In a time of great uncertainty in Washington, government contractors are feeling especially uneasy. The newly created Department of Government Efficiency (DOGE) is pouring over every aspect of the federal bureaucracy, prompting widespread layoffs, aggressive cost-cutting measures, and a push to reduce outsourced spending, which is particularly affecting top services contractors. 

As of late May, Oliver Wyman estimates DOGE has terminated approximately $5 to over $7 billion in annual contract value, primarily in professional services, consulting, and information technology (IT). President Trump’s fiscal year 2026 budget request proposes $163 billion in cuts to the non-defense discretionary budget. 

DOGE may or may not continue, given the departure of Elon Musk and his recent fracture with the Trump Administration — but the ethos behind it is here to stay, as lawmakers reckon with changing tax and spending priorities, as well as ballooning interest payments on the federal debt. 

That poses a problem for government contractors. As pressure mounts, they might feel compelled to pare their own workforces. As of early June, we have seen this accelerate beyond the initial reductions at global health contractors, now affecting market-leading government services and technology firms. 

But they must balance that impulse with the recognition that the government’s workforce cuts today could actually increase demand for their services over time. 

Striking the right balance is critical. In this environment, government contractors should avoid short-sighted workforce actions and prepare for the customers of tomorrow — who will buy differently, look at programs differently, and not only expect but need to create greater impact with fewer people.

Resiliency and talent strategy are the name of the game

First-mover companies that start redesigning their talent strategies today are likely to fare best in the years ahead. It is more crucial than ever to approach workforce management through a strategic and future-oriented lens, rather than reacting impulsively to program cancellations or other government actions. Government services firms have a once-in-a-generation opportunity to shape and shift customers’ mindsets toward outcomes-based, high-impact solutions delivered through a differentiated, technology-enabled workforce. 

To be sure, the talent shortage for critical skillsets such as artificial intelligence (AI), cybersecurity, and software engineering — and the loss of institutional knowledge in the aerospace, defense, and government (ADG) sector — will remain an enormous challenge for contractors. Attracting talent and competing with the commercial sector was already hard enough (as we discussed in our last ADG workforce insights publication). If the ADG sector lets this invaluable talent go, workers are likely to move to the commercial sector and stay put.

So, how do firms set themselves up to be resilient and weather this immediate storm, position themselves to be ready and able to answer the call for help from federal agencies when it comes, and be competitive in the new market environment?

Step 1: Prioritize talent retention to protect critical skills

In times of disruption, it is vital for government contractors to avoid being shortsighted. While the instinct may be to lay off all staff assigned to canceled programs, this will lead to the loss of valuable talent. 

Instead, companies should consider reassigning top performers with critical skills to other programs or internal roles until new business opportunities arise. This helps preserve institutional knowledge, avoids the loss of critical skills, and positions the organization to respond quickly when demand returns.

The key questions to answer: How can we “right-size” our workforce without being overly reactive? Which skillsets are essential to retain/preserve during workforce reductions? Do we know which individuals across the business have these skills? And how do we balance talent shortages in critical skills, such as generative AI or software engineering, with cost-cutting?

Step 2: Revolutionize the traditional siloed staffing model

Contractors should embrace flexibility by reducing barriers across programs and viewing the talent pool as an enterprise-wide resource. They should consider cross-training initiatives to enhance skill versatility and facilitate smoother transitions between programs. Fostering a culture of adaptability will better align the workforce with evolving business needs.

The key questions to answer: Do we have a robust system for identifying top performers and key skillsets? What processes can we implement to maintain agility and pivot delivery models when needed? What strategic initiatives can build resilience in our workforce?

Step 3: Break the linear relationship between growth and headcount

Extraordinary calls from the US government to cut waste and drive efficiency through contractors create an opportunity for government services firms to stand out in the crowd. It will be critical to find ways to demonstrate newly generated efficiency to customers — most likely through technology and AI-enabled efforts — to answer the government’s call. For contractors, this may also create an opportunity to break the traditional linear relationship between revenue and headcount. 

The key questions to answer: How do we empower our workforce to deliver outcomes-based solutions? Is our workforce effectively trained to recognize opportunities for tech and AI insertion? Where can we increase the value delivered to our customers without adding staff? What tools do we have to do this?

Step 4: Capitalize on widespread government layoffs to get unrivaled talent

Today’s climate presents a unique opportunity to acquire talented individuals newly available due to layoffs in the government and technology sectors. Contractors should take advantage of this by identifying strategic hires that can enhance their organization’s capabilities. Investing in new talent now can position the firm for success as the market stabilizes.

The key questions to answer: What gaps exist in our workforce that should be a priority for new talent acquisition? Who are the former industry hires that could accelerate our growth strategy?

Embrace change to drive future growth and success

While the current environment presents significant challenges for government services firms, it is helpful to view these disruptions as opportunities for growth and transformation. By asking critical questions, adopting a strategic approach to workforce management, and taking advantage of market conditions, organizations can successfully navigate this turbulent landscape.

For more information on how we can assist you, please reach out to the Oliver Wyman aerospace and defense team.