The government services ecosystem is always on a mission. Whether executing on existing contracts or anticipating solutions for the challenges of the future, industry executives are continually refining strategies and aligning capabilities to meet the needs of citizens at home or those deployed abroad.
Executives shared their perspectives recently in earnings calls that covered their companies’ fourth-quarter results.
Through a mix of reflection on 2022’s developments and forward-looking discussions, executives were quick to highlight a more favorable labor market and selective M&A practices as key trends affecting the industry during the fourth quarter.
Industry analysts were also eager to discuss the implications of artificial intelligence (AI) during the quarter’s calls. Executives generally proceeded with caution around this topic, given the uncertainty of its implementation or its ramifications.
Three themes emerged from the calls, transcripts of which were provided by Bloomberg.
Mergers and acquisitions: The lowdown on the slowdown
Increasing interest rates tempered the M&A market after record-setting years emerging from the pandemic. Executives emphasized organic growth, noting that M&A would be pursued only under the most ideal and strategic of circumstances.
Horacio Rozanski, chief executive officer of Booz Allen Hamilton, acknowledged the industry-wide slowdown in M&A activity. He said Booz Allen Hamilton is focused on future acquisitions that will accelerate organic growth.
Carey Smith, president and chief executive officer of Parsons Corporation, referenced “very high criteria” that need to be met for a potential acquisition target to be considered.
We expect private equity players to set a similarly high bar as it relates to new platform acquisitions, given the increased cost of borrowing and its impact on investment rates of return. The near term will likely be characterized by well-aligned bolt-on acquisitions that provide synergistic opportunities.
Labor market optimism
Executives struck a more optimistic tone on talent than in recent quarters.
Bruce Caswell, chief executive officer and director of Maximus Inc., praised his company’s hiring efforts in the improved labor market. He said Maximus has staffed an appropriate level of talent on mission-oriented work initiatives.
Nazzic Keene, chief executive officer of SAIC, said a more normalized labor market has returned for the company.
Other executives reported an uptick in hiring numbers during the fourth quarter of 2022 compared to the previous year’s same timeframe.
What drove this labor availability? Possible explanations include the following:
• Layoffs in other industries and ecosystems
• Companies’ willingness to consider broader and less traditional labor pools
• Continued flexibility regarding geographic location for remote and hybrid roles
• A slowdown in the pandemic-driven boost in job switching and early retirement
Maintaining a skilled workforce with the necessary security clearance has always been a priority for the large industry players. Executives have a renewed optimism that projects will be sufficiently staffed with the appropriate talent to achieve optimal mission success.
AI frenzy
The topic of AI peaked in the public square after the release of ChatGPT and other competing large language models in the fourth quarter.
Customer applications of artificial intelligence are not new for executives in the government services industry, particularly those serving the most innovative corners of the defense market. But executives are wrestling with the implications of the rapidly developing AI arena and how they will play out in the near future as the broader world reacts.
And as cyber threats evolve in number and complexity, the need to stay ahead of the latest technological developments is a matter of national security.
Roger Krone, chief executive officer of Leidos, said his company is combining AI and cyber solutions to ensure a greater level of security in systems and networks. Leidos has also implemented language models within its day-to-day operations to free up human capital to pursue activities involving more cognitive discernment.
AI and machine learning (ML) made their mark on defense far before the release of ChatGPT, thanks to the long-time cutting-edge efforts of DARPA and other innovation centers within the federal government.
Contractors continue to innovate their solutions and enhance capability. They are using AI, ML and quantum computing to solve both defense and civilian-oriented challenges.
As the public learns and explores the applications of AI and ML, contractors should consider how these technologies could improve and enhance internal company operations. But contractors have a heavier lift when it comes to embedding AI and ML tools into operations, given their use of sensitive and classified data. Publicly available AI tools are not secure, and they are ignorant of data and concepts that the federal government has not made public. Therefore, contractors must continue to develop and implement both internal and customer-facing tools in tandem.
This technology will evolve rapidly, and the tone of executives indicates that AI will continue to be transformative in the ecosystem.
The takeaway
Executives are excited about the future. They have a renewed focus on organic growth, cutting-edge technologies and a normalizing labor market. The fourth quarter’s earnings season closed by highlighting the overarching theme of agility, moving into calendar year 2023.
