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Despite a lot of uncertainty in the broader economy, contractors have at least a somewhat optimistic view about the federal market. That’s thanks, in part, to a big influx of federal spending initiatives since the start of the pandemic. But vendors still see big challenges on the horizon, including increased competition and new demands to comply with federal regulatory requirements. Those are some of the findings from Deltek’s annual “Clarity” study, which surveys hundreds of government contracting leaders each year. Dan Firrincili is Senior Product Marketing Manager at Deltek. He joined the Federal Drive to talk more about the findings.

Interview transcript:

Jared Serbu: Dan, let’s start at the very high level view of what this year’s study actually tells us about how companies are feeling. Let’s start with your confidence index. What does that tell us about how companies are feeling about the market and compared to past years and some of the reasons behind that?

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Dan Firrincili: Yeah, so this year’s confidence index, I’ll unpack a little bit of the methodology behind how we how we arrive at the that index score for you. But the index, essentially, it measures the overall confidence that contractors have that they can grow their public sector sales over the next 12 months. So for those out there who haven’t seen our index, it’s measured on a scale of zero to 200. And obviously, zero is indicating kind of the lowest confidence level. 100 reflects kind of neutral confidence, and then 200 would indicate the highest level of confidence. So for this year, our confidence index score is 141.7. And so that does represent a 1.1 percentage point increase compared to last year’s score. So last year, we were at 140.1. But it’s important to note a couple of things, this year’s score is actually not the confidence score is not as high as it had been in the pre-pandemic years. So just as a, for example, in 2019, the score we got was 143. So I think our read on this is that score for for for this year, reflects that contractors are kind of feeling cautiously optimistic, in the face of, you know, what, what’s a worldwide pandemic, a potential U.S. recession. And then, you know, with the ongoing conflicts overseas, and some of the some of the challenges attached to that. So there’s, I would say, there’s still a fair amount of optimism heading into the year but not quite, not quite as high as in previous years.

Jared Serbu: And let’s talk a bit about challenges what came across in this year’s survey as some of the biggest ones that companies are facing this year?

Dan Firrincili: Yeah. So in terms of the top challenges, I think it’s important just to say, I mean, the government contracting industry, and this is reflected in the, in some of the metrics in the report, has shown some pretty considerable resiliency, through the past two years you have, there’s new government initiatives, there’s legislation, there’s funding sources that are providing a pretty healthy business opportunity, despite overall turbulent economic conditions. So I’d say, you know, our survey always does look back in some ways it does, it looks back into performance for 2021, it also looks ahead to the rest of 2022. A lot of businesses told us that they outperform their financial expectations, and that they did better than they expected. So for as a for example, there, what was reported back to us was a 15%, median profit, profit margin, excuse me, and that’s across all contractors, which was actually the highest in 10 years. So there was there’s certainly a lot of positive things coming out of the report. But there’s definitely as you look through the results, some pretty key themes that are emerging, and I’ll just, I just want to mention three of those here right at the top, one of them being increased competition. So for example, one in three, respondents told us that they’re perceiving increased competition as a critical challenge in 2021. We’re also seeing labor and talent challenges that are, you know, talent shortages, the great resignation. These seem to be impacting nearly every department. And so when we go out, we survey a number of different personas, business development leads and project and risk management leaders, financial leaders, for a number of others, human capital leaders, IT leaders. And pretty much across the board, we’re hearing that those labor and talent challenges are showing up as major impacts. And then the final theme is just just like, complicating factors things like supply chain challenges, managing the distributed workforce and then, you know, new compliance requirements that have emerged are kind of becoming ingrained as kind of realities to doing business in 2022.

Jared Serbu: On that distributed workforce point, I found that a little bit interesting, even taking your point that some of this is a little bit backward looking. But it was interesting to me that companies, even a couple of years into the pandemic, are still kind of struggling to get their arms around how to manage the new realities of this workforce. Can you expand a little bit on what they told you the specific challenges they’re facing workforce wise are?

Dan Firrincili: Yeah, so I think on the talent side, what we’re seeing is those talent shortages popping up. Well, what does that mean? And what are they going to do about that? I think what the survey told us is that a lot of contractors are looking to update their hiring and their retention practices. On the IT side, for example, as a for example, we heard talent gaps are kind of a top challenge for coming into the year. You know, again, we’re seeing that across the board, but I think that it’s what we’re seeing is that contractors need to and are starting to get creative. I think this is good news about, you know, how they backfill, how they account for some of the departures that are happening. And so, you know, it’s pretty clear that companies are, they’re willing to invest in finding and acquiring top talent, but they’re trying to be selective about how they do so and how they deploy those funds to do so. So, as a, for example, human capital specialists indicated that one of the things they’re looking to do is actually increase incentives among their existing employee base. So just going tapping their existing employee base for referrals. 49% of those we surveyed told us that that’s a top initiative for them. There’s a lot of companies, 47% told us that they’re hiring new leadership, another 45% told us that they’re looking to hire more recruiters. And really fewer are outsourcing that recruitment, that number was down at like 33%, which is probably if you think about it a more costly way of going about doing it. In fact, the largest companies, it was really half of the largest companies told us that they’re more inclined to actually outsource that recruitment. So there’s, there’s definitely a lot, a lot going on in that area around, you know, kind of around hiring and around retention that a contractor should take note of.

Jared Serbu: Yeah. And one of the other things that came across in the report is finding new IT talent, specifically, as you kind of, as you mentioned briefly a second ago, is one of the biggest challenges in the IT space there, which I think is directly connected to another section of the report that talks about regulatory requirements, some of that challenge, and that demand to hire good IT folks is driven directly by requirements like CMMC, right?

Dan Firrincili: Yeah, absolutely. For sure. One of the things that we have in this year’s report is, you know, and the question there is like, well, you know, what do businesses need to do to implement those CMMC requirements, and to properly address all the new, all the new regulations. We actually heard in this year’s report, the majority of companies, it’s 59%, acknowledging that CMMC requirements do apply to their business, which is, which is good to hear, because it’s, it’s coming and contractors need to be prepared for that. And so 83% told us that they’re planning to achieve level two, or level three certification, which in the long run will be to their benefit, because it’s going to allow them to compete for more.

Jared Serbu: And we certainly won’t do justice to the full study here. But one other area I wanted to get into before we closed is how companies are responding to things like contract consolidation, which has obviously been a long, ongoing trend in the federal government. Seems to be a pretty big theme in this year’s report in terms of the challenges that companies are seeing, how are they responding to that challenge?

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Dan Firrincili: Yeah, I agree. Absolutely consolidation to be kind of an imminent reality, both for last year, for this year, for the rest of the year, particularly as it pertains to those government wide contracts that are managed by the, managed by GSA. We actually did ask, specifically, around contract consolidation. We asked for firms to identify, you know, given all the consolidation that’s out there, what are your top, you know, kind of capture priorities, and we have some pretty interesting results around that. The most popular response there was actually focusing on strategic teaming initiatives, which applied to nearly 75% of the survey population told us that they’re going to be focusing there with another 50% telling us that they’re going to be investing even more in business development. What was notable there is that small and medium size companies were really driving the tendency to lean even more heavily on teaming, whereas the larger size companies told us that what they’re going to have more faith in is just making kind of broader investments overall to business development. So the contract consolidation is something that we’re going to continue to be, continuing to be tracking here.

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