While government services contractors battle a tight labor market and ongoing supply chain disruptions, they emerged from the third quarter of 2021 excited for advances in digital warfare and the future of defense.
Top executives in the government services space highlighted opportunities and strategic initiatives in their third-quarter earnings calls, which were transcribed by Bloomberg and AlphaSense. Three themes came into focus.
1. The labor market requires strategic action
The labor market is tight, competition for technical positions is fierce, and security clearances continue to be a hot commodity. As a result, federal contractors are closely monitoring their workforces, hiring top talent and investing in retention efforts.
Hiring is Booz Allen Hamilton’s “top operational priority,” CEO Horacio Rozanski said, noting it accelerated rapidly over the first two quarters of the year.
Leidos CEO Roger Krone said wage inflation has yet to affect his company directly but mentioned that leadership is being “thoughtful” about the fight for talent.
Other executives cited wage inflation and wage pressures. CACI CEO John Mengucci emphasized his willingness to pay for top talent, particularly for those who are cleared with specialized technology skills and certifications.
2. The pandemic continues
Even before the omicron variant of the coronavirus began affecting the pandemic outlook in the United States, the government services ecosystem continued to feel lingering effects of pandemic distruptions—decreasing award amounts, delayed awards, lengthening lead times and parts shortages.
Mantech CEO Kevin Phillips summarized the three primary effects: “The slower return to normal within our intelligence community customers, continuing supply chain challenges, and a tight labor market.” He went on to highlight the lack of predictability around supply chain challenges, which affect the timing and level of material procurements.
Krone—at Leidos—in early November characterized those issues as a delay that should correct early next year, as opposed to a long-term problem. Whether the omicron variant reshapes that outlook remains to be seen.
3. Digital warfare market opportunities are driving innovation
Contractors continue to position for the future of defense in the form of digital warfare—defending electronic information and information infrastructure.
“The full and rapid implementation of digital warfare into traditional operating technology missions is of increasing importance,” Mantech’s Phillips noted. Rozanski of Booz Allen Hamilton called out the digital battle space and areas of hypergrowth in the national cyber realm.
The threat landscape continues to evolve with cyberattacks becoming quicker, smarter and more complex.
Bob Pragada, president and chief operating officer of Jacobs Engineering Group, cited three of several major emerging threats to national security: cyberattacks on mission-critical infrastructure; speed and complexity of near-peer threats; and the adoption of data-intensive, artificial-intelligence-based applications that are dramatically increasing the need for real-time data security and integrity.
An effective and proactive response will require an innovative, data-oriented and technology-driven approach.
Looking ahead
Company executives in the sector continue to be attentive to the complex and evolving needs of the federal government. We expect fourth-quarter 2021 earnings calls to center around the continuing resolution, end-of-year mergers and acquisitions activity, and additional executive orders coming from the Biden administration.
Brad Sawyer, RSM senior associate in financial consulting and valuation services, contributed to this article.
