At the same time, a push to cut costs has made government buyers more willing to look beyond contracting powerhouses in search of solid companies that might have new ideas and lower prices.
The changes within the market have opened a potential door for those who are neither too small nor too big.
Mid-tier firms boast they offer a wider range of skills than a small business, and because they typically have fewer layers of management than a big contractor, they can keep overhead costs down, and be more responsive to government requests.
The opportunity has attracted the notice of private-equity firms, which have invested in buying or building local mid-size contractors, including Sotera Defense Solutions and Six3 Systems, both in McLean.
“It’s a very good time to be” a mid-tier firm, said John Hillen, who heads Sotera, which was purchased by a private-equity firm in 2011 and posted $334 million in revenue last year. “The principal market force is that the customer wants a company like that; they want a choice other than huge super aerospace primes or small businesses.”
Many private equity firms swooped in when mid-tier firms faced more challenges. From 2000 to 2006, mid-tier companies’ market share dropped from nearly 38 percent of the total value of federal service prime contracts to just under 32 percent, according to data analyzed by the Center for Strategic and International Studies.
But more recently, medium-size contractors have staged something of a comeback, growing their share to just over 35 percent in 2010. Still, the road is proving rocky; in 2011, the number fell back to 33.6 percent.
Playing to their strengths
Industry analysts say mid-tier contractors are primed to do well in a difficult budget environment.
“There is a thirst from the government customer for a new idea, a new solution, a new approach,” said John Song, a senior vice president in Houlihan Lokey’s aerospace, defense and government group. “In a low-cost environment, the mid-tiers might be able to get there quicker, they might be willing to eat into the margins.”
Defining a mid-tier can be tricky. Most industry analysts and observers agree that to be mid-tier, a company can no longer qualify for small-business status, which typically requires somewhere in the range of $25 million to $35 million in revenue, depending on the industry. Generally companies are considered large once they pass about $1 billion to $2 billion in sales.
Jean Stack, managing director of the aerospace, defense and government group at investment banking firm Houlihan Lokey, said a company with $100 million in revenue that has a single contract isn’t a mid-tier. True mid-tiers must have a well-defined portfolio of customers and a distinctive skillset.