The U.S. federal government has emerged as a major marketplace for business to pursue. Since 2001, the size of federal spending has more than doubled and political pressure has resulted in more of that spending going to outside companies (federal contractors) instead of government employees. Firms are increasingly viewing the government as a viable customer. Unfortunately, selling to the U.S. government is very different than selling to commercial customers.

1. From:
Business-to-Government
Marketing Relationships
Introduction and overview of the government
contracting marketplace in the United States
Josephson et al. (2019)

2. From:From:
 Growth in Government Contracting
 Enormous growth in government spending since the beginning of the 20th century.
 Total government spending has increased more than 120% from 2000 to 2017 ($1.79
trillion to $3.98 trillion).
 Political pressure has increased since the 1980’s to reduce the number of federal
employees. Federal spending has increased substantially, but most of the jobs/functions
have been outsourced to government contractors.
 Now, more than 170,000 firms are registered as “contractors” for the federal government
 Business-to-Government Relationships
 The U.S. spends more than $500 billion dollars each year on goods and services procured
from firms selling to the federal government
Overview of the Contracting Economy
Josephson et al. (2019)

3. From:From:
 Procurement Mission/Goals
 Federal procurement is not always aligned toward “best value”, but achieving specific socio-economic
goals. Many contracts are “set aside” for firms that meet certain demographic criteria, such as: minority
owned, disabled veteran owned, Alaskan Native or Hawaiian, etc.
 Procurement Regulations and Oversight
 The Federal Acquisition Regulation (FAR) guides the rules and requirements for every single
government transaction. From the who, what, where, when, and how the firm can sell to the federal
government
 Highly idiosyncratic to the context and costly for the firm to abide by.
 Sizeable regulatory asymmetry, with limited safeguards
 Procurement Scale, Scope, and Consistency
 The U.S. government is the single largest and most diverse buyer of goods and services in the world. It
is the amalgamation of all commercial industries.
Differences between B2G and
Commercial Procurement
Josephson et al. (2019)

4. From:From:
Costs from B2G Relationships
 High transaction costs for selling to the
federal government
 Regulations create significant
idiosyncratic assets that are difficult to
redeploy
- Creates dependence asymmetry between
contracting firm and the federal
government
 Results in higher ex ante (screening)
and ex post (monitoring) costs for firms
- DoD report found an 18% cost
increased for firms selling to federal
customers compared to commercial
customers
Benefits from B2G Relationships
 High operational efficiency from three
primary factors:
- Economies of Scale. B2G offers high-
volume and high dollar figure contracts
not found in commercial landscapes
- Economies of Scope. Diversity of
customers/agencies offers up- and
cross-selling opportunities
- Economies of Planning. Federal
customers have nearly zero default
risk. Budget projections and priorities
are publicly available and transparent
Josephson et al. (2019)

5. From:From:
Firm Value
 Firms need to have a strong emphasis
on serving government customers to
increase firm profits.
 Firms should also focus on a
concentrated set of government
customers (fewer agencies) as it
lowers the costs-to-serve customers
and allows for faster development of
economies of scale
Firm Risk
 A strong emphasis on serving
government customers makes the firm
more susceptible to unanticipated
changes (i.e., it increases firm risk)
 The increase in firm risk can be
mitigated by:
- Having a diversified government customer
portfolio (serving multiple government
agencies)
- Having deep relational ties with key
government customers (agencies)
Performance Implications of Business-
to-Government Relationships
Josephson et al. (2019)

6. From:From:
The Emergence of the “Public Goods
Marketplace”
Josephson et al. (2019)
1.00%
1.70%
2.90%
3.80% 3.50%
2.90%
1.90%
-0.10%
-2.50%
2.60%
1.60%
2.20% 1.80%
2.50% 2.90%
1.60%
2.20%
4.13%
7.95%
7.41%
6.16%
7.81% 7.41%
2.77%
9.30%
17.94%
-1.72%
4.22%
-1.84% -2.33%
1.49%
5.20%
4.45%
3.35%
FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017
U.S. GDP Growth
Federal Spending Growth
Federal Expansion Era Debt Limit Era Rearmament
War on Terror
• Defense spending increases by 117% between 2001 and 2010
Troubled Assets Relief Act (TARP)
• Government purchases toxic assets from financial institutions in 2008
Affordable Care Act
• President Obama signed the Patient Protection and Affordable Care act in 2010
Sequestration
• The Budget Control Act of 2011
specified $917 billion dollars of cuts
over 10 years
• Department of Defense budget
shrank by 19%
Trump Admin
• Defense
spending
increased
from ~$500
billion to $700
billion for FY
2018
Supplemental slide

7. From:From: Josephson et al. (2019)
Description
Nature of the
business
The exchange of goods and services between
businesses and government agencies.
The exchange of goods and services between
businesses.
Examples of
customers
Department of Defense, Department of
Veterans Affairs, Department of Justice,
Department of Agriculture, Department of
Education
Walmart Stores, IBM, General Electric, Apple,
Exxon Mobile, Weyerhauser
Procurement Mission
Value proposition Driven by public stakeholder interests and
welfare, required to provide societal welfare
to satisfy specific stakeholder requirements
set by Congress or the White House.
Driven by value and solutions, so
procurement decisions are geared toward
solving critical problems and optimizing
performance with that solution.
Procurement risk
preference
Low risk tolerance; purchases based on prior
specifications with little incentive for
innovation.
Medium to high risk tolerance; purchases
based on the needs of the organization. May
seek innovative solutions to differentiate itself.
Spending pressures Close monitoring of government spending
from U.S. voters and Congress.
Varies depending on the nature of the
organization.
Procurement Regulations and Oversights
Regulatory minutia Subject to Federal Acquisition Regulations
(FAR) and agency-specific regulations.
Idiosyncratic to the organization. Not subject
to FAR.
Procedural
transparency
Most aspects of the bidding and procurement
process are open to public discourse.
Difficult to gain information about
competitors’ offerings and prices.
Relationship-
building tactics
Subject to Code of Federal Regulations; Heavy
regulations related to providing incentives to
procurement officers.
Not subject to Code of Federal Regulations:
Less stringent rules related to providing
incentives to buyers.
Procurement Scale, Scope, and Planning Horizon
Size and variety of
contracts
Multiple contract sizes (small dollar amounts
to multi-billion dollar awards), along with
multiple contract structures (fixed price, cost
reimbursement, etc.).
Varies.
Solvency and
prompt payment
Timely payment schedule (15 days in many
cases; Bloomberg 2012). Virtually no solvency
issues.
Less prompt payment schedules. Varying
degrees of solvency.
TABLE 1
Comparison of Business-to-Government and Business-to-Business Relationships
Criteria Business-to-Government (B2G) Business-to-Business (B2B)
Supplemental slide