Now that it looks like we are nearing a deal to reopen the government and raise the debt ceiling temporarily, I’ve been thinking about where this leaves the government services industry. If the shutdown ends this week or next, we’ll all get back to work, assess the damage, and begin digging out of the hole this lost time has dug. In a month or so, it might seem like we’re back to normal, but I think that’s a bit of a leap based on articles like this from Politico. In a blog from the beginning of the shutdown, I posited that this kind of instability in budgeting and appropriations might be the new normal. We’ve had essentially the same debate between Republicans and Democrats since 2010 about entitlement spending and government revenue/taxes with no resolution. The fundamental positions have not changed despite many skirmishes and an election. All signs now point to a 2014 mid-term that might tweak at the margins but will result in a Republican controlled House and a Democratically controlled Senate.
So what does that mean for the government services industry? If we continue to see short-term deals that postpone the reckoning, I think contractors are going to seek ways to insulate themselves from business disruption due to possible future shutdowns. At first this might simply amount to larger rainy day funds. That of course will have negative effects, pulling money away from other productive uses (investment, training, etc.).
However, if there are repeated disruptions, I think businesses will begin to seek some form of shutdown insurance to stabilize finances and guard against a catastrophe. One form of this could be an actual shutdown insurance policy underwritten based on how much of a company’s work is deemed “essential” or “nonessential”. Whether any institution will offer such a product is something I don’t know.
A second form of “insurance” might come from contractors seeking higher fees from work that is likely to be disrupted to cover down times. Although contracting is extremely competitive, there comes a point at which companies that have cut to the bone will simply go out of business during extended or repeated shutdowns. Additionally, other businesses that might have entered the government space would pursue work elsewhere rather than take on the additional risk. That would eventually reduce the pool of companies competing and raise costs.
I don’t know how likely either of these scenarios are but I do feel like companies will begin to need to make adjustments to this new normal in order to survive going forward. What do you think companies will do if this is the new normal?