Few companies, if any, can claim complete immunity from the heightened spotlight and scrutiny on their contracts with the U.S. government for certain types of technology and services work.
Especially if that work is labeled as “consulting,” at least based on how the General Services Administration is defining it and seeking to cut back on in an aggressive manner.
In IBM’s first quarter earnings release and call with investors, the global technology giant laid out the impacts it is feeling from contract cancellations amid the Trump administration’s drive for cuts through the Department of Government Efficiency and other avenues.
Recall that Big Blue is known to be one of the 10 companies GSA has labeled as among the federal government’s largest consulting providers and aggressively seeking concessions from, with the DOGE’s backing.
IBM’s chief financial officer Jim Cavanaugh told analysts the company estimates it has lost “a handful of contracts” and “less than $100 million of backlog” from contract cancellations or reductions, driven by the Department of Government Efficiency.
Substantially all of that reduction is in IBM’s consulting business, which Kavanaugh said had a total annualized backlog of $30 billion as of the first quarter’s end on March 30.
IBM’s total revenue for 2024 was $62.8 billion, of which Kavanaugh said the overall U.S. federal business represents “less than 5%.”
“About 60% of that is consulting, which is more susceptible to discretionary efficiency type programs,” Kavanaugh said of the federal revenue makeup. “40% of it is technology, which is all high-value annuitized revenue under contract.”
The consulting segment posted $20.6 billion in sales and U.S. federal represents “less than 10%” of that total, Kavanaugh said.
On that same call, CEO Arvind Krishna cited the processing of veterans benefit claims and implementation of payroll systems as among IBM’s lines of work. Big Blue also works with GSA on initiatives to support that agency’s procurement function, Krishna added.
“I don’t think of these as optional, now are there some areas around the edges which could be viewed as discretionary? Yes,” Krishna said. “But in our case, that is the minority of our business, not the majority.”
Publicly-traded government contractors must take a unique approach to transparency with the investor community, given how they have a customer that has a publicly-disclosed budget and methods to see (most of) its spending activity.
For the pure-play GovCons, these sorts of disclosures about disruptive patterns in the market are a regular occurrence. It is a rarity to see a global company like IBM provide this level of detail into its U.S. government business because of the relatively small share of revenue.
Accenture did the same for its investors in March, when the company estimated U.S. federal work at around 8% of the overall $64.9 billion in total fiscal 2024 sales.
Accenture is also on GSA’s now-mostly infamous list of 10 along with IBM and Science Applications International Corp.
SAIC also laid out for its investors the potential risks from the push for federal spending cuts.
But pretty much all of SAIC’s revenue comes from the U.S. government of course, so that category of question about potential financial impacts from changes in spending has to be asked.
For investors, their purpose of asking USG-centric questions to companies like Accenture and IBM is to contextualize that part of the business with those working in other industries.
Down the road, that question seems certain to become one focused on whether those companies will put more time and attention toward other markets than USG.
That is for another time. In the here and now, IBM CEO Krishna and other CEOs are prioritizing communication with customers and the public on why their companies matter to the federal government.
“The work we tend to do is much more mission-critical is much more about building the government systems, which make them more efficient and so we see them carry on,” Krishna said. “It’s hard to predict where that goes over the rest of the year, so I’m not going to try and make that prediction on DOGE and consulting, except to caution… if there is pressure in the economy, consulting tends to see headwinds before other parts of the business”
