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Jim McAleese: The 2013 Sequester and How GovCon Firms Have Responded so Far

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Jim McAleese, founder and principal at McAleese & Associates,  recently caught up with Executive Mosaic, parent company of the Potomac Officers Club (P.O.C) and publisher of GovCon Wire, to provide some detailed insight and perspective into the 2013 sequester.

McAleese will be speaking on May 14 at the P.O.C’s Post-Sequestration Summit with nine other government and industry thought leaders about where the GovCon market is headed as down budgets become the norm.

In this segment, McAleese provided the following perspective with respect to the 2013 sequester and how government contracting firms have responded since it went into effect.

To register for this event and gain unparalleled insight into what the market and budget may mean for your firm, visit the event site here.

After concluding this piece, click over to ExecutiveGov for McAleese’s analysis of how the sequester impacts the military.

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From the government’s perspective, it was universally expected that there would ultimately be a compromise — without going into sequester.

From the contractor perspective, there was a bit more skepticism, but there was also a strong sense of optimism that if we were to slip into sequester, that the period of sequester would probably be only two-to-four weeks, and that cooler heads would then prevail, and a compromise would result.

And it [sequester-compromise] would be retroactive, so that it would not impact the customer; it would not impact funding; and therefore, it would not impact the contractor profit-and-loss, in terms of sales, operating margins, operating profits, and earnings-per-share.

As a practical matter, almost all of the contractors issued their 2013 guidance when they released their fourth‑quarter results in late January.

The vast majority of contractors issued their 2013 guidance with the expectation that we would have no sequester, and that we would either have a continuing resolution, (flat‑line funding from 2012), or that the Department would receive a 2013 Defense Appropriations Act, which is ultimately what occurred. That now allows for new program starts, and also allows for quantity increases for key programs, particularly in the heavy production areas of multi-year procurement,  platforms like DDG-51s, New Attack Submarines or Virginia Class Subs, the V-22 Osprey, etc.

The various constituents – the Department, the industry and also the investment community – all generally expected sequester either to be avoided,  or that it would be of short duration, after which all of the parties would come to a compromise.

About three to four weeks into formal sequester, the “body language” of the majority of the contractors suddenly made it clear that they were no longer lobbying against sequester. The Department’s positions was still ‘sequester is triggered; this is what it’s going to mean for the mission; this is what it will mean for readiness; this is what it will mean for the services and this is what it will mean for the investment accounts’.

The contractors who had generally been lobbying together for sequester avoidance, or suspension of sequester, became suddenly less vocal and less visible. And you could actually see for the first time that it [sequester] was taking on a level of seriousness that people had not previously expected.McAleese_Logo_JPG

You began seeing a greater quantity of management changes, with sudden resignation of corporate officers, and you began seeing no mergers and acquisitions, because cash had now become king. In other words, survival is the first word of business. You also saw a significant increase in the number of organizational restructurings.

Companies began to realize that this [sequester] was no longer something that could be avoided for 2013.  The focus was now on making sure that every company knew how much funded backlog it already had, that would be immune from 2013 sequester. Companies would know then how much time they had to drive costs out of the system, faster than either their sales could fall, or faster than the influx of now-smaller orders would be coming through the door.

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