The U.S. government is the largest customer in the world, purchasing more than a half-trillion dollars’ worth of goods and services yearly out of its $4 trillion budget. So it’s no wonder that some 60% of Fortune 1000 customers sell to the government. But is this client one to go “all in” on? While a stable customer, the U.S. government market can prove challenging to navigate in other ways. For example, Lockheed Martin had to cut costs (and thus revenue) of the F-35 fighter jet in response to sudden political pressure, which prompted a 4% drop in its market value in 2017.
Despite the U.S. government’s buying power, there has been little research conducted on whether selling and serving this customer positively affects firm performance and profitability. A new study in the Journal of Marketing seeks to address this gap. Our research team developed a conceptual framework based upon qualitative in-depth interviews with 19 government contracting experts. We then used prime contract award data provided by the U.S. Government Accountability Office to assess revenue provided by the U.S. government to 1,360 publicly traded firms between 2000 and 2017. Finally, we developed a large empirical model to study the stock market’s response.
In our interviews, we learned that U.S. government business has unique characteristics that differ from commercial markets, including promoting diverse socioeconomic goals, allocating millions in set-aside contracts for historically disadvantaged firms, and sweeping upheavals accompanying political leadership changes. In addition, U.S. government customers often shun taking risks to acquire novel solutions and technologies and are under constant pressure to reduce spending. Firms that serve the government are subject to strict regulations and must follow specific rules and guidelines to bid for and execute work. However, the U.S. government’s purchasing power is enormous, contracts are large, and its agencies are less likely to have solvency issues than commercial firms.
Key findings include:
- Serving the Business-to-Government marketplace has pros (scale and reliability) and cons (high compliance and learning costs).
- Investors see value benefits accrue to those companies that do a large book of business with the U.S. government, typically over 30% of their yearly sales.
- However, investors also see risk concerns to serving the Business-to-Government marketplace.
- Executives should recognize that in order to reap full benefits from B2G relationships, they need to strategically manage their portfolio of government customers (both in terms of breadth and depth).
- Regulations may entrench market incumbents, rather than increasing market access to more participants, an unintended consequence.
So how can companies that serve the U.S. government seek to optimize both performance and risk? Our research team suggests that they should:
- Become “purists” rather than “tourists” by increasing government emphasis, rather than dabbling in this market, due to its cost and complexity of entry.
- Develop a concentrated portfolio of key accounts (i.e., agencies) and then build strong relationships with these customers to extract the most value from them. This will improve firm performance by increasing value and reducing risk.
Managers at firms can use this research to evaluate their government marketing and sales strategies to optimize performance and risk – or decide whether to pursue this market at all. Top executives of firms should consider whether increasing their government focus is key to future success or creates systemic financial vulnerability that could create significant future harm if political priorities change.
Policymakers should be cognizant that current regulations and procurement barriers entrench incumbents, making it harder for U.S. agencies to get new solutions and competitive prices. If so, current processes may need to be reformed to increase competition.
From: Brett Josephson, Ju-Yeon Lee, Babu John Mariadoss, and Jean Johnson, “Uncle Sam Rising: Performance Implications of Business-to-Government Relationships,” Journal of Marketing, 83 (January).