Today's Top 100 face a tough market getting tougher

Today’s government contractors are being rocked by the specter of budget cuts and a shaky economy, all the while customers are demanding ever more sophisticated solutions and support for an operations tempo that continues to increase.

The companies on the 2011 Top 100 are not immune to these trends, and their business models and strategies are evolving rapidly to take advantage of the opportunities the current environment presents.

Our annual rankings serve as barometer for the government market. A look at the rankings and the profiles of the top 20 companies reveal three major trends in the market:

• Competition is becoming fiercer because many segments of the federal budgets are flat or shrinking.
• Customers are pushing for solutions to help them become more efficient.
• The leading companies are reshaping themselves to lower costs and emphasizing their capabilities in areas where there is growth.

The annual Top 100 rankings are compiled by Washington Technology through an analysis of data from the Federal Procurement Data System, which collects agency reports on prime contracting obligations. (See "about our numbers" for more details.)

COZYING UP TO CUSTOMERS

The increasing intensity of competition is being driven by the government’s overall flat budget and the prospect of cuts in the near future. But the shrinkage is not across the board. While reductions are happening in some areas, other areas such as cybersecurity, homeland security, energy, command and control systems, and health care IT are growing.

Many companies also see business opportunities by helping customers use IT to become more efficient and retool processes to lower operating costs.

Ever on the hunt for opportunities, government contractors are gravitating toward these pockets of growth. The result is more competition as more companies chase fewer dollars.

In this environment, the old adage of getting close to your customers has taken on a deeper meaning, even for the No. 1 company Lockheed Martin Corp., which tops the rankings for the 17th year with $17.3 billion in prime contracts.

Step one in keeping close to customers is performance on existing contracts. “That’s probably even more important today as we think about the deficits and budget issues,” said Linda Gooden, executive vice president of Lockheed Martin’s Information systems and Global Solutions business.

Poor performance makes winning new work and even hanging on to existing work very challenging, executives said.

“I like to say that we have to do two things well in this business: We have to make bold promises and deliver on them,” said Paul Cofoni, CEO of CACI International Inc., No. 14 with $2.5 billion in prime contracts.

Another step in close customers relationships is hiring key personnel that understand the segments of the market where companies want to grow.

Hewlett-Packard Co., No. 7 with $3.8 billion in prime contracts, for example, touts a retired rear admiral and a retired vice admiral among its recent key hires. Retired Rear Adm. Betsy Hight is leading HP’s cybersecurity practice, and retired Vice Adm. H. Denby Starling is vice president of command and control for infrastructure services.

“We’re not going to miss a beat here,” said Dennis Stolkey, senior vice president of HP Enterprise Services’ U.S. public sector business. “We’re dedicated to our clients’ mission and to shareholder value, and we’re going to continue moving in that direction.”

And of course, if you can’t hire domain experts, mergers and acquisitions are a tried and true approach.

Except perhaps for Booz Allen Hamilton, which said it isn’t seriously pursuing acquisitions, all of the top 20 companies and many of the companies beyond are active in the mergers and acquisitions field.

“We are looking for companies that can bring us access to new customers or a capability we don’t have,” said James Cuff, executive vice president of Science Applications International Corp., No 6 with $5.2 billion in prime contracts.

PROVEN SOLUTIONS, LOWER COSTS

What nearly all government customers want are solutions that can improve performance and reduce costs. The days of throwing money at problems are over.

“Ultimately, the surge of funding that we saw from DOD for the last decade was bound at some point to return to more normal growth rates” or even flatten or decline, said John Shephard, vice president of strategy and development for ITT Corp.’s Defense and Information Solutions unit. ITT is ranked No. 16 on the Top 100 with $2.1 billion in prime contracts.

The budget crunch is forcing many agencies to look at their IT investments and ask two questions:

• What value are they getting for the money they spend?
• How can they lower their IT costs?

High on many agency lists for reducing costs are initiatives for data center consolidation and cloud computing.

Dell Inc., No. 15 with $2.2 billion in prime contracts, is hearing similar questions in the commercial market and is adapting its business model to highlight services along with its traditional hardware sales.

“It is a complete transformation,” said Frank Muehleman, vice president of Dell’s public and large enterprise business. “It is about understanding the customer and talking about vertical solutions. The sales process becomes more consultative and more about expertise.”

Dell’s transformation is heavily focused on managing storage and data centers. A similar theme is struck by other companies such as Computer Sciences Corp., No. 11 with $3.5 billion in prime contracts and HP.

These companies all have significant commercial businesses and using those capabilities is growing part of their strategies.

“We are much more engaged with our commercial teams in taking their offerings and moving them to the federal space,” said David Zolet, president of business development for CSC’s North American Public Sector.

Part of the strategy reduces costs for the companies because they can increase their return on investment by taking the solutions they develop to more markets. The government also is growing more comfortable with commercial solutions because it wants to get a less expensive solution that has a proven track record.

Finding ways to reduce costs for their customers has been a sweet spot for Booz Allen Hamilton, No. 9 with $3.7 billion in prime contracts.

Agencies facing reduced budgets or downsizing still must perform their missions so “they look to firms like ours to come in and help them deal with the organizational change – how are they going to do more with less?” said Gary Labovich, a Booz Allen senior vice president. “That plays well to us.”

Important areas for Booz Allen include program management support and cybersecurity, he said.

EVOLVE OR PERISH

As demands in the market change, so do government contractors.

Many are active in mergers and acquisitions to bring in new contracts, customers and domain expertise.

Two companies better known for their construction and engineering services -- KBR Inc., No. 10 with $3.5 billion, and Jacobs Engineering Group, No. 20 with $1.7 billion -- are building their IT capabilities through acquisitions because they see growing demand from customers.

“Within the federal market, a part of our acquisition focus will be in the IT arena,” said Jacobs President and CEO Craig Martin. “Our historic IT capabilities have been in [the Defense Department], particularly with the Army and the Marine Corps. The TechTeam acquisition gives us a stronger position with health care and other federal customers.”

Several companies also have restructured to better align with customer demands and to put more emphasis on capabilities in growing segments of the market.

Boeing Co., No. 3 with $8.4 billion in prime contracts, created a standalone IT business, Boeing Information Solutions.

The unit was created to “say that we have the capability to leverage what we have done, to leverage the corporate IT solutions for our supply chain, and to create a domain with our technical solutions,” said John Hinshaw, vice president and general manager of Information Solutions.

Likewise, Harris Corp., No. 13 with $2.9 billion in prime contracts, created a new unit – Integrated Network Solutions – to showcase its IT capabilities and bring together historic IT capabilities with several acquisitions.

Another driver for many of these changes is the need for contractors to reduce their own operating costs as they face a customer very focused on getting the lowest price possible. Many of the companies, particularly the diversified defense firms, have had to lay-off workers as the government has cut programs.

Those pressures are not expected to abate anytime soon, said Gerald DeMuro, executive vice president of the Information Systems and Technology Group at General Dynamics Corp., No. 5 with $5.5 billion in prime contracts.

“The market forces are really driving all of us to be as aggressive as we can and as efficient as we can in providing these services and systems to the government,” he said.