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Uncle Sam Rising: Performance Implications of Business-to-Government Relationships

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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.

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Uncle Sam Rising: Performance Implications of Business-to-Government Relationships

  1. 1. From: Business-to-Government Marketing Relationships Introduction and overview of the government contracting marketplace in the United States Josephson et al. (2019)
  2. 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. 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. 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. 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. 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. 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