COVID-19: Weathering the Storm – A Discussion
In order to continue providing the critical services and solutions our country relies on during the COVID-19 crisis, it is paramount for the government contracting industry to proactively address both near-term business risks and potential long-term shifts coming out the current pandemic crisis.
We hope the following observations foster a dialogue across our collective government solutions and services market as we all look to maintain productivity and innovation critical to meeting our nation’s challenges.
Liquidity Challenges Loom:
Leadership teams must keep a close eye on working capital and cash on hand to ensure it can meet current operations and avoid losing valuable talent. Some of the key areas we think deserve attention include:
- Cash Management – While government customers have been incredibly accommodating thus far, it remains possible that cash flow to government contractors could be constrained at some point. While the Federal Reserve has already taken great measures to ensure credit remains available, accessing funds on existing lines of credit now to ensure working capital is available should the market seize up may be worth any associated interest payments.
- Government Policy and Relations – The response from government customers has been astoundingly reassuring in these early days of the crisis, and recently implemented measures can help protect contractor cash flow; but the devil is in the details and contracts and legal teams must be attuned to the dynamism of contracting in this environment. Additionally, Government Relations teams must engage at an increased tempo to effectively shape follow-on legislative or regulatory relief.
- Cost Avoidance and Cost Deferment – Leaders will need to implement creative new combinations of cost avoidance and cost deferment strategies to avoid a material amount of cost take out that could impact an operation’s timely bounce back. Reductions in force and decreased investment in growth to bridge near-term cash gaps can be significantly more costly to recover from over the long term.
- Communications with Employees – Employees are nervous about their own personal cash-flow situations. It is critical that government contractors share with them some of the planning mentioned above to provide them confidence and to avoid surprises should changes be necessary.
A ‘New Normal’ on the Horizon
Several permanent changes are likely to occur to our market, posing some important questions for executive teams to begin considering. Even though the answers may not be clear yet, it is important to ask the appropriate questions as we witness shifts in the following:
- Value Delivery Models:
- Which paradigms will be forever impacted as the customers’ view of “essential” support and on-site versus off-site requirements shift?
- Is your growth team considering what government markets will look like in the new normal?
- How will organic and inorganic investment strategies change in the future to better serve customers?
- Technology & Business Model Could Equal Shifts in Competitiveness:
- What types of IT requirements and collaboration tools will customers expect from contractors moving forward?
- Will this shift finally open the door to more performance-based contracting versus traditional level of effort-based contracts?
- Which competitors have already laid the groundwork for this shift and will be best positioned to shape new technology and business model requirements?
- Back Office & Indirect Costs:
- How has back office productivity fared in this sweeping transition to remote support? How should those results inform facilities and IT planning and budgets?
- Given some element of increased telework across the back office, are there new considerations that will drive shifts in how government categorizes allowable and unallowable costs? In how those telework costs are pooled and allocated?
- Which firms (competitors) are positioned to lead the way in innovating in this new environment and how will they shape the new benchmarks for indirect spend?
Avascent is the leading provider of strategy and management consulting services to firms serving the government markets. In addition to effective strategy implementation and M&A support, Avascent provides support to finance, operations, and growth teams looking to improve profitability and competitive positioning through strategic financial planning and analysis.