Shutdown certainly disruptive, but robust budgets still reign

Few market observers know for sure how the overall political landscape will shake out with the specter of another partial government shutdown looming, plus a split Congress and White House over the next two years.

But during a Washington Business Journal breakfast event Thursday, executives and industry observers agreed that the government market remains healthy and vibrant against that backdrop of general political uncertainty.

Recall that nearly three-fourths of the federal discretionary budget are funded for this current fiscal year ending Sept. 30, including the Defense and Veterans Affairs departments plus most of Health and Human Services. The five-week shutdown ended Jan. 28 impacted some civilian departments and agencies like Homeland Security and NASA.

Prospects of shutdowns and other political disruptions do create “challenges for those of us who operate in the environment… for attracting employees in the workforce,” Deloitte’s Dan Helfrich said at the event in Tysons Corner, Virginia.

“It leads to difficult conversations that we have to have with our teams, but the budget is what drives spending and the budget is robust right now,” added Helfrich, who leads Deloitte’s government and public services practice.

Funding for the once-shuttered agencies has to be approved by Feb. 15 or they will close again, while a budget for next fiscal year still has to work its way through the process in Congress. Spending caps from the Budget Control Act of 2011 return for fiscal 2020 -- and hence sequestration -- if lawmakers do not make an agreement.

“Sequestration was a much bigger impact on the health of this sector in government contracting than anything we’re dealing with today,” said Helfrich.

Robin Portman, CEO of Atlas Research, said the political environment has resulted in “abrupt, major shifts” by their government customers in terms of policy emphasis, particularly among health-focused agencies her company focuses on.

A collective thirst for innovation and new ways of integrating advanced technologies remains robust across civilian and defense agencies alike, said Portman, who joined the mid-tier player Atlas in late 2017 from Booz Allen Hamilton.

The current landscape of a divided government does not necessarily change that push to innovate. But it does challenge contractors to understand where the current administration’s priorities and main focus areas are and in “having a watchful eye on the horizon in terms of what could happen or where we could go,” she said.

“My advice to any… even small business… would be to ensure that you’ve really got a strong market sense and capability within your organizations,” Portman said.

This especially holds true when “you’re standing up a small company or even a mid-tier company,” she added. “Model it out in terms of being able to understand where the market spending could be going.”

Bob Kipps, co-founder and managing director of investment bank KippsDeSanto, said that while the shutdown does contribute to the government market being in an “eye of the storm,” the merger-and-acquisition landscape has not changed all that much.

Prospective buyers remain active in looking for opportunities to move into a new capability area or customer and the heightened M&A activity seen in recent years should continue in 2019, he said.

“People look at this sector (as) different than some other verticals and they’re also viewing the positive of where we are in this cycle versus maybe in the broader economic cycle,” Kipps added. “In some respects they’ve been told to diversify into a later-cycle vertical and they haven’t given on that up yet.”