Kevin Plexico serves as vice president of information solutions at software provider and market research firm Deltek, where he manages research operations and products for Federal Information Solutions.
Plexico will address the Potomac Officers Club‘s Post-Sequestration Summit Tuesday May 14 as one of an unparalleled group of speakers who will address the future of government contracting in the down-budget era.
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ExecutiveBiz: How does the budget environment we are currently operating in compare to other notable periods of your time spent in the federal market?
Kevin Plexico: This is the first multi-year decline in federal discretionary spending since the mid-1990s. Prior to that, you’d have to go back a couple decades to find another multi-year decline, although the decreases now and even in the 1990s were not that steep. Both were in the single digits, assuming you factor out the economic stimulus funding blip in 2009.
This is in contrast to the double-digit declines other industries have suffered, such as the stock market and housing industry declines in the late 2000s. One of the remarkable things about the federal market is its stability. I doubt one would find another industry that has demonstrated such consistent growth and resilience to economic downturns. We just happen to be in one of its rare downturns right now.
ExecutiveBiz: What makes the federal market so stable?
Kevin Plexico: It’s not really subject to the economic fluctuations of supply and demand the same way that other markets are, because it’s based on the federal budgeting process. I think most members of Congress and the president assume we’re going to have slight increases in budgets. We don’t want them to get out of hand and we need to contain spending, but most of the constituents that drive them are pushing government to make bigger investments in various areas. So, it’s hard to get the political will to reduce spending in the federal world.
ExecutiveBiz: 6 months to a year ago, was there a general understanding in industry and government that it was likely we would arrive where we are now? Is there any consensus about what’s around the corner?
I think most of the industry fully expected a decline in funding and a challenging budget environment. However, I think most people, myself included, thought the sequestration would be avoided.
The sequester cuts alone are not that severe, at roughly 7 percent of discretionary funding, but it’s the fact they need to be implemented in such a narrow window of time and agencies have such limited discretion in how to implement them. This has caused unintended consequences.
The situation is compounded by the fact that agencies did very little preparation because they also thought the sequester would be avoided.
ExecutiveBiz: As you indicated, most people in the industry expected a decline in funding in such a challenging environment. But did anyone expect sequestration to hit the way it has?
Kevin Plexico: I can’t speak for everyone, but people that I’ve spoken with around the industry seemed to think that sequestration was going to be avoided. There was a lot of pressure and momentum for it to be avoided and I think most members of Congress and the president, based on his comments at one of the debates, believed that sequestration was going to be avoided. So there was very little planning for it.
ExecutiveBiz: What were agencies able to do in preparation for sequestration?
Kevin Plexico: It had a lot to do with the timing of when it went into effect. The current fiscal year, FY 2013, began on Oct. 1. Agencies were funded for the first six months at a higher level of spending. The sequester was supposed to go into effect in January and then it got delayed until March.
Now, they had a much shorter period of time to make the cuts to get to an end-of-year number that is about 7 percent lower than they thought that end-of-year number was during the first half of the year. Agencies did hold back some spending, like travel and conference costs, and many agencies held back on some expenses and totally avoided others.
But, they’re still operating in an environment where they’re funding at a much higher level halfway through the fiscal year. It’s not easy to turn that ship quickly to steer it down to a lower funding level.
ExecutiveBiz: What are some of the unintended consequences that you’re seeing?
Kevin Plexico: We’ve seen some of the more visible unintended consequences – with air traffic controllers and the TSA coverage at airports – where Congress had to effectively act to take off the table. We also saw some challenges related to furloughs. Agencies have to effect the cuts in employment costs, because that’s one of the areas where they have to make equal cuts to every account. Salaries are clearly a major expense category and are subject to the cuts just like other accounts.
But, in the federal world, you can’t just lay people off – that costs money and has a fairly long tail associated with it. So, they fall back on furloughs – people are sent home without pay, but they still have jobs.
ExecutiveBiz: What are some of the largest challenges facing budget makers right now?
The biggest challenge facing Congress and the president is the imbalance between our nation’s tax policy and social policy (entitlement programs like Medicare and Medicaid). Unfortunately, our two political parties are on opposite ends of the spectrum on what changes need to be made to bring them into balance.
The consequence thus far has been that the budget ax has fallen on the one area that Congress has found agreement – discretionary spending. Unfortunately, discretionary spending is becoming a smaller and smaller component of the budget, so there is no ability to make a big dent in future deficits through discretionary spending cuts.
ExecutiveBiz: How are the contractors responding to this environment?
Kevin Plexico: Over the last several months, companies have been streamlining their operations and making cuts in certain areas, particularly if they’ve lost some key contracts. I think they’ve been expecting a lower growth environment and trying to maneuver themselves into markets that are growing faster, which is why we’ve seen a lot of M&A activity in areas like cybersecurity and healthcare.
In the period since the sequester has gone into effect, I think companies have taken a bit of pause in some of their investments. At least, they did that for the first couple of weeks. And agencies did the same, in terms of slowing down awards and solicitations.
We’ve seen that start to loosen up a little bit as companies get a better handle on how their business is going to be impacted by the sequester. They have a bit more confidence and understanding of what they can expect. We’ve seen some companies get back to business as usual, with a little bit of factoring in their expense level. But, they’re trying to shift their orientation to the new market to support growth in the long term and reduce costs to drive higher margins in the short term. Because, when you’re not growing as fast, frankly, investors expect a higher margin.
ExecutiveBiz: What are some of growth areas you’re seeing?
Kevin Plexico: The healthcare reform initiative has driven investments, growth and spending in the Treasury Department and in Health and Human Services. Treasury is not an organization you typically think of as being associated with the healthcare reform legislation, but they have a large role in collecting the fees, taxes and penalties associated with paying for the healthcare implementation.
In organizations like the Department of Veterans Affairs and the State Department, typically, as we wind down periods of war, our nation’s soldiers come home. They tend to move into the Veterans Administration and the benefit programs that are provided. We move to more of a diplomacy and foreign relations kind of environment, versus the military and warfighting environment. So, funding tends to shift to those organizations, and we’ve seen that, too.
ExecutiveBiz: So, there are still opportunities there for them to grow.
Kevin Plexico: I believe so, absolutely. Depending on the size of the company, we see 30 to 40 percent of them growing. It may be lower next year – it certainly is right now, compared to 2011 and 2012. But, there are still a large percentage of companies that are growing across the industry.
ExecutiveBiz: How important is having high-quality research and analysis of the federal government market at this time?
In this environment, companies have to be very focused in their strategy and execution. And since so many agency budgets are impacted, many companies are finding it challenging to grow by expanding their relationships with existing agency customers as they have in the past. As a result, contractors need to identify other areas of the market they can grow into – ideally, markets that are thriving.
There remain a number of areas of government spending that continue to grow despite the budget challenges. Building a successful strategy – and executing it – is essential to growth. Having that strategy and execution built on a foundation of research and real data versus anecdotal perspectives is a necessary element of success.
ExecutiveBiz: Where is Deltek’s space in the market?
Kevin Plexico: Deltek has two major parts to its business – providing software and information solutions to help companies manage their business more effectively. Those are accounting systems that comply with government cost accounting rules and regulations and project management systems and technology that help companies manage their projects and deliver on time and on budget.
The part of the business that I come from is the information solutions and research organization that provides the intelligence companies need to find new opportunities, understand growth segments, understand the customers and agencies that are in those growth segments and do research on the companies they would likely be competing against and possibly partnering with in those areas. We give them the information they need to build the strategy, and execute that strategy, to go after those markets in those segments they’re pursuing.
ExecutiveBiz: How about partnerships, what’s happening there?
Kevin Plexico: Partnering has always been essential, because of the way the government forces prime contractors or large prime contractors to subcontract a large percentage of their work that they win to companies of different socioeconomic statuses.
At the same time, as agencies have moved to consolidate their contracts in many respects and award these large-scale, multiple-award, task-order-based contracts, it has forced companies to team to be able to better go after the individual pieces of work that come out.
So, if you have a large contract where the scope is very broad on any given task, you don’t exactly know what skills you’re going to need in advance. You have to wait for that task order to come out and then form a team that might require you to have software, equipment, certain skill sets, capabilities or certain physical presences that you need to partner with somebody to put your best foot forward.
So, we have seen a lot more teaming in the last couple of years.
ExecutiveBiz: How can citizens, firms and organizations become more engaged and better learn about budget negotiations, possible bills and other federal market moves?
Kevin Plexico: The President’s budget has a remarkable level of detail. The House and Senate, in their budget committees, also provide detail that would enlighten citizens and businesses to the approaches the respective parties have to addressing the issues. At some point, it is up to them to decide which position they support and make those positions known to their Congressional representatives.