Government Market Sparkles In Gloomy Economy

The demise of the dot-coms and the pullback of many high-flying, commercially focused information technology companies have many businesses in the government market looking positively young and vigorous ? and attractive.Just peruse the firms that earned a spot this year on Top 100 list of Federal Prime Contractors in Information Technology Services. Many of the top-ranked companies achieved revenue or earnings growth that was strong and impressive, and even companies toward the lower end of the rankings are posting numbers that would be the envy of just about any dot-com startup. Several of the publicly traded government IT and defense companies that couldn't catch a cold on Wall Street a year ago are now outshining companies in other IT sectors."There's been a rush to safety," said Richard Knop, managing director of the investment bank the Windsor Group LLC of Middleburg, Va.That safety is the federal government and the $45 billion it will spend this year on IT products and services, no matter how high or low the S&P 500 is."The government is a great customer," said Ray Oleson, chairman and chief executive of SI International Inc., McLean, Va., and No. 99 on this year's list. "They have cash, and they pay on time."And what the government pays adds up in a hurry. With $3.3 billion in prime contracting dollars, Lockheed Martin Corp. captured the top spot on this year's list, the seventh consecutive time the Bethesda, Md., company has held the honor. Thanks to merger and acquisition activities, a new star is on the rise: At No. 2 this year is Northrop Grumman Corp., with more than $1.6 billion in revenue. The Los Angeles company was not too shabby at No. 10 last year, but in the course of 12 months it acquired three other companies that independently made the Top 100 in previous years.Its big prize was Litton Industries Inc., which on its own would have ranked No. 12 on this year's list. But Northrop Grumman also acquired Federal Data Corp. and the federal division of Sterling Software Inc. The company also made a fourth acquisition, the federal business of Comptek Research Inc.The Top 100 is based on General Services Administration data analyzed by the market research firms Federal Sources Inc. of McLean, Va., and Eagle Eye Inc. of Fairfax, Va.Analysts and industry officials don't expect Northrop Grumman to continue that pace of acquisitions. "They are going to be digesting for a while," Knop said. But there are plenty of others on the list that are expected to continue to make acquisitions.CACI International Inc., Arlington, Va., (No. 20) has closed four deals in the last year, helping to push up that company 10 spots in the rankings. Chairman and Chief Executive Officer John "Jack" London said the company has no plans to slow down its acquisitions."We are pretty much in constant pursuit," he said.Others that many expect to be active buyers include Affiliated Computer Services Inc. (No. 17), Anteon Corp. (No. 23), General Dynamics Corp. (No. 9), L-3 Communications Corp. (No. 53), Science Applications International Corp. (No. 6) and SI International Inc.Just about everybody is looking to make acquisitions in the IT space, but defense and aerospace companies will be particularly aggressive, because IT is where the growth in defense spending is concentrated, said Thomas Meagher, vice president of equity research, BB&T Capital Markets, Richmond, Va.,Aerospace and defense companies, such as General Dynamics and BAE Systems Plc (No. 19), have made acquisitions in recent years that made them major IT players."There is an overall strategic objective to move up the food chain, to actually go after and win larger contracts and programs in the systems area," said Robert Stow, vice president of engineering and technology at BAE Systems North America of Rockville, Md. BAE was created in November 1999 by the merger of British Aerospace and Marconi Electronic Systems. The parent, BAE Systems Plc, is in Farnborough, England.What many companies are positioning themselves for are growing opportunities in outsourcing, information assurance, modernization efforts and large systems integration projects.Outsourcing alone is expected to double in the next five years, from $1.7 billion to $3.3 billion, according to International Data Corp., an IT research firm in Framingham, Mass.In 2000, the Navy-Marine Corps Intranet contract, won by Electronic Data Systems Corp. of Plano, Texas, (No. 7) and worth $6.9 billion over eight years, was the crown jewel of outsourcing. Under the contract, EDS will be responsible for providing desktop computing, networks, communications, training and support for 360,000 sailors and Marines.Many agencies and companies will be watching the project to see how it develops and how it succeeds, said James Kane, president of Federal Sources. "The issue now with NMCI is implementation," Kane said. "Everybody is going to be watching it."While EDS came away with the prize and beat other teams led by Computer Sciences Corp. (No. 4), General Dynamics and IBM Corp. (No. 18), at least one of the losing bidders saw the competition as a positive in its pursuit of future outsourcing work."We were a long shot, but we showed tremendous understanding for what the Navy needed, and we were right there until the end," said Kendell Pease, vice president of communications for General Dynamics of Falls Church, Va. "I think we gained great credibility with our customers as a result."Many in the industry see outsourcing as inevitable, as the federal government faces a shortage of capable people and growing demand for more modern services.The government has "discovered what businesses have: It's better to have experts do IT than to try to do it yourself," said Frank Marchilena, president of command, control communication and information systems for Raytheon Co. of Lexington, Mass. (No. 5)Because the federal work force is shrinking, aging and increasingly mobile, other federal agencies will be fielding similar kinds of innovative outsourcing contracts such as NMCI, said Albert Edmonds, president of EDS Federal."The government is getting to the point where it is looking for partnership rather than provision of service under a contract," he said.The big outsourcing prize on the horizon is the Groundbreaker contract at the National Security Agency, which may be awarded in August and could be worth $5 billion to provide the IT equipment, support and services for the nonintelligence-gathering operations at the spy agency.Companies leading teams to capture that opportunity are AT&T Corp. of New York (No. 10), CSC of El Segundo, Calif., and OAO Corp. of Greenbelt, Md. (No. 42)While many agencies may not take on such large-scale outsourcing projects in the near future, nearly all of them are facing issues related to security, information assurance and modernization."The military has been buying [information assurance] for several years," said Alfred Picarelli, senior vice president of the information technology team at Booz-Allen & Hamilton Inc. of McLean, Va. (No. 12) "We would expect this year that IA will be a much bigger play on the civil side than it has been in previous years."The move toward electronic government is fueling part of this on the civilian side, he said.On the defense side, the military is addressing new threats and information warfare.Booz-Allen, Lockheed Martin and TRW Inc. of Cleveland (No. 8) each won a Trailblazer contract from the NSA to help modernize its intelligence-gathering capabilities. While many details have not been released about the contract, Picarelli said it should be worth hundreds of millions of dollars to Booz-Allen alone.Company executives and industry analysts also optimistically point to statements and actions coming out of the new administration that bode well for IT spending, especially within the Defense Department, where several reviews of military programs and force structure are under way. More money isn't expected, but "I think we'll see a reallocation of existing resources," said CACI's London.Austin Yerks, senior vice president of business development for defense at CSC, said his company is bullish on the prospects of winning new business in the defense market, especially projects dealing with enterprisewide outsourcing and systems modernization. While most in the government market see a plethora of opportunities, serious pressures remain in the market place, according to analysts and industry officials. Many companies are still working on the right business model for dealing with procurement reform that began more than five years ago, with legislation such as the Clinger-Cohen Act of 1996."I've been surprised that the impact of procurement reform has not worked its way through as well as you might have thought," said Federal Sources' Kane.Governmentwide contracts and the GSA schedule that offer a wide range of IT products and services have shortened sales cycles and forced companies to adopt new management skills, he said.On the one hand, "the more you bundle, the more business we can get," said Duane Andrews, corporate executive vice president at SAIC. But omnibus contracts also entail more mini-competitions within those contracts, creating more work for the bidders.Agencies also are looking for more applications that address a particular function, such as human resources, financial management and customer relationship management, Kane said.This is creating opportunities for commercial companies, especially consulting firms such as Accenture (formerly Andersen Consulting and No. 59), KPMG Consulting Inc. (No. 41) and PricewaterhouseCoopers (No. 45), he said.Traditional government contractors will need to partner more with these companies and develop more relationships with the major enterprise resource planning software providers, such as Oracle Corp. (No. 31), SAP America Inc. and PeopleSoft Inc., Kane said.The cooling economy and the fall of the dot-coms has reduced the shortage of skilled IT workers. Many executives reported that retention has gotten easier, and some have former employees returning from failed enterprises.Nevertheless, finding people remains one of the biggest challenges that government contractors face."Staffing is still a key driver in the market," said CACI's London. "We can find the business ? we just need more people."XXXSPLITXXX-The Washington Technology Top 100 is compiled through the work of two market research firms: Federal Sources Inc. of McLean, Va., and Eagle Eye Inc. of Fairfax, Va. They analyze data from the General Services Administration's Federal Procurement Data Center.The rankings are based on product service codes. is substantially the same as in past years, but some additions were made based on discussions with industry executives and analysts. The codes are selected to give the most accurate snapshot of government spending on information technology, telecommunications and systems integration work.After selecting the codes, Federal Sources, Eagle Eye and Washington Technology sift the data. Every year the list sparks questions, and here are the three that nearly everyone asks.The list is compiled by Federal Sources and Eagle Eye using data reported by federal agencies to the Federal Procurement Data Center. These agency reports include dollars obligated to prime contractors during fiscal 2000 that are worth more than $25,000. They do not include spending on subcontractors because the government does not collect that data. They do include reported GSA schedule spending.Eagle Eye and Federal Sources extract the data on agency spending for information technology and telecommunications as indicated by 74 codes selected by . All three organizations worked to account for mergers and acquisitions.About 65 agencies report contract obligations to the FPDC. Agencies that do not report include the U.S. Postal Service, the legislative branch and the judicial branch. Spending for most intelligence work also is not reported.? Your company's federal revenue figures may include revenue derived from your work as a subcontractor.? Your company's federal revenue figures may report the estimated life-cycle or award value of contracts won during the year. The FPDC data covers only actual obligations (spending) made during federal fiscal year 2000.? The federal agencies reported some of your company's work under a code that is not one of the 74 codes selected by .? The federal agencies holding your prime contracts did not fully report spending under those contracts to the FPDC, or you had revenue from non-reporting agencies such as the Postal Service, legislative and judicial branch agencies or spending on intelligence work.To see the complete list of product service codes, . XXXSPLITXXX-The big-ticket projects always draw attention during the procurement process, even after contracts are awarded. Here are some of the contracts analysts and industry officials say they are watching. At $6.9 billion over eight years, it is one of the largest government IT outsourcing contracts ever. The contract covers desktop and infrastructure resources for 360,000 sailors, Marines and civilian personnel. Won by Electronic Data Systems Corp. in October 2000.A $5 billion, 15-year contract to outsource and modernize the nonintelligence-gathering IT functions at the NSA. Award expected in August.A $2 billion contract to modernize the Customs Service's myriad IT systems used to monitor imports and exports. The contract is heavy with business process re-engineering requirements. Award pending at press time.Project to build the infrastructure to allow the Army to integrate and modernize its command and control systems on the battlefield. Value estimated at $5.2 billion over 15 years. Request for proposal expected in early 2002.A contract to modernize and integrate the Federal Aviation Administration's telecommunications systems used by air traffic controllers. Valued at $2 billion over 10 years. Award expected in October.Department of Housing and Urban Development is putting together a $1 billion contract for outsourcing services covering information processing and telecommunications. Request for proposal expected in July.XXXSPLITXXX-1. Lockheed Martin Corp.2. AT&T Corp.3. Northrop Grumman Corp.4. Computer Sciences Corp.5. Raytheon Co.6. Boeing Co.7. Unisys Corp.8. SAIC9. TRW Inc.10. Brown & Root1. Lockheed Martin2. United Space Alliance3. Hughes Electronics4. CSC5. Boeing6. IBM Corp.7. Digital Equipment Corp.8. Northrop Grumman9. TRW10. SAIC1. Lockheed Martin2. United Space Alliance3. Raytheon4. AT&T5. CSC6. SAIC7. Unisys8. Boeing9. Affiliated Computer Services10. TRW1. Lockheed Martin2. United Space Alliance3. CSC4. Boeing5. Raytheon6. AT&T7. General Dynamics Corp.8. TRW9. SAIC10. Northrop Grumman1. Lockheed Martin2. Northrop Grumman3. United Space Alliance4. CSC5. Raytheon6. SAIC7. Electronic Data Systems Corp.8. TRW9. General Dynamics10. AT&T