tier companies are locked out of key markets or forced into secondary roles by large MACs like Alliant because they don’t qualify for Alliant SB and cannot be competitive on Alliant Unrestricted because of extensive past performance requirements.

Bottom 10 mid-tier contractors in FY2015

Fiscal year Size FY 2011 FY 2012 FY 2013 FY 2014 FY 2015

Dutra Group M $25.018

S $0.000 $4.560

Lighthouse for the Blind Inc. M $25.112

S $5.760 $6.529 $6.495 $7.404

Erimax Inc. M $25.188

S $5.168 $5.419 $8.114 $8.254

AEEC LLC M $25.153

S $6.564 $5.570 $6.811 $18.846

Phoenix International Holdings Inc. M $25.214

S $6.766 $5.918 $6.688 $21.179

Dentsply Sirona Inc. M $25.238

S $9.154 $9.717 $11.402 $12.614

NewWave Telecom & Technologies Inc. M $25.035

S $3.294 $7.484 $16.848 $15.744

Pen-Link Ltd. M $25.109

S $7.550 $12.380 $12.668 $24.961

Smart Global Solutions JV LLC M $25.004

S $16.952 $18.830 $16.739 $24.241

Entwistle Trust/The M $28.110 $55.803 $25.001

S $17.061 $19.218


Dollars in millions

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47.2%

46.4%

3.4%

STEADY PERFORMERS Around half started as mid-tier and remained mid-tier during the same period–698 vendors in total.

FLIP-FLOPPERS The percentage of contractors that bounced from mid-tier to large and back again–only 50 vendors in the past five years.

3 PATHS FOR MID-TIER CONTRACTORS

There were 1,479 mid-tier vendors in fiscal 2015, we took a look at their movement between tiers over a five year period.

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RISING STARS The percent of vendors emerged from the small-business sector in the previous five years–698 vendors in total.

INDUSTRIES WHERE THE MID-TIER THRIVES.Construction, facilities and IT are all mid-tier dominated markets

NAICS NAICS Definition FY 11 FY 12 FY 13 FY 14 FY 15

2011-2015 Total

2011-2015 Share

2011-2015 Growth

236220 Commercial and institutional building construction

$11.60 $11.50 $8.90 $9.40 $8.20 $49.60 7.80% -29.70%

541330 Engineering services $7.00 $6.50 $6.00 $6.20 $6.20 $31.90 5.00% -11.40%541712 Research and development

in the physical, engineering, and life sciences (except biotechnology)

$4.30 $5.10 $5.20 $5.60 $5.60 $25.90 4.10% 29.70%

541519 Other computer-related services

$4.70 $4.80 $4.90 $5.60 $5.80 $25.90 4.10% 23.10%

561210 Facilities support services $4.60 $5.80 $5.20 $4.80 $4.50 $24.90 3.90% -1.80%324110 Petroleum refineries $4.30 $6.20 $4.10 $4.10 $4.20 $22.90 3.60% -2.50%541611 Administrative management

and general management consulting services

$3.90 $3.80 $3.30 $4.00 $3.50 $18.50 2.90% -10.20%

541512 Computer systems design services

$2.00 $2.40 $2.70 $3.90 $4.60 $15.60 2.40% 125.70%

561612 Security guards and patrol services

$2.50 $2.40 $3.00 $3.40 $3.10 $14.40 2.30% 23.60%

237990 Other heavy and civil engineering construction

$2.90 $2.70 $2.50 $3.20 $2.70 $14.00 2.20% -7.30%

541990 All other professional, scientific, and technical services

$2.70 $2.80 $2.70 $2.80 $2.90 $14.00 2.20% 7.30%

541710 Research and development in the physical, engineering, and life sciences

$3.20 $2.90 $2.10 $1.80 $1.20 $11.20 1.70% -61.50%

562910 Remediation services $1.90 $1.90 $1.90 $2.30 $2.20 $10.20 1.60% 10.30%

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Dollars in billions

NAICS NAICS Definition FY 11 FY 12 FY 13 FY 14 FY 15

2011-2015 Total

2011-2015 Share

2011-2015 Growth

336413 Other aircraft parts and auxiliary equipment manufacturing

$1.80 $2.10 $1.90 $2.00 $2.20 $10.00 1.60% 24.10%

541511 Custom computer programming services

$1.80 $1.80 $1.50 $1.70 $1.80 $8.50 1.30% -1.00%

524114 Direct health and medical insurance carriers

$0.50 $1.20 $1.10 $2.70 $2.20 $7.60 1.20% 392.20%

483111 Deep sea freight transportation

$1.50 $1.50 $1.60 $1.10 $1.50 $7.20 1.10% -0.30%

334511 Search, detection, navigation, guidance, aeronautical, and nautical system and instrument manufacturing

$1.70 $1.70 $1.20 $1.20 $1.20 $7.10 1.10% -31.00%

517110 Wired telecommunications carriers

$1.40 $1.50 $1.40 $1.00 $1.40 $6.70 1.00% 2.50%

334111 Electronic computer manufacturing

$1.30 $1.30 $1.40 $1.40 $1.20 $6.60 1.00% -3.00%

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Dollars in billions

Continued from previous page.

One explanation for the mid-tier sector’s apparent stability in market share is that a significant amount of the dollars received by companies in this sector continue to derive from small-business set-aside contracts.

Companies that received set-aside awards as small contractors can continue to perform work funded on these contracts through the end of the contract, task order or active option period before they have to recertify their size. Furthermore, some small businesses, such as ANCs and tribally owned contractors, can grow well into the mid-tier and beyond while still being considered small.

Particularly in the past several years, federal agencies have engaged in aggressive outreach to help achieve their small-business utilization goals. These efforts have shown results. According to Bloomberg Government’s proprietary contracts data, the $58.6 billion in fiscal 2015 set-aside spending is the highest amount since at least as far back as fiscal 2000.

When set-aside dollars are excluded from all categories of spending, the mid-tier contract total declines from $116 billion in fiscal 2011 to $98 billion in fiscal 2015, a 15 percent drop. This is less than the 19 percent decline in overall spending. And during this period, the mid-tier and small-business shares of procurement actually increased modestly. This suggests that set- asides are not diverting dollars from mid-tier vendors that don’t qualify for set-asides.

THE ROLE OF SMALL BUSINESS SET-ASIDES

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To further unlock the potential of innovative and battle-tested mid-tier companies some agency and legislative relief may be appropriate, including:

- extending flexible teaming arrangements to mid-sized companies that recognise aggregate as well as individual team member performance.

- allowing mid-tier companies to grow their commercial revenues while still being considered small businesses for the purposes of government contracting

- limiting the use of quantitative past performance evaluations, or making their terms more flexible to include smaller mid-tier companies

- speeding incumbent displacement by limiting “protesting for profit” by vendors that can receive automatic extensions of existing contracts for months while the GAO or the court resolves weak or frivolous claims

Beyond these kind of solutions, the success of mid-tier companies comes down to the value that contract officers perceive from their submitted bids, which in theory should include innovative and cost-saving technical solutions that less-nimble or less-experienced contractors will have difficulty matching.

Bloomberg intends to monitor this key federal industrial sector on an ongoing basis in the months ahead.

Despite some mid-tier successes and seemingly strong performance data, evidence is emerging that certain government acquisition practices may lead mid-size company growth to slow or stall, causing the observed drop in average revenues. Some of these practices and trends include:

- record levels of set-aside spending, particularly with Alaska Native Corporations and Tribally-owned companies that can grow very large and still be considered small businesses.

- the growing use of strict past performance quantification as an evaluation tool on contracts like OASIS and Alliant, which hinders smaller mid-tier companies from bidding as prime vendors, locking them out of important growth markets for years

- flexible teaming arrangements offered to small busineses but not to mid-tier companies

- intensified competition from all sectors as overall federal spending declines

Furthermore, SBA’s announcement that foreign place of performance spending will be included in metrics of small business utilization starting in FY 2017 will intensify small business outreach by putting downward pressure on small business procurement shares.

Unlike with small businesses, there is no statutory goal for federal agency mid-tier company utilization. Nonetheless, mid-tier procurement share has been relatively steady over the last five years and OMB spending forecasts predict overall contract growth, which could help all companies. Furthermore, some agencies have shown a willingness in recent years to upend traditional incumbent relationships by selecting new companies on major vehicles, such as on the Veterans Affairs Department’s Transformation Twenty-One Total Technology Next Generation (T4NG).

SO... WHAT’S NEXT?

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