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.

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