While government services contractors battle a tight labor market and continued supply chain disruptions, they are excited for what the future holds relating to infrastructure, artificial intelligence and zero-trust cybersecurity.
Top executives in government services recently highlighted opportunities and strategic initiatives in their second-quarter earnings calls. Specifically, the companies represented were ManTech International Corp. (MANT); Booz Allen Hamilton (BAH); Leidos Holdings (LDOS); ICF International (ICFI); Parsons Corp. (PSN); PAE (PAE); Vectrus (VEC); CACI International Inc. (CACI); Jacobs Engineering Group, Inc. (J); Telos Corporation (TLS) and Palantir Technologies, Inc. (PLTR).
Five key themes surfaced from those calls:
1. Labor pains
An excruciatingly tight labor market remains front-of-mind for contractors as they work to attract and retain talent.
“I believe every company in our comp group, and more broadly in the economy, is experiencing recruiting challenges in a tight labor market,” ICFI CEO John Wasson said.
Carey Smith, president and CEO of Parsons, highlighted the particularly competitive labor market for technical and cleared personnel. Charles Prow, president and CEO of Vectrus, noted the “U.S. staffing situation is something that we’re monitoring on a daily basis.”
Contractors are leaning into labor-replacing technologies and providing technology-enabled labor with the flexibility and remote work opportunities they seek. CACI CEO John Mengucci noted his company is driving efficiencies by developing tools to help people perform their jobs and get work done with fewer people. Due to this, Mengucci said he is less concerned with wage inflation and more concerned with hiring the right people.
2. Infrastructure: Invest, then protect
Infrastructure remained a key focus with greater visibility into the infrastructure bill that passed the Senate in August. Contractors are excited not only about investing in the country’s infrastructure, but also the long-term opportunity to protect, maintain and service that infrastructure.
Leidos CEO Roger Krone predicted a future emphasis on what he described as “protecting the infrastructure,” and how the initial infrastructure investment will spur investment in areas like 5G and related information technology.
“When we all have 5G, the functionality that you will carry in your pocket is going to increase by an order of magnitude,” Krone said. “And that, with cloud as a service, we could see that as spurring a whole new round of investment and application migration.”
3. Supply chains have changed forever
Extended supply chain disruptions highlight a new normal focused on smarter, more data-driven decision-making rather than a return to the supply chain status quo. Strategic businesses are using this period of disruption as a launching pad to position their customers for supply chains of the future.
Palantir Chief Operating Officer Shyam Sankar boldly stated: “Supply chains will never be the same.” “It isn’t just about today’s shortages; the old world is fixated on the accuracy of the forecast. The new world is all about how well you manage the error in your forecast. The error is the signal; the error is the opportunity to win.”
“The old world is fixated on the accuracy of the forecast. The new world is all about how well you manage the error in your forecast. The error is the signal; the error is the opportunity to win.” — Shyam Sankar, Palantir COO
4. Artificial intelligence will change the game
AI will continue to be a driver of digital transformation in the federal government. AI also gives contractors opportunities to improve their own operational efficiency and data-driven decision-making.
Booz Allen Hamilton CEO Horacio Rozanski views AI as “a critical technology to drive mission,” he said. He expects to see it in space in addition to cyber and intelligence.
Megucci said AI is ubiquitous throughout CACI’s business. The Biden administration, he said, is “focused on enabling technologies and methodologies, like artificial intelligence and agile software development” as it provides their federal customers “speed, efficiency and predictive analytics.”
5. Cyber: Trust no one
Telos CEO John Wood noted that a number of cyberattacks targeting various sectors in the United States have pushed President Biden to put cybersecurity at the center of his agenda. He cited the president’s May executive order on cybersecurity and subsequent actions, such as new requirements for pipeline security, and some legislative initiatives in Congress.
Such cyberattacks contribute to the “never trust, always verify” mantra of zero-trust cyber architecture that is a level up from traditional security models.
Said ManTech CEO Kevin Phillips: “The cyber defense piece is moving towards zero-trust architecture moving to the cloud. There’s a lot behind that through the executive order that came out.”
Mengucci stated CACI is moving all of its networks “much, much closer to zero-trust.” He noted that those not in line with zero-trust cyber architecture are going to get in line shortly.
Looking ahead
Company executives in the sector continue to be attentive to the complex and evolving needs of the federal government. We expect third-quarter earnings calls to center around the federal budget process, M&A activity, and prioritization of innovative technologies to drive efficiency.
Brad Sawyer; associate in financial consulting, valuation services, at RSM; contributed.
