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How CSR Can Lead to Lucrative Government Contracts - Ideas for Leaders
Idea #755

How CSR Can Lead to Lucrative Government Contracts

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KEY CONCEPT

Government contracts are big business. A new study shows how corporate social responsibilities activities can help a company beat out its competitors for lucrative contracts with most government agencies — defence-related agencies excepted.


IDEA SUMMARY

According to the World Trade Organization, the products and services purchased by the government account for 15-20% of developing countries’ GDP. Putting aside the relative handful of defence contractors with their multi-billion contracts, how can companies break into the B2G sector? The surprising answer from one academic researcher is a firm’s corporate social responsibility activities.

Matching the information from U.S. government procurement contracts, corporate results and corporate social responsibility databases, covering the period 1992 to 2013, Caroline Flammer of Boston University’s Questrom School of Business found that 

Companies that are more actively involved in corporate social responsibility initiatives are more likely to obtain government procurement contracts. The data is unequivocal in showing the influence of CSR on successful government contract bids.

The CSR advantage is stronger for companies who are just beginning the relationship with the government agency. Companies that don’t have a long track record with the government have not had the opportunity to build up trust. Therefore, government agencies must look for other indications of trustworthiness; CSR is such an indication, giving companies with little track record an edge over other companies seeking to begin a relationship with the government.

The CSR advantage is stronger in competitive industries. Intense competition can tempt companies to engage in unethical acts — cutting corners to lower their bids, for example. Trustworthiness is thus a key differentiator for companies in competitive industries, which explains why CSR activities can increase the changes of being selected.

The CSR advantage is stronger bids involving complex projects. Multi-year projects, large-scale projects and cost-plus projects (compensation is based on invoicing on-going costs plus a fee, rather than a preset fee for the entire project) all give contractors an opportunity to act unethically — for example, over-charging costs, or holding up a multi-year project during renegotiations when circumstances inevitably change during the project. Again, trustworthiness, as signalled by CSR, is a valuable differentiator.

Defence contracts are immune to the CSR advantage. There are different reasons: 1) the defence industry is not competitive — only a few multi-national companies are able to produce the types of products involved; 2) political factors, such as political donations, influence the awarding of contracts; 3) CSR considerations seems irrelevant and even contradictory in an industry focused on tools for killing.


BUSINESS APPLICATION

Flammer’s research reveals the “signaling” value of CSR activities: Government agencies want proof of trustworthiness and, in the absence of other indicators — such as a long track record of successful, scandal-free projects with the procurement agency — are willing to consider CSR as such a sign. 

Not all CSR activities are equal, however. Flammer found that CSR initiatives related to institutional stakeholders — activities helping local communities and society at large, such as environmental initiatives, rather than CSR activities aimed at employees and customers — are more effective in signaling trustworthiness to government agencies. 

The implication is clear: Companies who want to enter the lucrative business-to-government (B2G) sector would do well to consider increasing their CSR activities, especially those geared to institutional stakeholders. What has your company done for the environment lately? The answer can make the difference between capturing or losing that million-dollar government contract.


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FURTHER READING

  Caroline Flammer’s profile at Boston University Questrom School of Business

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