Trial By Fire

Government can be a lucrative customer once one learns to master the procurement process. Or the relationship can kill a company. Maxima founder and CEO Joshua Smith is lucky. He learned a valuable lesson from the company’s near-death experience.

October 1 1993 by Chief Executive


In 1978, with just $ 15,000 of his savings, Joshua I. Smith started Maxima in Bethesda, MD, offering government agencies systems integration services and records management. Its first contract was a $ 10,000 award from the then-newly created Department of Energy.

A former biology teacher and executive director of the American Society for Information Science in Washington, Smith recognized that local governments as well as federal agencies had special needs in coping with data management and information technology. (The company’s name is a compression of “maximizing information for effective decision making.”) In addition to providing services to federal agencies, it had contracts with Prince George‘s County, MD; Richmond VA; Montgomery County, OH; and commercial customers such as Federal Express in Memphis TN; Cleveland, OH-based TRW; and Washington, DC‘s Marriott.

Aided by the Small Business Administration’s 8(a) program allowing minority-owned companies special access to contracts, Maxima became a front-line competitor. By 1985, the company had grown rapidly, reaching $59 million in annual revenues and employing over 1,200 people. But a year later, the SBA decided Maxima was no longer a struggling small business and forcibly “graduated” it from the program. Some $100 million worth of contracts were disallowed.

Smith, who is chairman of the Commission on Minority Business Development, might have ended up as another minority entrepreneur deep-sixed by SBA bureaucracy, but he quickly went on the attack. He reduced overhead, cutting staff by almost 400, including the president and COO. Maxima left its Bethesda headquarters building in favor of a single floor in a Lanham, MD, office building. Perhaps most important, he refocused strategy, concentrating more on county government, which according to a Syracuse University study spends $31 billion on information technology. At this time, board member and Finance Committee Chairman John Allen, a New York investment banker, introduced Smith, 52, to venture capitalist Harry Edelson. Edelson, a former investment banker with New York’s Merrill Lynch and First Boston, directs Edelson Technology Partners, a technology venture consortia backed by New York-based AT&T and Paramount Communications; St. Paul, MN’s 3M; Dearborn, MI-based Ford; Cincinnati Bell; and Asea Brown Boveri, located in Stamford, CT

I was impressed by the quality of their work” says Edelson, “but the charisma factor wasn’t lost on me either. The people writing the checks for local government services in 18 of the top 22 cities in the U.S. are minorities or women. And nobody seems to be able to open doors as well as Josh.”

An infusion of ETP capital (it took a 20 percent stake) and a loan from NatWest gave Smith breathing room. Downsized to $42 million in revenue with 800 people, Maxima recruited Hungarian-born Andrew Bart as its new president. This year, it signed a 10-year deal that could be the most lucrative in its history: Maxima and technology giant EDS tied in a bid to provide systems integration services to members of the National Association of Counties (NACo). In a deal worth hundreds of millions annually, the two companies formed an alliance in which Maxima becomes EDS’ principal subcontractor servicing NACo. Long an admirer of the Dallas-based information company, Smith patterns Maxima after EDS.

Merger watchers, meanwhile, report that early discussions between Smith and a large company led by a prominent African American are underway. If so, it would put Smith closer to his dream of running the largest minority-owned information systems company in the US. CE editor J.P. Donlon spoke to Smith about Maxima and the CEO’s rather conservative, controversial political philosophy.

CAPITAL POWER

Before we talk business, let’s touch on your sociopolitical philosophy, which is at odds with that of most black leaders. You’ve been critical of the Civil Rights Movement and some entitlement programs. Why?

The downfall of the black community is that it hasn’t gotten out of the Civil Rights Movement. Civil rights without economic strength is a borrowed event. It can be taken away at any time. Economic rights assure civil rights. Unfortunately, people are afraid to voice this opinion.

I ask black audiences how many of them are capitalists. Those 15 percent who started businesses are ashamed to raise their hands.

Then I ask how many believe in education, creating assets, saving, controlling their own destinies, spending money? They all raise their hands. “Ladies and gentlemen,” I say, “I just defined capitalism. You are capitalists.”

What is wrong with that label? Admitting you are a capitalist is like admitting you have leprosy. It’s peer pressure. We follow the wrong leaders who talk about the wrong things. We’re controlled by socialist preachers and ministers who are afraid of economics and business. When we have a problem, we go to Jesse Jackson. People are afraid to speak out, because they will be cast as pariahs. We have too few independent, middle-class black people. But once you’re independently wealthy, you can afford to be outspoken.

When I give speeches and say these things, I get standing ovations. People say, “Thank goodness, somebody’s telling the truth.” I ask them, “What about you? I’m telling you what you’re thinking. Why don’t you say it?”

The spirit is gone in the black community. We have a welfare system that has driven the soul out of people, because we now expect the government to take care of us. But government is a product of the powers that put it there. If you don’t have economic power, you can’t influence government.

GOING LOCAL

On the business side, Maxima started out supplying information services and systems integration to federal government agencies. Now you’re moving into the local government sector. Will your strategy change?

No, we’ve simply taken the skill base we acquired in the federal sector and applied it to local government. The core of our strategy always has been doing our homework before bidding on a job. We just extended that principle to learning everything about what makes the community tick.

In the early years, I got involved in the schools and joined the Chamber of Commerce. Most federal contractors do not do this. That’s a mistake. Before we bid on a job, we get to know the players-the commissioners, the people in the city, and the people in the county-to understand what the needs are. At Wright Patterson Air Force Base in Dayton, OH, that legwork resulted in Maxima winning the bid to provide support services and systems engineering. We replaced a contractor who had been there 15 years.

The key to this success was sensitivity to community, involvement in community, and belief on the part of the community that you are good for it. If you’re doing a good job for local government, it’s pretty hard to knock you out of the box. On the flip side, you could be doing a great job for the federal government, and somebody comes in with a low bid, and he’s in.

We don’t plan to get out of the federal government market, but we want to start leveraging what we’ve learned into the local governments and communities. A study done by Syracuse University estimated the amount of money spent by counties annually on information technology exceeds $31 billion a year. That’s a tremendous market-one that doesn’t have many players yet-so to corner market share, a company just has to establish and maintain a reputation for quality.

Maxima has a definite edge there. We have an impeccable service record: no terminated or defaulted contracts. That’s important. You can recover from a financial loss, but you can never recover from a loss of reputation.

What value-added services does Maxima provide to local government that other contractors can’t or won’t?

We can adapt our ability to handle technology on a large scale to smaller operations on a cost-containment basis. Usually, we can do a contract 15 percent to 20 percent cheaper than the government can. We are flexible and responsive, and we don’t have to go through Civil Service to hire people as government agencies do. But, even more important, we’ve found, is making sure somebody is always here to answer the phone and help the customer if he has a problem.

I subscribe to a hands-on philosophy-one that especially applies to the CEO. You shouldn’t send your best salesperson or your best marketing person to make a deal or propose a bid. You must send the top decision maker: People feel more comfortable, and you’re one-up on the other bidders whose CEOs aren’t there.

HOW LOW CAN YOU GO?

How do your prices compare with your competition?

We’ve very competitive-not cheap, not expensive, but competitive. That means we can adjust our bid based on things that happen at the table. In the commercial area, if you don’t come in around the low bid, you won’t win the contract, but as we get into high technology, we can’t low-price the solutions.

Doesn’t government have to take the lowest bid?

No. Usually it does, but that’s changing, because people are making decisions based on best value. The low bid doesn’t necessarily ensure that the company can solve the problem. It might just complicate the situation, requiring more money to correct it. Value can be determined by every community and every bidder.

Are you willing to accept a lower operating margin than larger companies in order to secure federal government business?

We started with a strategy: First get in the door, and then make money. Plan to have a low margin the first several years. But once you gain the government’s confidence, you become the outsource contractor of choice. As the government upgrades and enhances systems, you have a tremendous leg up, because the upgrades often entail unanticipated requirements. That’s where we recapture our margins.

What percent of your business is dependent on government contracts?

Approximately 85 percent to 90 percent is government contracts. Of that percentage, about 30 percent is federal; the balance of the business we get is from state and local governments.

HARD TIMES

In the late 1980s, Maxima employed over 1,000 people. Today, you’re down to 800. Why?

I guess you could say we grew too rapidly in the early years of the business. We were part of the Small Business Administration’s 8(a) program, which refers business to its members. Maxima took off like gangbusters. We grew to almost 1,500 people.

However, once a company reaches a certain point, it is excluded from 8(a). Unfortunately for us, this step came without any warning: One day we woke up, and the SBA just yanked the rug. It took five years for us to recover, because we were undercapitalized and overstaffed.

Our concept of finding new ways to target customers and provide full service was right. The problem was that we went after the retail sector, in which everyone was low-bidding everything. Even so, our concept would have worked if we had sufficient capital. We had acquired some companies, and they started bleeding us to death. Luckily, in 1988, we arranged some life-giving transfusions: National Westminster Bank gave us a bridge loan; NYNEX and Edelson Technology Partners invested in Maxima.

Nonetheless, we needed more than outside help; we also had to change the mentality inside the corporation. I fired seven top executives-including the president-and all their support staff in October 1989, because it would have taken too long to convince them to change. We didn’t have the time. We had to become lean and mean.

MINORITY OWNERSHIP

What are your other plans for the future?

I’d love to form the largest U.S. information systems corporation owned or controlled by African Americans. We have an opportunity to band together and form larger operations. We’re about to launch a major delivery and distribution system in cooperation with other minority-owned companies throughout the U.S.

Minority ownership of business is critical. Blacks in this country are retrogressing economically compared to other minorities. We estimate that by the year 2000, blacks, who represent 12 percent of the population, will generate only 12 percent of minority business revenues, whereas today the number is 25 percent. Asians are only 3 percent of the population, yet they generate 53 percent of minority business. Black businesses will generate four-tenths of one percent of the American gross domestic product.

Black entrepreneurs have an obligation to serve as role models, in occupations outside athletics and entertainment.

AFFIRMING OPPORTUNITIES

Despite a conservative, “minimalist” view of government, you believe strongly in affirmative action. Isn’t that a contradiction in terms?

Not at all. Affirmative action gives people a chance to gain experience and then move on to use that knowledge in starting their own businesses. When you get special treatment, you have a special obligation to make sure it propagates.

But you started your business with $15,000 and no affirmative action.

I did receive affirmative action in the sense that I got an opportunity to learn skills and get knowledge and exposure that was denied me. Having done that, though, I’m not saying to the corporation: “Hey, take care of me; I want to retire here.” I have to use that experience. Affirmative action is a prelude to what you’re going to do. It’s not an end in itself.

How do you dispel the lingering perception that the affirmed party only got his or her position because of a government-mandated program?

If those who receive affirmative action expect it to continue forever, they’re wrong as hell. After some initial assistance, advancement should be based strictly on merit. If all things are equal, then race is not a factor. That means you will not get the job if you’re not prepared. The real danger of affirmative action is that everything becomes vanilla.

I don’t care if people hate my guts for my views, because when I bring value to the table, we can do business; we can work together.