Welcome to a new era of government contracting

Is insourcing dead? Is the era of big systems integrators ruling the roost coming to a close? Will the defense cuts save the economy?

These were some of the dominant themes I heard executives and others talking about at investment bank Raymond James' 10th Annual Government Services & Technology Summit on Thursday.

A variety of public and private companies gave presentations on their strategies. Because three presentations were usually going on simultaneously in different rooms, I couldn’t hear all of them, but the ones I did hear often shared similar themes.

The easy one to explain is the death of insourcing. Several executives and other speakers commented that a year ago insourcing was a big concern, but not so much now as Defense Secretary Robert Gates has publicly admitted that the cost savings he envisioned from moving contractor jobs to government jobs did not materialize.

The demographics of the government workforce make widespread insourcing untenable, several speakers said.

Joe Kampf, chairman and CEO of CoVant, a private equity group, had one of the day’s best quips: “Insourcing doesn’t bother me, until they come for my people.”

I think that was a subtle reminder that while insourcing might not be a major impact to the industry as a whole, there will still be pockets of it and when it happens to you, it’s bad, no matter what the macro trend is.

The theme that people came back to repeatedly was this idea that size and bulk are not the measures of success they once were for government contractors.

Brian Gesuale, senior vice president of Raymond James, used two leading companies of the past decade as examples.

In the mid-2000s, CACI International and SRA International both were rewarded with growing market valuations as they grew. But while they have continued to grow larger, both have seen the value of their stock decline, Gesuale said.

“The supersizing strategy is not the strategy going forward,” he said.

Instead, Gesuale and other speakers emphasized the need to build value by focusing in on niche capabilities that are close to the customer’s mission.

“We want to be close to the flagpole of the agency” is how Vangent CEO Mac Curtis described it during his presentation.

In other words, whatever your company sells, you need to be able to tie it directly to supporting the mission of the agency.

“You need to know what you are good at,” said Terry Glasgow, president of NCI Inc., another presenter.

This is particularly important in the current budget environment because as agencies look to reduce costs, they are going to stick with the contractors who know and support their mission the best.

This trend supports smaller and more nimble companies that specialize in a few critical functions and avoid being seen by their customers as a broad-based IT provider, several speakers said.

Looming over much of the talk on Thursday was the economy and the budget and the impact of attempts to rein in government spending, particularly at the Defense Department.

John Hillen, president and CEO, of Global Defense Technology and Systems, gave a convincing argument that this recovery and downsizing of defense is much different than other similar periods in U.S. history.

Unlike the end of World War II or the end of the Cold War, today’s defense spending is much smaller when compared to the federal budget and the Gross Domestic Product.

Defense cuts are not going to “move the needle” on the budget crisis, he said.

Mandatory spending on entitlements and interest payments on the debt are growing too fast for defense cuts to have much of an impact, he said.

“The math just doesn’t work anymore,” he said.

Overall, the mood at the conference was upbeat. Companies are still actively looking at acquisitions. More deals are expected to be made in 2011 as companies shore up capabilities in areas of the budget that are expected to grow.

Spirits also were buoyed by the successful IPOs of the past year by companies such as Global Defense.

The sentiment also seems to be that with Republicans in control of the House there might be more controls on spending than when the Democrats controlled all of Congress. There were several comments about gridlock perhaps being a good thing.

Borrowing a quote from Bill Gates, Kampf said, “I’m a paranoid optimist.”

The quip drew chuckles but plenty of heads nodded in agreement.

There are plenty of challenges and threats in the market, but the right strategy with a focus on the mission can yield valuable results, seemed to be what Kampf and others were saying.