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Third Annual Highlights Report

GovCon Industry Study

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4 Introduction

5 About This Report

6 Executive Summary

7 Section 1: Business Development

11 Section 2: Project Management

15 Section 3: Financial Metrics & Operations

19 Section 4: Compliance & Risk Management

25 Data Profile

27 Deltek Profile

Know more. Do more.

GovCon Industry Study


4

In every corner of the globe, organizations are coming to grips with a new economic reality. Volatility is in, certainty is out. Belt-tightening is in, meteoric growth is out. The way forward for most companies is sure to demand a fresh approach to doing business. That’s not necessarily bad news. This wake-up call has created a real sense of purposefulness within companies worldwide. Organizations are finding better, more efficient ways to do everything from targeting opportunities to optimizing risk. They are doing more with less – and they are doing it with more precision and efficiency than ever before.

Bottom line, firms that adapt their operations for success in this tougher environment – trimming excess costs, siphoning inefficiencies from programs, better identifying the right RFPs to pursue, leveraging technology for quicker and more accurate results – will be the ones who thrive in the coming decade. Those that are slower to recognize and accept the change, clinging to the old ways of doing business, will soon find their contract wins drying up and their existence threatened.

In this Clarity GovCon Industry Study 2011 Highlights Report, we take a hard look at how firms are adjusting to today’s business realities. Now in its third year, this report identifies the emerging trends of the day from a record number of responses. This year, 429 organizations of all sizes – roughly 33% more than last year – raised their hands to participate in the study, acknowledging its role as a vital benchmark for the GovCon industry.

We invite you to dive into the comprehensive metrics and insights contained within these pages. Read them. Examine them. Discuss them. And above all, use them to help you uncover what you need to be doing to keep pace with – or leap ahead of – your peers and competitors in today’s new era of government contracting.

Know more. Do more. Profit more.

Introduction

Clarity: GovCon Industry Report 5

About This Report

Survey DetailsWe collected 429 responses from Senior Executives, Business Development, Project Management, Finance and Accounting leaders from the Government Contracting Industry.

Company Headcount1 - 24 14%

25 - 99 21%

100 - 499 37%

500 - 999 8%

1000+ 20%

Revenue Breakdown$0 - 20 M 42%

$20 - 99.9 M 34%

$100M+ 24%

Revenue Breakdown By SectorFederal 69%

State 19%

Local Governments 1%

Other Public Sector 6%

Private Sector 5%

Company Headquarters Breakdown By RegionDistrict-Maryland-Virginia 47%

South 18%

West 18%

Midwest 7%

Northeast 9%

Pacific 1%

6

As the saying goes, ‘two is a coincidence, three is a trend.’ In this third annual Clarity: GovCon Industry Report, we added a third data anchor to the foundation established over the past two years. In some cases, this has helped to draw out interesting trend lines and even suggest shifts in the industry.

A full 429 GovCon insiders contributed their knowledge to this report – a record number. Based on feedback, we added a number of new questions giving us both a deeper understanding of the business as well as a look at it from new angles. What we found was an industry that has a renewed sense of discipline and purposefulness in all areas of business. We hope the insights contained in these pages help you as you continue adapting to the economic realities of today’s GovCon environment.

Here are a few highlights from this year’s study:• Growth rates, as expected, slowed significantly. Firms reported

they grew at half the rate of 2010. Furthermore, twice the number of firms across the board said they were experiencing negative growth compared to last year. At mid-sized companies, the few 50%+ growth reports of 2010 entirely disappeared this year. What factors are forcing the industry to put on the brakes? And what is the outlook for 2012?

• Firms overwhelmingly agreed the top three business development challenges facing the industry include a more restrictive spending environment, increased competition and limited business development resources. What are companies doing to address these issues? What other issues are on their radar screens?

• With increased financial oversight, GovCon firms are taking extra time (being meticulous?) in their invoice preparation. Average invoice cycle climbed by two days, said respondents. This attention to detail is paying off downstream as DSO plummeted 20%. Will DSO continue declining or will we see it rebound to previous levels?

• Cost discipline and efforts to improve efficiency are hitting the bottom line. Overall average profit margin nearly doubled over last year. At the same time, 15% of the largest companies reported double-digit margins compared with 2010. Several other positive indicators were reported in this area as well. Can companies continue to wring still more excess and inefficiency out of their operations? How will pressure to grow the top line affect this? Or will margins begin to contract again?

• Half the firms we surveyed said their risk, issue and opportunity management practices were mature. Yet results also suggest many of them aren’t doing contingency planning as part of risk management, a serious gap. Do organizations truly understand this essential discipline? Or do many still consider home-grown spreadsheets an adequate tool for managing risk?

Executive Summary


Introduction

Today’s newspaper headlines sum it up: the brakes are on. After a decade of year-over-year steady growth, government has ratcheted back on spending and GovCon firms are feeling the pinch. Firms report that growth has slowed by half, although collectively they are optimistic – perhaps too optimistic – that they’ll be able to hit the accelerator again next year.

Faced with the brutal facts, firms are asking themselves some hard questions right now: How should they be positioning themselves for insulation from the contraction? How can they become smarter in competing for business? What are the best sources for learning about opportunities earlier? Survey respondents told us in multiple ways they are worried about these and other kinds of business development-related issues. Here’s a snapshot of how things look today, and what GovCon firms are doing in response.

Key data points from the survey:

1. Overall average growth was 7.3% this year, half of last year’s 14.7%. Projections for growth in 2012 are an optimistic 20%+.

2. “Definite M&A Plans” jumped from 40% to 50% at large firms while the percentage of small firms with “Definite M&A Plans” doubled from last year.

3. Roughly 10% more firms across the board said their revenue came from Subcontracts, a trend away from Prime since 2009.

4. 2011 saw a sharp spike in the number of large firms writing both Funded Contract proposals and Task Order proposals.

5. GWAC and MAC Win Rates doubled to 50% in 2011 for the largest firms while their Agency-Specific IDIQ wins leaped from 38% to 50%.

6. Firms are equally dependent on Government Sources, Personal Relationships and Commercial Sources for finding new opportunities.

7. Companies identified their top three business development challenges as: (1) a more restrictive spending environment, (2) increased competition, and (3) limited business development resources.

“The biggest obstacle to our growth is not having enough BD resources to operate to our standards.”

Section 1: Business Development

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Figure 1: Current Growth Rate by Firm RevenueReport planned growth rates for this past year (as a percent of Total Annual Revenues)

Following an average growth of over 14% last year, this year’s reported growth was sliced in half to just over 7%. Twice the number of firms are expecting negative growth compared to last year. The high-paced growth rates of 50%+ have all but disappeared. Last year, one-third of firms projected growth at or above 20%. This year, 1 in 5 small firms and just 1 in 10 firms overall expect this.

This lull is being driven by a funding-level decrease, the first year-over-year decrease in discretionary spending in more than a decade. While some companies find themselves in one of the few “sweet spots” in today’s market, nearly everyone is feeling squeezed. Still, that hasn’t stopped them from eyeing the future with rose-colored lenses. We were intrigued to discover some aggressive growth expectations for 2012. On average, firms anticipate a 20.2% growth rate next year, nearly three times 2011’s reported rate. Realistic? We have our doubts – and we think this optimism will be tempered when firms see 2012 funding levels in black and white.


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Top Three Challenges

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More Restrictive Spending Environment

Time Consuming Forecasts and Reporting

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Not Enough Time to Assemble High Quality RFPs

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Figure 2: Top Business Development Challenges

What do you see as your top three business development challenges?

Firms were united in their assessments of today’s top business development challenges. A More Restrictive Spending Environment, Increased Competition and Limited Business Development Resources were overwhelmingly identified as key issues. All other responses finished in a distant second tier.

The feedback makes sense. In an environment where funding is declining and the same companies are competing for fewer

dollars, increased competition is the natural by-product. We hear from our discussions with firm leaders that business development organizations feel more pressure to uncover new opportunities, gain deeper insights on every opportunity and increase efforts to build relationships that will lead to business. This won’t be easy. As many respondents noted, getting access to certain government agencies and decision makers presents an enormous barrier to business development efforts at companies of all sizes.

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Clarity Outlook

2010 was the last of a 10-year period of year-over-year increases in discretionary spending. That growth was the product of post-9/11 Homeland Security spending, war-related spending on Iraq and Afghanistan and the Economic Stimulus intended to jettison us out of the 2009 economic crisis. The 2011 cut in discretionary spending was modest; 2012 cuts promise to be much more drastic.

To survive in this new era, firms must hone their ability to identify and research opportunities as well as develop and leverage deeper integrator relationships. They will need to ratchet up customer satisfaction efforts as protecting incumbency will be crucial. And they’ll need to position themselves to move into growing areas of the market, either through acquisitions or through organic growth.

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Better Understanding of Opportunities in Early Stages

Automation of Time Consuming Tasks

Improved Use ofOrganizational Knowledge

More / Better Training Methods

Exploration of New Markets


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Improved Sales Analytics

Additional Staffing

More / Better Teaming Methods

Improved Sales Processand / or Support

Hardware or Software Investments

Acquisition of Partners,Competitors, Other FIrms

Figure 3: Importance of Business Development Initiatives

What business development initiatives are you pursuing to address these challenges?

In last year’s report, we pointed out that contractors could no longer simply churn out proposals and rely on a certain percentage of wins for their growth. Instead, they needed to hone their ability to determine when and when not to bid, an effort that would ultimately reduce costs and boost win rate. This year’s results suggest that firms are heeding that call. To address their business development challenges, firms are seeking to better understand and identify opportunities in the earliest possible stages. Sure, that puts pressure on business development resources up front. However, it should be offset by a reduction in the number of proposals being produced.

Alongside improvements in targeting, firms said they also will be exploring new markets to counteract the slowdowns in their current markets. While fifth on the list overall, Exploring New Markets came in with almost as many “High/5” responses as top vote getters. Going forward, these initiatives will continue to rank as high priorities for GovCon firms. We also expect to see More or Better GWAC and IDIQ Management climb up the ladder as more companies evaluate competing for these lucrative contracts.


Introduction

The U.S. Government has called on today’s contractors to do more with less. More so than ever before, a firm’s success within this mandate will rest on its ability to scope, price and execute successful, profitable projects. The burden of this rests squarely on the shoulders of project managers, a function that is coming into the spotlight as budgets tighten and intolerance for cost and schedule overruns grows.

Overall, firms are rising to the challenge. This year’s Clarity survey indicates that project managers’ certifications are growing, a trend we have been observing over the past three years and one that continues to accelerate. The percent of projects coming in on or under budget is increasing. And confidence in the status of projects is rising. Though project visibility remains cloudy, we anticipate this and other concerns will diminish over time as sophistication of the project management function continues to grow.

Key Data Points from the Survey:

1. Project visibility continued its steady decline, with mid-sized and large firms registering a slight drop from last year.

2. Across the board, firms reported a rise in projects operating on or under budget. A rise in confidence accompanied this spike.

3. Overall maturity of the project management discipline is on the rise, particularly at large firms where the percentage characterizing themselves as Very Mature nearly doubled over 2010.

4. The percentage of PMP-certified program managers continues to grow. Nearly half of mid-sized and large firms told us 50%+ of their program managers are certified.

5. Small firms reported a 50-point spike in No PMO to 70%, up from 20% in 2010. The results are part of an overall expansion in reports of No PMO.

6. Survey takers agreed the top three challenges facing the project management function in the next 2-3 years include Collaboration and Communication, Accurate Project Cost Forecasting, and Inexperienced Project Managers.

“Performance pressure is still on, and promises to stay on. The winners will have to figure out how to optimize every corner of their PMO.”

Section 2: Project Management

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How would you rate the visibility into the status of your Organization’s current projects?

Large firms reporting High Visibility into projects has been trending downward by 5 percentage points per year for the past three years including 2011. This year, the visibility fog seeped down to mid-sized firms, which reported a 10-point drop in High Visibility. The potential problem: many of these big organizations are strapped to legacy IT systems where extracting data can be cumbersome. On the other hand, small firms, perhaps better able to change direction and leverage advances in project management software more quickly, reported a 10% increase in High Visibility. As government clients increase their oversight and scrutiny of projects, we expect to see more firms leveraging software that provides a real-time, integrated and comprehensive view across programs and projects. Pe

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Figure 4: Project Visibility by Firm Revenue

“We need to upgrade our methods by bidding intelligently, partnering wisely, and executing on projects with precision. This means delivering a great end-product on-time and within our projected budget.”


Rate the maturity of your firm’s Project Management discipline.

Firms are sliding steadily up the maturity ladder in the area of Project Management. Notably, no large firms reported Very Immature this year while the Very Mature responses for this segment nearly doubled. Small firms saw an uptick in maturity as well, with nearly 70% reporting Very or Somewhat Mature, up from just over 60% last year. We suspect these numbers are the result of companies honing their focus on the people, processes and tools required to move their Project Management discipline forward. Firms are realizing this is more than just smart business. Those that fail to climb the maturity ladder may soon find themselves outbid, outperformed, and out of business.

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Project Management Maturity

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Figure 5: Project Management Maturity by Firm Revenue

What percentage of your Program Managers has a PMP certification or other formal program management training?

Government Contracting firms are realizing that high-performing Program Managers are the key to success in today’s “do more with less” environment. Abandoning their old views of PM as an administrative function, smart companies now understand this discipline requires a highly specific set of skills. As a result, they are investing in training and development of their Program Managers. This explains the trend toward higher certification percentages across the board. Almost half of the firms over $20 million reported that more than 50% of their Program Managers are PMP certified. Going forward, we expect to see these certification percentages continue to climb. Corresponding improvement in all project management-related metrics is likely to follow. We may be moving to a day when managers without a PMP certification will be obsolete.

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Figure 6: Percent of Project Managers with PMPs by Firm Revenue

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Figure 7: Top Project ManagementChallenges

What do you think will be the top three challenges facing the Project Management function within your organization over the next 2-3 years?

For the first time, we asked respondents to share their views on the major challenges facing the Project Management function in the next two to three years. Not surprisingly, communication and money nearly tied for the top reported challenges. Communication has always been a struggle for Government Contractors, both within their organization and with their subcontractors. On the cost side, forecasting has historically been difficult because many organizations don’t have their costs and schedules tied together appropriately. New software enables cost and schedule integration for better predictability so we should see this challenge diminish somewhat going forward.

The challenge identified by the most firms as their #1 issue was Inexperienced Project Managers. In comments, several respondents expressed concern that “green” customer program managers hindered the performance of more experienced contractor managers. If the rise in PMP certifications continues to hold, we expect to see this concern fade.

Clarity Outlook

Government Contracting firms are united in their opinion of today’s most pressing challenges. When it comes to their fix-it list, people, cost and communications dominate the top spots. And with belt tightening and increased scrutiny, firms know they need to turn a laser focus on these issues or risk severe competitive and performance consequences.

In light of these concerns, we expect firms to continue their emphasis and investment in people, process and technology as they relate to Program Management. Unlike many other areas of firms, we will not be surprised to see the overall discipline of Program Management emerge from this current industry downturn in a better, faster form.


“If we are to continue growing, we need to get better at monitoring financial metrics and adjusting operations based on our forecasts.”

Introduction

The steps companies have been taking to trim expenses and shed inefficiencies appear to be finally hitting the bottom line. Survey respondents told us their profits are climbing, days sales outstanding (DSO) has plunged and other key metrics are holding steady. Still, firms aren’t breathing easy – not by a long shot. They raise big concerns about cash flow and about keeping costs down to remain competitive in today’s cash-crunched environment. This financial rigor is sure to serve firms well. Easing up at this point would expose firms to the risk of losing competitive ground and suffering unwelcome financial burdens.


1. Average profit margins nearly doubled to 8% compared to last year for firms overall.

2. Monthly invoice cycles climbed to an average of 12.2 days while DSO plunged nearly 20% to 42.8 days.

3. Average unallowable costs were 2.99% of total annual revenues, up from 1.67% last year.

4. This year’s composite fringe rate came in at an average of 28.6%, down from 32.5% last year, possibly reflecting continuing benefit reductions.

5. The overall composite overhead rate climbed to 43.8% from 39.9% in 2010.

6. Respondents agreed the top three challenges facing financial leaders in the coming years will be Organic Top-line Growth, Cash Flow and Alignment with Executive Management.

Section 3: Financial Metrics & Operations

16

Profit / Loss margin (as a percent of Total Annual Revenues)

Looking across all firms, average profit margin nearly doubled over last year’s figure to 8%. When we break this down by firm size, the good signs continue piling up: 15% of the largest companies reported double-digit margins compared to a small sliver last year. Roughly 1 in 5 mid-sized firms reported greater than 10% profit margins, up from less than 1 in 10 last year. And nearly half of all small companies said their profit margins were in the double digits, about twice last year’s percentage.

What’s going on? In part, there may be some catch-up happening. The wake-up call rang for the industry a few years ago, and firms began tightening their belts. Since it takes time to change a ship’s course, we may now be seeing, we may now be seeing the fruits of their efforts. At the same time, it is likely that the efficiencies noted in the area of Program Management are starting to hit the bottom line. Improved adherence to schedules and budgets has a direct impact on a firm’s bottom line. If the economy continues on its current path, we may see strong profit numbers again next year. However, this doesn’t mean it’s time to relax. Top line growth and cash flow remain critical rallying cries, and profit may take a back seat if firms continue to struggle in these areas.

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Figure 8: Net Profit by Firm Size

“Growth for us will come from diversification into more vibrant markets, M&A and implementing technology to improve internal operations.”


Average Monthly Invoice Cycle (days from end of project to when invoice is out the door)

Firms’ average monthly invoice cycle crept up to 12.2 days compared to 10.1 days in 2010. On the whole, small firms reported a shorter invoice cycle than their larger counterparts. However, we note a three-year trend of the smallest firms logging longer invoice cycles.

There may be a couple of explanations for longer invoice cycles. Certainly, this trend may be linked to the decrease in resources dedicated to overhead operations such as generating invoices. There is also likely a correlation between increased invoice cycles and the noted decrease in Days Sales Outstanding (DSO). Perhaps firms are being more diligent about ensuring invoices are generated correctly the first time. If that’s the case, efforts on the front-end would certainly extend the invoice creation cycle, while at the same time reducing the time it takes to get paid.

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Figure 9: Average Invoice Cycle by Firm Revenue

Average Days Sales Outstanding (Days from when invoice is shipped to when payment is received)

Average Days Sales Outstanding (DSO) plunged 10 days to 42.8 days, compared to last year’s 52.6 days. Large firms tended to have a longer DSO than their smaller counterparts, with 40% of them reporting DSO of more than 60 days. This is not surprising considering invoices for larger firms are typically more complex.

When we step back, we are intrigued by the dramatic and unprecedented drop in DSO. Could it be that the trend towards more Fixed Price contracts has resulted in fewer line items for government organizations to review before they release payment? Or are firms doing a better job of ensuring accuracy before invoices are sent out, reducing the number kicked back for errors? Regardless of the reason, we won’t see a 10-day drop again next year and are likely to see this number creep upward as the government continues scrutinizing budget expenditures.

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Figure 10: Days Sales Outstanding by Firm Revenue

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Top Finance Challenges

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Figure 11: Top Finance Challenges

What do you think will be the top three challenges facing the financial leaders of your organization over the next 2-3 years?

Firms told us that top-line growth and cash flow were top of mind—exactly as we would guess in just about any industry these days. In open comments, respondents revealed subplots, including the challenge of maintaining working capital to align with their growth and acquisition strategy. A number of firms noted the need for improved automation of financial reporting and planning. This may become a higher priority as the business of running a government contractor becomes more complex.

One interesting finding was that Executive Alignment edged out Compliance for the third spot. We also expected to see the management of M&A activity place higher. However, clearly firms have their attention focused inward on optimizing operations. Over the next few years, shifts in these responses will be highly dependent on government actions. Further budgetary contractions and increased scrutiny on contractors is sure to have an effect on where management attention and resources are paid.

Clarity Outlook

One positive outcome of the tough GovCon climate of the last couple years is that firms have captured efficiencies in their business. This financial belt-tightening that began when the economy started its nose-dive will serve firms well as we steer toward recovery. Early signs are encouraging—reductions in DSO coupled with spikes in profit margins. But firms must take care to remain vigilant. Pressures on top line growth and cash flow are sure to turn the heat up on an already competitive market.


“The DCAA seems to be focusing more on audits that can generate significant penalty fees. So we are being forced to invest significant money and resources to ensure our compliance.”

Introduction

Compliance and Risk Management are pivotal factors in a GovCon firm’s ability to win contracts and generate profits. For starters, headlines have illustrated that issues in both of these areas can quickly escalate into crises that can delay critical programs and cost a contractor millions—or even their entire business. Perhaps just as importantly, the sophisticated management of both Compliance and Risk considerations can lead to serious competitive advantages that firms are so desperately seeking in today’s marketplace. Already, the U.S. Air Force has institutionalized a rigorous Risk Management effort on a single software platform. Other organizations won’t be far behind.

In some respects, Compliance and Risk Management are on the opposite ends of the adoption curve. Compliance has become a recognized requirement. Firms often acquire the appreciation for the need to proactively manage compliance after their first audit or review. Firms are still exploring the challenge and the opportunity offered through Risk Management. Just 8% of firms rated themselves Very Mature in Risk Management – and that’s likely an optimistic picture. The vast majority of contractors (a) don’t do it at all, (b) do it only when a customer requires it, or (c) think they manage risk but in reality have a weak, ineffective method of doing so. Therein lies an opportunity. Firms that embrace Risk Management with enterprise-wide initiatives and tools will see opportunities open to them to leapfrog ahead of the competition.


1. Over 60% of firms claimed that government oversight of their company increased last year, up from 42% the previous year.

2. Top audit issues remained steady for the third year, with Labor and Timekeeping and Indirect Rates maintaining the top spots.

3. Respondents were evenly split on their Risk Management maturity levels with half saying they were Mature and half admitting Immaturity.

4. Four in 10 firms said they employ organization-wide Risk Management initiatives.

5. Those firms that do embrace Risk Management reported that responsibility lies at the top with COOs (28%) and CEOs (27%) tied for leading the efforts.

6. Most Risk Management initiatives are triggered in reaction to a contract or event; they are not yet being implemented proactively in a widespread way.

7. Large firms unanimously agreed that Risk Management would continue to grow in importance over the next few years.

Section 4: Compliance & Risk Management

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How would you characterize the change in the overall level of Government oversight of your organization over the last year?

As we expected, 2011 saw a significant increase in the level of government oversight. Last year, 42% of survey takers told us they’d seen an increase in oversight, this year the number spiked to more than 60%. In talking with GovCon firms, it seems much of the change can be attributed to a perception that audits are happening with increasing frequency. With headlines blaring the need for better government oversight, it is tough to tell how much of this is perception versus reality. Regardless, companies are definitely feeling heightened pressure.

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Figure 12: Level of Government Oversight

What are your top three audit issues over the last year?

Year over year, the top Compliance issues have remained the same, shuffling only slightly each year. Labor & Timekeeping, Indirect Rates and Internal Control Systems have consistently commanded the most responses. The next four – Unallowable Costs, Billing, CAS Compliance and Executive Compensation – comprised the second tier of responses.

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Figure 13: Top Audit Issues


How would you rate the maturity of your organization’s Risk, Issue and Opportunity (RIO) Management discipline?

Roughly half the firms we surveyed consider their RIO practices Somewhat or Very Mature. We find this interesting because our conversations with firm leaders across the country suggest there is a wide range of definitions for RIO. A few can show off comprehensive, in-depth analysis, centralized information and mitigation exercises. For many, their Risk Management program is an Excel spreadsheet with a list of action items that sits on an analyst’s desktop.

As Risk Management becomes an increasingly critical activity throughout all levels of government, we should see this definition tighten up. Contractors who fail to mature in this area will take very real hits to their business: (a) they will lose the competitive game due to perceptions of their inability to control risk, and (b) they will suffer from failed projects due to lack of adequate risk insights.

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Figure 14: RIO Management Maturity by Firm Revenue

How would you characterize the scope of the Risk, Issue and Opportunity (RIO) Management initiatives within your organization?

It was encouraging to find 4 in 10 respondents say they have Organization-wide RIO Initiatives. However, the other side of the spectrum was well represented too. Nearly 50% of large firms – and even more small and mid-sized companies – confessed to having No Initiatives or Isolated RIO Initiatives.

A story of Have’s and Have Not’s is emerging here. This should serve as a wake-up call to companies without a rich, organization-wide RIO Management program. This is the direction the GovCon business is heading. We are likely to see more of these client mandates, as well as a move toward more Divisional and Organizational level initiatives amongst firms. Pe

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Isolated Initiatives

Divisional Initiatives

Organization-wide Initiatives

Figure 15: Scope of the RIO Management Initiatives by Firm Revenue

22

“Changes to procurement regulations are coming fast and furious. Our budget to address these changes cannot keep pace. This will be our top challenge in the near future.”

Please identify the areas of your organization that have benefited from managing RIO. Also identify the areas that you feel would benefit from managing RIO.

Firms overwhelmingly agreed that all areas of performance can improve with RIO. For some areas, such as Financial Performance, Strategic Planning, Program Management and Business Development, that assessment was nearly unanimous.

We asked the question in a way that would gauge the gap between what firms are doing, and what they know they should be doing. First, there were significant gaps across the board. This points to a latent appreciation for RIO that may portend a growing movement

torwards more sophisticated planning and analysis. The largest gap existed in the area of Contingency Planning, which raises a big question for us. If firms aren’t doing fundamental Contingency Planning, do they truly understand Risk Management? By the same token, it’s interesting to note that while 50% of firms claim they are Somewhat or Very Mature with respect to RIO Management, so few have applied it to Contingency Planning. This suggests to us that the industry may not fully understand the definition and scope of Risk, Issue and Opportunity Management.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Have BenefittedWould Benefit

Financial Performance

Facilities

Strategic Planning

Program Management

Business Development

Percent of Respondents

Org

aniz

atio

nal F

unct

ions

Contingency Planning

Operations / Supply Chain

Health and Safety

Figure 16: Organizational Functions Benefitting from RIO


What would most likely trigger a RIO initiative for your company?

Contract Requirement is an obvious leader for completing an RIO initiative. We are likely to see this continue as clients and prime contractors continue to increasingly require it. As more firms are forced to leverage Risk Management in isolated initiatives driven by contract demands, we will watch closely the impact on the changes in the scope of RIO within firms.

It is noteworthy that the top three RIO triggers are reactive. Something needs to happen (i.e., an RFP or a major loss) to trigger a company’s leap onto the RIO bandwagon. It is not until we reach trigger #4, Financial Incentive Through Improved Performance, that a proactive approach to Risk Management emerges. As we move forward, we predict companies will evolve out of reactionary mode and become more proactive about RIO.

0 10 20 30 40 50 60 70 80 90 100

Contract Requirement

Insurance or Credit Rating Reduction

Major Loss or Issue

Damage to Reputation

Financial Incentive Through Improved Performance


Like

ly R

IO T

rigge

rs

SOX or Other Compliance

Pressure from the Board of Directors / Investment Community

Political Turmoil

Ranking1

2

3

Figure 17: Likely RIO Triggers

24

Clarity Outlook

Risk factors determine whether a project will succeed or fail before it even starts. As the industry becomes savvier about how to handle these risks, we will see Risk Management efforts grow and spread throughout government with increasing speed. The U.S. Air Force has already thrown down the gauntlet, establishing C-level oversight for risk and mandating the use of its centralized Risk Management platform. The move is a foreshadowing of what is to come.

In the nascent RIO arena, there seems to still be a broad definition for what Risk Management means. Handling Risk Management with Excel or a homegrown system does not equate to RIO maturity. Firms that are realizing very real benefits of staying ahead of risks and identifying early opportunities for increased profit and competitive advantage talk about the value of deploying comprehensive Risk Management tools and practices.

“As benefits of RIO become more apparent and applications of the process become more practical / visible, we will continue to integrate them into our business process.”


Data Profile Revenue Range

Small 0 - $19M

Mid-Sized $20M - $99M

Large $100M+

Business Development

Growth Rate (ave.) 12% 1% 6%

Proposals Submitted (ave. per year)

8 12 47

Win Rate (ave.) 67% 62% 56%

Project Management

Project Status Visibility High 22%Moderate 19%Low 2%

High 16%Moderate 16%Low 4%


Project Status Confidence High 31%Moderate 10%Low 2%



Project Management Maturity Very Mature 24%Somewhat Mature 45%Somewhat Immature 26%Very Immature 5%

Very Mature 12%Somewhat Mature 52%Somewhat Immature 31%Very Immature 6%


Financial Metrics and Operations

Days Sales Outstanding (ave. days)

39 44 49

Invoice Cycle (ave. days) 9 14 15

Profit Margin (ave. %) 10% 6% 6%

Top Finance Challenges 1. Organic Top Line Growth 2. Cash Flow 3. Alignment with Executive Management

Compliance & Risk Management

Top Audit Issues 1. Labor & Time Keeping 2. Indirect Rates 3. Internal Control Systems

Risk, Issue and Opportunity (RIO) Management Maturity




Risk, Issue and Opportunity (RIO) Management Scope

Organization-wide initiatives 48%Divisional initiatives 6%Isolated initiatives 32%No initiatives 14%




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