The month that was

A roundup of the important news and issues of the last 30 days

Are you ready for a shutdown?

The federal government dodged a bullet when Congress and President Barack Obama approved a two-week extension of the continuing resolution to keep the government operating, but the threat of a shutdown still looms March 18. 

Everyone wants to make cuts to federal spending for the remainder of fiscal 2011, but the stumbling block is that Republicans and Democrats can’t agree on how deep the cuts should be or where they should come from. Then throw in the wild card of the tea party Republicans, who sometimes go against the party leadership, and the question starts to look like not whether the government will shut down but for how long. 

For contractors, the challenge is determining what work they can do if there is a shutdown. Not all the lessons from the last shutdown in 1995 apply today. Plus the importance of technology in today’s government operations makes an easy work-or-no-work decision much more difficult. A Washington Technology online poll found that 52 percent of contractors said they will continue to work during a shutdown. But 28 percent of respondents expect there will be layoffs.

Winners and losers in the 2012 budget

President Barack Obama’s 2012 budget proposal came in with plenty of winners and losers. Overall IT spending would go up a percentage point or two and is expected to hit a whopping $79.5 billion. But underneath that deep ocean of spending are pockets of cuts that will hurt some contractors. 

For example, spending on advisory services would be cut by $2 billion in fiscal 2012. The emphasis on cloud-first systems also will hurt some contractors who make their livings running government infrastructures that will shift to the cloud. Same for custom-built IT systems, which the budget also targets for reduction. 

The bright spot is for contractors that have systems and technologies that can reduce the cost of government operations. In addition to the move to the cloud, agencies are being pushed to consolidate data centers. They will need contractor support to make those moves. 

But the overall impression of the 2012 budget is that competition will get fiercer and the pressure on profit margins will increase. “The name of the game is going to be delivering what you promise at a lower cost,” said Paul Strasser, senior vice president and general manager at Dynamics Research Corp. 

Of course, no one is laying odds on a 2012 budget actually getting passed before 2011 ends.

Triumph of the machine

IBM Corp. executives said several times that Watson didn’t need to win the man vs. machine battle on game show "Jeopardy!" to prove the success of the technology. But it didn’t hurt that the supercomputer designed to understand human language trounced its two human competitors. 

IBM scored a marketing coup with the news coverage and viewership ratings the Watson computer garnered. It took four years to build the computer and program it so it could parse "Jeopardy!" clues and find what it thought was the most likely correct answer in three seconds. 

Few can dispute that Watson pushes the field of natural-language computing to a new level in terms of the technological achievement and heightened awareness of the field. 

Big Blue is already moving beyond its game show triumph, announcing that Watson will go to medical school to work with researchers and develop a tool that will allow doctors to talk to it and work toward a diagnosis. 

Perhaps an appearance on "House" is in the cards next.

Big contracts keep on rolling

Science Applications International Corp. avoided a drawn-out protest of the State Department’s $2.5 billion network infrastructure contract by bringing the enemy in-house. After competing against each other for the award, losing bidder Northrop Grumman filed a protest in January, only to withdraw it Feb. 8. A few days later, SAIC announced its team, which included Northrop Grumman. 

There's nothing wrong with that, and it’s a move government officials try to encourage to avoid protests that stop work in projects. 

The State award was the biggest award to a single contractor so far this year. Other notable contracts to date include a $488 million Army award to ManTech International to support mine-resistant, ambush-protected vehicles and a $114 million intelligent transportation contract that Booz Allen Hamilton won. 

Northrop Grumman was dealt a disappointment when the Government Accountability Office denied its protest of a canceled $2.6 billion contract. Northrop won the contract to build the IT infrastructure for the Homeland Security Department’s new campus in Washington. After all the losing bidders filed protests, DHS and the General Services Administration canceled the contract and restarted the competition.

No end to deal-making 

Several deals announced in the past month represent a microcosm of the drivers behind the rampant mergers and acquisitions activity in the government market.

  • ManTech International Inc.’s acquisition of TranTech Inc. gives the company greater access to an important defense contract: Encore II.
  • Harris and NCI Information Systems Inc. each closed health care-related deals, showing how companies are using acquisitions to move into growing market segments.
  • Global Defense Technology and Systems' agreement to be acquired by Ares Management illustrates the continued interest in the government market by private equity. Ares is paying a 50 percent premium on GTEC’s price per share.
  • Finmeccanica said it is looking for buyers for portions of its U.S.-based DRS Technologies business. Like many large defense companies, Finmeccanica said it needs to streamline operations and jettison businesses that are not in its core capabilities.

Quote: “The name of the game is going to be delivering what you promise at a lower cost,” said Paul Strasser, senior vice president and general manager at Dynamics Research Corp.

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