In government contracting, less is often more
When George Mason University’s Brett Josephson spoke with managers about company growth, the prevailing wisdom, he said, was that a company should diversify as it expands.
But as his new, groundbreaking research shows, when contracting with the federal government, specialization, not diversification, can be a key to company health and a rising stock price.
“Concentration is the key finding of this paper,” said Josephson, an assistant professor of marketing. “You can’t serve all agencies. It’s very expensive. You have to concentrate on one or two within the federal government, build that core knowledge. That’s when you get the biggest bang for your buck in the stock price.”
That’s important to note on a macro level, but especially in Northern Virginia, where the economy is heavily dependent on the federal government.
The research, titled “Uncle Sam Rising: Performance Implications of Business-to-Government Relationships,” was co-authored by Ju-Yeon Lee, assistant professor of marketing at Iowa State University, and Babu John Mariadoss and Jean Lynn Johnson, associate professors of marketing at Washington State University, from where Josephson earned his marketing PhD.
The research was also supported by the Center for Government Contracting in Mason’s School of Business. The research was published in January edition of the Journal of Marketing.
“Brett is doing dynamite research that is directly applicable to the $500 billion government contracting industry,” said Jerry McGinn, executive director of the Center for Government Contracting. “His work is providing great fuel for our center, and I very much look forward to continuing collaboration with Brett and other School of Business faculty during 2019.”
Josephson and his team conducted 19 in-depth interviews with government contracting experts to identify unique aspects of the business-to-government interface. They also examined 1,360 publicly traded firms that did business with the federal government during a 16-year period.
Why did companies that limited their business with the federal government to even one agency generally perform better economically than those that dealt with many? Because agencies within the government do not all play by the same rules when it comes to regulations and procurement, which creates logistical and economic hurdles, Josephson said.
“We found that there are true inherent transaction costs for doing business with the federal government,” Josephson said. “It requires a lot of unique assets and capabilities. The firm has to develop some sort of institutional knowledge about how to deal with the customer. You need to drill down on core competencies within those agencies to extract more value.”
Of course, dealing with fewer agencies creates the risk of becoming too dependent on those customers and being susceptible to procurement changes.
“What our project was designed to do is take that first big stab in trying to understand what makes government contracting different than other industry verticals,” Josephson said.
