Trump and the GovCon market

The Trump Administration’s first 100 days passed this weekend and the period has certainly sparked a lively conversation in the DC region about the impact on the government contracting community and the almost $500 billion per year market to provide goods and services to the US government.

The headlines are spectacular at times (Lockheed Martin market capitalization falls 2 percent in one afternoon after Trump Tweet!). The presidential method is….um…..unprecedented…shall we say. The new president sends bold, broad directional signals with authority: “Lower Costs!” “Stop Hiring!” “Buy American!” Confusion reigns and anxiety ensues, but nobody really knows what it all means or how it will affect their businesses.

I recently gave a talk to a group of GovCon CEOs and offered a way to think through this phenomenon and this period.

Think of this analogy. An elephant trainer (called a Mahout in India) riding an elephant through a jungle. In this analogy the president is the Mahout, the elephant is the vast organization that is the U.S. government and its contracting activities and budget (so that includes numerous different agencies and Congress). The jungle is the overall business environment – which includes technology trends, competitive trends, demographic trends and the like.

Right now we all want to focus on the Mahout, and what he is shouting to the elephant (and the jungle sometimes). And this is a Mahout who is really good at getting attention. What the Mahout says matters – let there be no mistake about that.

But for the GovCon industry, what the Mahout orders or shouts are far less important than the nature of the elephant and its behavior, and even less important than the kind of jungle through which it strides. 

In fact, the importance of these three actors to the immediate future of the GovCon industry is inversely proportional to the amount of news each one gets. GovCon leaders should weight their thinking and their moves accordingly. The overall environment will have more effect on them than the nature or health of the elephant and the elephant will matter more than the rider.

President Trump sends aggressive signals about his intent, his priorities, and his values. Most leaders do. But what do they really mean for GovCon? As a Wall Street Journal article last week pointed out about his Buy American executive order (Headline: “President Has Limited Power to Buck Trend”), it’s very difficult to figure out how to implement such a directive or even if it is good for the government or taxpayer. 

Does this mean the 25-year policy encouraging foreign direct investment in the United States is over? Hundreds of billions of foreign dollars to date have been invited into the country by the U.S. to create jobs here. There are even hundreds of foreign-owned companies with subsidiaries (notably BAE) doing classified work for the U.S. government in the United States and with American workers under special rules and boards (full disclosure: I serve on three of these boards).

In the meantime, over half of the top 50 American contractors offshored some of the jobs in the firm. As a professor who teaches international business strategy, I would expect them to. Supply chains, some labor, and capital markets are truly global. Some big and prominent American GovCon firms have parent companies headquartered in tax havens overseas. What does Buy American for government contracting mean in this mix?

Other executive orders have sown similar confusion but likely not much long term impact. The hiring freeze on government agencies was an important signal, but for the most part it simply caused confusion, some creativity to work around it, and a stall in action of any kind – which hurt contractors as much as government employees. 

We focus so much attention on these things in the industry – we have a headline grabbing Mahout with an evocative twitter account after all. But the elephant matters more, and the jungle more still.

As to the elephant, it now has enough money to operate for another week at least – but this elephant has been a Continuing Resolution beast for a long time. And a longer term deal is imminent. That rhythm of funding the government alone is more consequential by far than presidential actions. And when we look at the amount of money and not just the method of its authorization and appropriation, this is still a mighty big elephant. Far bigger than 15 years ago.

My guess is that by the time Congress is done weighing in on the president’s proposed 2018 budget, the Defense Department indeed gets its big plus-up but the “losers” in the President’s budget submission don’t lose that much. Even in Trump’s blueprint only four agencies go down in budget more than small single digits – State/USAID, Education, EPA, and HHS. And they have their champions in Congress. This president is not afraid to spend.

The elephant will likely continue to grow – we ask it to do so much more now than we used to. Discretionary spending by the federal government, which is the money from which the “addressable market” for GovCon exists, is up 40 percent since 2002. 

The elephant has a lot of other characteristics and behaviors that effect things more than executive orders or even policy priorities. Things a president cannot or will not affect that much. These are perennial complaints that never seem to go away. Dated, burdensome, and ineffective procurement rules and regulations, security clearance problems of several kinds, the cost of oversight, the acquisition process and its inefficiencies and slowness. Those shape the elephant. Different Mahouts have had little effect on this over the years.

Finally – the jungle. Or is it a savannah? Or a mini-ice age? Any answer is ultimately more important in shaping the industry than the rider or the elephant. 

Demographic trends, technology trends, business outsourcing trends, competitive trends, workforce management trends, unexpected health or national security events. When you look back, it was these things that made the GovCon industry what it was – not a particular administration or a particular budget imbroglio. 

Have you heard of the “Silver Tsunami?” – this will be the mass retirement wave (or retirement eligible anyway) of government workers over the next few years. Did you know about the 9:1 imbalance of government technology experts between those over 50 years old vs. those under 30? When was the last time a government agency did its own technology solution without a contractor – for almost any issue? What will follow the cloud or mobility and be the breakthrough technology that every agency must have in 2024? Will commercial industries really break onto the scene now that Amazon, Google, and others have established a beachhead? – or just tinker with government as a problematic customer best left to specialized service providers? What is the next 9/11? What is the next Zika virus? The next OPM breach?

Those dynamics – the elements of the environment in which the GovCon industry exists - are where CEOs should spend the majority of their thinking time and energy. Of course companies need to be attendant to the changing nature and traits of the elephant, and even the shouting of orders from the Mahout (which sometimes the elephant responds to….and many times it doesn’t). 

But, a certain amount of strategic clarity can be gained from knowing what matters most in the long run.