Federal Spending Is Region's Bright Spot
Wednesday, May 13, 2009
In flusher times, government contractors might chase corporate customers or consumers, selling them technology, equipment, advice and services in a bid to diversify and expand their market. But this isn't one of those times. Now, the biggest source of cash is more likely the federal government.
Washington isn't just handing out bailout and stimulus money, it's earmarking funds for alternative energy projects and plans to modernize health care record-keeping. Companies far and wide are taking notice.
The boom in government spending is attracting keen interest from big utilities, technology firms, start-ups and the lobby firms they employ. And it has foreign investors scouting real estate opportunities. Even Donald Trump is prowling for prospects; he recently bought a golf course here.
All that doesn't mean that Washington's economy has been chugging along without a care. In February, unemployment climbed over 6 percent, the highest in at least 19 years. Companies including private-equity giant Carlyle Group, manufacturer Danaher and advisory firm Corporate Executive Board have laid off workers. But the pain has been dulled some by the region's roots as a company town.
About a third of Washington's economy either is the federal government or is highly dependent on it, according to the Center for Regional Analysis at George Mason University. The sudden boost in federal spending stands out in the economy's general slump.
"It's less that there's a big pot of money than that there's less money elsewhere," said John Clerici, a partner in the governments contracts practice of District law firm McKenna, Long & Aldridge who helps companies enter or develop their presence in the federal market. The federal government is lending or spending $700 billion on banks and $787 billion in stimulus money, as well as billions of dollars more to bail out companies such as AIG, prop up major automakers, and increase liquidity and lending.
Law and lobby firms are benefiting as clients new and old ask for advice on getting government money and complying with the many rules and regulations that come along with it. Some companies are going a step further to open offices to be near the federal spigot.
Julia Spicer, head of the Mid-Atlantic Venture Association, said some West Coast companies, particularly those involved in energy, are considering building a presence here.
"Questions are being asked: Do we need to be closer to that? Companies are asking the question, investors are asking the question, suppliers are asking the question," Spicer said.
Such moves could bring work for the region's struggling construction companies, architects and building managers. The research firm Delta Associates is predicting that the bailout, stimulus and other related regulations could lead to demand for 2 million to 4 million more square feet of office space in the next few years, including for contractors.
Some say the move here has been worth it. CSC relocated its headquarters to Falls Church from California last year, and Jim Sheaffer, head of its North American public sector, said that "put all the pieces together in a really powerful way."
The higher-ups are more tuned into what's affecting government contractors, and it's a quick trip downtown if a top executive needs to pay a visit to a government client. CSC chief executive Michael Laphen is on a presidential commission to study issues related to U.S. telecom infrastructure, and being in Washington has made it easier for him to consult with experts at his company and contribute.
Sheaffer said that while the company isn't diverting a lot of resources from its private-sector business in response to the recession and stimulus, economic changes can affect how much of its revenue comes from where.
Industry observers "consider the public-sector work that firms like CSC do to be the stable platform in recessionary times," Sheaffer said.
The government market may not produce spectacular revenue, but it generally does not gyrate as sharply as the overall economy.
"The highs aren't real high, and the lows aren't real low. It does kind of stay in the middle," Vangent chief executive Mac Curtis said of the government market. "It's a good market to be in."
IBM's layoffs, started earlier this year, didn't hit its federal business, based in Bethesda. It has been serving the government since the 1930s, when IBM began working with Social Security.
"This is not a new thing for us, but this market is probably growing faster than many other parts of IBM right now, so it's a good business for us in general," said Todd Ramsey, general manager of IBM's federal business. "It's even better in comparison to some things that are happening in other industries around the world."
Executives are also on the lookout for competition, as firms of all sizes and experience levels chase a piece of the stimulus.
Vangent's Curtis said he has seen some signs of companies moving into the federal marketplace but not as many as he'd expect. He anticipates, however, that some of the big contractors that have traditionally focused on defense will make the shift, as health care and energy become hot topics.
"Every firm worth their salt has a stimulus task force in place," said Jim Dinegar, head of the Greater Washington Board of Trade. "The activity, the money and the attention is absolutely with the federal stimulus."
But while stimulus money will be spread all over the country, managing it will fall to Washington, said Knight Kiplinger, editor in chief of Kiplinger's Personal Finance and a self-described "voracious student of the Washington economy." He compares the expansion possibilities to Washington's growth around the Civil War, World War I, the Depression and the Great Society, saying that even when other metro areas' economies struggle, Washington's generally grows.
"It's relentless," he said.