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By Nick Wakeman

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Nick Wakeman

Can you survive two more years of budget chaos?

If you listened to just the first part of Stan Soloway’s talk about the government market at the Grant Thornton contractor event this morning, you’d walk away thinking that there is little hope.

The issues with procurement and the political process are systemic, and it isn’t possible to identify where the political pressure will come from to fix the problems.

Congress may have settled the funding issue for the remainder of fiscal 2013, “but they punted a lot of the big decisions,” said Soloway, the president of the Professional Services Council. He was speaking at the accounting firm’s program on its annual contractor survey.

Historically, the government market has been seen as one of stability. Profit margins are lower than the commercial world, but the customer pays on time and is predictable. There is a nice cash flow.

“That does not exist anymore,” he said.

The current state of things isn’t going to be resolved in the next year. “Sequestration has eight more years to go, unless our governance processes come to grips with the bigger picture issues,” he said.

Soloway described a market of “confusion and chaos.” Just look at the last six or seven months.

Since September, government agencies have had to deal with multiple budget scenarios. First, they were told that it was business as usual. The big cuts, i.e., sequestration, wouldn’t happen.

Then, November rolled around, and they had to rejigger because sequestration looked like it actually might happen. Then it didn’t.

Then, in January, they needed a plan to get through March, but no one knew what would happen then. And then the sequester actually hits in March, and contingency plans had to kick in.

“So how do you plan? How do you make long term commitments?” Soloway said of the government. “It shouldn’t be any surprise that lead times have been stretched beyond anything we have seen in years.”

Other areas of concern include upcoming debates on the debt ceiling, which could hit in May, and then the fiscal 2014 appropriations.

Both the Senate and the House have passed budget proposals, but there is little common ground between them. The Senate bill is the Democratic Party’s proposal, while the House represents the GOP’s view.

The dueling budget proposals are “very different philosophically,” he said.

So, that was the gloomy part, but Soloway also sees reasons for optimism, especially for government contractors providing support for highly technical and complex government priorities.

Overall, government spending for professional services dropped by $6.4 billion between fiscal 2011 and fiscal 2012, but 60 percent of that came from logistics support services; in other words, the drawdowns in Iraq and Afghanistan.

But, spending in other areas, such as engineering and technical services, program management, and financial management services stayed steady.

Spending on professional services, which, for Soloway, includes IT, will remain strong around high priorities such as health IT, cyber and analytics because the government lacks in-house expertise, so a high percentage of the work will be done by the private sector.

“It isn’t so much a budget question as it is a gap question,” Soloway said. “And contractors exist to fill gaps.”

And the gaps are going to get worse. While the acquisition workforce is growing, it lacks experience, with many on the job less than five years, which makes it a challenge to take on highly technical and complex work.

There also is a demographic problem with the IT workforce. While the overall government workforce has a 4-1 ratio of people over 50 versus those under 30, which is bad enough, the ratio in IT is worse, at 7-1, Soloway said.

The government continues to lag the private sector in its ability to attract and hire young people with high tech skills, at the same time that its requirements and priorities are increasingly technical, he said.

“Industry will continue to grow because the government can’t fully reverse this trend,” he said.

Despite Soloway’s optimism, my mind keeps coming back to his earlier comments about the lack of a source of political pressure to force the two parties to find a compromise.

According to Soloway, in 2010, 63 Republicans were elected to the House from districts that President Obama carried in 2008. Those could be considered swing districts, and should apply some pressure for moderation.

But in 2012, the number of Republicans elected from districts that also voted for Obama dropped to 15.

In the Senate, only one Republican is up for reelection in 2014 from a state that voted for Obama.

“So, where is the political pressure going to come from for moderation?” Soloway asked.

Given that scenario, I agree with his assertion that little progress is going to happen in the near term, and that we have to wait, and hope, for more clarity from the results of the 2014 election.

So, we are in for a couple more years of budgeting via chaos, and I hope that Soloway is right when he says that “long term, the industry is in fine shape. It’ll just take some time before this rocky road levels out.”

Posted by Nick Wakeman on Mar 28, 2013 at 9:49 AM

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