Signed into law in February, the Bipartisan Budget Act of 2018 is a two-year agreement that raises the spending caps for both defense and non-defense in FY2018 and FY2019. The increase has been cause for great expectation and speculation in a government contractor community eager for a return to the days of strong and sustained growth. However, not everyone shares that rosy view, with a minority of skeptics wondering, despite the fanfare, if spending will grow at healthy levels, if at all.
As is often the case where large sums of promised spending collide with congressional scrutiny, the answer may lie in the middle. Over the next 18 months we anticipate room for cautious optimism, and forecast a noticeable growth in IT services, even over the next three years. We also expect some growth in manufacturing overall, though not nearly to the level anticipated for some of the defense hardware manufacturers. Should spending increase in the next year and a half, there is likely to be intense competition among contractors to defend their existing contracts and/or work aggressively to grow their own piece of the pie.
But regardless of how narrowly or widely the spigots open – and we’ll discuss the likely winners below – a recent survey by Market Connections reveals that eighty percent of Defense IT decision makers believe they will see spending increases within the next 18 months. If that’s the case, contractors should be preparing now.
The Current Situation and Outlook Is Generally Positive, Though Some Skeptics are Wary
The expected influx is certainly welcome news to the nearly four in five Defense IT decision-makers that report their projects are on hold. But at the same time, while two-thirds feel that proposed spending increases will move their projects forward, there is still some skepticism in the market, with one in five not quite sure that this will be the case.
Spending on Cyber Will Continue to Grow
If spending does occur, most believe—not surprisingly – that it will focus on cyber security and the modernization of equipment and networks. The other focus of investment will be in people, including the staffing and training of individuals ranging from civilian personnel within DoD to active duty troops. And IT straddles both approaches, where we believe a portion of funds is likely to go to technology, and to the people that create that technology and the users that rely on it in the field.
The Spending Increases Are Likely to Be Felt – or Perhaps Not Felt – Within the Next 18 Months
Four in five believe they will feel the impact of the budget increase within the next 18 months. But while there is room for cautious optimism, two key factors must be considered: first, the realities of the funding process; and second, the limited proportion of funds that are contractor-addressable. The contractor-addressable market refers to money available to pay government contractors for existing and new work. We used the calculation as an analysis tool to gauge the scope of the spending increase.
Regarding the realities of programmatics, budgeting and funding, Ray Bjorklund, president of Birchgrove Consulting, notes that the budget deal is only a two-year agreement to raise the caps on spending in discretionary civilian and discretionary defense. And while there may be some impetus to move forward with some programs as the spending caps are raised, a reality is that the budget is determined annually and must go through the entire appropriations process. Moreover, as we come up on the midterm elections, there may be different ways that the appropriators in Congress will look at this. The final step occurs when the executive branch decides the apportionment once the appropriations are granted/enacted by Congress.
The second factor, that of contract addressability, hits very close to home: even though the budget agreement involves a great deal of discretionary and mandatory money, Bjorklund believes only 23% of that share – which covers civilian as well as defense business, is likely to go to contractors. And that proportion does not generally change much over time, influx or not. A share of this 23% depends less on contractor size than on the type of contractor, and a wide variety of contractor types may compete for those dollars, in general including transport, professional services, pure R&D, medical services, and pharmaceuticals.
To an extent, the technology and services areas may be better off than other types of firm– here too there is room for cautious optimism. But it also depends on how proactive the contractors are in leveraging existing opportunities or creating their own. For IT/defense IT, if the contractor has new cybersecurity solutions whether for intel purposes or for better back-office functionality, DoD will want to hear about it. Nevertheless, agencies are going to rely heavily on existing contracts due to the quick turnaround pressure of the spending deadlines.
“Things don’t happen overnight.” Ray Bjorklund
Undoubtedly, a lot is going on in the IT arena, such as looking for ways to provide solutions that address the DoD’s unfilled expectations. This pent-up need alone signals some room for growth. But while there is some reason for cheer on the IT front, the influx is not likely to be a windfall. What is apparent, however, is that IT services will experience stronger growth in the near term among IT services firms, ahead of IT products firms.
- IT products growth forecast: modest in the near and longer term.
- 2-3% growth over the next three years
- 1-2% growth in years four and five
- IT services growth forecast: robust, but tapering off in the long term.
- Very healthy 5-8% growth over next three years, a level not seen in a long time
- 1-2% growth in years four and five
Plan an 18-Month Proactive Strategy
And so, bearing in mind the types of firms more likely to be winners, and the projected level of growth for that category in the coming years, the question then becomes how contractors can best position themselves to get the most out of the influx. First and foremost, this calls for an 18-month planning window, beginning now.
To start, invest in BD and marketing, and be proactive not only to expand, but also to defend existing contracts. In addition, look for areas where competitors are not performing as well and compete in that space. This is especially true in what may end up being a rather flat market in the longer term, leading some contractors to focus on grabbing market share away from their competitors. Or, you may consider partnering arrangements with other contractors to grab a new slice of the pie. To create your own competitive advantage, consider the following three-pronged strategy to recognize the environment in which you’re competing, and shape it to your purposes.
- All Hands on Deck!You have 18 months… or do you have only five? The clock is ticking, because funding will have an impact sooner rather than later. We know that 2018 opportunities are out there, and to seize those openings, leverage your internal and external sources to identify government needs and challenges. There is no time to waste, or wait. The results of the midterm elections could affect spending in FY2019, therefore, front-load your investments to maximize 2018 commitments, including advertising, events and targeting, and be cautious in your projections for 2019. It is critical to have identified your primary targets and gather as much information on their needs and preferences as possible.
- Only Three Months to Spend for an Entire YearIt’s time also to help your friendly neighborhood procurement official. With only three months left in FY18, COs will be working overtime to make sure they meet procurement requirements, while also contracting more dollars. Understanding that they will be under stress, the time is ripe to communicate to them about how you can help. The normal sales cycle will be compressed, so making sure you are delivering the necessary content will be critical. White papers and third-party studies are great as tools to scope out their need; but for proven technologies, product demos and trials may be the most critical in the coming months because they have the greatest impact late in the decision process. Market Connections’ Federal Content Marketing Review is a useful resource for the types of content federal decision makers seek during each stage of the procurement process.
- Be Where They LiveFocus on projects helping agencies with cybersecurity, modernization and personnel development. The government has both technical and personnel needs, and this opens the door for contractors to highlight ways to help with both. Many companies will be looking to make a splash, so it is imperative to make sure your messaging and outreach campaigns are living where your targets live. This means it is key to understand where your targets are going for information. What websites are they visiting? What publications are they reading? What events are they attending? Make sure you’re visible where they are. Utilize resources like the Market Connections’ Federal Media and Marketing Study and Federal Events Study to help you differentiate by agency or need.
Ultimately, proactivity is the key. The IT service contractors that start without delay to map out and implement a BD and communications plan with their government targets will be in a far better position to realize more of the gains.