Caught in the middle

Any small business that survives its infancy reaches a painful time in its development. At some point, a company will grow too large to be an 8(a) firm and ultimately too large to be a small business, even under the most generous Small Business Administration definitions.

When that happens, company officials may find themselves in a difficult spot. They are too large to get the set-asides and preferences that small businesses enjoy and too small to compete head-to-head with large companies. For systems integrators, which typically serve as prime contractors and delegate portions of a contract to a team of subcontractors, it's an especially tough position.

"You now have a universe of companies that are in the same boat as we are," said Vish Varma, vice president of corporate development at AlphaInsight. The company graduated from the 8(a) program more than three years ago. This year, it became too prosperous to qualify as a small business under SBA's definition. The company's three-year average revenues exceeded $21 million, the threshold for its industry classification, he said.

Such companies are no longer small by legal definition, but they are still dwarfed by giants such as Lockheed Martin, Raytheon and Computer Sciences Corp., companies they now have to bid against, Varma said.

The problem, he said, isn't one of ability. Midsize companies often retain the agility they had as small companies while they gain the breadth that eluded them earlier. The problem is lack of visibility.

"When you're small but not legally [defined as] small, the government forgets you," Varma said. "I think they expect you to accept whatever you can get. We have chosen to be choosers, not beggars."

To succeed when that time comes, he said, companies should prepare in advance.

"We believe that any [chief executive officer] who is not championing strategic planning and the execution of the strategic plan is being derelict in his duties," Varma said.

With the right corporate infrastructure and well-laid plans, he said, company officials can judiciously choose contract opportunities that will move the business ahead, rather than taking a "shoot at anything that moves" approach.

For example, AlphaInsight officials formed a coalition with two other companies to win a $75 million contract at the Army's Aberdeen Proving Ground. They are now considering forming an alliance of about 15 companies to bid on the forthcoming Alliant governmentwide contract, acting as one large firm instead of several smaller ones.

"Big companies go out and do M&A — mergers and acquisitions," he said. "We are doing SAs — strategic alliances."

The federal government's multiple definitions of small businesses complicate the process. The definitions of small depend on a company's industry category. Diversified companies that are able to pursue a range of contract types may fit into several industry categories. A company can be small by legal definition when it pursues some opportunities and not when it bids on others.

Opportunities are increasing

Midsize companies can be successful in the federal market if they approach it correctly, industry advocates say.

"I've been surprised about how strong the position of the midtier integrators has become," said Jim Kane, president and CEO of the Systems and Software Consortium, an industry trade group.

"The only way that you can prosper at the midtier is to have some kind of differentiation strategy," he said, whether you do that with thought leadership, cost leadership, subject-matter expertise or something else.

Companies that are not far removed from their small-business roots are wise to focus on their strongest niches, Kane said. Reliable Integration Services and Arrowhead Global Solutions are examples of companies that have succeeded by limiting their reach to a few areas in which they excel, he said.

Larger firms that are still midtier, including SRA International and SI International, can be more diverse, but they still must differentiate themselves from giants such as Lockheed Martin and Northrop Grumman, Kane said.

Chip Mather, senior vice president of Acquisition Solutions, said not all company owners want to see their businesses grow large. "I see them getting bought pretty quickly," he said.

Choose good leaders

Varma advises building a core executive team before putting together a sales team. Although aggressive salespeople can generate revenue initially, they will later fail if their efforts are not grounded in a solid strategic plan, which comes from the company's executives.

At the same time, company officials should structure their business so that growth will be based on policies and practices, not personalities, said Phillip Foote, chief operating officer at STG, another small company approaching the point of outgrowing SBA's definition of small.

"The first and foremost thing you need to do is make sure the company is not defined as the owner," he said.

Entrepreneur Simon Lee, for example, founded STG in 1986 to provide services to the State Department. Foote, a veteran of Signal and Westinghouse, joined the company in 1998. STG began diversifying its offerings, winning work with the Environmental Protection Agency, Department of Veterans Affairs and other civilian agencies.

The company graduated from the 8(a) program more than six years ago, but by the legal definition, it is still small, albeit barely. STG officials are preparing for the day when the company outgrows that status, too.

One advantage midsize firms enjoy is the quick responsiveness that small businesses are known for, Foote said. By contrast, he said, "big companies have whole layers of management who walk around all day stirring their hot chocolate and waiting for you to make a decision so they can say no."

Know the market

Midsize companies have another advantage if their executives have worked in government, said Thomas Sundling, president and CEO at ITS.

"I know some of those guys," said Sundling, who worked in the intelligence community.

Sundling, who joined ITS in 2004 when founder and former CEO Bruce Crothers retired, said he expects the intelligence market to open to ITS soon.

Sundling came in with ambitions to make ITS grow. Crothers had shepherded the company since its founding in 1974, with intentions of keeping it relatively small.

Sundling wants to build the company into a $500 million business in the next five or six years through acquisitions and internal development.

Grow slow

A measured approach to growth can help a company earn external financial support. In 2003, the financial services firm of Riordan, Lewis and Haden (RLH) helped ITS recapitalize the business. RLH became the largest shareholder at that time.

Chris Lewis, a partner at and chairman of RLH, said the firm was willing to invest because Crothers had made good decisions in running the company. Sundling's appointment the next year was another good move, Lewis said, because Sundling has the ability to identify and concentrate resources on the markets that best fit ITS' capabilities.

"Their strongest point is their reputation within their industry as doing great work for their clients," Lewis said. "Reputation is something that's very hard to develop, and it's very hard to maintain."

Foote said midsize companies should not try to grow too quickly. It's more important to build on successes carefully, he said.

"Our growth, compared to some competitors, has been staged, controlled," he said. "We don't get big for bigness' sake."