Contracting

IT strategy for contractors in the era of budget cuts

bills with tight belt

Firms are already re-evaluating their business methods to maintain profitability despite reductions in the overall business base.

The sequester will continue to put significant pressure on contractors and agencies as it strips as much as $1.2 trillion from defense and nondefense programs in the next decade. And with a budget deal now in place for the rest of the fiscal year, officials are bracing for more spending cuts in 2014.

All those cuts are expected to significantly decrease the number of contract awards, prompt the restructuring of existing contracts, increase the use of firm-fixed-price contracts that place higher risks with contractors and spark still more lowest price, technically acceptable contracts.

In response to the potential impact on their revenue and profitability, government contractors are pursuing a combination of aggressive strategies, and underlying each of them is a need to review and revise the existing information systems.

Here is how companies are likely to adapt and how IT will play a key role in executing these strategies.

Improving internal efficiency

Firms are already re-evaluating their business methods to maintain profitability despite reductions in the overall business base. They are increasingly trying to figure out how to be stronger, lighter, faster and more agile with fewer resources. IT systems can play a significant role in that transformation.

Many companies have old legacy systems. From 2002 to 2007, their focus was on maximizing revenue in a time of increased government spending. As long as systems complied with federal Cost Accounting Standards (CAS), there was no need to invest in upgrades. Yet legacy systems have costs. Clunky invoicing processes slow collections, compliance reports can take days or weeks, and variance in costing is hard to calculate and explain to auditors.

Those issues were hidden when contracts were plentiful, but today such systems need to change. Now firms want to streamline and automate processes to reduce costs, but that is difficult to achieve without upgrading to new business systems.

Spin-offs

Federal budget cuts will prompt more contractors to shrink by spinning off divisions that are growing more slowly or are no longer central to their business. The top 10 contractors announced five divestitures in 2013, according to data compiled by Bloomberg. In the defense industry, the services organizations get hit sooner by budget cuts than do large weapons programs because of the shorter buying cycle. That is because agencies often pay for services the same year they are delivered, while weapons programs are paid for with funds that are appropriated years ahead of time.

And as services organizations are spun off, they must implement their own business systems. In order to deploy such systems quickly while also complying with federal regulatory requirements, companies are selecting commercially available enterprise business systems.

Mergers and acquisitions

The third impact is an increase in M&A activity. Several contractors are seeking to offset the spending cuts’ pressure on their revenues through the acquisition of companies that work in high-priority areas for federal agencies. Cybersecurity, big data, C41SR and signal intelligence companies will likely continue to reap a premium because they are seen as growth areas even in austere budget times.

However, the acquiring companies must ensure that the acquired organizations’ business systems can support the government’s contracting requirements, which might be changed by the acquisition. A newly combined company that wants to bid on larger projects, for example, must ensure that its system supports full CAS compliance rather than modified CAS. And if the acquired organization will be managed as a subsidiary, it is critical to ensure that its business systems enable agility and efficiency while achieving regulatory compliance.

About the Author

Carr Phillips is senior director of solutions marketing for the professional services industry at SAP.

The 2015 Federal 100

Meet 100 women and men who are doing great things in federal IT.

Featured

  • Shutterstock image (by venimo): e-learning concept image, digital content and online webinar icons.

    Can MOOCs make the grade for federal training?

    Massive open online courses can offer specialized IT instruction on a flexible schedule and on the cheap. That may not always mesh with government's preference for structure and certification, however.

  • Shutterstock image (by edel): graduation cap and diploma.

    Cybersecurity: 6 schools with the right stuff

    The federal government craves more cybersecurity professionals. These six schools are helping meet that demand.

  • Rick Holgate

    Holgate to depart ATF

    Former ACT president will take a job with Gartner, follow his spouse to Vienna, Austria.

  • Are VA techies slacking off on Yammer?

    A new IG report cites security and productivity concerns associated with employees' use of the popular online collaboration tool.

  • Shutterstock image: digital fingerprint, cyber crime.

    Exclusive: The OPM breach details you haven't seen

    An official timeline of the Office of Personnel Management breach obtained by FCW pinpoints the hackers’ calibrated extraction of data, and the government's step-by-step response.

  • Stephen Warren

    Deputy CIO Warren exits VA

    The onetime acting CIO at Veterans Affairs will be taking over CIO duties at the Office of the Comptroller of the Currency.

  • Shutterstock image: monitoring factors of healthcare.

    DOD awards massive health records contract

    Leidos, Accenture and Cerner pull off an unexpected win of the multi-billion-dollar Defense Healthcare Management System Modernization contract, beating out the presumptive health-records leader.

  • Sweating the OPM data breach -- Illustration by Dragutin Cvijanovic

    Sweating the stolen data

    Millions of background-check records were compromised, OPM now says. Here's the jaw-dropping range of personal data that was exposed.

  • FCW magazine

    Let's talk about Alliant 2

    The General Services Administration is going to great lengths to gather feedback on its IT services GWAC. Will it make for a better acquisition vehicle?

Reader comments

Please post your comments here. Comments are moderated, so they may not appear immediately after submitting. We will not post comments that we consider abusive or off-topic.

Please type the letters/numbers you see above