The Bottom Line: Sequestration Looms: Fact or Fiction

Sequestration. It’s a word rarely heard outside the halls of Congress, but it now could become a common topic through the hallways of corporate headquarters and around dinner tables throughout the country. Without going into a lot of legal mumbo-jumbo, it means that government agencies cannot spend funds that Congress has already authorized. In other words, you and your spouse may have already agreed to purchase a $500 couch, but now you’ve lost your debit card.

But with $1.2 trillion at stake, losing that card puts more than just a furniture sales person’s commission at risk—it puts the store, company and maybe even the manufacturers out of business. And that’s the amount of money involved in the latest U.S. budgetary issues. Half the cuts need to be made from the defense budget and half from domestic programs. Results from such action could put warfighters and citizens in danger and wreak havoc on a still fragile economy.

Although the sequestration of funds would not go into effect until January 2, 2013, the effects of even the threat of such an action can have far-reaching consequences much sooner. For example, the Worker Adjustment and Retraining Notification (WARN) Act requires employers with at least 100 full-time employees to provide written notice to affected employees 60 days before ordering planned closings or massive layoffs. Yes, that would mean on November 1, 2012, immediately before the busiest shopping season of the year. Although some companies such as Lockheed Martin have announced that they will not notify its employees of possible layoffs related to sequestration because the U.S. Defense Department does not anticipate any adverse contract actions on or about the beginning of next year, the uncertainty is on the tables—boardroom and kitchen alike.

It won’t be reality that reigns in the choices made at these gatherings but rather the perception of reality, and that can lead to many bad decisions. Companies could decide to lay off workers in anticipation of lost income. If the sequestration is averted, this could mean that employers would lose a talent pool that would take years to rebuild. On the employee side of the equation, workers may choose not to wait to receive a pink slip and begin a job search, leaving their employers short on staff to fulfill existing contract requirements. Furthermore, families unsure of future paychecks may decide that this is a good time to scale back on holiday spending and large purchases.

The bottom line is that the federal government has known for years that it needed to deal with increasing expenses and decreasing revenue. Sequestering or even threatening to sequester funds now may be the impetus for Congress to act, but the consequences could come at a higher price than anyone ever imagined.

Is your company preparing for the sequestration? How could sequestration affect acquisition?