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Nov 26, 2020

The Government services firm business model

Time to read: 5 min

What’s in it for you: Understand how government services firms work and their basic business dynamics.

Is it worth reading: If you haven’t worked for a government services firm then yes.

Content

  • The government services firm business model
  • Key services firms activities

 

The government services firm business model:

The government is massive, has highly varied needs, and spends $250-300B a year on everything from  janitorial to strategy services.  But regardless of the actual service all government services firms share the same basic business model:

  1. Win a government contract for $X 
  2. Pay people to deliver the services for less than $X
  3. Keep the difference

Key services firms activities: So let’s take a look at a services company’s major activities and how those affect profitability: 

 

Submitting your proposal (Point A): This is what it sounds like.  The government publishes needs and services firms propose solutions and prices to deliver those solutions.

  • How this impacts business success: Most small businesses will submit proposals to do work before they’ve hired the people to do it.  And this creates a major challenge because:
    • If you’re new you may not know how much it will cost to deliver the work 
    • The government is highly price sensitive so you will be under pressure to push your costs down
    • You probably won’t have hired the people when you submit your bid price
    • When it comes time to hire you may find that the people are actually much more expensive than you anticipated 

 

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Find, vetting, and hiring the people to do the work (Point B): Once you win the work you hire the people to do it (for very small businesses the owners may be the people to do the work)

    • How this impacts business success: The ability to efficiently and effectively source and hire talent is arguably a service’s company’s single greatest profitability driver.
  • If you’re too slow: You typically only get a month or two from the time you are awarded a contract to the time you have to start performing on it. If you can’t find all the people the contract asks for on day one your customer is A: not going to be happy B: won’t pay you for the people that weren’t there
  • If you’re too fast: If you bring people on before the contract officially starts anything you pay them is pure cost to you, the government won't pay you back
  • If you get the wrong people: The government tends to be very specific about the credentials and qualifications of the people you staff on their contacts so you need to be sure that the people you hire qualify administratively and that they can actually do the work the government expects.
  • Additional information:
    • For thoughts on how to staff your first win/whether you should quit your day job to staff a contract you won see HERE
    • For more on typical ways to manage your staffing and HR see HERE

 

Having the financial depth to cover the gap between starting work, and getting paid (Point C): The government has gotten much better about their payment speed (especially for small business) but you should have at least three months of employee salary in the bank to make sure you can pay your staff while you are waiting to get paid. If you don’t have that much in savings there are a variety of services that can help you.  See HERE.

 

PROFIT! (Point D): This is pretty self explanatory but your ability to correctly set a bid price when you submit your proposal (Point A) will determine whether this is a large, small, or negative number.

 

Offramping people (Point E): This is the converse of point B and has a huge impact on profitability:

  • If people are on payroll after the contract ends that is pure cost
  • If you have another contract starting soon after this one ends you may be better off paying the team to write proposals/do non-billable work so that you can roll them onto the next contract

 

Marketing and relationship building:

One of the most important things a services company does is marketing themselves.  For more see HERE

 

 


Other GovCon & SBIR guides, classes and analysis

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Topics: Government Contracting