Researchers from the Walton College of Business are asking questions about government contracting, putting pressure on the long-term effects of partnering with the largest consumer in the world.
In “When the chickens come home to roost: The short- versus long-term performance implications of government contracting and supplier network structure,” Ellie Falcone, Steven Carnovale, UA Department of Supply Chain Management Chair Brian Fugate, and Garrison Endowed Chair in Supply Chain Management Brent Williams examine the truth of the adage “it is not what you know, but who you know.” Are connections really the key to success, and how do supply chain networks affect the financial potential of a government contract?
If you assume the old saying is correct, and success lies in a company’s network, then businesses that are secure in a contract, or partnership, with the U.S. government are in the catbird seat. There’s a lot of money in government procurement. The U.S. quarters off 20% of its annual federal budget for contracting in the private sector, making it the most lucrative purchaser in the nation.
Additionally, a government contract tends to cause a halo effect around the supplying company: other firms regard the supplier positively. Consequently, receiving future business becomes more likely.
Microsoft’s landmark Joint Enterprise Defense Infrastructure (JEDI) deal with the Department of Defense exemplifies this bandwagon side effect. The Trump administration signed on the tech giant to overhaul the department’s antiquated IT infrastructure. Though it eventually fell through, the JEDI contract caused Microsoft’s stock price to surge, and Azure (the company’s cloud computing service) sales soared by 79%.
At first, government contracting seems entirely beneficial. Government suppliers encounter boosted sales, increased credibility, and more requests for proposals in the future. But these benefits are short-lived due to the opposing goals of the private and the public sector.
A Conflict of Interest
Congruence theory states that a person’s or organization’s actions yield more positive results when they align with their social or economic roles. A partnership is mutually advantageous when the two groups share common goals, exhibiting high compatibility. The researchers drew on congruence theory when examining government contracting’s direct influence on the supplier’s financial performance.
They discovered that governments and private businesses have remarkably low compatibility. Policymakers and government buyers hold motives that may not perfectly align with the goals of the private sector. While companies and governing bodies do share common ground—they aim to maximize efficiency and reduce costs for themselves — governments also focus on initiatives beyond economic success.
The U.S. legislative branch influences procurement by enacting policies and regulations allowing the government to conduct social and environmental management through its contracts, possibly creating a conflict of interests while maintaining private contracts. While government buyers seek out valuable, low-risk partnerships within the private sector, they also use private contracts to advance toward long-term economic goals such as stimulating regional economies, encouraging small businesses, or social objectives like providing economic opportunities to minority or women-owned businesses. A social objective can supersede economic motivations, causing the government agency’s commitment to suffer. Due to its role as an agent of social control, the governments have differing contracting dynamics and commitments to the buyer-supplier relationship than firms. This opposition suggests high levels of incompatibility, and the researchers found the relationship between the government and supplier turns from beneficial to harmful for the supplier as the partnership ages.
Incongruence adds burdens and uncertainties to the supplier, leading to a long-term financial performance decline. The relationship between the government and the supplier can be like any relationship. According to the researchers, the two parties begin in a “honeymoon” period that protects them from negative outcomes. However, this protection’s longevity depends on the commitment and communication between the two groups. The study showed that this misalignment of interests between government buyers and private suppliers eventually hindered the supplier’s financial performance. The incompatibility challenge is inescapable, as all companies are subject to the adverse effects of a government contract. Yet, some firms can weather the storm and actually turn long-term profits while operating under a contract with the government.
The Hands You Shake
To fully understand an organization’s behavior and potential, one must first examine the supply chain network in which it’s embedded. One can learn a lot from a firm’s ecology and the characteristics of its direct suppliers and buyers. Network structure determines resource accessibility, organizational behavior, and available strategies. Furthermore, researchers find that positive supply chain characteristics facilitate firms’ risk management capabilities, operational efficiency and agility, research and development, and innovation output. Supply chain connections also provide firms with data, allowing for informed managerial decision-making.
A supply chain network is so instrumental to success that businesses with a more robust network will outperform others operating under otherwise identical conditions within the same industry. The researchers view supply chain networks as an “invisible source of power” that well-positioned firms may draw upon in times of need.
Considering the prominence of a firm’s network also helps evaluate its potential to operate well in a poor situation. Companies can raise their prestige by connecting to other larger companies through their supply chain. This relative rise occurs because being connected to a popular individual, in turn, makes you more popular. For example, if your business were to gain a contract with a multinational conglomerate like Boeing, you would have more resources available when dealing with crises than you would if you were instead connected to a local small business.
Firms must have a prominent network to capitalize on a government contract. Suppliers with high network prominence can pool and utilize resources from the supply chain network, enhancing profits and the halo effect while alleviating the uncertainties government contracting generates. Due to the accessibility of valuable network resources, firms can be agile when facing changes and challenges.
Additionally, high prominence implies thorough embeddedness and more power within a supply chain network, which leads to more bargaining power. Firm managers may use this power to mitigate the adverse effects of goal incongruence and governing approaches by government buyers and strengthen the business commitments between the two parties.
Maintaining Positive Performance
While managers should be wary when signing into a buyer-supplier partnership with the U.S. government, they need not be fearful. Previous researchers focused on the short-term benefits of government contracts, but Falcone, Carnovale, Fugate, and Williams have provided insights into the adverse long-term consequences. Using their findings, companies can successfully navigate such a complex and potentially disastrous relationship. Managers who find their company firmly embedded in a network of prominent firms can feel confident and reap considerable profits when supplying to government buyers.
Assessing your position and the government agency’s potential motivations may allow you to extend the once brief period of increased profits and positive effects into protracted benefits for your company.
Matt WallerBrian Fugate is chair of the Department of Supply Chain Management and the Oren Harris Chair in Transportation at the Sam M. Walton College of Business at the University of Arkansas. He also is a MIT Fulbright Senior Research Scholar and co-editor-in-chief of the Journal of Supply Chain Management. Prior to his Ph.D., Dr. Fugate worked in worldwide transportation and logistics, supplier development and industrial engineering in the airline, consumer packaged goods and automotive industries.
Jack TravisJack Travis is pursuing an undergraduate degree in journalism at the University of Arkansas. Travis is the copy editor of the Arkansas Traveler and the treasurer of the UA chapter of the Society of Professional Journalists. He is interested in marketing and brand journalism.
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