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Unintended Consequence

The Death of Small-Company Innovation

Mar. 10, 2013 - 01:50PM   |  
By A.J. CLARK   |   Comments
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In times of national crisis, lawmakers tend to forget about small business. Sequestration is no exception.

While the media focus on stories like the U.S. Navy docking ships, the Air Force reducing flying hours for training or intimidating across-the-board hiring freezes, there are many more unseen and unintended victims of sequestration in the $500 billion cuts to defense.

Those big stories are important, of course, but there are other effects that no one is talking about. What impact will sequestration have on military recruiting in general, or the U.S.’ reputation as a military power?

My concern is for the small businesses that work in defense. My industry, the small defense contracting world, has been feeling the pre-emptive effects of sequestration for months already. I believe many more sweeping changes are coming and that even in a best-case scenario, the small-contractor industry won’t survive intact.

Even if a quick resolution to sequestration is found, the budget continuing resolution ends March 27, followed by the deadline for congressional budget adoption in mid-April. It’s safe to presume that defense budget cutbacks are here to stay in one form or another.

The current pressure caused by sequestration on small defense businesses is centered on three dynamics. The first is obvious: The government, uncertain about the future, simply isn’t releasing any work requests, which eliminates short-term work opportunities.

The second is less obvious. We know large companies are cutting overhead by laying off staffers. And while that doesn’t seem to have a direct tie to smaller contractors, it adds up to a likely loss of subcontracting work. That’s because the employees the big companies are keeping will need to do all of their work internally.

As most small businesses know, you hire your own staff when you are just starting out because subcontracting work results in a pass-through fee, but no contribution to your company overhead pools. Large companies are in the same situation right now. They need to use their own people to keep the contribution-to-overhead ratio high enough to save the buffer zone of employees they really want to keep through the sequester downturn.

The last issue is the continuing resolution, which has halted any new work requests and starts. Traditional work is tanks and planes, but new work is cyber tools and cloud computing solutions, the kind of work many small businesses have a real play in. Many of them are innovators who rely on new work to get started.

However, that said, small defense contractors shouldn’t give up hope.

One piece of advice I can offer is to try looking at any partners where you act as value-added reseller or service provider. Propose to them a parlay of the relationship into the commercial space. You’ve probably done some great work with them in the federal space, and now is a good time to cash in on all that effort and ask for some latitude in the commercial arena.

At Thermopylae, we’ve been successful with our partner Google in their Enterprise Group, which recently named us Innovation Technology Partner of the Year for Maps and Business Tools, and are now aligned as a service provider that can resell Google’s software, with an emphasis on the Geo Tools part of the business, which we support development of with its engineering teams, in the commercial space. That opens up a massive distribution channel for us to put out our software as value-added for commercial customers.

Another idea is for small businesses to invest in their internal intellectual property. If you see less work on the horizon, it could be the right time to focus on a new project or product you’ve been thinking about developing.

Also, don’t forget to keep your message and brand alive. With government conferences and travel being canceled, you’ll need to find ways to reach out directly to your customers, and potential customers, to stay top of mind.

We’ve been fortunate at Thermopylae, having had the benefit of some great advisers over the last few years who warned of sequestration’s potential impact. Over the past two years, we’ve worked hard to follow up on commercial business opportunities with Google, for instance, which is now one of our largest partners. We also took every resource and dollar we possibly could and invested it back into our intellectual property, our software product line. Thankfully we are now seeing these efforts come together just when we need it the most.

Getting through this is going to take trust. Small businesses need to band together and trust each other for support. They need to trust that the institution that is the defense of our nation is not going to end. They need to trust in talented young people who need jobs — take the risk and hire them. Use this opportunity to refresh your bench strength with candidates who otherwise might be scooped up by much larger firms.

There will be life after sequestration. When the small businesses who survive venture back into the new landscape, we can all be much better off with fresh talent and bright new ideas to provide to our clients across both the commercial and federal spaces.


A.J. Clark is CEO of Thermopylae Sciences and Technology, an Arlington, Va., company that offers Web-based geospatial capabilities, mobile software framework and applications, situational awareness, cyber security and cloud computing.

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