Last year, Northrop Grumman spun off of its shipbuilding business, which included a massive shipyard along the James River in southeast Virginia and another, smaller shipyard on the Mississippi Gulf Coast, after the company identified shipbuilding as a non-core business.
The spinoff was so large that it created a Fortune 500 company, Huntington Ingalls Industries, Inc., which generates about $7 billion in annual revenues, thanks largely to its largest customer—the U.S. Navy. (Huntington Ingalls is the only shipyard that builds the Navy’s nuclear-powered aircraft carriers and one of two that builds nuclear-powered submarines.)
Northrop Grumman’s decision to get out of the shipbuilding business showed its eagerness to quickly shed a business that didn’t align well with others in its empire, but it also illustrates how difficult it can be to operate a business that depends on government contracts.
Huntington Ingalls and other government contracting firms this year face formidable challenges, which include uncertainty over the federal budget, greater government scrutiny and changing procurement policies, among others.
“Companies in the government services market face a growing number of challenges in the current environment,” said John Hagan, who has identified many of these challenges as head of the defense and government services group at BB&T Capital Markets|Windsor Group.
So has Washington Technology, an online publication that ranks the 100 largest government contractors every year based on analysis of data from the Federal Procurement Data System.
Here are the issues of greatest concern to businesses that depend on government contracts.
Federal budgets are flat or are shrinking. And that creates greater competition, especially in growing areas, such as cyber security, homeland security, energy, command and control systems and health care IT. One of the things companies are doing to compete more effectively is to work harder to satisfy their customers by doing a great job on existing contracts so there are future contracts. Another thing they’re doing is trying to reduce their operating costs as they realize that government agencies are under pressure to shrink. Reducing costs often means reducing workforce. Defense contractors and others have done this and these pressures are not expected to ease up in the near future, Gerald DeMuro, an executive vice president at General Dynamics Corp. told Washington Technology.
Changing procurement policies. With more than one out of every six dollars of federal government spending going to contractors, the Office of Federal Procurement Policy is the agency that is supposed to make sure the government spends money wisely and reduces waste. The agency, which is part of the Office of Management and Budget, is viewed by many contractors as a thorn in their side because of changing policies. Keeping up with procurement policy changes is essential because one mistake can disqualify a company from efforts to land a job.
Hiring key personnel. Government contractors are competing for people who best understand businesses that are primed for the most growth. Hewlett-Packard Co., for example, boasts that it recently hired retired Rear Adm. Betsy Hight to lead its cyber security operation and retired Vice Adm. H. Denby Starling as its vice president of command and control for infrastructure services.
More audits. The government is hiring more auditors, and even agencies such as the Defense Contract Audit Agency, which conducts several dozen different types of audits, is under pressure from Congress, which wants to be seen as a taxpayer watchdog as the public gets more and more fed up with government waste. Late last year Office of Management and Budget Director Jacob Lew ordered federal agencies to put more resources into their suspension and disbarment programs. Michael Tinsley, founder and chief executive of NeoSystems, a Northern Virginia-based firm that provides back-office services for government contractors, nonprofits and other companies, says that and other signs make him think, “2012 may be the year of the government audit.”
Mark Di Vincenzo is a journalist with 24 years of experience and a New York Times best-selling author. Mark blogs via Contently.com.
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