Aiming high in federal contracting

As federal agencies pull back on spending, 7Delta's strategy is thinking big.

The Columbia information technology firm, which grew by focusing on work for one federal agency, is going after larger contracts and broadening its reach. It's a diversification tactic that other federal contractors at the smaller end of the scale are trying, too: expansion in a time of retrenchment.

Deltek, a Virginia IT firm that provides services to government contractors and other businesses, is seeing that trend — but warns that it cuts both ways.

"You have smaller contractors [that] are moving up-market, and of course the bigger guys are going down-market after things they traditionally haven't," said Tom Mazich, general manager of Deltek's government contracting business unit.

"The bottom line is the pie is smaller," he said. "People are fighting for their lives out there, and that means they're going into adjacent markets and opportunities that they hadn't gone into before."

Sequestration — across-the-board cuts to federal spending — kicked in March 1 and will slice $85 billion from the budget this fiscal year. But some agencies, especially within the Department of Defense, were already in "compression" mode last year, Mazich said.

7Delta, by contrast, has managed rapid expansion. The company tripled its revenue last year, increasing employment from 80 people to 175. (It's since added 11 more people.)

The company started in 2005 as a two-person subcontractor for the Defense Department's Military Health System. Then it won work with the U.S. Department of Veterans Affairs, which quickly became the company's largest customer.

What drove home the need to diversify further wasn't the sequester, or even the run-up to those cuts. The VA suspended some IT spending in 2010, "and that created a significant drop in business for us," said Jay Costenbader, 7Delta's vice president of business development.

So 7Delta officials looked to other agencies with a need for health care IT, the company's specialty. Now, besides its original two agencies, the company also contracts for the Internal Revenue Service, the Navy and the Federal Aviation Administration, among others.

Since it began to diversify, the company has landed even more work with the VA, which remains by far its top customer. But 7Delta is still working to increase its base, Costenbader said. Especially with budget cuts on the menu at nearly every agency.

"Hopefully it will help to mitigate some of that risk," he said.

The VA is a special case: It's exempt from sequestration cuts. But that's upping the competition for its contracts, Costenbader said — that, and efforts by companies to get a piece of the health care spending pie.

Louis E. Sapperstein, a senior partner at RS&F, an Owings Mills-based consulting and certified public accounting firm, works with many government contractors. His view on small companies aiming big: tough, but not impossible.

He says he can't think of any industry but government contracting in which a firm with $5 million in annual revenue could — with a lot of effort — land a $50 million contract.

But making that work takes extensive planning, he said. A small company might need to completely revamp itself from the inside out.

"All of a sudden, you have to build out your infrastructure — you have to get better accounting controls and internal controls in place," Sapperstein said. "Maybe you have to hire a human resources person. … And then you've got to go to the bank and say, 'Listen, I've got a $750,000 line of credit; I need about a $2.5 million line of credit.'"

Costenbader said 7Delta has spent the past two years working on just those sorts of changes.

"This past year, we did about $45 million in total revenue, and we're building systems that will support us to be a $200 million or $300 million company and beyond," he said.

The next test: competing as a no-longer-small company.

As a service-disabled, veteran-owned small business, 7Delta qualifies for set-asides. But the way it's growing, it won't be in the "small" category for much longer. Then it must go head-to-head against the massive players.

7Delta is preparing for that, too, by going after multi-year contracts that would extend the effects of its small-business classification and perhaps make the shift less jarring.

"That's the biggest challenge for a small business: that transition from small to large," Costenbader said.

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