By Cornelia L. Kiley, COO and Jordan Gersh, M&A Director, sbLiftOff
For decades, American businesses have increasingly focused on their ability to recruit, develop, and retain talent. Any successful CEO will tell you that assembling the right team is a top driver of growth and among the most important things they do.
Will we see a time when the demand for top talent so far outpaces supply that companies resort to acquiring an entire workforce rather than individual employees? The fact is, we are already seeing it. In 2021, the shortage in information technology workers created a wave of acquisitions that left many folks scratching their heads.
An analysis by CompTIA for December 2020 reported an estimated 332,564 job postings for open positions, 22,500 more than in November and the highest monthly total since March 2020. And this uptrend is expected to continue: the demand for high-end specialization, such as expertise in cybersecurity and other mission-critical IT functions, promises to increase more than 30% in the next decade, according to CompTIA.
This imbalance has left many C-suite executives scrambling to find talent. A workforce of highly skilled technology workers has become equally as important as deep customer relationships, highly differentiated products and services, and strong financial statements. The phenomenon was mostly limited to larger firms in 2020, but then cascaded into the lower end of the middle market in 2021. The trend looks likely to continue in 2022.
An increasing number of M&A deals—across all market caps—look more like talent acquisition plays. Companies that can boast a workforce of highly skilled employees working in cybersecurity, artificial intelligence, machine learning, or data science are being acquired at valuation multiples traditionally reserved only for companies with strong revenue growth backed up by solid operations, infrastructure, and proven leadership teams.
This is especially true in the government contracting sector where companies serve the needs of federal civilian and military agencies. In 2022, most government agencies are expected to spend more on operations and programs with cybersecurity at the top of the priority list. More than $18 billion was earmarked for cybersecurity last year, and that was before a war with a strong cyber component broke out in Europe this year.
The spending is likely to continue its upward trajectory. “This is one of the most sustained periods of high demand for skilled technology workers that we’ve seen since we started in 2011,” observed Gary Ditto, founding partner of Who Staffing. “The number of contract workers has increased significantly, and we believe this trend will continue post-Covid since it offers so much flexibility.”
Not only does contract work add logistical and managerial flexibility for both the employee and employer, but it also provides a degree of financial flexibility, especially for government contracting firms. Relative spend on personnel (i.e., as a percentage of revenue) is significant and allows employers to manage their businesses efficiently because employees are directly correlated with revenue streams from multi-year contracts with federal agencies. In some cases, employees who are contractual may be associated with specific projects and revenue. As the revenue increases so does the workforce, and, equally importantly, as the work pivots, their talent needs and labor costs can quickly adjust.
High demand has also driven the development of creative recruiting strategies. Sponsorship of grants and fellowships are ways to build ties to universities that are educating this talent. With the rapid pace of technological change, many of the most desirable job candidates are under 30 and connecting with them while they are still in college is a way to keep your organization on the leading edge of innovation.
Government contracting companies are more attractive than ever — and not just to other government contractors. Some have employees with skills so valuable that companies outside the government sphere are courting the owners with high valuations, long term employment contracts and equity or synthetic equity.
Government contracting firms have started to make deals driven by the value of their human capital and transacting with commercial companies as well as other government contracting firms. Assuming demand for cybersecurity and other IT functions remains high—and labor statistics continue to improve—government contractors will serve as both traditional investment-style returns as well as accelerated talent-acquisition pipelines.