Contracting industry anxious about Defense cutbacks, but some see opportunity

By Marjorie Censer
Monday, August 16, 2010

As spending on large Defense Department weapon systems has become increasingly constrained in recent years, defense contractors large and small looked to the services industry as a more reliable and growing segment of Pentagon spending.

No more.

Defense Secretary Robert M. Gates announced last week that he planned to sharply curtail spending on support contractors, who provide professional services and information technology expertise, sending a wave of anxiety through the local contracting community.

The blunt declaration wasn't exactly a surprise to many who have seen expenditures on such services spiral upward for years. But like any bubble, when it pops, it is jarring. Many companies spent the week poring over Gates's statement, strategizing over how to justify their existing contracts and plotting how to position themselves for future work.

"Industry seems a little panicky to me," said Michael S. Lewis, a defense analyst with BB&T Capital Markets.

At the Northern Virginia Technology Council, which counts among its constituents a large group of defense contractors, Bobbie Kilberg, the organization's president, issued a statement calling the economic impact on Northern Virginia "particularly devastating."

Members are "concerned, they're upset," she said. "Nobody quite understands what it means."

Gates made major cuts to weapons programs last year, but this time around aimed his scalpel at contractor costs as well as spending on items like oversight reports and IT systems, where he said the department is paying too much without knowing exactly what it's getting.

He vowed to cut spending on contractors providing support by 10 percent annually for the next three years and immediately reduce advisory and assistance contract spending for intelligence by 10 percent.

"There are a number of aerospace and defense contractors who over the last 15, 20 years have expanded their presence in the support contractor roles -- whether that's delivering IT-based systems, supporting those systems, doing transaction processing," said Ray Bjorklund, senior vice president and chief knowledge officer at FedSources, which analyzes the government market. "Now, the balance changes a little bit."

Gates's announcement was only the latest to target contracting services. The Obama administration has pushed back against outsourcing and questioned whether companies should be able to work in such a wide variety of areas, asking whether the government is adequately protected against conflicts of interest.

Analysts and industry advocates are warning that some companies will be hit harder than others.

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