With a 16-day partial shutdown of the U.S. federal government in October, government debt negotiations set for the beginning of 2014 and the full-blown effects of budget sequestration on the horizon, it's no wonder many government IT solutions providers are a bit queasy these days. But what was the real impact of the shutdown on government VARs, and are they rethinking the way they do business in the face of U.S. government financial uncertainty?
Our investigations show that the October shutdown itself didn't have a huge impact on the industry, mostly because it ended before it could cause big problems. VARs reported delays in payments, contract awards and advertising of new contracts, for example.
But while the shutdown didn't have a big detrimental effect on government technology VARs, the threat of another one tied to the Feb. 7 federal budget deal deadline has some VARs spooked, with at least one we spoke with considering building up his commercial business as a hedge against potential federal cuts. Industry participants agree it's time to get used to a new reality and VARs had better make sure that they're selling what the government will be buying.
"No one is willing to gamble on this particular Congress and administration -- it's too risky," said Mike Lisagor, business development expert at Centurion Research Solutions, a Chantilly, Va., consultancy that provides research and training services to government contractors.
VARs that do business with the federal government have had a keen eye on the consequences of the shutdown. "There were some service contracts that the government chose not to renew, but that's a secondary result of sequestration," said Toby Zellers, vice president of strategy and solutions at TVAR Solutions, an 8-year-old VAR that focuses 100% of its business on the government. The McLean, Va., company reports year-over-year growth and had revenue of $90 million in 2012.
Budget cuts are] keeping us on our toes. We're looking a lot harder at focusing on the commercial market in FY2014.
president and founder, Accelera Solutions
The decision not to renew service contracts or use fewer outside contractors was made to preserve the jobs of government employees, he explained.
Meanwhile, at Accelera Solutions -- a Fairfax, Va., VAR that attributes 70% of its business to the government -- payments on some invoices due to Accelera were delayed, which in turn impacted Accelera's payments to its creditors. But most distributors, suppliers and OEMs were aware of the situation and showed flexibility, said Joe Brown, president and founder of the 11-year-old company.
What was more concerning to the company president than late payments was that the federal shutdown diverted attention from generating new opportunities, because 5% of the full-time staff of about 150 employees was furloughed as the result of the shutdown. "We had to go into risk mitigation mode, which was distracting to say the least," Brown said.
Accelera was able to retain its staff by reassigning the furloughed technicians to other projects for the company.
Cash flow problems?
Fearing that a shutdown could happen again, VARs, like a lot of government contractors, have to carefully manage their overhead expenses and cash flow.
Industry participants we spoke with were in agreement that for the most part, larger VARs are better able to sustain their business in hard times, whereas some small companies have difficulty managing cash flow when no payments are coming in. And if they provide professional services and if they're not working, there's no money coming in.
That's of big concern to Jeff Sessions, senior vice president of corporate strategy at Red River, an 18-year-old government VAR headquartered in Claremont, N.H. "We partner with a lot of smaller VARs who are focused on niche services delivery and who are important to our ecosystem. We're worried about them," he said. With 125 employees, about 95% of Red River's business is government-related.
Noting that what's good for one is good for all, Sessions said that his company subcontracts out work to deliver unique critical services offered by smaller VARs. "If they're unable to do some things, it can hurt us because we're ultimately responsible to get the job done," he said.
Bigger problems lurking
Government IT solutions providers agree that things are going to get tougher in FY2014.
"We anticipate some additional reductions based on sequestration, with a lot still unknown," Accelera's Brown said.
Sessions sees sequestration in addition to the continuing debt ceiling conversation as "the disaster of all disasters in front of us."
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"The government will have to make some hard decisions on how they spend money, and it's going to force this industry to change," he said.
Brown expects budget cuts that are closer to the bone. "It's keeping us on our toes. We're looking a lot harder at focusing on the commercial market in FY2014," he said.
Beyond the budget cuts is the fact that more federal agencies are adopting lowest-price technically acceptable (LPTA) acquisitions to drive more competitive bidding. "It's the way the world is going, and has changed the game," Red River's Sessions said. He said that it's OK in noncritical areas like hardware purchases but poses more of a problem on the services side -- for example, in healthcare, where services may pertain to life-or-death issues.
"The paradigm has shifted to LPTA, and it doesn't matter whether a VAR is selling software, hardware or services. It affects the entire market," Centurion's Lisagor said.
Reaching into the cloud
In a do-more-with-less climate, expect to see the government's cloud solutions strategy pick up steam going forward. "Cloud initiatives got stalled this fiscal year, but that doesn't mean the government pulled back on its strategy," said Shawn McCarthy, research director at IDC Government Insights.
"It won't happen overnight -- and we saw this market flat instead of growing in the previous couple of years -- but it ultimately will pick up," he said, adding that cloud is a different opportunity that VARs need to understand because it will affect their business.
Zellers said that TVAR's strategy in FY2014 is to make greater investments in cloud and is engaging with cloud providers that have FedRAMP authority to operate. FedRAMP -- the Federal Risk and Authorization Management Program -- is a governmentwide program that governs cloud security assessment, authorization and monitoring.
Uncertainty about the government hasn't caused TVAR to reduce staff or put off filling positions (it currently employs 10 sales professionals and five engineers, including two new sales staff members who were recently hired). But because of uncertainty around the federal budget, it has made internal adjustments with respect to territories and customer coverage.
Centurion's Lisagor is telling government technology VARs to strengthen their relationships with existing customers; review their product and services portfolios to make sure they're chasing the right opportunity; and, if the company can't be the lowest-price bidder, look for agencies that are willing to award contracts based on value.
Expect to see funding for healthcare-related IT and cybersecurity to go up, whereas IT work deemed as less critical (in areas such as certain types of weapons systems and certain agencies) to go down, he noted.
Not all news is bad news. In fact, Red River's Sessions believes that the government has a real challenge on its hands, one that's fantastic for the IT industry. "Because we solve their issues -- such as making processes go faster, doing more with less and to make them more profitable -- the government needs us more than ever," he said.