News Column

CEO Forecast: With Cloudy Economy, Executives Turn to Government Contracting

Jan. 28, 2009

Jessica Haro and Richard Kaplan--Hispanic Business Magazine

ceo forecast, 2009 forecast, government contracting



With the economy stumbling through a deep recession, America's companies are undergoing radical and unprecedented change. Major industries are shedding employees at an alarming rate just to stay alive. Others, such as the bastions of the banking and auto industries, have sought and received federal bailouts worth billions of taxpayer dollars. Many companies have simply folded, casualties of the increasingly competitive marketplace. With the economy in turmoil, CEOs must possess a sense of urgency, a mind for innovation and a curiosity for taking a risk, as new business models emerge.

In light of these new economic frontiers, Hispanic Business magazine interviewed CEOs about their plans to weather the recession and remain economically viable in 2009. In doing so, we took a look at key business sectors with one major question in mind: When will the economy recover? No one knows for sure, but the executives agree that the turnaround might be quicker than we think.

With the number of private-sector jobs shriveling, some companies are increasingly turning to government contracts to boost their businesses and get them through these rough economic times.

Flexibility Key To Survival
"While it will be challenging, this is an opportunity," said Randy Velarde, president and founder of the international petrochemical firm The Plaza Group. "It's important to pay close attention to what customers want and need, and take care in specifically meeting those needs. If we continue to treat our customers well through this recession, we will keep them now as customers after the economy recovers, and be more successful in the future."

In times of crisis, the CEOs agree that one key way to stay relevant is to adapt and diversify. Being flexible is essential to survival in the corporate world.

In the construction industry, builders are trying to cope with the sluggish private development market. So they have begun to focus on government contracts as a stable source of revenue.

"Right now, private construction is slow and environmental construction has slowed down considerably," said Gabino Cuevas, CEO of Florida-based engineering company Cherokee Enterprises Inc. The company has focused on landing contracts with the federal government and now has jobs in Maryland, Georgia, and South Carolina.

"Developers are hurting because there is no new residential construction going on at all, but we do more than that," Mr. Cuevas said.

He said he hopes that the Obama administration's talk of funding infrastructure and environmental projects might boost the industry.

"Green buildings and sustainability are all people are talking about, and it's having a huge impact on the industry," Mr. Cuevas said. "Our niche market is fuel storage, and with the push for alternative fuels, we want to stay on top of that trend."

Health Care Challenges
Standard wisdom says health care is one commodity the consumer can't forgo. But the recession can disrupt a sector in a roundabout fashion. One problem for health care firms, said Rainier Gonzalez, CEO of Miami-based Pacer Health Corp., is that as unemployment mounts, the number of those without insurance increases.

The uninsured patient pays out of pocket for expenses and that pushes up the rate of payment defaults. Profit margins at medical companies get squeezed.

Pacer Health buys and manages financially distressed hospitals and health care facilities throughout the rural counties of southeastern United States. The company, which had revenues of $50 million in 2007, introduces better management practices to put them on a sound financial footing. But the new economic environment makes the work of Pacer Health significantly more challenging.

Since President Bush urged that all governmental medical records be converted into electronic format, medical IT companies have been thriving. TerraHealth Inc. of San Antonio, which pulled in $31 million in revenues in 2007, offers medical consulting and IT support services to health care organizations, especially those operated by the Department of Defense.

"Government contracts are recession-proof," said Ted Terrazas, the company's chairman and CEO. They offer "more comfort since the contracts are for longer periods of time, although the margins are smaller." TerraHealth hopes to expand its business into the commercial sector. That growth, Mr. Terrazas said, will help "balance our portfolio" and further reduce risk.

Going Green Means Cash
Firms engaged in environmental consulting and remediation services may see a boost this year through government contracts.

Both Kemron Environmental Services Inc. of Laredo, Texas, and Cape Environmental Management Inc. of Atlanta predict stable or even expanding revenues in 2009, in part because much of their work is government contracted or mandated.

For 2009, Kemron CEO Juan Gutierrez predicts a 10 percent rise in revenues over $24 million in 2008. The recession, Mr. Gutierrez said, has put a serious "damper on redevelopment work" that Kemron does for the commercial firms. "Fortunately, up until now, we have not seen any kind of dramatic fall in the federal work," where Kemron does 70 percent of its trade.

Mr. Gutierrez said the No. 1 challenge in 2009 will be locating qualified personnel.

Fernando Rios, CEO of Cape Environmental, foresees growth for his environmental remediation, construction, and fuel systems company. "Our primary client is the Department of Defense, and they always seem to have money," he said. "We are expecting to grow about 25 percent [in 2009] so we are very fortunate." The firm had $93 million in revenues in 2007.

Despite the positive predictions for Cape Environmental this year, Mr. Rios cautions that construction firms in the region are experiencing significant declines. "They are feeling the pain," he said. "Residential and commercial work is way down, but state and local government work also is falling." Many construction firms are expecting a "reduction in revenues by half" in 2009.

Technological Strides
Information technology and telecommunications are hurting along with the overall economy. MicroTech LLC, based in Vienna, Va., has achieved close to 1,000 percent growth during the last three years, reaching revenues of $12.5 million in 2007.

The company has fared well in part because of the demand for IT solutions by the Department of Defense and the Department of Homeland Security. The company targets the government with its array of IT services, consulting, and support.

Such governmental sectors, involved in the fight against terrorism, cannot afford to be lax in updating their IT infrastructure.

"Regardless of what you do," said Anthony Jimenez, president and CEO of MicroTech, "the economy is having an impact on everybody."


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: HispanicBusiness.com (c) 2009. All rights reserved.


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