2024 Top Pricing Exec to Watch Hagen McHenry is Reimagining Strategies for Pricing and Growth
Editor’s Note: Dedicated experts in the field of cost and pricing boast a unique set of experiences. Hagen McHenry is no exception. A star in his field, McHenry has seen it all: from supporting small organizations to large, from commercial to government. In this interview, NCMA sat down with McHenry to learn about the cutting-edge techniques that earned him WashingtonExec’s title of Top Pricing Exec to Watch in both 2023 and 2024. This article is a synopsis of our interview.
Hagen McHenry, Vice President of Pricing, Estimation, and Competitive Assessment at Peraton, has more than 20 years of contracting experience. He started his career in a small management consulting firm then moved to larger businesses such as Hewlett-Packard and Raytheon, before arriving at Peraton in 2018.
Throughout his career in government contracting (GovCon), McHenry has watched the discipline of cost and pricing evolve significantly. “Early in my career, pricing was more of an accounting and financial analysis-based role that provided financial projections to the corporation for any contract they were pursuing,” McHenry says. “Now, it’s more focused on the customers. The government is evolving in the way it evaluates proposals. Contractors, in turn, are evolving their pricing practices to ensure they provide value to those customers, at the right price.”
There’s a fundamental difference between a consultative, commercial practice and the challenges of pricing in the GovCon world. “Commercial contracts are not bound by the Federal Acquisition Regulations (FAR) and negotiations are held directly with the customers,” he says. “By contrast, GovCon pricing is far more rooted in accounting principles, contract and subcontract management, audit compliance, and corporate risk and reward. It’s very different, unique, and unlike anything else out there.”
Another difference is that government funding comes from U.S. taxpayer dollars versus corporate revenue streams. Consequently, every taxpayer has a stake in their money being spent wisely and how it will be used to make a better world. “Pricing organizations have a responsibility to meet those vested interests,” he adds, and there are many regulations and laws to ensure that happens.
Today, McHenry prefers to call his practice area “pricing and growth” instead of “cost and pricing.” “We’re creating new business with every proposal we submit,” he explains, “all while expressing value to our government customers and providing them with confidence that we can successfully execute the mission for our price.”
Pricing as an Enabler for Growth
There are many ways a business can grow. For pricing to be a growth driver, it requires agile systems and resources that can scale according to growth objectives. Most companies already have such systems in place, even if they are not purpose-built for pricing per se. This infrastructure – tools, techniques, and procedures – establishes the foundation for record keeping, governance, procedure, and internal policy.
The key, says McHenry, is to structure them as multi-purpose platforms so you can also use their input and output data for pricing. For example, Peraton has a dedicated pricing tool that helps create efficiencies and minimize errors in its pricing models. There are also many other interconnected systems within the scope of pricing. He points to four in particular: cost accounting, resource management, supply chain management, and workforce timekeeping.
• Cost Accounting
All companies track costs – a critical input factor when pricing new business. When a contractor bids on an opportunity, “We have solutions that we’re delivering, and often we have similar capabilities somewhere else within our corporation,” McHenry notes. The questions to ask are then: How much is it costing us to deliver those solutions? What types of resources are required to execute the contract? What are the differences between that contract and the one we’re bidding on? How can we improve productivity and efficiency inside of that and be cost effective? A well-calibrated cost accounting tool can help answer these questions.
• Resource Management
Increased labor costs due to inflation, competition amongst contractors, and a seasoned workforce are important considerations. Key questions include: How many employees do we have and/or need to hire? Of those, how many are going to be direct on this project? What is the current cost of the personnel and how will their salaries change across the length of the contract? Across geographic locations?
These questions that cost and pricing leaders have always asked are now seen in a new light and have a much greater focus in the aftermath of the pandemic. “A lot of people transitioned to remote work or moved to different locations. Geographic distributions of personnel have evolved, and the standards of pay between those locations are changing rapidly,” McHenry says. This is important for determining varying pay rates and the availability of employees for a project. “Having good human resources systems with trending data that can be leveraged for program startup, as well as pricing, is a key component,” he explains.
• Supply Chain Management Systems
Understanding your supply chain activity can provide important pricing inputs. “We track a lot of things on the procurement side,” he says. “With regard to the supply chain, having proven vendors and subcontractors who are able to provide necessary services, hardware, and software, and being able to readily get a broad range of quotes to bid is absolutely necessary to ensure we’re providing the best value for our customers. As a Tier 1 prime contractor, we must act as good stewards to the government. This is a very important component of how we conduct business.”
• Workforce Timekeeping
Direct labor timekeeping systems help organize and monitor your workforce accordingly, so you know the cost per employee in any given skillset, capability set, or job category, he says. “The more data we have, and being able to review it from various viewpoints, such as skill levels, locations, unique requirements (e.g., special skills and clearances), the more reliable our predictions of future direct labor costs.” The number of hours spent on common tasks, he adds, is often overlooked in the cost collection process.
Most companies don’t standardize their work breakdown structures in a way that will produce this information efficiently. If you structure your system in a way where you can analyze the hours by common tasks, then you collect a lot of powerful data that can provide significant assurance to your customers.
It’s critical, then, for businesses to recognize early on (i.e., when they’re still small) the need to be prepared for growth in this way – and to structure their systems accordingly. This includes ensuring the business has an adequate records management system, and that data is being organized and collected in a way to both scale and demonstrate what has been done.
The same is true for the supporting processes. “You may not need all of the information today, but you will need it tomorrow,” McHenry says. “Starting from a place of evolution – establishing proper processes at the onset – will make it easier to transition in the future. This allows you to deal with growth more easily.”
• Estimating and Training Systems
In addition to the four major systems discussed above, McHenry identifies two others that can help promote growth through pricing.
The first is an estimating system which helps promote transparency, consistency, and reliability in the proposals and quotes organizations may submit.
The second system that is often forgotten is a training system to make sure the people doing the work, and the estimating system itself, are performing at a high standard. The goal is to create a functional, reliable system, which meets the government’s requirements for any size company, that can scale using additional growth resources.
This merging of the training and estimating systems – their ability to interconnect – is a crucial point when it comes to pricing, he adds. The estimating system, for example, makes use of data from both the cost accounting and resource management systems.
In other words, the use of these systems is not about the data any one can provide, but the way they all work together. All personnel engaged in estimating must be trained in and understand how these systems support each other and their importance to the estimation process.
A System of Systems: Governance for Growth
Thinking about the interconnectivity of these systems requires a broader viewpoint. As important as they are, it is equally important to consider the processes that govern the work around those systems.
How do we structure them? How do we execute them? How do we ensure that an appropriate level of review and standards are applied to them? In effect, a pricing team must examine the system under which its systems operate.
For example, growth will inevitably require the scaling up of one’s systems, or graduation from one to another. A small or medium-sized business might be able to use QuickBooks for its cost accounting; a company of 3,000 employees, however, will need something more robust to handle complex transactions. Because of the interconnectivity, that graduation will also affect the company’s estimating system. Thus, there needs to be a carefully considered process in place before such upscaling to ensure the systems remain compatible.
Governance is also important. At Peraton, McHenry’s estimating system includes multiple levels of review and approval which must occur before an estimate can be submitted to the government. There is also a system in place that records those approvals. “What’s really important, as companies grow, is the ability to prove what you do,” he says. “We’ve spent a lot of time on tools to help us with repositories, keeping and tracking data, and making sure they’re available for audit purposes.” Being able to demonstrate his pricing team completed the necessary training to use the upscaled systems is one such proof point.
Pillars of Proper Pricing
McHenry has organized his team into three major focus areas, or pillars, to support GovCon pricing.
• Estimation
Estimation refers to a general analysis of what it takes for a contractor to deliver solutions to the customer. For example, let’s return to the questions around cost per person per hour and how many hours it takes to deliver on a task. “We focus heavily on current programs of similar scope – or, specifically, tasks within a contract that are similar/analogous – and industry benchmarks to help us estimate what a given contract will require,” McHenry says. “We then use that empirical information in our justification to the customers, which gives them assurance and reliability.”
This is yet another example of how contracting companies need to prepare for future growth and opportunities to encourage that expansion. “Once we’re awarded the contract, it becomes a new proof point for our company to use for the next opportunity,” he says. “We consistently track our performance on any given contract so we can easily leverage that information for future opportunities with our customers.”
• Competitive Assessment
It’s not enough to know what it takes for your business to deliver its solutions to customers – you also need to know what it takes for your competitors to deliver them. McHenry’s competitive assessment team is dedicated to answering such a question. This work allows the business to remain competitive in terms of the pricing for a given contract. They can also utilize this information to improve their capabilities and programs to make them as efficient and productive as possible – all while aligning with industry benchmarks.
• Pricing
The Pricing Team produces the internal financial models and projections for the corporation and the proposal deliverables—cost volume narratives with supporting models and, often, basis of estimate justification—that make up the final bid submission to the customers. “They are the glue that binds it all together.”
• The Decision-Making Process
McHenry’s experience and expertise in pricing has afforded him the ability to develop a set of best practices for making decisions on pricing, one that accounts for the three pillars described above.
It begins with appreciating the differences between each customer. “When we look at our current programs, often it won’t be an exact one-for-one match; there are different intricacies of every organization within the government,” he says. “It really comes down to how we apply the data we have in this environment, how much it will cost us, and whether it provides our customer with the value they need to award the contract to us.”
To that end, companies should set up a series of reviews to answer those difficult questions throughout the process – not just a review at the end, when it’s too late to address the issues that interim reviews might raise. “You want to make sure you incorporate reviews consistently throughout the process, so there is opportunity to make potentially broad changes within the given timeframe,” McHenry explains. This will ensure those changes are integrated to achieve the desired result.
The information gathered from these reviews should factor into the fundamental bid/no bid decision. If a team does the work early enough, adds McHenry, they will hopefully never have to make such a decision. This can happen early on with whitepapers or requests for information that the government has when they’re thinking about how to generally structure the acquisition. He says, “If we have a solution and we know the customer’s pain points and what they’re hoping to accomplish, and we’ve worked with them to understand the nuances, then we should be able to bid. It then becomes a question of, ‘Can we successfully perform the work for the value the government needs? Are there ways in which we can make that context work?’”
The bidding process also depends on the organization, particularly its size. For a small business, cashflow is of paramount concern: The ongoing reviews should examine whether the company will be able to cover the initial costs and/or the costs of scaling to size on a large contract without disrupting the cashflow. For significant staff increases, do they have enough resources to pay their employees while awaiting government payment on their invoices?
A larger business is more likely to absorb those costs, especially in fixed-price contracts which are paid out on a deliverable basis versus monthly or staggered over time. For large businesses, it’s more a question of, “Does this fit with our strategic model? Can we be competitive? Do we have a cutting-edge solution here?” McHenry says. “To go after a large business contract is very expensive. Many resources have to align to execute the proposal processes, which is why we work with our customers to have well-aligned solutions. And, if they don’t align well, it might not be the right investment.”
When it comes to international contracts, there’s a separate slate of details that need consideration. Does the company have expatriates, people working remotely internationally, and/or other resources that can be deployed to the work site? What is the income tax structure for the company and for international employees’ salaries? Is it an austere or dangerous environment, and does the company have the ability to provide adequate protection? Is the contract in full compliance with International Traffic in Arms Regulations (ITAR)? These questions only scratch the surface.
The Keys to Successful Pricing
Throughout his career, McHenry has established several through-lines. Here are six key takeaways on how to price for efficiency, success, and growth.
1. Pricing is larger than pricing itself.
The factors that go into pricing decisions come from, and feed into, all aspects of a contractor’s business. “Think about pricing as an interconnected set of activities and the result of a good process,” says McHenry. “The process evolves over time, so you have to invest in the ongoing improvement of the pricing process.
2. Think about what data your organization has and how it can be used more broadly.
The interconnectivity of your activities, processes, and policies means the data you gathered and used for other purposes, such as cost analysis, HR/resource management, and finance, can also be applied to pricing. You simply need to organize the data so it can be used effectively for proposals. “Structuring operational data for future opportunities is key,” McHenry says.
3. Think about compliance now, not later.
There’s no surprise or hidden wisdom to this one. Planning for growth means planning for the changes in process, policy, and compliance that come with it. Save yourself time, trouble, and headaches by not kicking the can down the road. “If you don’t think about it now, it usually becomes a burden later,” McHenry says.
4. Stay agile.
“I think we’ve seen a lot of evolving trends from our customers during the past few years on how they evaluate proposals,” McHenry says. “To succeed, you need to stay agile and keep ahead of or at parity with your customer’s expectations and build teams that can adapt to those changes.”
5. Redefine value.
The concept of value takes on a new shape in McHenry’s discussion of pricing, which is not incidental. His holistic, interconnected perspective on pricing rests on a rethinking of what value means.
“Pricing should be less about the actual dollar value and more about what the customer receives for the value,” he says. “What is the value of a price? How do you provide justification for a price in a way that reflects the value? If you structure your pricing process with this in mind, you’ll be highly effective.”
6. Demonstrate leadership.
The biggest indicators of success in a pricing organization stem from the people who perform the work and the leadership that surrounds them.
Hagen spotlighted that at the end it really is the people that help make this work so valuable. “I have been incredibly fortunate at Peraton,” he says. “The entire C-Suite supports our team; they value the work we do. My boss, Chief Growth Officer Mike King, understands our process and encourages us to perform at a high level. He is always standing with us to help achieve that standard. His leadership is something I strive to emulate with my team. Over the past six years, I have built an incredibly skilled, diverse, and motivated team – the credit to our success belongs to them for the hard work, commitment to the mission, and the excellence they demonstrate on a daily basis.” CM
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