Deniece Peterson, Deltek’s Senior Manager of Federal Industry Analysis, opened our DOD Virtual Roundtable: The War on Spending. The September event brought together a group of defense industry veterans and analysts to discuss the impact of possible budget cuts on the Department of Defense and the contractors that support it.
Peterson noted that DOD spending cuts alone can’t solve the federal government’s budget crisis. “Sixty percent of federal spending is on mandatory programs, like Medicare and Medicaid,” she explained, “so cuts to defense are not going to be a silver bullet that solves the problem.”
Whatever its impact on the federal budget, the expected cycle of smaller budgets will have a significant impact on how the contracting industry does business, panelists agreed.
Larger Numbers of Small Procurements
“One thing you’re going to see is an increase in the number of procurements, even though those procurements are going to get smaller,” Gunnar Hellekson, Public Sector Chief Technology Strategist for Red Hat, told listeners. “DOD is saying, ‘We need to be more agile in our procurements, more able to identify problems quickly.'”
“We’re not going to see another Crusader, we’re not going to see another Future Combat Systems for quite some time,” he added. “Program size is generally getting a lot smaller.”
John Sutton, Senior Vice President of Business Development from QinetiQ North America, told a similar tale. “I think, from a business development perspective and from a federal contracting perspective, the keys will be agility, speed and focus,” he said. “That’s what will be tested over the next several years.”
A Faster DOD
The group saw the DOD trying to reform its procurement processes to work at a faster pace.
“Everyone seems to be arriving at a similar set of conclusions, and everyone is waiting with baited breath for the implementation,” Hellekson said. “Hopefully we will see an improvement in the communication process, in the transparency between government and industry, and maybe not a lighter, but certainly a more agile procurement process.”
The Changing Face of Procurement
“There are a few things that, I think, could change the procurement process,” Peterson added, “such as joint development. The biggest thing actually is aligning the budget process with the IT lifecycle. That’s where a lot of money is wasted. By the time agencies get the funding, the technology may be obsolete or the need may have changed,” she explained. She predicted that the next five years will see a trend toward “shorter deliverables,” with “12- to 18-month timeframes.”
Challenging Environment for Small Businesses
The panelists saw a particularly challenging environment for small businesses.
“With smaller contracts, I think the mix of competition may start to look a little different,” Peterson explained. “If we’re not going to see these big, complex, expensive programs anymore that have been the bread and butter for the top contractors, they’re going to go where the money is going, possibly pursuing those smaller contracts, actually competing against those smaller companies.”
“We can expect procurement tempos to increase,” Hellekson added. “I can foresee the process getting a bit simpler, and easier to respond to. The bad news,” he said, “is that small businesses may find it a bit challenging to keep up.”
Still, Peterson said, “I also think there is an opportunity for smaller companies, in terms of focus. It’s becoming clearer which areas still have life in them, or are a little more stable, such as cloud computing.”
Some small businesses may even position themselves to be acquired in the new climate, she noted. “We’re seeing the big guys involved with a lot of merger and acquisition activity, buying up those small businesses because they have that niche.”
Strategy Still the Key
Regardless of whether a company wants to be acquired, the panelists agreed, those that want to survive the cuts need to have a clear strategy in place to do so.
“Have a strategy and have it articulated such that you know what you want your company to look like in five years,” Sutton advised.
Hellekson agreed. “Focus and specialization are going to become enormously important,” he said. “Right alongside that is that importance of partnerships and building up an ecosystem alongside your own capabilities.”
Agile Companies Have the Advantage
Still, the panelists said, there will be opportunities for agile companies to succeed at the DOD, even in a tougher budget environment.
“Look at those areas that DOD must spend on,” Peterson advises. “Things that are more stable because they are directly tied to the mission.”
Hellekson added, “If you have a well-defined identity, a well-defined niche and can clearly articulate how you’re helping the government achieve a particular mission, you’ll be in pretty good shape regardless of the future condition of the budget.”
Sutton concluded, “The key to growth in the future — it’s going to come down to focus, agility, speed and hustle. If you can outhustle the guy next to you, you’re going to be fine. You just need to do it all at twice the speed you did five years ago.”