Practitioner Perspectives Archives

April 2023 – Vol. 12; Issue 𝜋

DWPA Staff on April 1, 2023

Procurement Reform Takes Center Stage in 2024 Budget Request

The 2024 Presidential Budget Request addresses widespread frustration with the current state of federal procurement delays and protests
At the root of the problem are understaffed and inexperienced procurement teams that cannot make timely awards and are easy protest marks
Widespread adoption of emerging technologies can and should be used to streamline both RFP generation and proposal evaluations
From “loser pays” to stays of incumbent performance, to limiting the number of protests, there is plenty of low-hanging fruit in protest reform
Reconstituting the procurement force that has been ravaged by retirements and remote work remains a top priority in the 2024R budget
Accessing non-traditional pools of talent and embracing innovative technologies are the best ways to restore the glory of federal procurement

Current State of Affairs

We have seen the struggles. They are real. Since the advent of COVID-19 and with the move to remote work, procurement shops are having more and more difficulty getting their work done. These procurement shops are often understaffed and the technical teams that help them write and release RFPs are also working remotely, with their job and procurement demands far exceeding hours in the day. This has driven contract delays as procurement shops struggle to release RFPs on time and to release them with consistently high quality. Delays are compounded by the Sisyphean attempts to slow down and “protest proof” procurements, only to have many protested anyway. According to the FY22 GAO report, the number of protests has gone down year-over-year, likely as a result of delays. At the same time, the effectiveness rate where the protestor obtains some sort of relief has reached an all-time high of 51%. Nobody is happy.

Efficiency Gains

To combat these challenges, the government has attempted to drive efficiencies. Contract consolidations and scorecard evaluations are response to the need to lessen the burden on procurement teams, but these are mere band-aids over bullet holes. The 2024 Presidential Budget Request includes several initiatives aimed at achieving real efficiency gains. To combat the attrition in the contracting officer community, the 2024R budget proposes broad use of ChatGPT and other emerging AI/ML tools to automate RFP generation. While this promises to dramatically decrease RFP cycle times and improve writing quality, efficiency gains are most sorely needed in the proposal evaluation process. Where early OCR efforts to automate scoring met with mixed results, the 2024R budget proposes sweeping reforms to the evaluation process, to include crowd sourcing, web-based polling approaches, and – a particular favorite of the Biden administration – borrowing the Social Credit System that the PRC has proven to be a best practice.

Protest Reform

As no real procurement process improvement can be had without protest reform, the 2024R budget promises the most sweeping changes since establishing the OFPP in 1974. For starters, introducing “loser pays” terms to the protest ecosystem would dramatically cut down on the number of frivolous protests. Similarly, changing the default setting from allowing incumbents to continue performing work in the wake of a timely protest would erase the overwhelmingly positive net present value of a protest and make incumbents think twice. The 2024R budget goes further still, borrowing some commercial innovation from Roger Goodell and limiting bidders to a maximum of two “challenges” per fiscal year. Taking a page out of the Fairfax County Public Schools handbook, the 2024R budget proposes to cut down on protests by no longer notifying winning bidders, so as not to hurt the self-esteem of losing bidders and would-be protestors.

Reconstituting the Force

The third leg of the procurement improvement troika is immediately reconstituting the force. Unlike the false claim that the IRS would be hiring 87,000 agents, this surge is real. Procurement staffing is at 1970s levels and the 2024R budget calls out the need to hire nearly 100,000 contracting officers, COTRs, and legal specialists. Attracting this talent in a tight labor market – and ensuring they are the most diverse work force – will require tapping non-traditional talent pools. While Buy American mandates forbid offshoring, opportunities abound in sourcing procurement talent from the ranks of recently displaced tech workers and treasury managers at SVB. Relaxing citizenship requirements and prohibitions on felonies will also enable procurement nearshoring opportunities along the southern border, in Martha’s Vineyard, and from prison populations. Finally, the Administration will harness the power of the Gig Economy with on-demand staffing from the new procurement app, “Güber.”

2024R Initiatives to Improve Procurement

Contract consolidation to reduce number of procurements
ECPs and contractor-requested mods to be considered in option exercise decisions
Real-time, interactive orals sessions (scenarios, test problems) to replace formal, overly rehearsed oral presentations
ChatGPT and other AI/ML tools to expedite RFP generation
Replacing detailed cost props with list of top five executive salaries
Adoption of ultra-streamlined protests akin to the new MLB pitch clock – protests limited to 5 pages and adjudicated in 5 days
Crowd-sourced approaches to streamlining evaluations
Past performance and CPARS replaced with Glassdoor rankings
Paint by Numbers RFP templates to lower the hurdle for bidders and reviewers alike
Screening key personnel by Wonderlic scores to minimize impact of creative resume writing

April
203-585-4577
will.halloran@wolfdenassociates.com

Fools’
202-205-8800
Fools@dwpassociates.com

Day
800-488-3111
Day@dwpassociates.com

March 2023 – Vol. 12; Issue 3

DWPA Staff on March 1, 2023

The Big Dance Returns: 2023 Federal M&A Bracket

In 2023, we expect fans to continue to view public, high-seed ADG teams as good defensive positions
M&A efforts will focus initially on critical capabilities and customer presence, with contract vehicles becoming important later in the year
We predict more teams, particularly publicly-traded buyers, will turn to the M&A transfer portal to supplement 2023 performance
Increased investment in small businesses will likely disincentivize those players at the margin from entering the NBA in 2023
The lack of mid-tier teams will split PE betting between F&O blue bloods and SBSA Cinderellas
Investors will pay up for increasingly scarce top seeded teams and then dollar-cost average via lower seeded bolt-ons and tuck-ins

Analyzing Our 2022 Bracket

Grab your pen and paper and crack open a cold one: it’s time to fill out the 2023 federal M&A March Madness bracket. Unlike most professional “Bracketologists,” let’s reflect on what we got right and wrong in 2022. We correctly predicted strong recruiting for the hottest talent (AI/ML, Cyber, Cloud), which is likely to hold steady. However, this year we expect M&A efforts to focus on critical vehicles over capabilities or customers. As NCAA TV contracts end and key recompetes loom, teams will be looking for deals to join big money BIC/IDIQ conferences (e.g., Alliant 3, OASIS+, CIO-SP4). We incorrectly predicted lower public company valuations as recessionary fears drove investors to the security of ADG stocks, pushing these shares to close 2022 at or above 2021 price levels.

M&A Transfer Portal

Beyond acquiring critical contract vehicles, we expect strategic acquirers to turn to the M&A transfer portal to obtain strong players to pull growth forward into 2023, rather than disappointing boosters. Legacy consulting firms remain the most aggressive recruiters of scarce/in-demand capabilities to enhance their federal IT roster. We also expect international players to work their ways onto U.S. rosters, as geopolitical concerns drive the desire to increase exposure to the world’s largest defense budget. While the M&A transfer portal peaked in 2021, there continues to be high activity consistent with previous years. However, remember that the NCAA likes fair competition. Power conference teams should be aware that they are being scrutinized for any potential recruiting (antitrust) violations, which could lead to severe penalties for those who aren’t closely following the rules.

Delayed Graduation to the Big Leagues

Extended eligibility for small businesses will likely increase future draft stock and disincentivize would-be sellers from entering the draft early. Now that the NIL offers players endorsement opportunities and the government provides heightened SBSA ceilings, small businesses are incentivized to stick around for an extra year or two. In 2023, we predict would-be sellers to delay coming to market for another year to maximize their NBA draft stock. As small businesses gain more playing experience in the form of past performances, and as they mitigate small business transition risk, their draft stock will increase with investors. Additionally, a split Congress is unlikely to pass any tax changes, which in former years would have sent sellers rushing into the draft prematurely.

PE Bracketology

Given the lack of actionable mid-major (>$100M) assets, we predict private equity brackets to be bifurcated between paying premiums for less risky, F&O “blue blood” teams or picking several lower-seed SBSAs to outperform their peers in the tournament challenge. In strict “Calcutta” terms, investors can spend the same money to get the #1 seed or get all four #9 seeds. Neither strategy guarantees success, though private equity owners must be cognizant of the SBA’s affiliation rules when betting on a confederation of small business teams, as they might ultimately face a tougher draw than anticipated. This year, we expect private equity funds to continue to pay up for their initial entry into the bracket – especially for those scarce nine-figure platforms – and then dollar-cost average their investment through bolt-on and tuck-in acquisitions to craft a winning bracket.

February 2023 – Vol. 12; Issue 2

DWPA Staff on February 1, 2023

The Congressional Mardi Gras Parade

After protracted delays, the 2023 appropriations parade is here and taking center stage as carnival goers let the good times roll
Like the Ukraine invasion that broke the 2022 budget stalemate, the bipartisan support for the 2023 budget was forged by inflation
While most krewes turned out well in the 2023 appropriations, the Department of Defense was crowned Mardi Gras King this year
Equally as entertaining for Mardi Gras revelers this year are the competing parade routes of the infrastructure bill and the CHIPS Act
Even more so than in previous years, it is critical to pick your parade routes and stake out your spots carefully to catch the most beads
The hangover from the latest budget party will be swift and severe as we head into a debt ceiling debate and 2024 budget impasse

Bulls on Parade

This year’s Mardi Gras parade came late. Like the krewe that procrastinates picking its theme, Congress operated under a continuing resolution and went to the brink of another government shutdown, before finally passing the 2023 budget appropriations. Behind the $1.7T+ omnibus bill was the fallout of a lame-duck Congress – Democrats anticipated this being one of the last pieces of legislation they could pass on their watch. Ultimately inflation broke the stalemate with spending on salaries, materials, and assistance to families. Inflation had not been tied to appropriations for a long time, but recent economic realities forced Congress’ hand. On the defense front, the FY23 NDAA received a 10% increase to address, among other things, counter interference by foreign players in other countries. Rising tensions between China and Taiwan and the conflict in Ukraine instigated increased funding for the nuclear triad.

The Mardi Gras King

The Department of Defense was once again crowned as King of the Mardi Gras Parade this year, although almost everyone who attended caught beads because of spending hikes across the board. The King’s boon, $858 billion, is a 10% increase from last year and the highest ever spend on the defense budget. Notable allocations within the defense package are a $21B allotment for Space Force investment accounts, which received an additional $2.3B above request to accelerate missile warning and tracking and improve spacecraft communication (to keep the Chinese Balloon krewe out of the parade, among other unsavory characters), and $17.6 billion for continued modernization of the nuclear triad. A few civilian agencies stood empty-handed on the sidelines of this year’s parade, most prominently the IRS, who received a 2% cut. However, as a part of the Inflation Reduction Act, Biden allocated $80B toward the IRS for systems modernization, taxpayer services, and operations, offsetting most of the funding cuts.

Competing Parade Routes

While defense may be the headline parade in this year’s appropriations, there are other parade routes to consider. Like every savvy Mardi Gras veteran knows, you cannot stake out a choice spot on every parade route, so you must make tradeoffs and allocate your resources accordingly. The Infrastructure Bill parade route allocates funding toward cyber, cloud, tech, and other infrastructure, so parade goers with a focus in IT should consider aligning. The CHIPS Act parade route is also compelling, with $200B of the $280B total spend directed specifically at scientific R&D. True to the indulgent spirit of the season, appropriated funds are already buoying the chip industry this Fat Tuesday – with oversupply in selected segments – yet these funds will build important domestic capacity. The obsession over protecting our and our allies’ physical and digital borders may find civilian contractors without these capabilities scrounging for crumbs of the king cake.

Planning Next Year’s Parade

Because of the late passing of this year’s appropriations, it is already time to look ahead to the 2024 budget request cycle and prepare for next year’s parade. Like the unfortunate souls who clean up behind the parade routes, we could be looking at a tumultuous passage, possibly another continuing resolution, and maybe even a full year CR or shutdown threat again. Since the House flipped, gridlock between the House and Senate will become even more of a feature of the legislative process. Like the beads hanging in the trees along the parade route mid-summer, a full year continuing resolution, a shutdown, or a sequestration are ghosts of prior years. Some are worried that discretionary spending may have peaked, and we may see a return to fiscal conservatism like we experienced in 2012-2015. If these budget concerns are valid, it may be time to shake off the Mardi Gras hangover and get serious about trimming indirect expenses, shedding underperforming assets, and preparing for a period of Lenten discipline.

A Mardi Gras Guide to the Budget Parade

The defense float received the most spending with significant investment in Space Force and technology R&D
The “Build Back Better” infrastructure bill provides several opportunities for savvy parade-goers to capitalize on new opportunities for bead catching well beyond physical construction
The agriculture, rural development, and FDA floats each received very little funding – around a 3% increase, which represents a real dollar cut due to inflation
Parade organizers plan to reduce deficits over the next 10 Mardi Gras through increased tax revenue
Despite the IRS receiving a 2% cut in this year’s appropriations, the Inflation Reduction Act allocated $80B for IRS modernization after the fact
A substantial chunk of spending was allocated toward mitigating inflation related costs, such as salary increases, materials, and assistance for families

Fiona Cronin
850-559-6395
fiona.cronin@wolfdenassociates.com

Thomas Sharkey
202-591-5958
thomas.sharkey@wolfdenassociates.com

Kevin Robbins
202-841-1085
Kevin.Robbins@deepwaterpoint.com

January 2023 – Vol. 12; Issue 1

DWPA Staff on January 22, 2023

Braving the Winter: What You Can Do to Prepare for a Sale

Timing the market is a mistake; focus on the fact that great companies are bought in any market and worry less about mean multiples
Buyers and sellers can both have unrealistic valuation expectations – sellers, show buyers your worth via sustainable growth & profitability
Keep up your firm’s reputation by maintaining strong customer relationships and differentiated solutions – those are priceless to buyers
Don’t overlook the details – collect and organize your corporate and contract documents via a data room for ease of sharing with buyers
Find ways to protect key employees in a change of control – incentive plans or restrictive stock options are common retention practices
Engage third party advisors to provide real-time insights into buyer universe and valuation and structuring trends, and to tailor your process

Walking into the Tundra

Is it time to put the ski lodge on the market, place the cold gear in permanent storage, and move somewhere where January means golf and swimming pools? As we step forward into the unknown tundra of 2023, sellers wonder – did they miss the window? High interest rates, historic inflation, and general economic uncertainty are not often coupled with the seller-friendly environment we experienced in recent years. However, just as weathermen often fail to predict the next snow, we wouldn’t recommend trying to “time the market” as an exit strategy. Timing the market can result in missed opportunities (market can always get worse), and a failure to focus on what really drives enterprise value – growth. Remember, great companies get bought in any market, so keep tending your fire until you feel ready.

Bundle Up Before Heading Out

Before driving out into the M&A process snowstorm, make sure you conduct critical internal and external diligence checks. You’ll want to develop strategies to inform your customers about a potential acquisition and reference checks to avoid a slippery surprise. Consider engaging advisory firms (investment banks, auditors, consultants, QoE providers) early to make sure you don’t slip on the icy roads of your M&A journey. Sellers, be prepared for buyers to fully peel back your firm’s corporate layers, checking for any red flags before leaving town. Ensure any compensation, succession plans, and/or legal issues are not forgotten in hibernation, as buyers will be on the prowl. Just as you wouldn’t drive into a snowstorm without provisions, be sure to stock a data room with all contract files and corporate information. Finally, be ready to back up your sales pitch with data to avoid buyers getting cold feet on the deal.

Time to Check the Thermostat: When Should You Sell?

Are you about to graduate from small business and feel you don’t have the right leadership to succeed in a F&O environment? Do you feel you won’t be able to succeed in your current market at your current size? Do you think your enterprise value can only increase through significant or risky investments? If yes to any of the above, then it might be time to throw on that Canada Goose jacket and clear the snowy driveway for a sale. Make sure to consistently shovel your driveway as the snow piles up. This will prevent savvy buyers plowing you in for your lack of preparation. Year-round, you should focus on hiring employees, creating enduring offerings, developing a strong 8(a)/SB graduation strategy, and growing your business. These investments will pay off come springtime, boosting your firm’s valuation.

Hire Experts to Guide You Down M&A Slopes

You may not want to hit the slopes without an instructor. You’ve made the decision to go to market but aren’t sure how to identify and select the right buyer. Let an investment bank be your guide as they have a deep understanding of the buyer universe. Hire an investment bank to help maximize purchase price, or if you aren’t certain which potential buyers “have” to own you. Bringing in third party experts will also enable you to focus more on your core business and go tackle those black diamonds. Advisors, like ski instructors, are expensive, so weigh the pros and cons before deciding. In addition to making sure there is a personality fit, make sure they can tailor their approach to your desired outcome. Whatever ski trail you chose, finding the right buyer takes time and effort, but understanding your corporate objectives is key to making it down the mountain and avoiding any potential “yardsale.”

Defrosting Federal M&A Myths

Myth: You can time the market
Reality: It’s nearly impossible to find the “right time” to sell; focus on growth potential, owners’ personal goals, and the enduring value drivers
Myth: Buying a company with prime positions on large IDIQs and GWACs guarantees more revenue
Reality: The nature of most IDIQs and GWACs requires secondary competition and only guarantees the right to bid for certain work
Myth: Obvious competitors = right buyers
Reality: Competitors may not pay top dollar for you and the ultimate buyer is often outside your market and looking to expand its offerings
Myth: There is always a premium for scale
Reality: The drivers of premium valuations are also the traits that enable companies to achieve scale
Myth: M&A activity dramatically slows as interest rates rise
Reality: GovCon stability and buyer “flight to quality” buffer M&A volumes and valuations even as interest rates rise

Will Halloran
203-585-4577
will.halloran@wolfdenassociates.com

Billy Marrin
703-244-9231
billy.marrin@wolfdenassociates.com

Kelly Moore
757-510-1111
kelly.moore@wolfdenassociates.com

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