Shared services can be a powerful growth engine for tribal 8(a) firms, but only if management keeps clear sight of what those services cost and what they leave on the bottom line.
By John Shoraka/Chairman, GCP
As the former Associate Administrator of Government Contracting and Business Development at the U.S. Small Business Administration, where I was responsible for the 8(a) Business Development Program for seven years, and as someone who has spent the last nine years advising everyone from new entrants and nascent tribal organizations to Fortune 500 companies on navigating the federal marketplace, I have long been a strong proponent of shared services. For new entrants and nascent firms seeking to leverage federal contracting for growth and expansion, shared services can be a powerful tool. Entity owned firms, in particular, are uniquely positioned to benefit.
The Regulatory Basis
As a matter of regulation, entity owned firms can leverage common administrative services across multiple 8(a) entities, reducing G&A and overhead burdens and increasing competitiveness. Nascent tribal entities can further benefit from third party shared service providers. Rather than building capabilities from scratch at significant expense, before even receiving any federal contracts, a tribe can purchase back office administrative services on a fractional basis. These services can then scale with the firm’s development and growth.
Control Means Visibility
The key qualifier, however, is that the numbers don’t lie. As one of my dear colleagues often likes to say, “the math is the math!” Tribal management is required by regulation to maintain control and oversight not only of their 8(a) subsidiaries but also of the implementation of shared services. The critical aspect of maintaining that control is clear, direct visibility into the costs of shared services and their impact on the bottom line. Between retainer agreements, hourly charges, success fees, and bonuses, it can be difficult to analyze the true impact on the tribe, the tribal holding company, and its various 8(a) subsidiaries. Nevertheless, the bottom line is profitability…and, more specifically, profitability as compared to industry standards.
“The math is the math!”
The bottom line is profitability, as compared to industry standards
The Revenue Trap
Tribal councils and holding companies often focus on revenue and revenue growth and unwittingly accept high shared service costs on the assumption that higher revenue means more work and therefore higher costs for common administrative services. This is not only incorrect but diametrically opposed to how shared service providers should work with their clients. As revenues rise, costs for common administrative services should not increase proportionately. The reason is simple: the team that can handle 10 transactions can often handle 100, especially with today’s advances in automation and artificial intelligence. Costs for shared services can certainly increase, but they should not rise in direct proportion to revenues, the number of contracts, or the volume of transactions.
What to Measure Instead
Tribal managers should focus less on revenue growth alone and more on the profitability of each 8(a) subsidiary. This is critical in two respects: first, profitability is the fundamental reason tribes enter the federal marketplace. Second, the SBA 8(a) program requires that tribal entities be managed in a way that returns the maximum profits to the tribe…that is precisely why they enjoy special privileges for participating in the federal marketplace.
From my experience, profits measured against industry standards should be the primary focus. One can analyze revenue growth, gross profits, and net profits. In short, if you have solid revenues but low gross profits relative to industry standards, you are likely mispricing bids or implementing projects inefficiently (perhaps through over reliance on expensive subcontractors). If you have good revenues and solid gross profits but net profits that fall below industry standards, then your overhead and G&A costs are too high…and you should carefully examine your shared service providers and their associated costs. As an example, our own firm, GCP, was able to reduce our back office shared service costs by more than 25% by shopping around and identifying quality alternatives.
The Benchmark
With respect to industry standards, one source of data by sector for government contractors is SMB Compass:
| Service Category | Typical Net Profit |
| Commercial-like services (janitorial, grounds maintenance, base operations) | 3% to 8% |
| Professional services (IT consulting, program management, engineering) | 8% to 15% |
| Specialty and technical services (cybersecurity, weapons systems, R&D) | 12% to 25% |
| Construction (military construction, facility renovation) | 5% to 10% |
| Products and manufacturing (equipment, spare parts, supplies) | 10% to 20% |
The bottom line doesn’t lie. For tribal managers, focusing on it is the key to success and, quite frankly, the key to maintaining the required control over tribal entities…an SBA requirement for participation in the 8(a) program.
Building Toward Independence
Finally, it is critical that, over time, tribes internalize operations and expertise and reduce their reliance on outside service providers. This, too, is a core requirement of the SBA program. The intent of the 8(a) Business Development Program is genuine business development. Tribes should work deliberately with their shared service providers to obtain the necessary training and support, internalize operations, and build the infrastructure needed to stand on their own.
John Shoraka is Chairman of Gov Contract Pros, LLC and former Associate Administrator for Government Contracting and Business Development at the U.S. Small Business Administration.
The views expressed here are his own.
