Top 100 contractors hunt for new opportunities

Contractors up and down the face a market that might be the toughest in 20 years and one that in all likelihood will get worse before it gets better. A market experiencing overall growth is probably two years or more away. As Joe Ayers, vice president and general manager of Dell Federal, put it: “Nothing has really been cut yet.” But the top dogs on the Top 100 aren’t tucking their tails in fear. Instead, they are counting on the bright spots in the market to get them over the hump. Those bright spots include cloud computing, mobility, IT efficiency, health IT and cybersecurity. There are also emerging areas in energy, video, big data and analytics. How are companies in the Top 100 – compiled by Washington Technology through an analysis of federal procurement data – positioning themselves for these opportunities? They are making acquisitions, leveraging commercial technologies, hiring new leaders and forming partnerships like never before. Interestingly, the bright spots are as much about the challenges government customers are facing, namely tight budgets and the prospect of more cuts, as they are about new technologies catching fire in the market. Agencies have a double-edge mantra: Save us money and bring us innovation. That growth is hard to come by in today’s market is evident from the raw numbers in the Top 100. The rankings are based on the government’s fiscal 2011, a year marked by government shutdowns and nearly six months of operating under a continuing resolution. Those delays to the budget caused a drag in the market and brought total prime contracts for the Top 100 in 2011 to $126.8 billion, compared to $132 billion in 2010. In 2009, the total was $129.9 billion. Some experts are predicting 2012 will be higher than 2011, but not by much. At best, this is a flat market. This leaves very little room for error by government contractors. “Delivering results and meeting or exceeding our customers’ commitments is always a top priority for us,” said Linda Gooden, executive vice president of Lockheed Martin’s Information Systems and Global Solutions. Lockheed ranks No. 1 for the 18th year in a row. The challenge for Lockheed Martin and other defense-heavy contractors is that the Defense Department is expected to experience the deepest cuts as well as the impact of the drawdown of operations in Afghanistan. Again the strategic response is to dig deep and find the opportunities where there will be continuing demand by customers for contractor support. The defense sector remains a “very large, very significant market on the services and IT side,” said Gerard DeMuro, executive vice president of General Dynamics’s Information Systems and Technology division. GD is ranked No. 6. “We think there are some segments that are likely to continue to grow, notwithstanding the overall projected decline in the budget.” The likely candidates for growth and stability in the defense market are intelligence, command and control systems, and cybersecurity as well as work refurbishing equipment returning from operations in Iraq and Afghanistan. There also are high tech niches that will fuel opportunities. Harris Corp.’s Sheldon Fox, group president of Harris’ Government Communications Systems, named full-motion video as a growth area, particularly because of heavy use of unmanned aerial vehicles collecting high-definition video and beaming it back for analysis and distribution. Budgets are expected to get tighter in fiscal 2013 and many are speculating that half the fiscal year could go by before a budget is passed. “Agencies used to have a five-year plan and would know what they are going to do and where their funding is going to come from. Contractors would come in a build to order,” said Todd Ramsey, general manager, U.S. federal for IBM Corp. “That’s been totally turned upside down. They don’t know what the future will bring, but they know they’ll have less money to do it.” The result is that agencies are slow to make buying decisions, said David Zolet, president of business development at Computer Sciences Corp.’s North American Public Sector. CSC is ranked No. 9. “The headwinds for all of us are around the shrinking budget and the election and what comes out of that,” he said. Contractors need to bring forward solutions and innovative ideas but not just to cut costs. “It is about cutting costs and applying those savings to improving mission outcomes,” Ramsey said. IBM is ranked No. 21 on the 2012 Top 100. The challenging environment is opening the way for new ways of doing business including technology as a service, including infrastructure, applications and security. The shift is significant for contractors and customers alike because the market has been built on buying things, not buying a service, said Susan Zeleniak, president of Verizon Federal. Verizon is ranked No. 18 on the Top 100. “Buying as a service brings a different set of service-level agreements and different kinds of liability and different requirements,” she said. “It’s an enormous change.” But the budget is going to force agencies to become more efficient and conduct business differently. Commercially available products and solutions that are open and standards based offer the best way forward for agencies, Ramsey said. “Our clients need to stop custom designing everything and start buying like the commercial world,” he said. “And if their processes don’t fit, they need to think about changing the process instead of building a custom system.” Going hand-in-hand with helping customers become more efficient, government contractors also have been internally focused on their own operations. Harris, for example, is selling its commercial broadcast business because it isn’t core to its strategic vision. Hewlett-Packard has announced plans to reduce its headcount by 27,000. CSC is looking for $1 billion in cost reductions. There also have been plenty of changes in the executive suite. Six of the top 20 have either a new CEO or have announced succession plans. Some of these changes such as the departure of Leo Apotheker from HP were performance issues. Others are planned exits such as the upcoming retirement of Bob Stevens at Lockheed Martin. His retirement and his successor were announced simultaneously and the markets responded positively. Companies also are making strategic hires. For example, CACI International has hired a new president, a new chief operating officer, and two new executive vice presidents. “All the people we brought in are people we sought out,” said Paul Cofoni, CACI’s CEO. “These are all people that are in their 40s and 50s, so they can take us through the next decade.” Acquisitions continue to be an important strategy for companies as they either try to shore up their positions or move into new areas of business. High on the acquisition list are companies in health IT, cloud computing, cybersecurity and data analytics. Access to contracts is another key factor. For example, ManTech International acquired TranTech last year to gain access to the Defense Information Systems Agency ENCORE II contract, a $12 billion task order contract that runs through 2018. But despite the challenges and the uncertainties in the market, all of the executives interviewed for the Top 100 issues expressed confidence. “As we address this budget cycle, there will be ample opportunity to work with the government customers and help them move into the future,” Lockheed’s Gooden said.