Uncertain budgets hit small businesses hard

Budget cuts, gridlock in Congress, regulatory burdens, rising corporate costs and a climate of fiscal uncertainty are proving more troublesome for smaller government contractors, but some are seeing some signs for optimism.

Budget cuts, gridlock in Congress, regulatory burdens, rising corporate costs and a climate of fiscal uncertainty are proving more troublesome for smaller government contractors, a panel of chief executives officers said today in Washington.

“The impact of this is largely felt most on the small businesses,” said John Jumper, chairman and chief executive officer of Science Applications International Corp., speaking today at a National Press Club Newsmaker news conference on the future of government contracting in an era of sequestration.

Kevin W. Miller, president and CEO of Sciolex Corp., a 35-employee contractor based in Chantilly, Va., that offers technology services to intelligence agencies, said that his company is facing growing operational costs at a time when profit margins for businesses are declining, making it challenging to compete with other small service providers with large contracts.

“In an environment where revenues are starting to decline, not just due to sequestration but other cuts that have come into the Department of Defense since 2011, it’s very difficult,” he said.

One major driver of rising corporate costs at Sciolex is the need to offer expensive, “Cadillac benefits plans” to attract the brightest employees--without whom his company would be less competitive, Miller said. He added that the largest internal uncertainty at Sciolex is how implementation of the Patient Protection and Affordable Care Act and its state health-insurance exchanges will affect the company’s costs.

“A lot of the uncertainty that comes into play at this stage is understanding what the state is going to do,” he said.

Also rough on small contractors are increasingly burdensome regulatory requirements, he said.

“I recently had to re-certify our qualification as a small, service-disabled business,” he said. “Five years ago when I did it, it was four documents and it took me about 30 minutes online. The process that I’m going through now started about five weeks ago. I’m 57 documents in and still have more document requirements coming.”

Frank Mendicino, CEO of SKYDEX Technologies Inc., a company with 32 employees in Denver that creates expensive, “premium” protective materials that mitigate shock for military uses, expressed unease that procurement decision makers in the government aren’t getting guidance from a gridlocked Congress about spending priorities.

“Congress is not giving the men and women that make the decisions on specifications and on products and services that will be purchased by the government any indication or any priority on how they should look at doing their jobs,” he said. “Our little company has to be concerned about the extent to which price and price alone will be a determining factor in the decisions that will be made relative to the procurement of the product spaces that we’re in.”

Such a concern about murky spending policies and priorities comes at a time when customers are “favoring smart, affordable solutions for supporting new and evolving missions,” Jumper said.

Overall, the environment remains complicated for contractors, large or small. “Attention at the moment is focused on sequestration,” Jumper said. “The bigger issues in the coming years are how to achieve the next level of military capability without depending on traditional modernization of big expensive platforms and the vulnerability of our nation’s digital and physical economic infrastructure from cyber attacks, natural disasters and other ‘new world’ dangers.”

Jumper also addressed SAIC’s impending split into separate, publicly traded companies, each with its own areas of expertise. The government technical services and enterprise IT business will retain the name SAIC, while the national security, health and engineering government and commercial technologies business will be named Leidos. Jumper will become CEO of Leidos following the separation.

In an interview with Washington Technology after the panel discussion, Jumper said that the decision to divide SAIC into two separate companies wasn’t a result of government cuts and budget haziness.

“It’s really a business decision to configure ourselves for the future,” he said. “It’s not really a budget issue. It’s more of a capability issue. It’s also to get rid of an organizational conflict of interest [under government contracting regulations]. We were self-opting out of billions of dollars of opportunities because of this [organizational conflict of interest] that we just didn’t have the ability to track over the years…it’s going to help us get our cost structure down.”

Despite the thorny climate of contractors, one panelist was sanguine about the future.

“I am not worried about our future,” Mendicino said. “I think that America is still the home of the greatest innovation and creativity of any country in the world.”

“We’ve got some problems but as has always been the case through our history, we’ll work through them. I’d be less than honest if I didn’t say that I’m concerned about the partisanship that we see in Washington, but I think we’ll get through that as well. I think we’re seeing a little bit of movement and have over the last few months. So I am very optimistic.”