RDG Consulting, Inc.
   

Case Study: Overcoming the Pitfalls of Federal Contracts

Written by Diana Rowe Martinez, September 2001

Background
Government contracts are difficult at best to attain, much less monitor, but many businesses are faced with this daunting task. Without the knowledge and experience with the nuances of federal contracts, attempting negotiations, and subsequently, contract management, can potentially prove costly to the contractor.

Radiometer America Corporation (RAME) obtained a government contract through a small-company acquisition, and quickly realized their knowledge of government contracts was limited. Yet, the job still needed to be completed.

Problem
A Federal Supply Schedule (FSS) contract was already in place through RAME's acquired California company. This contract covered two analyzers and five disposable items, two of which were already out of production. The resource for the newly acquired company had exited the organization. That contract needed to be converted ("novated" in government parlance) from the original awardees to RAME as the new owner and company responsible for contract performance. In addition, RAME desired to add virtually its entire product line of blood gas instruments and supply and accessory items to this existing FSS contract in order to simplify and streamline the selling process to the federal government.

According to Martin Miller, director of HealthCare Integration at RAME, "Additions and editing of past government contracts were never a strength of RAME, and the process always took numerous months and up to one year in some cases." This, of course, was unacceptable and unprofitable.

On the recommendation of a former associate, RAME contacted RDG Consulting Inc. to streamline and manage this process. "Dealing with the government's Group Purchasing Organization (GPO) seems to be well understood by a limited group," Miller notes. "RDG's Bob Grimm is among that elite group."

RDG's president Bob Grimm sees these obstacles all the time in the industry. "It seems that the smaller the business the greater the confusion on how to approach the government. Symptoms of this problem include difficulty selling to the government on an open market basis, a lengthy and cumbersome sales process, and competing with contracted suppliers, i.e., suppliers who already possess a FSS contract."

Case in point. When an uncontracted (i.e., open market) supplier competes against a contracted supplier, its challenge is an uphill battle because the government is faced with more "red tape" to purchase through the open market mechanism than to use the FSS program. Utilizing a contracted supplier streamlines the government's purchasing process and timeframe without having to go through the long and tedious processes of publicizing the procurement, soliciting and reviewing responses, then negotiating a contract. These tasks are avoided when similar or competing products are available through the FSS program.

In light of the cuts recently made throughout the government procurement ranks, "ease of use" becomes more than a buzzword — it is a reality because there are fewer buyers to perform the same amount of work! Therefore, it follows logically that the government buyers will take the path of least resistance — that of the FSS program. An independent study commissioned by the GSA to determine the average time to place an order through a contracted (FSS) supplier vs. open market confirmed the preference for use of FSS contracts. With an average of 15 days to order from a contracted supplier vs. 268 days on the open market, you can bet the government will be contacting their FSS contract holders before attempting the open market route.

RAME's inability and lack of knowledge in dealing with the government resulted in insignificant and sporadic federal sales. In part, this was due to the following:

  1. RAME did not have a FSS contract of its own.
  2. RAME's entire product line had not been added to the existing FSS contract inherited via an acquisition more than a year earlier.

However, by utilizing RDG's industry knowledge and Grimm's reputation in the business, RAME and other companies can quickly overcome any of these obstacles and turn them into advantages.

Solution
RDG's only requirement of RAME was access to information as requested and to promptly review RDG's proposals. Miller states, "Bob Grimm's reports were always concise and informative, making the decision process easy."

RDG's initial solutions to streamline this process were:

  1. "Novate" (or convert) the government contract to make RAME the new contract holder responsible for performance.
  2. Update the contract to include RAME's entire product line.
  3. Devise and implement a national account pricing strategy aimed at maximizing profitability and flexibility for RAME in the commercial marketplace.
  4. Negotiate a new "comparison customer" that is representative of the discount structure, terms, conditions, and volume under which RAME sells commercially.

The project presented RDG with a unique opportunity to formulate a "novation" agreement for RAME, a task it had not previously undertaken, but a task that RDG conquered with its usual professionalism and thoroughness.

Miller reports, "RDG's Grimm accomplished completion and submission of this contract with remarkable speed. When GSA's Senior Counsel returned our submission, the counselor noted that Grimm's submission was the best she had ever seen in terms of complete and timely submission, adding that she'd been doing this for years!"

"RAME was always willing to accept and agree with my recommendations," Grimm states, and that made his job easier. "I was able to justify the desired comparison customer, and the company's commercial pricing strategy was maintained intact. The government approved the modification requests very quickly. Needless to say, RAME was very pleased about that."

The key steps in implementing a strategic solution for RAME were:

  • Development of a federal pricing strategy designed to provide RAME with ultimate flexibility in a dynamic market setting.
  • Analysis of the past 12 months of non-government sales history.
  • Write a complete narrative description of RAME's commercial business by identifying and justifying discounts offered to the company's largest customers. (This process is called disclosure.)
  • Preparation of a complete, concise and consistent business proposal.
  • Respond thoroughly to the government's questions about the offer.
  • Negotiate the contract on RAME's behalf.
  • Educate the RAME sales organization on effective contract implementation, as well as training key sales personnel.

"The disclosure process is critical," explains Grimm, "because it forms the baseline for strategy and profitability as well as ongoing contract compliance with the Price Reduction Clause. Disclosure must be current, complete and accurate when it is presented to the government contracting officer to avoid potential financial liability downstream. This is an area where training and expertise can pay big dividends Ꭴ avoid huge pitfalls!"

Results
Within the first year after contract conversion, RAME's government sales jumped over 35 times their previous sales numbers, from less than $25,000 to more than $960,000! Shortened time from requisition to order placement, and the ease of use of the FSS contracts provided the RAME sales force with a valuable marketing and selling tool.

According to Miller, "RAME has taken a major market share position in government sales compared to our competition, many of whom have had federal contracts for a number of years."

Grimm agrees and initial studies have confirmed RAME's progress. "Even though it may be a bit early to determine long term effects, the market study I conducted for RAME about one year into the contract (after the addition of their entire product line) showed that RAME had rocketed to the leadership position in terms of providing blood gas analyzers, supplies and accessories to the federal government market segment. Their market share averaged in excess of 73% over the four most recent fiscal quarters (July 2000 - June 2001)." Click Here to see a graph depicting market share for Radiometer and its competitors as a result of obtaining a FSS contract.

Conclusion
RDG's Grimm advises, "A Federal contract without a well-conceived and competitive pricing strategy and thorough implementation plan will not be successful — you need all three. Providing training about the federal marketplace is also very useful because of the many nuances of dealing with the government."

The FSS contract is a valuable tool when coupled with a carefully developed price strategy and a thorough contract implementation program. The FSS contract is the preferred method for the government to procure commercial products from the private sector because of the many advantages the government has built into the program for its users. In addition, a number of federal agencies have mandated that the FSS program is to be used whenever a commercial product is available through the program.

"Most companies believe they must give the government the lowest prices offered to any customer. That is a myth!" Grimm refutes. "Allowing the government to provide the assistance and guidance to the contractor who is preparing its own proposal is like asking the fox to watch the henhouse."

According to RAME's Miller, "A high-quality product that costs more than the competition can be sold to the government on its merits versus the lowest price expenditure. These contracts can be structured with an eye on profitability that is valued based and can be done rapidly with a highly professional approach. Thoroughly researched and recommended consultants like RDG's Bob Grimm offer a major advantage in areas of weak sales or processes in daily operation and negotiation and implementation of government contracts. The intimate knowledge that Grimm possesses and can bring to the table will allow a client to recoup his fee many times over in terms of higher margins and profitability, instead of attempting to manage and communicate with the federal government yourself."

Federal contracts are full of potential pitfalls that the unwary contractor does not learn about until it's too late. Few companies, even the largest, possess the in-house expertise to properly and effectively negotiate and manage a federal contract. Outsourcing the management of a federal contract to experts, such as RDG Consulting Inc., is money wisely spent, which in turn allows the company to focus on what made it successful in the first place.

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