The government services ecosystem in the fourth quarter of calendar year 2021 was enthusiastic about opportunities related to infrastructure and 5G. The mergers and acquisitions environment is active but somewhat throttled. Labor remains a pressing issue, but hybrid work patterns are providing greater flexibility for employees and employers.
Top executives in the government services space highlighted opportunities and strategic initiatives in their respective fourth-quarter earnings calls, hosted early in 2022. Here are five trends that came into focus:
1. Marriage through M&A continues
Mergers and acquisitions continued early in 2022 but not quite at the same clip as 2021. While some executives continue to cite frothy multiples and robust pipelines, others believe many of the best targets were acquired last year.
Kevin Phillips, chairman, CEO and president of ManTech, acknowledged during the company’s Feb. 23 earnings call that the first half of 2022 will likely be lighter for opportunities than 2021, which he described as a “very heavy year.” Roger Krone, chairman and CEO of Leidos, took it a step further during the company’s Feb. 15 call, saying the business is “not really enthusiastic about what is out there.”
The most successful pairings are often the result of preexisting relationships, leading to a more natural marriage when the time is right.
However, other CEOs in the ecosystem—namely Horacio Rozanski of Booz Allen Hamilton and John Wasson of ICF International—signaled continued momentum. Wasson on Feb. 24 characterized the M&A environment as “quite active” and pricing as “still frothy.” Rozanski reminded listeners that his team continues to focus on cultivating opportunities based on existing relationships as opposed to broadly shopping the market via auction.
While 2021 will be difficult to top, strategic buyers are still open to acquisitions that provide a good match in terms of capability, customer and culture. The most successful pairings are often the result of preexisting relationships, leading to a more natural marriage when the time is right.
2. Companies are preparing to pursue infrastructure opportunities
Contractors continue to position for opportunities related to the Infrastructure Investment and Jobs Act in the short term and long term. While most of the infrastructure spending will be through grants at the state and local level, ICF International’s Wasson highlighted the opportunity for the company to perform environmental permitting and analysis, planning support and services related to such projects.
Jacobs Engineering Group Chairman and CEO Steve Demetriou challenged listeners on Feb. 8 to be even more forward-thinking in how they consider the impact of infrastructure investments. Specifically, Jacobs is planning for the expansion of future communities, predicting where and when to deploy electric vehicle charging stations, and measuring the social value that investments have on underserved communities and populations.
Parsons Corp. President and CEO Carey Smith on Feb. 23 spoke about the timing of this highly anticipated funding. She predicted funds would start flowing in late 2022, knowing that new programs wouldn’t be able to start until a full federal budget bill is passed. The company continued working on existing programs and those related to the formula funds within its focus areas of transportation, environmental remediation, and water and wastewater treatment. Now that the continuing resolution is no more, jockeying for new opportunities will commence.
3. Advancing 5G capabilities involves promising projects
Executives are excited about layering 5G capabilities into government services offerings—including those related to cybersecurity, communications, security and logistics.
Booz Allen Hamilton and Vectrus commented on new 5G projects; Booz Allen announced the opening of a carrier-grade 5G lab in central Maryland that will serve as a testing environment for secure, cyber-resilient 5G solutions.
Vectrus President and CEO Chuck Prow said the company was selected to complete the final phase of application development for a 5G smart warehouse at Naval Base Coronado in California. The warehouse also supports the Department of Defense’s 5G experimentation and testing initiative.
4. Hybrid work is a robust recruiting and retention tool
Hybrid work structures continue to be a tool to attract and retain workers in a tight labor market. Parsons continues to tout its flexibility around work location when the customer is amenable to such an arrangement. Smith, the president and CEO, went on to highlight flexible career paths to complement geographic flexibility. Specifically, Parsons is offering true technical pathing options that allow for technicians to become technical fellows and technology leaders, as opposed to the traditional management path
Contractors are also enjoying the benefits, when able, to reduce real estate expenses. Wasson of ICF International touted the company’s careful consideration of facilities investment, as well as its reinvestment of cost savings into business development efforts.
5. Wage pressures remain in place
The labor market remains competitive, and contractors continue to pay increased wages for desirable skillsets, clearances and certifications. Krone of Leidos noted that the company is seeing a “little bit of uptick in what we’re paying people.” However, the job market contains recent college graduates with some of the most desirable skillsets, like Python programming, Krone said. Hiring them has helped the company cost structure without compromising technical ability.
Contractors continue to pay increased wages for desirable skillsets, clearances and certifications.
Jon Mengucci, president and CEO of CACI, also highlighted a shift in cost structure in the industry during the company’s Jan. 27 call. As technology-focused work increases, CACI can be more efficient and flexible in hiring and leveraging headcount, he said. In other words, revenue is no longer linear to headcount, providing more options for absorbing wage increases.
Looking ahead
Company executives in the sector continue to be attentive to the complex and evolving needs of the federal government. We expect Q1 2022 earnings calls to center around highly anticipated new program starts that were previously held up by the continuing resolution, and the Biden administration’s fiscal year 2023 budget request.
