Funding worries dampen market optimism

Two major headwinds loom over the government market more than the rest amid the renewed optimistic outlook after two years of budget growth: the uncertain funding picture and talent supply crunch.

One boon for government contractors on the other hand is the Defense Department’s hunger for modernization and adoption of emerging technologies to counter adversaries like China and Russia.

But during Defense One’s Outlook 2020 conference Thursday, two heads of GovCon sector trade groups and one industry chief executive all agreed that companies are feeling stressed to certain extents from the headwinds even with the opportunities present.

For one, the government is operating on a continuing resolution through Nov. 21 despite the two-year budget agreement that sets spending caps but no appropriations and CRs have been a running theme in the market for many years now.

“Think about the ecosystem that’s post-World War II that led to these decades of enormous American leadership and innovation, it’s the partnership between academia, government and industry that’s not as strong as it has been,” Aerospace Industries Association CEO Eric Fanning said at the event in Washington, D.C. “For a healthy industrial base, we need our government to be thinking about its part of that responsibility, and that comes down to investment,” Fanning added. “It’s not just how much, it’s the predictability of it.”

Both Fanning and Hawk Carlisle, CEO of the National Defense Industrial Association, agreed that the current defense budget is likely the high-water mark after two years of frothy funding.

Carlisle, a retired Air Force general, brought up one bipartisan proposal put forth earlier this week that would reorient Congress to a two-year budget cycle that could almost be like a framework to set the caps but get more specifics down.

Of that legislation, Carlisle said, it “is a great idea because it takes the topline budget out of the political football realm and puts it into a little bit more regular order.”

Also as Carlisle pointed out: “China and Russia don’t have continuing resolutions,” nor do they have government shutdowns.

Neither does the commercial technology industry that competes with government contractors for the same pool of skilled talent, Parsons Corp. CEO Chuck Harrington said.

“They don’t have an employee workforce worrying about ‘Am I going to get paid for the next two weeks or am I going to get laid off?’ So these are the impacts that can have kind of a calming effect on, or uncalming effect on hiring, which I don’t think is positive for the country,” Harrington added.

Nor does innovation and iteration of technology, particularly the kind dependent on software.

“Our hardware products have a lifespan of probably 12-to-18 months before we come out with revisions of sensors and things like that,” Harrington said. “The pace of change to technology is ever increasing, so you can’t just take a time out and expect to stay up with your adversaries and competition.”

Along with budget, Fanning identified workforce as one of his two highest strategic, long-term concerns regarding the future health and outlook of the defense industrial base.

Part of that is down to communication in his opinion.

“The jobs we’re talking about in our industry are different types of jobs, they’re really high-paying jobs that have longevity, that allow you to raise a family, that lift up communities, the kind of jobs the automotive industry used to have where I grew up in Michigan,” Fanning said.

A low national unemployment rate of around 5 percent compounds a difficult problem of growing the talent base, not to mention the security clearance backlog even though the government has reported it is coming down.

Companies like Parsons are seeing broader population dynamics within themselves with Baby Boomer-aged employees in one group and Millennial-aged workers in another.

Harrington described how companies such as the one he leads are disrupting themselves in order to account for that through investments in new technologies that assist in tasks such as software code-writing to change the work environment.

“When we look at the advances in robotics and autonomous systems, I think even the way we weld ships and planes in the future is going to be greatly different with more 3D printing, more autonomous welding,” Harrington said. “We’re going to have to get comfortable that doing things with autonomous systems can achieve the same level of quality.

“It’s not because we’re going to displace workers, it’s because we have to augment the capability of the workers we have in this country with more capacity to get more done with the same workforce. Our population just isn’t growing fast enough to be able to meet the demand of what we’re producing.”