Top 100: Analysis

Turbulent, uncertain year drives changes among 2014 Top 100

The past year has been a roller-coaster ride of budget cuts, sequestration and a government shutdown

The past year has been described by many as one of the more difficult in recent memory, with Congress and the White House divided on government funding and priorities. The result was a year in which contractors had little visibility into spending plans beyond a few months.

Consequently, many companies on the 2014 Washington Technology Top 100 list saw their prime-contract revenue fall, and the prospects for a return to organic growth -- revenue growth from current operations, not acquisitions -- will continue to be a challenge.

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Prime contracts for the Top 100 companies totaled $106 billion for fiscal 2013, compared to $117 billion in 2012. It was the lowest amount since 2009, and the third consecutive year with a drop since the Top 100 hit a peak of $132 billion in 2011.

The result was a year where contractors had little visibility into spending plans beyond a few months. But the good news is that 2014 is off to a better start thanks in large part to the budget deal struck by lawmakers and the Obama administration that sets top-line budget numbers through 2015.

“Right now, we know the budgets at the highest levels, and I do believe there is more of a calmness,” said Sondra Barbour, executive vice president of Lockheed Martin’s Information Systems and Global Solutions business. The company is ranked No. 1 on Washington Technology’s list for the 20th year.

But the budget deal has not opened a floodgate of spending. “It is going to take a little while to work through this, but I think everyone understands that,” Barbour added.

CACI International CEO Ken Asbury held much the same view. “We’ve seen increased activity, but there is definitely a slower rate of awarding contracts,” he said. CACI is ranked No. 13 with $1.9 billion in prime contracts.

GOING GLOBAL

Many of the leading contractors in the government IT market are focused on both holding onto their current customers and contracts, but also reaching out into new markets.

While that two-pronged strategy has often been a goal in the past, it has a new intensity today because of current budget realities which have created a hyper-competitive market.

Federal agencies are focused on reducing costs, but they are still demanding that mission requirements be met. That means contractors must continue to wow their customers to stave off aggressive competitors.

Many of the leading contractors are doing just that while reaching out into new markets.

Larger defense companies, such as Lockheed Martin and No. 2 Northrop Grumman, are pursuing strategies to increase their international business and private-sector work.

Kathy Warden, president of Northrop Grumman’s Information Systems division, cited a growing opportunity for the company’s services internationally because of pent-up demand.

The company signed a deal less than a year ago with the London Metropolitan Police Service for a new command and control system, and Northrop Grumman is also the prime contractor on a biometric identification and fingerprint database service for police in England, Wales, Scotland and Northern Ireland.

“We look for this not to be just a one-year phenomenon with a couple of contract wins, but a trend and long-term path forward to growing our international presence,” Warden said.

Companies are also containing costs through layoffs and consolidations of business units. For example, General Dynamics made several restructuring moves in the business units of its Information Systems and Technology group. The company is ranked No. 5 with $4.9 billion in prime contracts.

“The restructuring has been necessary to adapt to the conditions that our marketplace is in,” said David Heebner, executive vice president of the Information Systems and Technology group. “While we’ve had some attention to that in the past, we are laser focused on it right now.”

The C4 Systems group had what Heebner called the most dramatic restructuring with a reduction in headcount; a new, more agile structure; and a consolidation of financial and administrative functions. For the IT group, the company integrated all of its military work into one line of business.

Although the federal market has contracted in recent years, there are hot spots such as cybersecurity, cloud computing and big data. But the popularity of those technologies are due in part by the government’s need to become more efficient and reduce costs.

Contractors also see the use of the cloud and big data as ways of offering services to government customers at a lower cost as way of differentiating themselves from competitors.

Because those technologies cut across multiple customer lines, several companies have streamlined operations by restructuring around solutions or lines of business, rather than specific customers. CACI, for example, is rolling out a matrix organization built around lines of business such as cyber, health care, business solutions, logistics and C4ISR.

“This allows us to concentrate our talent, no matter where they are, around solutions and not stovepipe them into different parts of the company,” Asbury said.

The change will allow CACI to bid on larger and more complex projects. It also helps customers because they get a single face from CACI, not multiple sets of people, he said.

Hewlett-Packard Enterprise Solutions is using a slightly different approach. Marilyn Crouther, senior vice president and general manager of public sector for HP Enterprise Services, said her group is relying on its chief technology officers.

“We’ve made sure our CTOs are directly aligned to our market-facing teams and are ready and able to execute solutions,” she said. HP is ranked No. 6 with $4.1 billion in prime contracts. “It’s not a big change in terms of organization but it’s a big change in prioritization and focus and how to bring innovation that is effective from a cost perspective.”

STRATEGIC ACQUISITIONS

While merger and acquisition activity slowed last year, several companies still made deals that have great potential to move the buyers forward.

The decision by QinetiQ Group plc to sell its U.S. services business means that the QinetiQ name has disappeared from the Top 100 and will be replaced by its buyer the SI Organization, which makes its debut at No. 46 with $390.6 million in prime contracts.

Also gone from the Top 100 is Dynamics Research Corp., which was acquired by Engility Corp., which is ranked No. 29.

Another marquee acquisition was CACI’s deal for Six3 Systems, which was recognized earlier this year by Washington Technology as the best single deal of 2013. The integration of that company is still ongoing, Asbury said. “First rule of an acquisition is to do no harm,” he said.

The deal increased CACI’s classified work and product business particularly in the intelligence market.
L-3 Communications, No. 15 with $1.9 billion in prime contracts, also was active reshaping its business mix with the addition of Data Tactics, an analytics and cloud computing company, and Mustang Technology, a defense sensor developer.

L-3 executive Les Rose sees more dealmaking across the market because of the budget deal.

“Now that we have a clear budget for this year and next … I think you’re going to see an increase in activity,” he said.

Moving forward, most of the Top 100 companies are optimistic about the future, but none are predicting a quick return to the height of the market as far as growth is concerned. The watch word for many is a focus on customers, whether it is current customers or new customers they are trying to win.

“If there’s some place to be, whether times are good or bad, it’s with your client helping them figure out what their problem is and helping them get to the next phase,” said Joe Logue, executive vice president of defense business at Booz Allen Hamilton, No. 7 with $3.4 billion in prime contracts. “This has never been more true than it is today.”

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