Technology Business Research, Inc.DOGE Disruption in U.S. Federal IT Services
Senior Analyst John Caucis and Analyst James Wichert, of TBR’s U.S. Public Sector Professional Services research team, share key challenges our clients in the space — including four of the top six federal systems integrators — and their partners face amid uncertainty in funding as the Trump Administration implements funding reviews and contract cancellations stemming from the work of Elon Musk’s Department of Government Efficiency (DOGE).
John and James also discuss what these disruptions mean as well as how many federal IT services vendors are using this time to enhance their partner ecosystems, positioning themselves for the inevitable workloads and IT modernization spend to come.
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DOGE Disruption in U.S. Federal IT Services
TBR Talks Host Patrick Heffernan: Welcome to TBR Talks: Decoding Strategies and Ecosystems of the Globe’s Top Tech Firms, where we talk business model disruption in the broad technology ecosystem, from management consultancies to systems integrators, hyperscalers to independent software vendors, telecom operators to network and infrastructure vendors and chip manufacturers to value added resellers. We’ll be answering some of the key intelligence questions we’ve heard from executives and business unit leaders among the leading professional IT services and telecom vendors. I’m Patrick Heffernan, Principal Analyst, and today we’ll be talking about the current state of the federal market with John Caucis, Senior Analyst for TBR’s Federal IT Services Practice, and James Wichert, Analyst for TBR’s Federal IT Services Practice. John Caucis, James Wichert, welcome back to the TBR Talks podcast, season 3. You guys were on at least twice so far, probably four times now. Probably twice each season I would guess right?
John Caucis, TBR Senior Analyst: Yeah, that sounds right.
Patrick: Okay. All right. I’m not going to hold you to it, I just thought, you know. Start off with that. Well, we want to talk about today. You guys cover the fed sector, federal IT in particular. You look at a range of companies, we’re going to talk about all of them, I’m sure, over the course of the next 20, 25 minutes or so. It is obviously a really hot topic these days, a lot more than it was a year ago. Probably the hottest it’s been for a long time because of everything that’s been happening since the inauguration back in January. So, we’re going to cover a lot of ground. If there’s certain things that I forget to ask about, jump in and add them. And at the end, I definitely want to get your take on sort of where things are going to end up, what are we going to be saying a year from now.
Current state of chaos
But right now, let’s just start with sort of the current apparent chaos across the federal government. Is it going to hurt or is it going to help the federal IT services vendors? Because IT after all, it’s a utility and you need to keep the lights on, unless you shutter an entire agency or department, in which case, I guess you don’t need to keep their lights on. And the DOGE guys are supposedly all about tech enabled efficiencies, so that should be a sweet spot for the federal IT services integrators. Yes. No? I know there were there was a lot in there, but sort of current state of play and is it a plus or minus for the companies that you cover? John. You go first.
John: I think it’s really going to vary by company. In the short, short term, I think there’s going to be pain for everyone. Because everyone to one degree or another, every one of the major contractors, especially the major contractors given their scale, given their breadth, given their exposure to the federal market, they’re going to be hit. You know, if, for example, I know that Deloitte, had a large north of $200 millions worth of contracts on the books with USAID. Obviously, if those come off the books, that is going to move their needle to the left significantly. IBM signed a $90 million contract with USAID, I think it was last, third or fourth quarter of 2024. That’s on the block, obviously. The contractors that have a larger footprint with the DoD will probably be more insulated from the disruption in the market. Although, Secretary Hegseth has indicated, about a month ago or so that the Trump administration is planning to reduce the defense budget by 8%. I know they dropped the dollar figure, and I think they said it would be something like $50 or $60 billion, whether that’s per budget cycle or over the next five years in total, that’s not clear. And we’ll come back to the issue of lack of clarity, because that’s one thing that is hitting all of the vendors equally. Just what are the- what is DOGE doing? What’s their strategy? How are they going about doing this? You know, the lack of clarity there is going to hit everyone equally. So, in the near- in the very near term and, oh, by the way, keep an eye on SAIC releases their earnings on Monday the 17th. They’re really going to be the first of the major FSIs to give us an in-depth take, I’m hoping, an in-depth take on how they’re being impacted by DOGE, although their discussion is going to focus exclusively on 2024, which is their fiscal 25. After that, keep an eye on what Accenture says. They’re releasing their earnings shortly after that. And I’m sure that with Accenture Federal Services being roughly 8% of their total business globally, they will be discussing the impact that they have seen thus far. Then after that, it’s really, wait a month until the federal earnings season really kicks in around the second or third week of April, right through the end of May, the beginning of June, when we have Booz Allen and SAIC. But in a nutshell, I think it’s going to vary from contractor to contractor depending on their exposure. The contractors that have a larger civil business or larger civil exposure, I think they’re going to be hit hardest initially. And then we’ll see how it plays out in the DoD. And at this point, I haven’t heard anything about how the intelligence community could be impacted. It sounds like more of the mission critical work that the Trump administration has underlined as being priorities, reside on the DoD and the intelligence community side. So, in a very large nutshell, I hope that provides some insight. James you may have some additional comments.
James Wichert, TBR Analyst: I mean, yeah, the simple answer is this hurts them in the short term. All this chaos, all this uncertainty, it’s just not good. It’s funny to say that, as you know, in consulting these tumultuous times where people want insights, you know, consultants tend to do well. But at least on the federal side, there’s not much of a focus on that in the short term. And I mean, in theory, you’re right that DOGE are after tech enabled efficiencies. But right now, I would say we’re seeing parallels to when we saw Musk take this “move fast and break things” approach when he was forced to take over Twitter a couple of years ago. Broad cuts in spending were quickly implemented, they delay payments on contracts, on rent, fired large chunks of people, and then they just rehired individuals that they realized were essential later on. And there was a lot of chaos, and it just did not lead to an efficient few months. And while FSIs have expressed interest in working with DOGE on pinpointing ways to increase efficiency and to make tactical changes, I mean, Musk doesn’t seem interested in switching up from his sledgehammer approach, at least in the short term. I mean, consultants would want to be more meticulous. They’d add costs to his short term. He feels confident that he can just repeat the approach he took with Twitter and apply that to the federal government with the end goal cutting something like $2 trillion in spending and I mean, now looking at what DOGE and the Trump administration have been trying to cut spending on. They’re loudly going after any contracts related to DEI, strategic communication, executive coaching and these other areas that they deem to be superfluous. Well, you know, technology modernization and operational efficiency are still seemingly priorities, but I mean, even then, contracts pertaining to that are getting caught up in all this chaos. We’ve seen, the 18F consulting unit of the General Services Administration has been shut down. Their roughly 100-person workforce was responsible for handling the IRS’s tax filing service, helping develop government agencies websites, helping them procure new technology. I mean consulting engagements; they’re another big thing they seem to be after. And you know, John and I have been talking about this with the press lately, but the issue with going after consulting services is they haven’t really outlined what they are and like where does the line stop between consulting and technology modernization. A lot of advisory services are embedded into larger IT services contracts. So, it’s going to be hard to identify. And we’re going to get a lot of chaos in the in between as vendors and agencies go into increasingly granular detail on what they do. And, you know, it’s not just like the types of work, you know, DOGE and the Trump administration are targeting, it’s certain agencies in their crosshairs as well, like the Department of Education, National Oceanic and Atmospheric Administration, the IRS, the VA, USAID, whereas there’s a little more job security for those FSIs helping enable border security and working with the DoD. I just think, yeah, in the short term this is all pretty rough for vendors. We’re already seeing efforts being made by companies to trim their headcount, reduce their billable staff. I do think there’s some long-term opportunities though, particularly for the vendors that go after employees with security clearances and skilled in emerging technologies. Eventually, the federal government is going to have to rebuild from this slash and burn approach and whether that’s with, you know, DOGE or the next administration. Especially since these headcount reductions at agencies will lead to them needing to increasingly rely on vendors while these systems are modernizing. They still do need to modernized. And looking at consultants, while they’re a private sector solution to bureaucratic gridlock and where the government can pay them per project versus salary in perpetuity and there’s less red tape, so, there’s always going to be a place for them. You know, especially in a world with less federal employees, like the VA’s headcount is expected to be- it’s like culled by like more than 80,000. And that’s just the VA. I think the IRS is expected to half their headcount. Eventually there are going to be contracts for FSIs to try and mitigate the chaos. And yeah, they’re going to need a lot of people for that and optimized infrastructures.
IT infrastructure modernization
Patrick: I wanted to just touch on something you said about the IT infrastructure, the need for that modernization. If I’m not mistaken, a lot of why the federal IT needs to be modernized is because some systems are still running on Cobalt and like the most, you know, I mean, I know it’s not great big IBM servers taking up an entire warehouse, but it’s not that far off from it. Is there the rationale is there the argument sort of that the sooner we just break all that, it’ll be easier to rebuild? Because part of those big contracts for the modernization was the slow migration. Not slow intentionally, but you know, deliberate, but also, like you know, secure, like all that kind of all of that IT modernization had to happen in a government secure, accountable way. Now it’s sort of, we’re just going to break the whole system. And so, when we go to rebuild, we don’t need those Cobalt engineers because we’re just not- we’re going to build something brand new. Is that crazy to say that or is that a potential that that’s what’s going to happen here.
John: Well, you’re right when you say that there’s a lot of antiquated technology that is still at the heart of federal IT infrastructures. There’s no doubt about that. And a lot of it is still running on Cobalt. They’re still using old mainframe type systems. And that has to change. The first major accelerator, because as you may have heard this adage, but, you know, things in the government tend to move in a glacial pace,
Patrick: Right.
John: and, and modernization-
Patrick: Right, well I was with the government so, I know how- I know exactly how it moves so-
John: Exactly, and in the lead up to the pandemic five years ago now, modernization was happening. There was- nobody would try to make the argument that we don’t need to modernize, we don’t need to start moving towards digital infrastructures, cloud-based infrastructures. And now on top of that, AI and automation and then quantum in the near future as well. No one would say we don’t need to do those things. But, everything was moving, they said the government, the federal government tends to be 3 to 5 to 7 years behind the commercial space in terms of its technology maturity.
Patrick: Right.
John: The pandemic did accelerate that because it really put the spotlight on the inadequacies of most federal IT infrastructures. And it was mostly on the civilian side because the DoD and the intelligence community, because of the core nature of their missions, had to stay ahead, technologically ahead of our nation state rivals, Russia, China, etc. who continue to accelerate their investment to IT enable their own military infrastructures. So, it was mostly on the civilian side. So, we do have kind of an example of how to do it from the DoD, but we have- there’s still a bunch of modernization work that still has to happen despite the Covid related acceleration five years ago. The bull market in IT spend that was, you know, really initiated by the Biden administration with a heavy emphasis on security, with an increasing emphasis on AI. But it has still- the pace has increased. You know, and this is one area where I’m kind of hopeful about the, you know, once DOGE gets past the Hulk smash approach, which is
Patrick: It’s what we’re in now.
John: It’s what we’re in now. And frankly, I think it’s somewhat reckless. And, you know, once they perhaps take a step back and take a more graduated, more moderate, a more judicious approach to doing this, and, oh, by the way, they really need to engage industry more. I’ll call out a couple of examples here. The CEO of SAIC, Toni Townes-Whitley. The CEO of L3 Harris, immediately in December, I think, reached out to the DOGE advisory board, reached out to the Trump administration and said, we’re here. I mean, it’s almost like if you remember back to the 70s or 80s, The Six Million Man program, where they have the intro and they would say, we have the technology, we can rebuild it. Well, you know, the CEOs of these companies, in particular, L3 Harris and SAIC, we have the technology. We can do this, engage with us. And they’re still waiting for that. It’s now the middle of March.
Patrick: Yeah.
John: And to my knowledge, there hasn’t been a more aggressive, a more active outreach on behalf of the DOGE advisory board to do that, to engage with industry. It’s just been, as I termed it, Hulk smash.
Patrick: Yeah.
John: Which doesn’t work. So, there’s going to have to be some pullback. You know, like I said earlier, keep an eye on the earnings, you know, to see just what the fiscal value of the disruption has been.
Patrick: Yeah, that’s the other observation from what you said earlier John, is because one of the characteristics among the, you know, Hulk smash is one aspect of what’s been happening, it’s also been a lack of transparency and a lack of clarity and accountability into what’s going on. That can happen- that has happened in the absence of any clear, defined metrics of the impacts beyond sort of the layoffs. What we’re going to see with SAIC, what we’re going to see with Accenture, what we’re going to see with all the other earnings is, this is the actual not just the market reacting and the market’s fickle. Who knows why the market goes up or down. Right. But a company’s earnings are pretty clear. Like there’s no getting around like what happened here. I mean when- Deloitte doesn’t report its earnings, but like you said, Deloitte $200 million contract with USAID gone. That’s going to hurt Deloitte. And there’s no, like there’s no fudging that, the same thing is going to be true with SAIC and the others. And so, where you can sort of claim to have saved a billion here and a billion there and then not be exactly held accountable for what that savings was. You can’t say that to an SAIC that can actually just say, look, you know, we’ve got shareholders. We got to put numbers on, you know, we’ve got- we’re being audited. We can’t just say we saved or we, you know, we did this.
FSI mega trends for 2025: lack of M&A, new partnerships, and contract structures
All right. Let’s step away from the chaos in DC for a second. What are some of the other mega longitudinal trends that the FSIs are facing this year? Are there going to be mergers? Are there going to be blockbuster acquisitions. Is it going to be more private equity encroachment on the space. What’s next John?
John: I would say, well, in terms of mergers and acquisitions, if I’m a member of the C-suite at any of the federal systems integrators, the FSIs, I’m pumping the brakes on that.
Patrick: Full stop
John: Yeah, full stop. And not because valuations are out of control like they were the last several years, which was one of the primary demotivators of acquisition activity, things were just too expensive. Valuations have come down but it’s not a strategic priority. Right now the strategic priority is trying to figure out how to navigate the chaos.
Patrick: Yeah.
John: And they don’t have enough guidance from- you know, because of lack of transparency, because of lack of engagement with the DOGE advisory board, they don’t have what they need to craft a one year strategic window, let alone a 3-to-5-year strategic window, which is the kind of thing that happens at the C-suite level. They just can’t plan for these things. So, as far as you know, all the nice to have things, which would be nice, you know, for somebody who’s trying to expand their cloud capabilities. It would be nice to acquire some cloud capabilities or consultancies with ServiceNow expertise or AWS expertise. Who knows what’s going to happen a year from now, maybe, you know, maybe AWS, even though they’ve been one of the leading hyperscalers in the market, especially in the intelligence community, you know, maybe their business is impacted- their top line, not just the bottom line, not just down the P&L, but at the top lines are going to be shaved by 10%, 20%, 30%. And that work’s just not going to be available.
John: So, M&A activity I think is off the table, maybe in lieu of that, the focus might be enhance and strengthen your partnership ecosystems. Because eventually when things stabilize, you’re going to need to be able to bring the right team to the table the first time, because all your competitors are going to be doing that. And the competitors like Booz Allen and Leidos and Accenture that have been the most proactive and have the best run partnership ecosystems, the best managed partnership ecosystems, will have an advantage. Others have been catching up. SAIC has done a great job of enhancing their relationships with AWS and the other hyperscalers. And we’ve been following the partnership related activities of the FSIs very closely. And we’ve seen others like General Dynamics Information Technology doing the same.
So, enhancing your partnership ecosystems, I think is going to be key. But just trying to protect what you have, I think even more of a priority than that will be absolutely optimize communications with your counterparts on the agency side. When you pick up the phone and you want to talk to the procurement official, the procurement counterpart on the other side, they have to, first of all, be available. But you need you need to optimize those relationships, A. B, there has to be a very clear-cut business case, particularly with what would fall under the auspices of consulting services.
Patrick: Right, right.
John: Okay. Those are going to have to be tied much more directly. And oh, by the way, one of the challenges there, is that there isn’t a universal set of job codes in contract to define all the different types of consulting. It’s just in many cases, you know, under one job code or one title and there’s hundreds, at least I would imagine, of different types of consulting, and you just can’t parse them out. So, the vendors are going to be, you know, their procurement teams, their bid and proposal teams, their price to win teams, are going to be under tremendous pressure to be very clear, to have optimal communications with their counterparts in the agencies, and to clearly establish the link between, you know, how they’re going to generate ROI, how are they going to generate your real transformation and do it in a cost effective way.
My fear is that we get pushed back to the environment about 10/12 years ago, the LPTA or lowest price technically acceptable contracting environment. Although some of the executives, at the FSIs have indicated that this is a slightly different environment. We were not going back to sequestration. You know, we’re not just doing what we can for the lowest price. We are trying to advance the technology maturity of agency. So very long-winded answer.
Patrick: The IDIQ days are definitely gone right? The indefinite duration, indefinite quantity. I mean, those bids were fantastic, or those contracts were fantastic for the FSIs when they existed.
John: Yeah, yeah. IDIQ might, be diminishing as a contracting approach.
Patrick: Yeah.
John: What I’ve also heard is that there’s going to be a greater shift. At least SAIC was expecting this from cost plus type contracting structures to fixed- firm fixed pricing.
Patrick: Yeah.
John: Because that puts the risk, all the onus on the contractor to deliver. So those contractors like SAIC, Leidos, etc. who have been optimizing, and Leidos is the best example of this, have been optimizing contract performance. They’re already ahead of the game.
Patrick: So, in the commercial space, you go from cost plus contract, and then you have fixed price contracts and then you have outcomes based. So, the difference between fixed price and outcomes based, being fixed price is here’s the job, go do it, here’s what you can charge for it. Outcomes based is, I’m only going to pay you if I get this outcome. But for the contractor, for the services contractor, the result is basically the same, which is you’re getting paid a certain amount of money. You can say, all right, I’m going to book $1 million here because that’s what I’m going to get, because I know I’m going to hit the outcomes. I know I’m going to get the million dollars. I know you’re going to pay me this fixed price of $1 million. The challenge though, is, you know, in a fixed price, the concern is, wait a minute, are you going to be able to do this project the way I think you’re going to do it, which is you’re going to charge me $1 million, put you’re only going to make 250, you know, you know, you’re going to make your margin, but not a lot more, or you’re going to be able to apply a lot of AI and automation and all that. And so all of a sudden I as the buyer, am overpaying, even though I’m paying you a fixed price, I’m actually overpaying because I didn’t realize you were going to be able to do this faster than that. And the same thing with outcomes based where it’s like, wait a minute, if you can get to that outcome and you can do it in, you know, much cheaper in your own- So, there’s always been a reluctance to accept those kinds of contracts from the buyers because they’re afraid that they’re going to be overpaying when the cost plus- And so it comes back to like the procurement mindset of I’d rather just do cost plus, and I’m never in trouble for having overpaid.
James: Or you end up with the situation from the first Trump administration where you’re, you know, you’re Boeing, you’re Boeing Defense, Space & Security, and you make a bid for Air Force One. You wind up horrifically made in your margins-
Patrick: Right.
James: You mess up the bid, you didn’t anticipate these costs to ramp up significantly.
Patrick: Right. Right. Yeah. There’s definitely the risks on the services contract or the supplier side. And that’s always been like everyone always defaults to the lowest risk commercial arrangement, which I guess makes sense. At the end of the day, it’s still humans that are signing contracts, and it’s human nature. But, James. Sorry, I went off on a tangent there, but I couldn’t help myself. James, some thoughts on the megatrends in the space.
James: I mean, I think John hit on M&A really well there. I think my view on it is all the FSIs valuations have cratered on Wall Street. I think everyone’s down between 25% and 50% from their November highs last I checked. I think ICF might have been like over 50% for like one brief window, like for all these companies together that’s like, I don’t know, over $30 billion in market cap just gone. And then I mean, that’s part of why I don’t think you’re going to see much M&A activity in the short term. It’s just going to be harder to get financing with all this uncertainty. And vendors are just going to be wary of splurging on M&A when they need to focus on, you know, surviving at least the next six months, even 12 months. They’re not sure if the Trump administration is going to just change course and, you know, those that will consider M&A will wait until the slash and burn has started slowing down and long-term definitive goals are actually outlined, like no one’s thinking they should spring for a business that does heavy work with USAID right now, even if the price is like probably as low as it’s going to get, they’re going to wait just because they don’t know what’s going to happen.
I guess you might see, and we did notice this in the last few years. You have vendors with venture capital arms like Maximus making more targeted strategic investments. And you might see an uptick in that activity. I know Maximus recently made their first ever investment via their venture capital arm. Yeah. Collaboration from partners would accelerate. Vendors are going to really push on redeploying their free cash flow into ensuring their businesses are still standing, come this time next year. I think, you know, we’ll see most vendors accelerate their investments in emerging technologies and develop meaningful proofs of concepts. And I mean, yeah, no, I think John really, you know, hit on that one really well.
John: If I could. Just one quick comment on the contract structuring, the trend. We have been hearing the term “outcomes”
Patrick: Right
John: being dropped more in the last 40/50 days
Patrick: That’s good.
John: as DOGE has taken- has this gone to gone to the federal space with the sledgehammer.
Patrick: Yeah.
John: So, I think we are actually moving in that direction. And we may go beyond, you know, many of the contractors actually break out their revenues and they will give you an itemization of, this is the proportion of our revenue that’s from fixed price, cost plus time and materials. I’m getting the sense that there’s going to be much more focus on outcomes over the next- at least the next four years of the Trump administration.
James: Do see that carrying over into the civilian space though? I know defense has always had more of a say in outcome-based contracting, they’re more technical, they have that more experience out of federal civilian, especially with all the cuts going on. Do you see that really picking up volume there, like gaining traction?
John: Well, I think there’s more opportunity in the civilian side to apply, we mentioned this earlier, some of the metrics, you know, where you can, you know, you can manage what you can measure. Okay. There are established metrics for measuring citizen engagement already in place. And Booz Allen has been developing, and Accenture and others that are more out in front in terms of AI, they’ve been developing those metrics and they’ve been using that to sell their capabilities. You know, this is how we, whatever those metrics are, you’d have to talk to an AI expert. But, so some of that, the ability to measure, is already in place. So, I would say yes from that perspective. But you’re absolutely right. The maturity of the DoD and the intelligence community is greater in other areas simply because of the nature of what they do or what they need technology to do for them.
Possible acquisitions
Patrick: Yeah. So, one thing, James, I want to come back to. You said, because John mentioned and I had to write this down because I’m going to use this a lot “when things stabilize, bring the right team to the table the first time.” But what you said was, if we’re going to see acquisitions, it’s going to be picking up those skills with your technology partners. Right. Did I hear that right?
James: I would view this more so as like during this like lull in M&A activity, you see pivoting into their partner networks and leaning on them more. So, collaborating together on proofs of concepts, you know, working in R&D labs together.
Patrick: Right.
James: I know GDIT has been expanding their presence across the US, so they can work on site with partners and clients.
Patrick: Right. So, then when we get to that, when things stabilize, if they’ve done all that sort of- laid all that foundation, done that groundwork, then they’re going to be able to bring the right team to the table the first time.
James: Yes.
Patrick: Right?
James: Yes.
Patrick: Right?
James: Yes.
Patrick: Yeah. Excellent.
John: Something just occurred to me, and this is thinking way outside the box here. But one area where we might see acquisitions, because the initial round of Hulk smash DOGE cuts have fallen disproportionately on small to medium, in many cases, disadvantaged, minority owned or veteran owned businesses. And in many cases, those businesses are so small that they only have one client, one agency as their client. And that business has disappeared overnight. But many of these companies have developed very specific niche capabilities and technologies that could still be of value to the larger FSIs, you know, to their larger peers. And many of these FSIs, James mentioned a couple, Leidos and Booz Allen for example, they came off of the four-year bull market in federal IT with enormous cash flows. One of the ways they can plow that money back into the company is to maybe step up and say, because they’re already partnering with a lot of these small to medium contractors, say we’ll bail you out. You know, we can keep you from going under, you know, by making an investment in your company, bringing you on board, you know, holding your hand, walking you through this period of tumult, and oh, by the way, then, you know, we have access to those technologies. I mean, it all depends on what they bring to the table. I would expect to see more in the AI and perhaps in the quantum and security areas.
Patrick: There could be some kind of creative partnering, creative investing that goes on
John: There may have to be.
Patrick: You know, almost like angel investor.
John: Yeah.
Who is set up to succeed and who is not
Patrick: Yeah, yeah. All right, let’s wrap it up. The last thing we want to talk about here, because, well, I was going to say at TBR, we always talk about specific companies. We’ve already mentioned a bunch so far. At TBR, we increasingly talk about ecosystems and I’m going to come back to what you said. You know, the right team to the table the first time. I think that’s going to be super important to keep in mind. And as our research continues to evolve around how these companies partner in the ecosystem, I think that’s something we’ll all be keeping in mind. And I know we have a lot of research coming out around the FSIs and the hyperscalers and the rest. But let’s, each of you pick one company and say, okay, when we get to the other side of this maelstrom, this company is going to be, and, I guess, make your choice. Do you want to say this company is going to be completely swallowed by the black hole and gone, or this company is going to be, you know, standing tall and proud and going forward. James, I will put it on you first.
James: Yeah. Okay. Well. I don’t think it’s going to be ICF in the best position for sure.
And even just ignoring all the DOGE craziness, GDT is still struggling with the lack of synergy between GDIT and mission systems. So, I mean, honestly, ManTech is probably my dark horse candidate which-
Patrick: I like it
James: which feels really crazy to say. I think they’re probably just in the least volatile long-term position. They’ve been making progress in the federal civilian market, but their bookings have always remained concentrated within the defense and intelligence market which is where their roots are. Like in 4Q we saw ManTech win $1.4 billion contracts to develop cyber platforms that support ICON objectives. You know, the defense intelligence clients, they’ve been seemingly less impacted by DOGE’s crackdown on mission critical spending. The real reason I’m picking ManTech is like, they’re private. And I think that leaves them in the safest spot. Basically, while all their FSI peers are racing the quarterly earnings clock during all this chaos, ManTech can take their time and wait for the Trump administration to clearly define spending priorities. And once, you know, they’ve identified that, they have the Carlyle Group’s financial backing at their disposal to build out what they need to do and, you know, they’re not going public any time soon.
Patrick: Right.
James: Certainly not on valuations right now. And so, they can focus on the fundamentals, you know, people and permission digital consulting practice. They can get displaced employees from AFS and Deloitte and they can recruit employees from federal agencies with security clearances or really niche skill sets.
There’s a lot of opportunities. And, of course, they’ve also been making a lot of organizational changes recently, like creating the Chief Acceleration Officer position, which, I mean, we had never seen a company do that before in the Federal IT Services Benchmark. They’ve added federal civilian and federal defense advisory boards to give them better insight into those client markets. They’ve launched the mission readiness and enablement practice. They’ve made an insane amount of appointments in like the last few months. I think right now they’re my dark horse-
Patrick: Yeah.
James: The least impacted at the very least, the most potential.
Patrick: It is a surprising one, that’s for sure. All right, John, what do you got?
John: Well, in this case, bigger isn’t always better, but in the current market, in the current environment, bigger might be better and no surprise then, I would have to nominate Leidos. But for a couple of real reasons beyond just their scale, they are well diversified across the federal market, about half of their business comes from the DoD space and the intelligence community. The remainder, the bulk of the remaining comes from the civil space. They do have a very large health IT business, which could expose them. I know that there’s been indications that some of the cost cutting activity may fall disproportionately in the health IT space, but there’s still a lot of monetization integration work that has to happen there.
Leidos is also fairly well diversified geographically relative to their federal FSI peers.
They have about 10% or 15% of the revenue coming from overseas, the UK and Australia primarily, and they have been doing well there. So that could offset some of the impact to their top line. They have a contract, an order book, that is chock full of multi-year, long tail, multi-billion-dollar strategic programs. For example, the $11.5 billion Defense Enclave Services award, which is ongoing, which is fully ramped up. And also, those contracts and their go to market model is really IT focused. They have a limited exposure, they don’t talk about any advisory capabilities they have. I know they have them. But they aren’t, and now this is a good gear shift over to the vendor that I think is the most venerable but also the most vulnerable, which would be Booz Allen.
Patrick: Right.
John: Booz Allen is, when they report their fiscal 25 earnings and their performance at the roughly around the Memorial Day time frame. Their fiscal year wraps up on March 31st. I fully expect that they’re going to have surpassed over $11 billion in annual revenue, three straight years of double-digit growth on the second or third largest revenue base within the sphere of the contractors that we track, just had an amazing run the last 3 or 4 years. It’s over.
Patrick: Yeah.
John: Because they are more akin to a traditional management consulting firm. If you go back to what they look like, how they were operating, how they were structured prior to their IPO in 2010/2011, whenever it was. They were mentioned in the same breath as McKinsey, BCG, Bain.
Patrick: Yeah
John: You know, they had a world commercial business and world technology business, which was their federal business. They separated from the commercial, focused on federal. And then in about, 2016, 2017, 2018, 2018 particularly, they started to take on more technically complex work. So, they have diversified their portfolio and their go to market a bit more, but they’re still advisory led.
Patrick: Yep.
John: How much, what proportion of their business? It’s really hard to tell. But they’re going to be hit the hardest. And I think that the same factors impacting Booz Allen are going to have a negative impact on Accenture Federal Services. We have heard early on that there has been some restructuring there, some workforce rebalancing. That would also impact CGI Federal, who has made some acquisitions to become more consulting focused, although they still have more of an IT focus as well. And then, because of their small size, because of how nascent they are, IBM Consulting’s federal group, they made a strategic acquisition, strategic to their size at the time, it was two years ago roughly, they acquired a company called Octo Consulting obviously to expand their advisory capabilities. And they’re just starting to get off the ground with that. And now, you know, that could be derailed, at least temporarily. But the grandest negative impact is probably going to be Booz Allen Hamilton.
Patrick: Yeah.
John: But I see Leidos as coming out of this. They’re already the best positioned, strong cash flow, strong profitability, diverse model, more technically focused. With one area that I’ll call out before we move on. It’s still unclear as to in the DoD how much of the 8% budget cuts or the DOGE related actions are going to impact research and development. And Leidos does have their R&D subsidiary, Dynetics, which they acquired in 2020, which generates, estimates vary, but between $1 and $2 billion, you know, that’s roughly 6% to 7% of their revenue base. I know that hypersonics, for example, is still a strategic focus of the Trump administration. But all that is underpinned with R&D. If those cuts fall disproportionately on research and development, that could hit Leidos pretty hard. Beyond that though, I think they’re fairly well diversified and diversified enough just to weather the storm.
James: And for the listeners to this, keep an eye out on TBR’s social media channels for an upcoming special report from John and I, we’ll be going into each individual vendor on our benchmark and what the impact of DOGE will be in the short term for them and how they might face that. Also, I might suggest reading the Financial Times article that John got a quote in, excellent read, great quote.
Final thoughts
Patrick: Yeah. Thank you for saying that, James. So, yeah, the special report, the Financial Times article. And I think those, those two things, plus this podcast are going to be a really good marker for us because we’ll meet again in six months here in the studio. And we’ll talk about how much we got wrong, how much we got right, how much we never saw coming. Because I feel like if we had done this six months ago, we did not anticipate what we were talking about today. So
John: Well, the volume and the pace of change right now is so high we might have to get together in a month.
Patrick: Yeah, it’s a good point
John: Because we do have the federal earnings season coming up as I mentioned earlier, it’ll run through late April through the beginning of June.
Patrick: Yeah.
John: You know, so maybe we reconvene in two months or so, because then we’ll have a full picture.
Patrick: Right. Well, I mean, a full picture of chaos is still a picture of chaos.
John: Yeah.
Patrick: Gentlemen, thank you so much for coming in. We will do this again very soon. Thanks.
John: Very good. Thank you.
Patrick: Next week I’ll be speaking with TBR Principal Analyst Chris Antlitz about Mobile World Congress 2025. Don’t forget to send us your key intelligence questions on business strategy, ecosystems, and management consulting through the form in the show notes below. Visit tbri.com to learn how we help tech companies large and small answer these questions with the research, data and analysis my guests bring to this conversation every week.
Once again, I’m your host Patrick Heffernan, Principal Analyst at TBR. Thanks for joining us and see you next week.
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