Secret Keys to the Capital: No Place for a Novice - Navigating Government Contracts and Defense Industry Dynamics in 2024

Three pivotal themes have emerged in the intricate landscape of government contracts and the defense industry, thereby shaping the trajectory of businesses and organizations into 2024. In this exploration, we delve into the effects of Continuing Resolutions (CRs) on contracting, the evolving concept of OASIS+ and the broader trend toward larger government contracts, and the dynamic landscape of Mergers and Acquisitions (M&As) within the defense industry.

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The Effects of Continuing Resolutions in Contracting

The government's reliance on Continuing Resolutions (CRs) to maintain operations in the absence of a finalized budget has been a consistent strategy for over four decades. However, the last two years have brought unique challenges, with the COVID-19 pandemic disrupting global supply chains and creating a ripple effect in government contracting.

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CRs have impacted the contracting landscape in several key ways. Hiring processes within federal agencies have experienced slowdowns, hindering the recruitment of new staff and the filling of vacant positions. This, in turn, compromises the ability of such agencies to provide seamless services, respond to immediate needs, and engage in long-term planning. Notably, the Department of Agriculture (USDA) serves as an illustrative example, experiencing hiring disruptions during CR periods, which affect strategic plans and program services.

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Additionally, CRs impose restrictions on travel funds, limiting the ability of staff to travel to grantee or contracted locations for on-site program monitoring. This poses challenges to the grant-making process and introduces uncertainties in funding levels, affecting decision-making related to contracts and grants until final funding clarity is achieved.

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The Concept of OASIS+ and the Trend Toward Larger Contracts (5 Government Contracting Trends to Follow in 2023 (winvale.com))

Against the backdrop of CR challenges, a noteworthy trend has emerged in the form of OASIS+ and other large government contracts.

OASIS+, a government-wide acquisition vehicle, has become a focal point in discussions, representing a strategic shift toward larger contracts. This significant federal contract not only expands but also replaces the previous OASIS procurement vehicles, marking a fundamental evolution. The uniqueness of OASIS+ lies in its size and scope, with a ceiling of $100 billion over 10 years, making it five times larger than the original OASIS and its applicability across nearly all agencies and entities in the federal government.

Covering over 130 separate professional service labor categories, OASIS+ is accessible to meet the immediate need of agencies with a streamlined services procurement. This effort also places a stronger emphasis on supporting small and disadvantaged businesses, reserving 50% of contract dollars for them. The introduction of new contingent labor categories adds flexibility, while enhanced cybersecurity and supply chain risk management measures, along with expanded training and qualification requirements, elevate OASIS+’s complexity.

The government's inclination toward larger contracts is evident in the strategies of major players like KBR and Parsons, who have expanded their footprint through substantial acquisitions. More widely available professional services through OASIS will provide additional revenue streams to those companies finding a place, or several places, in this broad contract.

This greater size and scope enable larger program capacities required by modern initiatives like digital transformation and infrastructure modernization. The heightened qualification requirements introduced in OASIS+ raise the standards for management excellence, reflecting the evolving demands of federal initiatives. This latest generation of OASIS constitutes the most ambitious and complex professional services vehicle seen to date - underscoring a more complex operating environment for service providers pursuing federal opportunities.

Moreover, as cyber threats continue to evolve, OASIS+ aligns with the growing trend of cybersecurity compliance as a major revenue opportunity. The contract's enhanced cybersecurity measures address the imperative for government contractors to meet new compliance requirements such as NIST 800-171, CMMC 2.0, and recent DFARS/FAR rules.

The convergence of market drivers, including the surge in cyber risks and the need for skilled workforces, ensures cyber services will remain a growth area moving into 2024 and beyond. The intersection of OASIS+ with the escalating demand for cyber and IT integration as well as the usual professional services positions businesses at the forefront of addressing the evolving challenges and opportunities in the government contracting sector.

Exploration of Mergers and Acquisitions in the Defense Industry (GovCon M&A Deals ‘Rebounding’ After Slow Period—Dispatch from 2023 Baird Conference)

As mentioned above and, in light of larger, more broadly applied contracts, Mergers and Acquisitions (M&A) play a critical role in shaping the competitive landscape of the defense industry. The Baird conference shed light on the resilience and enthusiasm of companies within the sector, despite facing challenges such as increased regulatory scrutiny and supply chain disruptions. Notably, Noblis President and CEO Mile Corrigan expressed a keen interest in M&A, affirming that his company is ready to make its next acquisition.

The conference also highlighted that companies such as Booz Allen Hamilton, KBR, and Parsons are actively pursuing inorganic growth through M&A deals, signaling a commitment to expanding their mission areas. The strategic combination of massive M&A deals with strategic divestitures has been a shrewd approach by companies like L3Harris Technologies and RTX to sustain their presence in the market.

While the government contracting M&A deals are rebounding, there is a notable shift toward smaller deals, with 86% of transactions valued at less than $100 million in the last year. Small-sized technology companies are emerging as attractive candidates for acquisition, reflecting a trend toward agility and innovation in the defense industry.

Additionally, there is a growing presence of private equity (PE) in the defense sector, with numerous federally connected businesses coming under the PE umbrella. Momentum Aviation, Michael Baker International, and afore mentioned spin-offs from Huntington Ingalls, Raytheon, among others, have experienced increased interest from private equity. This is further exemplified by the acquisition of Peraton by Veritas for $7.1 billion, solidly exemplifying the expanding private equity interest in defense.

As larger contracts like OASIS+ create opportunities for growth, the involvement of private equity adds another layer of complexity and strategic maneuvering in the dynamic landscape of the defense industry M&A. The intersection of these factors underscores the multifaceted nature of the defense industry's evolution, where the pursuit of agility and innovation converges with strategic financial considerations.

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Conclusion

As businesses navigate the complex terrain of government contracts and defense industry dynamics, a strategic understanding of the effects of CRs, the evolution of OASIS+ and larger contracts, and the nuances of M&A activities are paramount.

The challenges posed by CRs necessitate adaptive strategies in hiring, travel, and decision-making processes. Simultaneously, the trend toward larger contracts, exemplified by OASIS+, and the resurgence of M&A activities in the defense industry offer opportunities for organizations to transform and strengthen their market position.

Looking ahead to the 2024 investing landscape in government contracting, these three key drivers—new contract vehicles, modernization focuses, and M&A—will play pivotal roles. The expanded scope and size of contracts, such as OASIS+, will create fertile ground for businesses to capitalize on larger program capacities required by modern initiatives like digital transformation and infrastructure modernization. Keeping a keen eye on multi-year task orders can be a great indicator of upcoming profits.

The heightened emphasis on cybersecurity, supply chain risk management, and qualification standards in OASIS+ will open avenues for specialized expertise, creating opportunities for businesses to position themselves as leaders in these critical areas.

Moreover, the increased focus on modernization and digital integration (to include AI) within the defense industry will drive demand for innovative solutions, creating opportunities for agile and technology-driven companies. The strategic M&A activities witnessed in the sector, including private equity involvement, will reshape the competitive landscape, providing opportunities for companies to diversify their capabilities and expand their market reach.

In the pursuit of the "Secret Keys to the Capital," businesses must remain vigilant to regulatory shifts, supply chain dynamics, and emerging trends. These ensure that businesses are well-equipped to navigate the complexities of government contracts and thrive in the lucrative, but evolving landscape of the defense industry.