From the August 1998 issue of Entrepreneur

The decision to become a subcontractor is perhaps an easy one to make--but as any seasoned entrepreneur will tell you, securing that coveted contract is an entirely different story. That's because the subcontracting process itself--from the initial invitation or query to contract award--often involves a tangle of complexities, any one of which can deter even the most ambitious amateur. From increasing global competition to Fortune 100 vendor consolidation, challenges run rampant. But the good news is, small businesses can learn to compete--and win.

According to the most recent figures from the National Association of Purchasing Management (NAPM), an organization for purchasing and supply management professionals, 54 percent of its members spent between $1 million and $10 million on purchasing in 1996, and 10.4 percent of its members surpassed the $50 million mark. That means subcontracting is and will most likely continue to be big business for entrepreneurs, despite the challenges involved. The advantages of a successful subcontracting relationship are more than worth the effort: You'll gain invaluable experience, expand your business, and open the doors to more big business and government contract relationships.

So what's the best way to get started? That depends not only on your product or service, but also on the type of company offering the contract. Many specifically seek small-business participation to meet threshold requirements, often because they're working on projects for the federal government. When bidding on a contract, says Gary Engebretson, president of the Contract Services Association of America, your first three steps should be:

*providing the procurement representatives with detailed information about your qualifications

*calling back and keeping the pressure on, but in a gentle way, and requesting a personal visit

*and being patient; the contractor may be seeking future, not current, prospects. Sell yourself to that corporation before a job even becomes available.

Another thing to bear in mind--especially if you've been down the subcontracting path before and have been unsuccessful--is that important changes have occurred in the government sector over the past few years. Consider recently passed legislation on federal contract bundling that Engebretson says is favorable to small business. (For more on the legislation, see "Pulse," March.) While smaller contracts are often bundled into one large contract--making it difficult for all but Fortune 1000 companies to get their teeth around the bid--the law now requires that 23 percent of all federal contracts be handled by small, entrepreneurial firms. Businesses that are awarded contracts that are part of a bundle carry responsibility for only a portion of the project, rather than the entire thing.

Businesses should also keep in mind the recent trend of businesses relying on subcontractors' past performance when awarding contracts. Unfortunately, that has a negative impact on small businesses that have yet to get their subcontracting feet wet. On the flip side, if subcontractors do quality work, they can acquire a good reputation, which may lead to more and larger contracts. "One of the best things a small company can do is to do quality work," says Engebretson.

And of course, the Internet will play a large role in the future of subcontracting. As purchasing managers and government agencies move toward the use of e-commerce and data interchange, potential subcontractors will eventually be able to submit proposals and be evaluated electronically. So if you don't have a Web site yet, it's time to get one.

One final note: Some experts speculate that California's recent abolition of affirmative action in state contracts will have negative implications nationwide, making an already difficult process even worse. But for now, it serves as another reminder for small businesses to keep networking, stay aware of available bids and always strive for quality.

The Essentials

Although landing your first contract will undoubtedly be a challenge, you can take steps to improve your chances of winning it. Those steps include:

1. Establish a networking system. Talk to other business owners, and spread the word that you're interested in subcontracting. Make as many contacts as you can.

2. Get the information out. Slick, informative brochures about your business are a must. Without those, contractors will move on to the next candidate.

3. Build a solid reputation. This is probably your most important task--without it, you'll surely be on the road to nowhere. Pay your bills on time, treat your employees well, complete all your projects by their deadlines, and institute quality-control procedures.

4. Be financially sound. Although small companies have a lot of fiscal constraints, establishing a strong financial foundation--in operating profits, net income, cash flow, history and future projections--will help you considerably in landing contracts.

5. Communicate with contractors before projects become available. Target the companies you want to work for, and convey your interest and qualifications. Because of this previous contact, when a project becomes available, they'll think of you.

6. Remember that performance is linked to getting new work. The benefits are twofold: If you do an outstanding job, larger firms or prime contractors will seek out your business based on your reputation. And if past clients include the federal government, they'll recommend your company to prime contractors on the hunt for small-business suppliers.

7. Keep your prices flexible and competitive. This is important because landing contracts is becoming more and more of a challenge--and the recent rise in global competition only makes things trickier. To set your business apart, establish attractive pricing, even if it means you won't make as much money in the end. "[Small businesses] may not be able to make as much profit as they want on a particular contract, but they might get the contract more easily [with lower prices]," says Robert S. Frey, author of Successful Proposal Strategies for Small Businesses (Artech House).

8. Be selective about the contracts you pursue. Don't aim for every contract that comes along. Winning a contract takes real dedication and planning. According to Frey, because most small businesses neglect to tailor their efforts, out of every 10 contracts they pursue, most will win only four.

9. Establish an ongoing strategic alliance, but don't pursue relationships with just anyone. Frey says your efforts will pay off if you develop well-thought-out, well-researched relationships with a few select businesses.

10. Know your client inside and out. Identify the decision makers. Find out how they put contracts together. Understand the decision-making process, and know all the steps involved. In the contracting world, ignorance is definitely not bliss.

Wanted: A Lasting Relationship

The firm: Based in Ft. Worth, Texas, Burgoon Co., a supplier of medical, safety and laboratory supplies (such as beakers, flasks and chemicals), was launched in 1988 by Nita Burgoon. She won her first subcontracting award from Bethesda, Maryland, aerospace manufacturer Lockheed Martin in 1992 and today continues to supply Lockheed's quality control, industrial hygiene and materials process control production facilities.

The slice: With her Lockheed contract, Burgoon expects to bring in about $500,000 this year. Her overall sales projections for 1998 are $4 million.

The criteria: In addition to offering quality products, consistent deliveries and competitive prices, Burgoon strives to provide her customers with the little extras--such as creativity, patience and persistence.

The hook: "I think part of being a successful entrepreneur is finding a niche market and then filling that niche," says Burgoon, 47. That's exactly what she did when Lockheed was dangerously close to shutting down its quality control assembly line. Burgoon was able to provide a solution that helped Lockheed avoid an assembly line closure--and in the end, she scored a contract that hadn't previously existed.

The spin: Strong subcontracting relationships will not only expand your business with a corporation but will also lead to new opportunities with other businesses. And when they're long-lasting, you'll surely benefit. "More often [than not], smart buyers understand that the value added by a company such as mine is worth the loyalty they give us," Burgoon says.

The connection: Many large corporations have a small-business center or someone you can talk to about contracts. Burgoon urges entrepreneurs to "meet them, work with them, get to know them, and let them know you're really interested. Nothing but good will come from it."

Three Of A Kind

The Big Three U.S. automakers advance minority subcontracting awards.

In February, three major automakers--Chrysler, Ford and General Motors--joined forces to substantially boost minority subcontracting opportunities. The SBA-supported agreement they signed, the first of its kind, not only fosters strategic alliances between minority and nonminority suppliers, but also increases the current contracting allotment of all three companies combined by almost half--raising the level to $3 billion over three years.

"The auto companies asked the government to enter into an initiative with them that would recognize their commitment and efforts to increase purchases for minority companies," says Judith Roussel, the SBA's associate administrator for government contracting. The resulting initiative is an extension of a program already in existence. Among other things, the automakers' agreement will encourage first-level (Tier 1) companies to subcontract with second-level (Tier 2) companies and provide new business opportunities for SBA-certified 8(a) firms.

After three years, the SBA and the Big Three will evaluate the initiative's success and determine whether it should be continued and expanded.

Wanted: Impressive First Impressions

The firm: Computer manufacturer Gateway Inc., based in North Sioux City, South Dakota

The slice: This year, the company will increase the dollar amount it sets aside for small, disadvantaged and women-owned businesses by 16 percent. Last year, Gateway awarded contracts totaling several million dollars to more than 1,000 small businesses.

The criteria: "Whether it's a product or service, we require high quality, on-time delivery, very good service and [a good] warranty," says Bob McMaster, manager of materials process improvement. Gateway also looks for competitive pricing and a drive to achieve customer satisfaction.

The hook: There are a few, actually. First, you must have an attractive, professional-looking brochure describing your products and your company. Second, you need to make a positive first impression. Third, Gateway seeks small-business owners who are aggressive, who follow through on commitments, who respond quickly to requests for information, and who can demonstrate their superiority over the competition.

The spin: "Know what you're up against as far as competition goes," McMaster says. "And I think it's a real advantage to do some research on the company you're trying to sell to."

The connection: Gateway does the approaching--so don't barrage the company with phone calls and letters. To find subcontractors, the company regularly peruses publications such as the Try Us Directory, a publication of small, minority-owned businesses, and the Thomas Register of American Manufacturers. Gateway also relies on local SBA offices and Small Business Development Centers for leads.

Wanted: The Best Of The Best

The firm: Aerospace manufacturer Lockheed Martin Corp.'s Ft. Worth, Texas-based Aeronautics Material Management Center (AMMC)

The slice: Twenty-two percent to 28 percent of the company's contracting dollars go to small, disadvantaged and women-owned businesses. Although actual dollars spent are increasing, fewer subcontractors are winning awards due to downsizing.

The criteria: To be a successful AMMC subcontractor, you must meet the industry's most stringent requirements, including a 98 percent on-time delivery schedule and zero percent product rejection over a 12-month period. For products and services that support the factory, think along the lines of quality and competitive pricing.

The hook: John Morrow, a procurement director for Lockheed's AMMC, describes the corporation as "an expensive operation to do business with." If a subcontractor can offer creative ideas that will save Lockheed time and money, procurement decision makers are sure to take notice. Some examples include warehousing or storing products for Lockheed, or offering one-stop shopping for products and services other than just your core function, thus eliminating Lockheed's need for additional vendors.

The spin: "Don't give up easily, and keep knocking on our door," says Morrow. "If there's an opportunity that's compelling, we'll recognize it and allow a [subcontractor] to bid."

The connection: What makes your product or service superior to the competition's? Determine that, and you're ready to approach one of the company's five nationwide procurement agencies, each of which has a small-business office. Contact Lockheed's Jim Randle at (817) 762-1603 or Jim.W.Randle@lmco.com

Next Step

  • Subcontracting Opportunities. For our latest listing, see "On The Lookout".
  • Pro-Net. Getting listed in this free, SBA-sponsored, Internet-based procurement database is a must for any small business seeking subcontracting opportunities. Federal buyers and large corporations use it to find the right firm by scanning the online network of more than 170,000 small businesses, 6,000 of which are also minority and nonminority 8(a) firms. To register, visit http://pro-net.sba.gov
  • CBDNet. Newspaper Commerce Business Daily's site lists government procurement opportunities and other subcontracting leads. Access it at http://cbdnet.gpo.gov
  • Small Business Development Centers. Located in every state, these centers can assist entrepreneurs with the procurement process (only one of their many services).
  • Thomas Register Of American Manufacturers (Thomas Publishing Co.). If you're not already there, get listed. Big corporations and federal government agencies consult this resource for suppliers who operate nationally. Visit http://www.thomasregister.com or call (800) 699-9822, ext. 444.
  • National Association Of Purchasing Management. If you attend this association's meetings, you can develop important relationships with the procurement representatives of large corporations. For more information, call (602) 752-6276.

Contact Sources

Burgoon Co., 2301 Strand, #240, Galveston, TX 77550, (800) 287-4666

Contract Services Association of America, (202) 347-0600, gary@csa-dc.org

Robert S. Frey, (410) 527-2468, bridges23@aol.com

Gateway Inc., Attn: Chuck Grothaus, 610 Gateway Dr., MDY11, North Sioux City, SD 57049-2000