How to handle today’s austere times

Austerity is here, it’s real and it will be the rule of the road for several years. The president’s fiscal 2013 budget request for defense will likely be about $260 billion less, over the next five years, than the top line projections of just one year ago. The civilian agencies, many of which have been facing fiscal quagmires for several years as a result of a non-stop diet of continuing resolutions, also face real pressures today and further reductions for fiscal 2013, likely in the 3 percent to 5 percent range.

And if sequestration happens, the challenges will be that much more significant. What is not yet clear is what all of this means for both the effective functioning of government and, of course, for the industry that plays such a critical role in supporting it.

Recently, the Professional Services Council, along with the Aerospace Industries Association and the National Defense Industrial Association, submitted to Defense Secretary Leon Panetta and other top DOD leaders a report on the anticipated impacts of the defense spending reductions. They included job losses, reductions in company-funded research and development, investments in people, and the potential loss of key suppliers.

In addition, it is clear that, dosuring the next few years, an already highly competitive market will become even more competitive. With fewer contract opportunities, the number and range of competitors vying for those opportunities will be even greater than they are today.

While the fiscal environment is an unavoidable reality, there are a number of actions companies can and should take to help ameliorate at least some of those impacts. Indeed, these strategies and actions were prominent in discussions with the secretary of defense, the deputy secretary, and the undersecretary for acquisition, technology and logistics, following submission of our industrial base impacts report. These strategies also have applicability across the government.

Key among them is an intensified focus on performance—at all levels. This includes not only programmatic performance, which should always be the principal objective, but also a renewed focus on the financial side, such as fostering a proactive dialogue to help customers identify areas for cost savings—even if those savings might impact company revenue—and tightening company overhead as much as reasonably possible.

At the same time, the government customer must also think and act differently. Despite the budget reductions, the government will nonetheless be spending a huge amount of money through contracts for goods and services. To ensure that those expenditures deliver optimal benefits in both the short and long runs, it is crucial that the government, as the DOD and Office of Management and Budget leaders have said, focus on value and other meaningful value discriminators in the acquisition process. Indeed, DOD leadership has said that given the times, they will be focusing more intently than ever on those discriminators.

Unfortunately, the No. 1 issue identified by our member companies in our report was the government’s growing propensity to do just the opposite, even when buying complex services, including those that generate the kinds of innovation that lead to performance improvements and sustainable efficiencies.

Likewise, government teams must be open to eliminating non-value or limited-value contractual burdens. And the government must get away from its habit of using margins—too often arbitrarily set at unreasonably low levels—as a key cost savings tool. Margins should be linked to the complexity and risk associated with the work being done. Here too, a disconnect between the leadership’s objectives and the field’s implementation is clear and must be addressed.

For every company in the federal market, this must be a time of internal and external reassessment. The same is true for our government colleagues. There are some things that are well beyond either’s control. The key is to focus on those things that we can control and to turn an era of challenge into an era of innovation and opportunity.