Engility CEO makes the case for transparency

Editor’s Note: The following is an adaption of a speech that Engility CEO Anthony Smeraglinolo gave Tuesday morning at the I/ITSEC 2014 conference on modeling and simulation. He described today’s environment for government contractors and what is needed for both government and industry to succeed.

As a nation, we are undergoing a shift in funding for our missions.  Servicing the national debt, entitlement funding pressures, and the war-weariness of voters after Iraq and Afghanistan, may have established a new and lower ceiling for national security spending for the foreseeable future.

But growing awareness of the ISIS threat, Russian and Chinese aggression and future flare ups in hot spots around the globe, remind us that the world is still a dangerous place. But absent a serious crisis, I do not believe there will be increased spending for mission and capability expansion.

This means this era of constrained budgets is here to stay even if the pressures to perform our missions due to continuing threats have not significantly decreased.
 
While constrained budgets are a given, I am hopeful that an era of federal spending uncertainty is not here to stay.  Budget uncertainty– created by  continuing resolutions, furloughs, government shut downs and sequestration -- seriously affects our military and civilian agencies. It also
has a negative effect on the private sector that is doing business with the government.

While I contend that we can live with these lower levels of funding and we will develop cost-efficient solutions accordingly, we cannot operate effectively when we have high degrees of budget uncertainty that results in the federal procurement machinery grinding to a halt.
 
I believe things have gotten better with the passage of the 2013 Bi-partisan Budget Act, passage of the fiscal 2014 budget, and the fiscal 2015 continuing resolution. 

After 2013, a year in which we saw virtually no acquisition activities coming from our government customers, we are now seeing evidence of things getting better with an increase in solicitations and award activity. While we expect this trend to continue into next year, as we all know, the threat of sequestration in 2016 is directly in front of us. I am hopeful, however, that as a result of the November elections, there will be a political solution that eliminates the use of this draconian budget tactic. 

While we contemplate what impact next year’s budget deliberations will have on the government and our industry, make no mistake about it, as federal budget offices and contracts shops face budget uncertainty, instability in funding creates issues and even chaos for industry. 

When decisions about contract awards are postponed and delayed, industry also postpones investments and hiring decisions. This results in platforms not getting built on schedule, R&D suffering, and ultimately, government getting hit with delays and reduced value.

The partnership, between government and industry operates best with certainty.  With this certainty, we all can structure and operate our business, and better support the mission.

Another characteristic of this fiercely competitive industry is that we find there are too many companies chasing fewer opportunities.
 
Consider that in 2001 the government services market was a $100 billion market with 45,000 contractors. In 2011 it was a $200 billion market but with 135,000 contractors.

While the size of the addressable market doubled, the number of participants tripled. As the funding for this market has begun to decline, the competitive pressures on industry have increased significantly.

It is still a great market but there are too many of us addressing it.
 
When there is more capacity than demand, something needs to give. And I think we have begun to see that in terms of industry consolidation.
 
Engility  recently announced an agreement to acquire TASC. Our TASC transaction is the latest example of the uptick in merger and acquisition activity.
 
Consolidation is undoubtedly a good thing for both the industry and our government partners.
Mergers and acquisitions result in increased scale, which enable fixed infrastructure costs to be spread across a larger base of business.
 
At the end of the day, consolidation done well should bring greater pools of capabilities together in one place for our customers.  These capabilities should be delivered more efficiently with lower relative overhead costs that don’t add value to the mission. 
 
From industry’s standpoint, consolidation is a way to enhance “mission readiness.”

Our future success will depend on:

• How we apply these capabilities in the context of a strong government and industry partnership.
• How we all adjust to today’s environment.
• How we all leverage innovation and agility as companies, as services, and as partners.

How we do these things will determine whether we are all truly “mission ready.”