During second-quarter earnings calls, government services company executives stressed that modern solutions are required to meet evolving technological threats. Generative AI continues to drive excitement and intrigue as companies jockey for competitive advantage in a crowded marketplace.
Uncertainty surrounding federal budget appropriations for the 2024 fiscal year, beginning Oct. 1, had executives discussing their strengths and competitive positioning. Funding from recent legislation, like the Infrastructure Investment and Jobs Act (IIJA) and Inflation Reduction Act (IRA), was also a topic of discussion as new bidding opportunities emerge in the U.S. and internationally.
Three themes emerged from the earnings calls, transcripts of which were provided by Bloomberg: generative AI, the international impact of industrial policy and positioning for the fiscal 2024 budget.
Generative AI
Generative AI continues to steal the show in terms of interest and investment. Booz Allen Hamilton CEO Horacio Rozanski said AI is permeating the entirety of his company’s business. Across the board, industry players are learning how to utilize this technology to maximize its application for internal efficiency and for delivering solutions to federal customers.
The generative AI innovation roadmap continues to lengthen and evolve as use cases multiply—particularly as it relates to deploying generative AI into existing applications and customer data analysis. CACI International CEO John Mengucci said the tense geopolitical environment is driving customer demand for modern, generative solutions to complex threats.
While executives are excited by the prospect of improving internal efficiencies through generative AI, its ability to empower and revolutionize technology tools and data analysis for customers is the main act.
Executives also commented on the tremendous speed at which innovation is occurring with this technology. Palantir Technologies CEO Alexander Karp called the pace “awe-inspiring.” Leidos CEO Thomas Bell said customers are feeling the pressure of holistic and vexing problems and are looking for solutions that have the speed and scale to keep up.
Bruce Caswell, CEO of Maximus Inc., said his company is managing the pace of change through the establishment of an AI governance board. This dedicated board seeks to adapt AI risk management, understand existing and anticipate future regulatory frameworks, and meet customer expectations. The goals of the Maximus board highlight the desire of governments, businesses and organizations to balance opportunity and innovation with risk and regulation.
To learn more about artificial intelligence, visit RSM’s generative AI page.
As the end of the federal fiscal year approaches, the industry consensus is that generative AI will remain a significant area of investment, and government services businesses will continue to evolve best practices to achieve differentiation in a very competitive space.
International impact of industrial policy
Nearly two years after the IIJA and the IRA passed Congress, government services businesses continue to be excited about the opportunities these bills present as programs receive funding.
The large industry players saw the benefits of providing diverse service offerings, given that the IIJA and IRA cover a wide array of needs. Specifically, companies with exposure to critical infrastructure and environmental remediation echoed excitement for these new opportunities as IIJA and IRA funding enters the pipeline.
Others highlighted the domino effect of government investment and industrial policy decisions—specifically, that foreign governments will follow the example of U.S. investment in infrastructure and critical technologies, with the European Chips Act cited as one example.
As international investment continues, government services businesses will look to further diversify customer bases geographically, especially where industrial policy-driven opportunities exist with U.S. allies.
Positioning for the fiscal 2024 budget
Executives reiterated relief at the passing of the debt-ceiling agreement reached in May 2023, noting that a worst-case scenario regarding a federal default was narrowly avoided. However, this provided little clarity on appropriations of the FY 2024 federal budget.
Bell said significant uncertainty remains surrounding the budget negotiations. As a result, his company is pushing to win awards and begin work on existing projects prior to the end of fiscal year 2023 on September 30.
Based on the negotiations of prior years, Mengucci predicts a continuing resolution will be passed by Sept. 30. Regardless of when a budget is agreed upon, executives remain committed to anticipating the federal government’s focus, including continued modernization efforts.
To mitigate the risk of a potential unfavorable budget outcome, large players are finding increased opportunities for international growth. Caswell indicated the United Kingdom, Australia and Canada are anchors to Maximus’ international opportunities. Other executives shared similar commentary on Australian opportunities, a country that has shifted its defense priorities, given heightened activity in the Indo-Pacific region.
Ultimately, it appears executives will exercise patient capital deployment toward long-term initiatives until the government’s funding priorities become clearer.
The takeaway
Regardless of how the federal budget negotiations play out, government services businesses will continue to ride the modernization wave that is sweeping federal agencies. Generative AI is just one of many tools used to gain a competitive edge in an industry where players innovate at an unprecedented speed.
We can also expect international investment to pick up, particularly if geopolitical tensions increase in Europe and the Indo-Pacific region. This will allow contractors to continue to pursue significant opportunities with U.S. allies in the event of an unfavorable budget outcome in the U.S.
Brad Sawyer contributed to this article.
