Small and mid-sized businesses have been struggling to navigate the stormy waters of federal procurement ever since sequestration crashed into reality last March.

While big companies had room to diversify their business and move staff around, smaller contractors had less wiggle room. Many had to layoff staff to counter ever tightening profit margins as they waited for new government contracts to emerge.

In part 6 of Federal News Radio’s special report, Private Side of Sequestration, we examine just how much small and mid-sized companies are feeling the pinch from sequestration by speaking with four executives in the trenches.

Lisa Mascolo, chief executive officer of Optimos, Inc., told In Depth with Francis Rose Tuesday the effect of sequestration on the IT industry has been fairly uneven.

“If you are one of the furloughed, obviously, it’s a big impact,” she said. “If you’re in a business that services the communities that serve government, you’ve probably been impacted. But, I think in the IT industry the predicted effects are fairly exaggerated. It’s not nearly as draconian as we thought it was going to be back in March.”

Mascolo reports that companies are scrambling to get the spend done now before the end of the fiscal year in September.

“No matter who I talk to, everybody’s talking about the fact that the government’s been hatching the egg for the first three-quarters of this year and now there is money to be spent,” Mascolo said. “It seems to me to be a much more frenzied end of year season than we’ve seen.”

According to Mascolo, Optimos has made it a point not to improve it’s margins by simply cutting the size of its workforce. Instead, it’s taken a more innovative approach.

“In our company, we’ve driven virtually all of our internal systems to the cloud,” she said. “We only buy what we need, by the drink, when we need it. We don’t host our own accounting systems. We buy our accounting system transactions in the cloud, just like we encourage the government to. That enables us to not only cut our costs, but to be able to pass that along to the government when it’s appropriate.”

Small and mid-sized business face the ‘Goldilocks Syndrome’

Kymm McCabe, president and CEO of ASI Government, told In Depth with Francis Rose that when coming up with a plan to deal with sequestration, companies have to deal with many unknown factors.

“The uncertainty of the past — budget and CR [continuing resolution], the sequester and furloughs — have caused agencies to hold off on letting contracts,” she said. “So, a lot of the requirements were pushed to the right and canceled. We at ASI have more pending awards than we’ve ever had in the history of the company, and we’re also expending lots of valuable, limited resources on procurements that are subsequently being canceled because of changes in direction, priorities and guidance, frankly just because our clients don’t know more than we do. They’re working through systems themselves.”

McCabe added that furloughs are having unintended impacts on agencies and contractors alike. “In the fourth quarter here, where we thought that awards would actually come through, but, of course, with the 32-hour cap, that isn’t going to happen necessarily,” she said.

As small businesses struggle due to sequestration, mid-sized businesses are seeing some compression in their contracting.

“We’re really having to think differently, work with clients to help them to see if they’re going to redistribute those contracts, how they take those contracts and they spread them across to both optimize their small business utilization but also ensure the stability of the industrial base around the mid-size, which is where we sit,” she said.

With 300 employees generating about $50 million in revenue, ASI is on the small end of the mid-sized tier.

“What we’re finding in terms of the small businesses is we’re in this ‘Goldilocks Syndrome,’ a little bit too big and a little bit too small and there’s very little, in terms of opportunity, that are just right,” McCabe said. “And as we see, there’s compression in the margins and there’s declining revenues in terms of the budget and fewer opportunities. What we’re seeing is those opportunities are either being bundled for large companies or they’re being set aside for smalls. So that’s really challenging for all of us in the small business area and the mid- sized business area.”

Staying competitive while cutting staff

Carmine Taglialatela, vice president of business development at TecPort Solutions, told the Federal Drive with Tom Temin and Emily Kopp that his company hasn’t had to lay anyone off yet, thanks mainly to its status as an Alaska Native Corporation.

Even with its ANC status, which offers some protections other contractors don’t have, TecPort still is feeling the sting of sequestration.

“We still face the same problems with some of the DoD agencies in terms of the furloughs that have been taking place and what have you,” Taglialatela said. “Unfortunately, it has held up some programs that would otherwise have been released.”

Although TecPort hasn’t had to layoff anyone due to sequestration, Taglialatela hopes that it won’t have to moving forward.

“I haven’t seen anything like this in my dealings with the federal government over the last 30-plus years,” he said. “It’s quite unique. I think we’re faced with so many different issues in today’s economy and what’s happening with government contracting and certainly with the different socio-economic classifications.”

Nancy Blethen, president and CEO of Tech Systems, a woman-owned small business, told the Federal Drive that with no awards being made her company’s pipeline has been impacted.

“There are procurements that keep coming out with significant delays and changes that are hard to keep up with,” she said. “It’s difficult to keep our staff in line when there are no awards being made.”

Before sequestration hit, Tech Systems had seen enough recent growth to be able to hire a full-time business development person. But, with fewer contracts, it wasn’t economically feasible to keep that position filled.

“The irony is that when business is down you need to invest in BD, but because business is down you can’t afford to invest in BD,” she said.

Blethen agreed with Taglialatela that the current climate for procurement is the worst she’s ever seen.

“We don’t have the resources to keep [employees] on the bench,” she said. “We’ve ramped down so quickly that we’re not sure if we could ramp up as quickly.”

As a result, Tech Systems has started the process of diversifying into the private sector and open up a new branch of the business.

“What we’re trying to do is get to a more stable market, so that we can ride out the storm from the government,” Blethen said.

MORE FROM OUR SPECIAL REPORT, PRIVATE SIDE OF SEQUESTRATION:

Part 1: Contractors confronted with new type of waiting game due to sequestration

Part 2: Federal 4th quarter spending spree offers contractors hope for return to normalcy

Part 3: Sequestration plays second fiddle in aerospace industry to previous cuts

Part 4 Prime contractors show strong earnings despite sequestration

Part 5: Contractor hiring, morale take sequestration hit

Part 6 : Small contractors struggle from, rise to the challenge of sequestration

Part 7: Planning for the worst: Companies aim for sequestration-easing strategies

Part 8: Small firms feel first bite of DoD budget cuts as large contractors’ stock soars

Part 9: Contractors adapting to post-sequestration environment

Part 10: Fed furloughs leave imprint on procurement process, contractors say

Survey: Contractors speak out about sequestration’s impact

Data Analytics: Sequestration’s impact on contractors by-the-numbers

Column: Sequestration creeps outside the Beltway

Audio Interview: Government market ground zero

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