SteelCloud breaks new ground

Strategy | Contractor moves past its troubles with a fresh business plan

The storm clouds that have hovered
over government contractor
SteelCloud Inc. for several
years appear to be breaking up mainly
because of a new, focused business
plan and a teaming agreement with a
major hardware manufacturer.

At least, that's the hope of Robert
Frick, who joined the company a year
ago as president and chief executive
officer, and Kevin Murphy, the company's
veteran executive vice president.

Founded in 1987, SteelCloud quickly
became a successful provider of integrated
and custom computer hardware
to government agencies. The company
owed much of its early success to
SteelWorks Mobile, an appliance it
built to integrate Research in Motion
Ltd. operating systems with BlackBerry
Enterprise Server for users of that company's
personal digital assistants.

It's a plug-and-play solution "that
even I could install in less than 30
minutes," Frick said.

RIM bought about 120 SteelWorks
Mobile units, and SteelCloud continued
to tweak the devices even after RIM
stopped buying them. By then,
SteelCloud was veering from one poorly
conceived business strategy to another,
"all [of them] trying to do good things
but never getting there," Frick said.

"The company lost focus," he said. As
a result, SteelCloud's government information
technology services fell by the
wayside. One of Frick's first acts as CEO
was to meet with Murphy and the rest
of the management team to assess the
company's strengths and weaknesses.

They attributed the loss of focus largely
to constant turnover in leadership
positions. "It was a different leadership
ever since I'd been
here," Murphy
said. The person
who was chief
executive when he
joined the company
was replaced
the following year,
a pattern that
lasted for several
years.

SteelCloud also attempted to acquire
another company, which Murphy
declined to name. But it was a poor fit
for the business plan, he said, so "we
ventured into a reselling business. We
ended up venturing into a partnership
with a large software vendor [and]
didn't have the support necessary."

Again, he declined to name the vendor,
adding that at the time, SteelCloud
"had the attention span of a 2-year-old."

NEW FOCUS

To remedy the situation, Murphy and
Frick refocused the business squarely
on government services, starting at
what Frick called the blue-collar level
by providing help-desk support.

One advantage of the services business
is that "you hire the resources when
there's a pending contract," Murphy said.

SteelCloud had a revenue run rate of
about $1 million a year in 2007. By
September, it had reached $4 million.
"When we look at the things we have
bids in on, it could double next year,"
Frick said. "I like IT services. It's direct
labor. It pays the bills. It keeps the
company going."

Now the company is moving up the
consulting pyramid. "We're actually
helping design solutions and systems
for a number of government or government-
related customers," he said.

Frick said he wants to double government
IT consulting in 2009 using the
same formula he learned during his
years at Perot Systems: "Pay attention to
who you're helping. Find out what they
need. Get it done right the first time. Be
responsible when they've got
a problem, and
they'll want
more," he said.

Frick's plans
are coming to
fruition. In
January, RIM
officials took a
new look at the
latest version of SteelWorks Mobile and
liked it, Frick said.

As a result, SteelCloud created
SteelWorks FedMobile, a plug-and-play
BlackBerry Enterprise Server appliance
for the Defense Department that works
with Microsoft Exchange, IBM Domino
and Novell GroupWise. The product
installs in less than 60 minutes.
In October, FedMobile became available
for DOD customers through
NASA's Solutions for Enterprisewide
Procurement IV contract.

"The solution is definitely something
that would find a good reception in the
market and would be in demand," said
Douglas Ireland, equity research associate
at JMP Securities in San Francisco.

By automating DOD's strict security
requirements, FedMobile has added
value to the product because the military is a demanding customer that
makes companies upgrade quality,
Ireland said.

Products that meet DOD security
regulations should also find a market
in the intelligence community, he said,
adding that SteelCloud's challenge will
be gaining access to capital.

"In normal times, they probably
could borrow against their track record
and use that to grow," Ireland said. "But
that may not be possible right now."

He said the current credit crunch
would probably hamper any attempt to
raise capital.

"Their organic growth path will be
sort of a long, slow ramp, which is great
[because] after 22 years in business, a
long, slow ramp can get you pretty far,"
he said. "But in the Silicon Valley tradition,
you would want to access capital
and then grow more quickly by hiring
more salespeople and broadening the
product range more quickly."

That is a step Frick is not prepared to
take. "I'm going to keep it simple here,"
he said. "I'm not going to spend a lot of
money hiring sales and marketing people."
The company has about 60
employees.

SteelCloud's business will grow in the
short term through increased orders
from current clients, not from new government
clients, Frick added.

SALES STRATEGY

Frick said he wants to sell FedMobile to
other government organizations,
including the intelligence community
and the Homeland Security and Energy
departments.

Frick, a retired Navy rear admiral, said
SteelCloud won't lose its bearings again.
It will stay on course in the government
sector, which accounts for about 70 percent
of its business. However, Frick
added that he expects government business
to fluctuate for a while.

For example, the Uniformed Services
University of the Health Sciences in
Bethesda, Md., has adopted
SteelCloud's FedMobile. But a contract
to build specialized servers for the U.S.
Postal Service has been postponed
because of a lack of funds.

Frick said SteelWorks Mobile and its
government equivalent will become a
large part of the company's offerings.
"It's not there yet, and I've told my shareholders
I'm not promising [anything],
but this looks very good right now."

SteelCloud plans to release additional
SteelWorks solutions that comply with
government and commercial wireless
security policies. And in November, the
company announced a joint venture
with telecommunications provider X
SAT FZE, based in the United Arab
Emirates, to market and support
SteelWorks products in the Middle East
and Africa.

Frick calls those products "the facilitator
for a transformation of this small
company that has struggled over the
years to be successful."

He added that for now, the main
competition comes from RIM because
anyone can buy the enterprise server
software and installation manual from
the company. But it's a daunting
process, he said, which was why RIM
asked SteelCloud to develop SteelWorks
Mobile in the first place.

David Hubler (dhubler@1105govinfo.com) is
associate editor at Washington Technology.

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