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FCW : February 2014
Commentary | CARR PHILLIPS CARR PHILLIPS is senior director of solutions marketing for the professional services industry at SAP. The sequester will continue to put signi cant pressure on contractors and agencies as it strips as much as $1.2 trillion from defense and nondefense programs in the next decade. And with a budget deal now in place for the rest of the scal year, of cials are bracing for more spending cuts in 2014. All those cuts are expected to signi cantly decrease the number of contract awards, prompt the restructuring of existing contracts, increase the use of rm- xed-price contracts that place higher risks with contractors and spark still more lowest price, technically acceptable contracts. In response to the potential squeeze on their revenue and pro t- ability, contractors are pursuing a combination of aggressive strate- gies, and underlying each of them is a need to review and revise the existing information systems. Here is how companies are likely to adapt, and how IT will play a key role in executing these strategies. • Improving internal ef ciency. Firms are already re-evaluating their business methods to maintain pro tability despite reductions in the overall business base. They are increasingly trying to gure out how to be stronger, lighter, faster and more agile with fewer resources. IT systems can play a signi cant role in that transformation. Many companies have old legacy systems. From 2002 to 2007, their focus was on maximizing revenue in a time of increased government spending. As long as systems com- plied with federal Cost Accounting Standards (CAS), there was no need to invest in upgrades. Yet legacy sys- tems have costs. Clunky invoicing processes slow collections, compli- ance reports can take days or weeks, and variance in costing is hard to calculate and explain to auditors. Those issues were hidden when contracts were plentiful, but today such systems need to change. Now rms want to streamline and auto- mate processes to reduce costs, but that is dif cult to achieve without upgrading to new business systems. • Spin-offs. Federal budget cuts will prompt more contractors to shrink by spinning off divisions that are growing more slowly or are no longer central to their business. The top 10 contractors announced ve divestitures in 2013, according to data compiled by Bloomberg. In the defense industry, the services organi- zations get hit sooner by budget cuts than large weapons programs do because of the shorter buying cycle. That is because agencies often pay for services the same year they are delivered, while weapons programs are paid for with funds that are appropriated years ahead of time. And as services organizations are spun off, they must implement their own business systems. In order to deploy such systems quickly while also complying with federal regula- tory requirements, companies are selecting commercially available enterprise business systems. • Mergers and acquisitions. The third impact is an increase in M&A activity. Several contractors are seeking to offset the spending cuts pressure on their revenues through the acquisition of companies that work in high-priority areas for federal agencies. Cybersecurity, big data, C4ISR and signal intelligence companies will likely continue to reap a premium because they are seen as growth areas even in aus- tere budget times. However, the acquiring compa- nies must ensure that the acquired organizations business systems can support the government s contract- ing requirements, which might be changed by the acquisition. A newly combined company that wants to bid on larger projects, for example, must ensure that its system sup- ports full CAS compliance rather than modi ed CAS. And if the acquired organization will be man- aged as a subsidiary, it is critical to ensure that its business systems enable agility and ef ciency while achieving regulatory compliance. ■ IT strategy for contractors in the era of budget cuts Agencies are all too familiar with budget-driven belt-tightening. Here's how the private sector is adapting. Firms are already re-evaluating their business methods to maintain profitability despite reductions in the overall business base. February 2014 FCW.COM 17
March 15, 2014