How to Lose 50% of Your Federal Business and Increase Your Expenses at the Same Time


Sometimes it’s not about the new client or revenue source, but rather about protecting what you already have – your current federal business. You can, quite literally, lose half of your business and increase your expenses through failure to pay attention to your back office. This should only matter to your firm if you worked hard to build up the business and both the company’s and your own reputations. While no one likes thinking about these things, they happen all of the time and can happen to anybody.

Need proof? Just the latest example is the story of a mid-size IT company working in the defense and intelligence worlds. They had established business with multiple agencies, including DOD and the Department of Homeland Security. The company’s average annual total sales over the past five years were approximately $315 million. The firm seemed well-positioned to grow with solid relationships and great solutions attractive to customers that had money.

Too bad they didn’t pay attention to their internal financial controls. As it turns out, their comptroller had embezzled funds for a full six years before an internal audit finally found the problem. By then, the comptroller had made off with an estimated $19.4 million.

Now, $19.4 million is not a small sum, but even people who, like this author, have rudimentary math skills, know that this doesn’t equal a 50% reduction in business. How did we get to this number?

This is a tight community and several things happened almost immediately. First, the Department of Justice and Securities and Exchange Commission opened investigations. Next, the US Attorney’s office opened one specifically on the impact of the embezzlement of the company’s federal contracts. Then the trade press got the story and ran with it. As a result, every competitor in the field made sure customers knew of the company’s problems, raising doubt on whether the company could be trusted, or would even be able to fulfill contracts. This question was further highlighted when a court directed that company assets be frozen.

It should be no surprise that the firm has seen sales tank through the first two quarters of FY’17, according to data posted on the Federal Procurement Data System. Even adjusting for a possible aggressive Q4, the company is almost certainly looking at a 50% decline in sales for this year.

In the meantime, it paid for an internal investigation. It is currently paying legal and other fees for three separate federal investigations on some aspect of its business. Senior people who would usually be driving deals are bunkered down on internal issues, disrupting normal business. Oh yeah, they have to hire a new comptroller, too.

The only good news for this company, at least in the short term, is that they are unlikely to land on the suspension and debarment list, at least not for any significant time. Why? While late, the company did conduct an internal investigation that uncovered the problem before a government auditor found it. That shows present responsibility, a key determining factor in whether a company should be suspended.  Had the government found it first, the company would quite likely have been suspended from federal business, possibly throwing its future viability into doubt.

After reading all of this, we certainly don’t need to preach on the benefits of watching over your back office. Whether it’s finances, contract compliance, or ethics, investments in these areas are pennies on the dollar in terms of the protection they can provide. Proper business hygiene keeps your firm ready to expand and thrive in the federal market.


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