2014 Market Outlook: Stan Soloway of PSC Warns about DoD Cost Reductions; Predicts Transformations in Federal Acquisition, IT Services Sectors

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Stan Soloway, President and CEO, PSC

Stan Soloway, President and CEO, PSC

2014 – WashingtonExec Annual Market Outlook Series

As we turn the page on 2013, we look forward to a new year and new opportunities for innovation and growth in the government contracting community. This past year we experienced budget sequestration, a 16-day-long government shutdown, and a perpetually increasing focus on cyber security and healthcare IT.

WashingtonExec reached out to those most knowledgeable and experienced individuals in the federal contracting space. We asked executives in and around the beltway for insight regarding where they see the government contracting community headed in 2014. Topics discussed include M&A activity, cloud computing, healthcare IT, defense, mobility, and more.

Stan Soloway is the President and CEO of Arlington-based Professional Services Council, a national trade association of government professional and technical services industry individuals which prides itself on serving as the voice of the government services industry. Soloway said certain cost reduction initiatives — particularly those at the Department of Defense — will likely cause problems for the 2014 market:

“2014 will be an interesting year for the market. On the one hand, the passage of the budget agreement and the ensuing appropriations bills eliminates at least some of the uncertainty that has dogged the government and the industry for the last few years. And history suggests that should enable  a more normal flow of business. By the same token, a number of the key cost reduction initiatives, particularly at DoD, are likely to continue apace and have a downward impact on segments of the market. For example, it is safe to assume that reductions in and deferrals of facilities and equipment maintenance (and in some cases modernization) will continue. Similarly, the Secretary’s initiative to reduce by 20 percent the overhead within the Office of the Secretary, the Joint Chiefs, the defense agencies and combatant commands are likely to move forward.  Inevitably, some of those reductions will impact the industry. The real question is whether the reductions are strategic and analytically supported, or piecemeal and arbitrary. Sometime this spring the debt ceiling debate will again likely arise and while the budget deal may well preclude the debt debate from having an impact on near term federal fiscal policy, as was the case in 2011, it is certain to be a heated debate with implications, beyond the obvious, that we cannot yet identify.

Beyond the flow of business, during 2014 we will need to continue and expand our collective work to reverse the government’s current default to low price procurements. Some progress was made on that front—witness Better Buying Power 2.0—but much work remains to be done. The challenge of delivering innovation and agility in an environment that struggles to recognize or reward the value of such deliverables, is among the most important facing the marketplace. Unfortunately, some leaders within DoD especially continue to argue that this problem, which 90 percent of PSC’s member companies indicated was one of their top concerns, is actually a “non-issue.” Likewise, there will be continued attention to system, facility and individual security. Each of these issues could have a meaningful impact on the market.

Finally, 2014 has the potential to be the year in which new, more comprehensive and holistic efforts are launched to transform federal acquisition in its broadest sense. The Federal Information Technology Reform Act (FITARA) was ultimately not included in the defense bill as planned. And while we are supportive of FITARA, the opportunity now exists to take a fresh look at the spate of interconnected challenges—from human capital to business policy to culture—that together inhibit many, if not most, major government technology issues.

As to the former, it is hard to say how much M&A activity we will see. Some had expected a rapid rate of significant activity over the last two years but while many, somewhat modest deals were done, there have been only a handful of significant deals. Now that the budget picture appears to be somewhat clearer, it may well be that the gaps between buyers and sellers will begin to narrow and more activity will transpire. Most of the deals are still likely to be in the modest range but we wouldn’t be surprised to see two or three big transactions sometime during the year, especially once things settle out later in the spring.

As for IT budget cuts, on one level the answer is yes—everything is on the table even with the budget deal. But overall, we expect that the IT budget will remain relatively healthy and that the focus on new acquisition strategies and approaches (i.e., agile, and the like) will continue to grow.  The real impact is likely to be in the transformation of the current IT services sector as the government accelerates its move away from owning IT infrastructure to the “as a service” model. This has, of course, already begun but most observers seem to agree the government has yet to really crack the surface; a number of challenges remain including security, privacy and business models. All of those pieces are likely to be key focal points throughout the year.

The issue of collaboration between industry and government in addressing tough issues like healthcare defense, big data, mobility and cloud is also an incredibly important issue. But it starts not with collaboration between industry and government but, rather, with collaboration within government itself. As we found in the research for our 2013 PSC Leadership Commission report, there are significant and worrisome disconnects between critical government segments and functions—acquisition and IT, finance and everyone else, etc. Overcoming those disconnects and driving a more effective, collaborative culture in government is a necessary predicate if the collaboration between government and industry is to be effective.  On the latter point and to the question directly, there is little doubt that the scope and nature of industry-government collaboration has suffered markedly in recent years. There are many reasons behind that regression but, despite strong leadership calls (from OMB, the senior leadership of DoD, and others) to enhance the scope and quality of collaboration and communication, the improvements have been generally modest. When Dan Gordon, who made enhancing communication a hallmark of his tenure as the administrator for Federal Procurement Policy, was departing his post two years ago, he said he was stunned at the resistance to doing so among the government procurement community. But as the question implies, the dramatic shifts taking place in technology and how and where it can and must be applied to government, mandate that collaboration become a centerpiece not an afterthought of the culture.

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