Forecasting the Future

An Article on the Dulles Chamber of Commerce’s “What to Expect in 2012” Discussion Panel

Late in January, the Dulles Chamber of Commerce hosted a panel discussion on “What to Expect in 2012”.  Members of the panel included executives from Professional Services Council, Raytheon, Northrop Grumman and Lockheed Martin.

The panelists discussed the expectations that 2012 has compared to 2012.  The main themes covered were the defense budget cuts, continuing resolutions, the current budget cloud of uncertainty, as well as the external events that may play a role in shaping the defense contracting environment.

The Dilemma:

Mr. Chris Bowie, Corporate Director of the Northrop Grumman Analysis Center said that 2012 will exceed the lows of 2011.  He also mentioned that the defense budget for 2013 will be 3% lower than 2012.  A contraction in investment accounts should also be expected. 

Mr. Stan Soloway, the President of the Professional Services Council mentioned Secretary of Defense Leon Panetta’s resolution to reduce America’s defense budget by up to $490 billion over the coming decade.  He briefed the panel that last year was the first time in ten years where the industry did not match the federal budget. 

The points mentioned above also means that the federal “funding stream remains under a cloud of uncertainty”, said Mr. Larry Duncan, Vice President for Federal and State Government Relations and PAC Affairs.  Yet, in spite of this cloud of uncertain, there will not only be challenges, but opportunities that contractors could benefit from.  Panetta’s resolution emphasizes a shift into reconnaissance, cyberspace warfare, special operations, and missile defense systems. 

Mr. Mark Esper, the Vice President of Government Relations for Raytheon, brought up the fact that external events will also play a big part in into feeding into that cloud of uncertainty that hovers around the federal budget for 2012 and beyond.  2012 is an election  year, and the Obama administration had to make a move to show that they are coming up with solutions to address the country’s deficit problem.  Of course, the winner of the elections in November will also dictate how the budgeting will be addressed in the years to come.  Although he still sees a “strong middle ground” out there, Mr. Esper noted that the parties themselves are moving further apart from each other.  He referenced 2010 when the Democrats were decimated.  In Congress, the deficit hawks now outnumber the defense hawks.

How to Thrive During Challenging Times:

In short, defense spending in general will face a difficult time within the coming years.  To meet the coming challenges, Mr. Bowie said that Northrop Grumman is reorganizing its structure so that it can better meet the new needs of the government. 

Mr. Duncan added that the reduction of the pie means that the bar has also been set much higher.  There needs to be a “resetting of expectations in terms of margins”.  Mr. Duncan suggested to the members of the audience that much more effective teaming arrangements be taken into consideration when it comes to resetting these expectations, as “the tightening of the belt flows down to the subcontractors”.

The representatives of the large prime contractors on the panel spoke of expanding their company’s horizons to look more aggressively at international opportunities.  They brought up USA’s NATO allies as potential sources of opportunities, namely: Australia, Japan, and Israel.  Potential external threats like Iran and China should also be taken into consideration when reviewing the international climate.  Mr. Esper added that in these challenging times, it is wise to “follow security threats are” and identify “where our partners and allies are”. 

Conclusion:

The climate for government contractors may be cloudy, but that doesn’t mean that there isn’t any room for sunshine.  The days of outrageous government defense spending may be behind us, but if a company does its homework and is able to leverage itself to respond to the changing environment, and if it is able to increase its efficiency and reevaluate its expected margins, then it should be able to thrive.