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The Impact of 2014 Budget Reductions on Existing Government Contracts

Government contractors should continue to consider several possible impacts of budget reductions on the government procurement process:
  • Existing Contracts: During 2013, we have already seen agencies reduce the scope and quantity of products or services purchased on existing contracts. Agencies may continue to “de-scope” the quantity, capability, or breadth of contract performance through change orders, as well as partial, or even complete, contract terminations for convenience. Depending on the budget pressures from the Hill, contractors should expect agencies to propose restructuring existing contracts to defer costs to the future. Such restructuring may result in more term contracts, extensions of contract schedules to match funding, and requests for waiver of existing contractor claims. Contractors may see their option periods waived, forcing them to negotiate new contracts at lower prices, and face increasingly pricesensitive competition.
  • New Contracts: During 2013, government contractors saw a decrease in the number of new contracts awarded, and we expect to see this continue. Types of contracts may also change, with agencies moving away from contract vehicles that place cost and performance risk on the government. For example, agencies are less likely to use costreimbursement and labor-hour contracts (previously favorites in the government services arena), instead favoring fixed-price contracts for a greater degree of cost certainty and lower risk. Indefinite Delivery/ Indefinite Quantity contracts will also become more attractive for the government because they allow agencies to negotiate at the task order level. In addition, government contractors are already seeing a trend away from “best value” procurements toward lowest price, technically acceptable sources.
  • Bid Protests: Stiffer competition for contracts will likely bring an increase in bid protest litigation, particularly from incumbents seeking to extend their performance on contracts, and offerors who need the awards to remain viable players in the government contracting space.
  • Procurement Integrity Violations: Intensified competition for fewer contracting opportunities can create a high-risk environment within companies, making them susceptible to employee misconduct, particularly with regard to following the rules of the competitive contracting process. In an effort to win contracts and curb layoffs and staff reductions, employees (particularly those in the contract “capture” process) may feel motivated to ignore or marginalize their company ethics and compliance programs and use whatever information is at their disposal—even prohibited government or competitor acquisition data—to give them an edge in the bidding process. Such ill-advised actions will lead to government investigations, prosecutions, suspensions, and debarments, and increase the risk for contracting officials who might be entirely unaware of such behaviors within their companies.
  • Small Business Contracting: The number of firms allowed to compete for federal small-business contracts has been increasing. Since 2010, the Small Business Administration (SBA) has raised the size limits for firms in hundreds of industries competing as small business contractors. For example, in July 2013, the agency raised the annual revenue limit for firms in the transaction processing industry from $7 million to $35.5 million to be eligible for small business contracts. This move made it possible for more than 7,400 additional firms to begin competing for contracts as small firms.9 This increased competition will, as a result, drive down prices.
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Topics: ECA Risk Forecast Report 2014

Will 2014 Continue to Be a Budget Rollercoaster for Government Contractors?

Although the world as we know it did not end with the sequestration in 2012, for government contractors, the 2013 government shutdown was like a tornado ravaging a town after an earthquake. Many contractors had to lay off staff assigned to affected government agencies and programs, further straining their already anemic bottom lines. One large government contractor reported that the shutdown cost the government about $30 million, while others reported profit declines by more than 25%. Contractors that provide services to the government reported declining sales, and many warned that 2014 could be even worse. The few contractors who are improving their profits are doing so not by boosting their sales, but by managing their costs. That means declining employment, freezing or reductions to salaries and benefits, and an overall shrinking in contractor capability. As one contractor recently told the Wall Street Journal, “[d]oing business with the government is not for sissies.”

Unfortunately, the worst may be yet to come. Several federal agencies found extra funds that helped them survive the automatic budget cuts in FY 2013, allowing them to minimize draconian terminations of contracts. For example, the Pentagon used more than $5 billion in unspent money from previous years to ease its $39 billion budget cut. The Department of Justice (DOJ) found more than $500 million in similar money. Agencies that have thus far withstood the harshest effects of the 2013 cuts are preparing for a second round in 2014 that will likely be worse than the first. Senate Appropriations Committee Chair Barbara Mikulski (D-MD) said that agency budget chiefs “squeezed everything to get through the first year thinking we would come to our senses.” Unfortunately, that didn’t happen. Most of those accounting maneuvers were one-time steps. The automatic spending cuts in 2014 promise to be far more painful to both federal agencies and the contractors that support them. It is more important than ever for sub-contractors to establish themselves as critical to a project, and for potential buyers to assess just how necessary they are given these external budget pressures.

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Topics: ECA Risk Forecast Report 2014

Government Contracting: Sequestration Isn't Over Yet

In previous LRN Risk Forecast Reports, I noted that government contracting requires a sharp calculation of risks versus rewards. Typically, that calculation has come out in favor of companies expending the necessary time and effort to maneuver a minefield of often complex and frustrating regulations in order to reap the financial benefits and stability associated with government contracting. For 2014, some companies might be recalculating their analysis and reconsidering whether the benefits still outweigh the risks of government contracting.
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Topics: ECA Risk Forecast Report 2014

Top 5 Strategies for Developing an Effective Blended Learning Program

1. Develop a broad set of operating principles.

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Topics: ECA Risk Forecast Report 2014

Trends in Ethics and Compliance Training: Blended Learning

All too often, ethics education is a dull and monotonous activity, and many employees find little connection between the annual compliance education program and the core business issues that are relevant at a local level. However, when an organization’s leadership commits to shaping an ethical culture, there is an opportunity to foster powerful peer-learning experiences. Designing a blended learning strategy enables an organization to employ a range of delivery formats (e.g., online, mobile, live), instructional strategies (e.g., scenario- and game-based learning), and communication tools to build knowledge, develop skills, and change behaviors. By delivering E&C content more frequently through a variety of channels, blended learning addresses different employee learning styles and combats training fatigue. Blended learning offers a more relevant, engaging, and social approach to E&C learning, and it prepares leaders at all levels to set the right tone.

Compounding the convergence of multiple generations and preferences in learning and communication styles, today’s organizations are operating in a global landscape with a diversity of employee and partner situations that require a deeper understanding of cultural preferences. Not only are there the more traditional calls for a blend of visual, auditory, or kinesthetic stimulations, but calls for the framing and context to be more culturally adaptive are mission-critical. While framing the topic of anti-bribery and corruption, the learning simulation for a shop floor employee in Taiwan must be framed in a different situational context than when presenting the same issue to a corporate executive team in Washington, D.C. or a vendor agent in Nigeria. When presenting the issue of speaking up and non-retaliation, the learning interaction presented to a team of claims adjusters in Cleveland, Ohio should be different than the problem-solving simulation developed for a manufacturing team in Santiago, Chile. Taking these diverse learning styles and cultural sensitivities into consideration when designing your education and communications strategy and program can enable greater knowledge “stickiness” and promote more adoption of the concepts of the program. The learning simulations should engage and challenge your workforce to consider the ethical quandaries of their roles and responsibilities, but framing the content with regional or cultural context adds an important dimension of impact and relevance. This strategy can shift the learning from passive participation to active learning and melt the typical barriers of global perception or “lost in translation” typical of many ethics and compliance programs.

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Topics: ECA Risk Forecast Report 2014

Trends in Ethics and Compliance Training

Generation Effect

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Topics: ECA Risk Forecast Report 2014

Ethics and Compliance Program Education: Top Challenges

One of the critical success factors for any ethics and compliance program is education. LRN’s 2013 Ethics and Compliance Leadership Survey Report found that 75% of ethics and compliance officers considered the creation of an education program a top priority, with 45% reporting that “keeping it relevant” was an important goal for their program.

Education and communication are critical components in transforming corporate cultures worldwide. Advancing ethical corporate cultures starts with designing effective education programs that promote awareness, impart knowledge, and breed an organizational sense of ownership and responsibility around business conduct. With today’s business paradigm requiring not only legal compliance but also ethical behavior, education leaders are finding the need to shift their learning strategies to adapt to the new business drivers and evolving audience requirements. Designing effective compliance and ethics education programs that reach diverse audiences across multiple time zones, in a progressive and innovative manner, is emerging as the new necessity. This is reinforced by research from LRN’s 2013 Ethics and Compliance Leadership Survey Report, in which the data shows convincingly that the most effective programs are delivered in a blended suite of modalities, addressing the various learning styles and attention spans of the evolving workforce.

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Topics: ECA Risk Forecast Report 2014

The Position of CECO and the Ethics & Compliance Program

While board oversight and engagement are critical, the position of the CECO within the organization is also extremely important. It ensures that a program has the appropriate level of authority and autonomy to achieve the twin goals of misconduct prevention and culture promotion. LRN’s 2013 Ethics and Compliance Leadership Survey Report indicates that the percentage of CECOs “who report directly to the General Counsel (GC) is declining. In our 2012/2013 results, 46% of E&C Officers respond that they report directly to GC, down from 57% in 2011/2012, and 56% in 2010/2011.”  The survey further found that 18% of CECOs now report directly to the Chief Executive Officer, and another 16% report to the Board of Directors.

Whether E&C is self-standing, or whether it exists within the Law Department, Internal Audit, or another function, it has become crystal clear that E&C has its own raison d’être, which is separate and apart from other functions. Only if E&C’s purpose and goals are recognized and realized within the context of the corporate structure will the program prevail. The appropriate positioning of the E&C function is a decision that should not be about convenience, but about effectiveness. In particular, its positioning must be such that the program has the independence and authority necessary to achieve the goals of misconduct prevention and culture promotion.

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Topics: ECA Risk Forecast Report 2014

Ethics & Compliance Program Management: Topics Addressed to the Board

Whether boards are able to exercise sufficient oversight depends on the boards’ receipt of the right types of information about the E&C program. Boards should be receiving helpline and investigations data (which is a common practice), but they also should receive information about the program more generally, and about E&C’s efforts to impact culture and ensure compliance. According to LRN’s 2013 Ethics and Compliance Leadership Survey Report, the types of information conveyed to boards tend to be principally lagging indicators, such as helpline data (80%) and code violations (70%). However, some (though fewer) companies also provide the board with more proactive information, such as culture survey results (42%) and risk assessment and mitigation plans (61%).5 General program information is necessary for the board to oversee the program in a comprehensive manner. Organizations should therefore consider whether it would be useful to expand the range of information they currently provide to their boards regarding the E&C program.

In addition to general program information, E&C personnel should consider providing the board with risk area-specific information for appropriate risk areas. This is the type of information discussed extensively by Delaware’s Supreme Court in the Stone v. Ritter case.6 The risk areas the board should hear about are: (1) those that provide the greatest overall risk to the company (which will obviously vary by industry and company), and (2) those in which the interests of senior managers and the company are not well aligned, as in those areas of “moral hazard” where board oversight can be extremely valuable.

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Topics: ECA Risk Forecast Report 2014

Ethics and Compliance Program Management: Characteristics & Oversight

Critical Program Characterisitics

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Topics: ECA Risk Forecast Report 2014

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Tackling compliance and ethics issues from around the world.

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