Market faces mixed bag of opportunities, challenges

The recent budget deal doesn't mean fiscal issues are behind us as comments by U.S. Sen. Mark Warner and the findings of the PSC Vision market research report made abundantly clear.

The annual Vision Federal Market Forecast generally covers a wide range of topics from specific contract opportunities to the procurement culture at different agencies to geopolitical influences on the U.S. government.

I’m going to focus in this posting on the budget and economy because they are the single biggest challenge to both government agencies and government contractors.

U.S. Sen. Mark Warner got things started at the 51st annual Vision conference, which now is part of the Professional Services Council. He mostly stayed upbeat and talked about the potential for emerging technologies such as big data, cybersecurity and unmanned systems to be a boon for Virginia business.

But he was darker when he turned to the budget, and as the event’s first speaker, he struck a chord that was repeated often throughout the morning: The recent budget deal is a positive, but “we aren’t out of the woods yet,” he said.

While the overall budget numbers have been set for the next two years, the individual appropriation bills still need to be passed.

While he didn’t call out the Freedom Caucus by name, Warner said there is still the chance that the most conservative faction in the House might try to flex their muscles and “attach a unnecessary and over the top rider that could still crash this thing down,” he said. “But let’s hope this outbreak of sanity continues.”

Warner was followed by Wayne Schroeder, chair of the PSC Vision topline defense forecast, and Robert Haas, PSC Vision chair for the federal IT budget.

Both presented the results of months of interviews with government officials looking at agency priorities, challenges and opportunities for industry.

Some of the macro-economic indicators could spell trouble for the government market. Growth of the Gross Domestic Product is expected to be in the low 2 percent range. That’s a slow growth path, Schroeder said.

U.S. deficits have come down to $400 billion range but are expected to grow past $700 billion by 2025.

The debt side of the equation is even worse, especially if interest rates rise as expected. A single point increase would raise the interest the government pays on its debt by $140 billion, Warner said.

Schroeder had one slide with the headline: Federal Budget Dynamics Worsen Without Structural Reforms that shows total debt growing from $3.987 trillion in fiscal 2016 to $6.134 trillion in 2025.

Interest on the national debt is 6 percent of the federal budget or $250 billion in fiscal 2016. In 2025, it is projected to be 12 percent or $761 billion.

Meanwhile, defense and civilian spending – the discretionary part of the budget – goes from 29 percent of the budget in fiscal 2016 to 21 percent in fiscal 2025. By that point, we’ll be spending more on debt service than we do on defense, Schroeder said.

“That’s why we aren’t out of the woods yet,” he said. While some think the nation can handle that kind of mix of debt and spending, others don’t. “Darker clouds might be on the horizon.”

At one time, Warner was one of several legislators that were pushing for the grand bargain that would bring tax reform and reform of entitlements. “But we’ve punted,” he said.

Turning specifically to defense and civilian spending trends, I thought it was interesting that Schroeder and Haas several times spoke about purchasing power.

While defense and civilian spending is growing overall by a percentage point or two, the buying power of those dollars is flat or decreasing because the increases in dollars aren’t keeping up with inflation.

One positive trend in the IT budget is that many agencies are trying to move more dollars into development and modernization accounts and out of operations and maintenance.

That’s a positive sign for industry, Haas said.

Agency officials told the Vision interviewers that they see cybersecurity and digital transformation as a mission enabler.

There also is a lot of interest in Agile development through small procurements. The downside of that is that more small procurements raises bid and proposal costs for contractors, Haas said.

There also is more of a need to align IT and the mission, which he called a paradigm shift.

A challenge is that policies are often lagging behind technology advancements and slowing adoption of new technologies.

Haas' key takeaways from the Vision research focused on budget pressures. His advice was for contractors was to be prepared for a “sequester mentality” from their customers. Many agencies are just trying to survive, he said.

Contractors need to act as trusted partners and bring flexible, innovative and cost-effective solutions to their customers’ problems.