6 Reasons to Keep Your Nose Out of the Government Trough

When I first started in business, the government of the day was keen to promote entrepreneurship among underemployed young people, and I applied for, and won, a contract for my business.

The entire experience of dealing with bureaucrats who cared more about optics than markets left me convinced that applying for government contracts under some form of "special" group status does more harm than good.

Here are six reasons to avoid chasing government contracts in your business:

1. Optics instead of markets
Bureaucrats are more interested in making things look good than in doing good things.

By way of a small example, our government customer looked more favorably on us spending government money on hard assets than services, so we ended up buying a van with our government money even though we could have rented one for the few weeks a year that we needed one.

Putting optics ahead of markets started to become common in our company and we became blind to the way the real world makes buying decisions.

2. Customer concentration
Governments usually hand out large, juicy contracts. At one point, more than a third of our revenue was coming from a single contract.

That's fine when the money is flowing, but as soon as the spigot runs dry, or the political winds blow in another direction, your business can be erased overnight. In our case, we got out of the government-contracting trap before the prevailing winds changed. Many of our peers were not so lucky.

3. Paperwork
Government contracts require a degree of legal and accounting oversight that require most small businesses to seek outside help. Unless you enjoy spending time with $300-an-hour lawyers and accounts ensuring you are "compliant," spend your timing chasing real customers.

4. The general contractor trap
Government employees find the process of getting a new vendor approved almost as arduous as you do, which is why, once you're approved, your bureaucratic customers may start asking you to sell them all sorts of things.

Once we were asked to retail printing services, even though we were a marketing agency, not a printer. The government department just told us to take a 15% commission for our trouble because it was easier for them to pay us rather than going through the hassle of getting a printer approved as a vendor.

In essence, you risk becoming a general contractor, which means you take a 10 or 15% administration fee to move paperwork around. You go from being a real business to being a paper-pushing administrator. Making 15% for doing virtually nothing may sound fine; but it can suck you into a business that you're not actually in, which in turn can have its own hidden risks that you may not be aware of.

5. Cash killers
The government hands out contracts slowly and on a schedule that is typically governed by political, not economic, agendas. This long and painful approval process means you often get strung out for months, and sometimes even years, waiting to hear on a contract.

Once, we waited for the "official" word on a government contract for three months. Our day-to-day point person in the government department assured us that we were approved and that all they needed was a "rubber stamp" from up above. Finally, after three months, and after employing the team we needed to fulfill the contract, we were told the deal was cancelled. No explanation was given other than that the contract had become a political hot potato.

6. Commoditization
Most contracts are handed out through a competitive bid process. Responding to competitive bids or Requests for Proposals (RFPs) is entrepreneurial suicide. It genericizes your company. Basically you'll be forced to offer a commodity product or service where the most important decision-making criteria for a customer is price and optics.

After a year at the trough, we stopped chasing government work. We started to compete again in the real world based on things like the quality of our service, not the political desirability of our company. We became a sharper and more market-focused company; and in the end we built a much more valuable and durable business.

You can download a free chapter of John Warrillow's new book, "Built to Sell: Creating a Business That Can Thrive Without You."
Photo courtesy of MojoBaer /Flickr