Government services executives continue to focus on hiring and retention, although the Russia-Ukraine war dominated discourse during the first quarter of 2022. Meanwhile, optimism around future spending, investment and opportunity stems from President Joe Biden’s fiscal year 2023 budget request and strong marketplace demand for advanced technologies.
Executives shared their perspectives recently in earnings calls that covered their companies’ first-quarter results. Four themes emerged from the calls, transcripts of which were provided by Bloomberg:
Doubling down on defense
The Russia-Ukraine war has highlighted the importance of a highly technical and capable national defense for the United States and its allies. The conflict may push defense spending trend lines up and to the right.
Kevin Phillips, CEO of ManTech International, highlighted the “national strategic pivot to focus on nuclear threats and the expanding domains of warfare” and the importance of intelligence and full-spectrum cyber capabilities.
Carey Smith; chair, president and CEO of Parsons Corporation; spoke about potential longer-term opportunities arising because of the war, including security systems and services, physical surveillance, cyber electronic warfare and assisting Ukraine with rebuilding after the war.
Wages rise, retention is paramount
Increasing wage inflation has caused the industry to augment strategies to retain skilled and cleared employees in a labor market that’s already tight.
Leidos fills most open positions in 30 to 45 days, chairman and CEO Roger Krone said May 3. He insisted that retention, not hiring, is the company’s challenge and area of focus going forward.
Companies are retaining their best employees using compensation increases and retention awards.
So how are companies retaining their best employees? Compensation and retention awards, ICF International Chairman, President and CEO John Wasson said May 4. Smith of Parsons Corporation estimated wage inflation to be approximately 3% to 3.5% and noted the company is keeping a close eye on the matter.
Booz Allen Hamilton President and CEO Horacio Rozanski said that cost control measures and fiscal discipline are necessary to ensure the company has the resources needed to reward, retain and compensate employees in a tight labor market. He touted the company’s culture and return-to-office flexibility as contributing factors.
Biden’s budget request
President Biden’s fiscal year 2023 budget request indicates a boost to both defense and civilian spending, which is fueling executives’ optimism.
ManTech Chairman, CEO and President Kevin Phillips was particularly enthusiastic about the “underlying demand signals for cyber, digital and systems modernization, data at the edge, and automation.”
Wasson of ICF was encouraged by health budgets and a focus on preparing for the next pandemic.
John Wood, CEO of Telos Corporation, connected the request for increased spending on cybersecurity to the 2021 cybersecurity executive order requiring zero-trust architecture at federal agencies. Wood reiterated that the presidential budget request was developed prior to the full escalation of the Russia-Ukraine war and recent increases in inflation, suggesting the budget Congress eventually passes will be larger than what President Biden proposed.
John Mengucci, president and CEO of CACI International, called the war a “wake-up call” and noted that China and other near peers remain threats. Krone of Leidos similarly noted a typical reversal of the peacetime preference for lower defense budgets in the wake of war.
Contractors should monitor Congress’ progress toward a fiscal 2023 budget but keep in mind that the budget process hasn’t been completed on time since the 1990s and often varies widely from the president’s request.
Contractors should monitor Congress’ progress toward a fiscal 2023 budget but keep in mind that the budget process hasn’t been completed on time since the 1990s and often varies widely from the president’s request.
Technology pushes forward
Key industry players acknowledge that the federal government will need to continue to spend to maintain leadership in the quickly evolving technological landscape. Capabilities such as hypersonics, nuclear power, space tech, artificial intelligence and cybersecurity will require significant research and development opportunities to remain competitive on the global stage.
Parsons’ Smith highlighted a data point that signals future innovation: the president’s request for $205 billion in total spending on research and development, a $45 billion (28%) increase from 2021. She also referenced the “increasingly crowded and contested” space race that involves anti-satellite and hypersonic threats.
President Biden’s request for $205 billion in total spending on research and development in 2023 represents a $45 billion (28%) increase from 2021.
Relatedly, Palantir Chief Operating Officer Shyam Sankar said: “The war is not just happening on the ground in Ukraine, but also in space.” He went on to praise the U.S. Space Force as the gold standard among allied nations.
Rozanski of Booz Allen Hamilton aptly summarized the pace and magnitude of change when he said: “The rapidly evolving challenges confronting our nation will accelerate the pace of change in our government’s mission and use of technology. Five to 10 years from now, technologies from 5G to AI and from blockchain to quantum will be ubiquitous across a range of missions.”
The takeaway
Amid global turmoil, government contractors seek to remain responsive and agile in the short term, and strategic and innovative in the long term. While the Russia-Ukraine war is understandably a top focus in the ecosystem, the demand for cutting-edge technological innovation persists along with the upskilled workforce needed to develop such solutions. Executives demonstrated their ability to keep longer-term goals in focus amid a period of geopolitical turmoil and immediate need.
For more insights, read our government contracting industry outlook for summer 2022.
Brad Sawyer, RSM senior associate in valuation services, contributed.
