How the biggest contractors are preparing for growth

The 2015 Washington Technology Top 100 is populated with the largest government contractors in the market, and nearly all are running their businesses on two intertwined tracks.

One track has them positioning themselves for future growth by making acquisitions, pursuing new markets, restructuring operations and investing in new technologies.

At the same time, they also are weathering a market that continues to contract as total prime contracts measured by the Top 100 fell for the fourth straight year. The continued decline isn’t totally unexpected as many executives look toward 2016 for when they expect overall growth to return.

The market peaked with the 2011 Top 100, when the aggregate prime contracts totaled $132 billion. For 2015 Top 100, the aggregate is $98.5 billion.

The lack of growth mirrors what government customers are experiencing as they continue to face constrained budgets. With several consecutive years of belt tightening, government agencies remained focused on reducing their costs, increasing efficiency and using new technologies as a way of increasing their effectiveness.

Many executives see this focus on cost, efficiency and effectiveness as a long-term shift on how government buyers view their relationship with their contractors, which will continue even when overall spending starts to increase.

Much of the repositioning companies have undertaken over the last year or so has been in response to this shift, and some of the moves have been dramatic.

A leading example is the recent announcement by Computer Sciences Corp., No. 10 on this year’s rankings, that it will divide into two companies: one focused on the commercial market, and the second on public sector.

The company has struggled for several years and has been a turnaround project for CEO Mike Lawrie since he came on board in 2012. Since then, the company has shed business units, restructured to flatten out its organization, and seen turnover among its senior leaders.

The split is expected to be completed by the end of October and may or may not be the final move either half of the business will need to make. But the positive for both the commercial and public sector portions of CSC is that both will be able focus time, financial resources and attention on just their marketplaces. One won’t be distracted by the other.

This will likely benefit CSC’s public sector business the most as its financial performance was the quickest to rebound since 2012 and has held steady for the most part.

Another major split is underway at Hewlett-Packard Co. (No. 7), which is separating its PC, laptop, and printer business from its services, software and higher-end hardware business. The move is similar to what IBM Corp. (No. 20) did in 2004. HP’s split is expected to be completed by Nov. 1, but the impact on its public sector business isn’t clear yet as both new companies will have substantial government business.

And another dramatic move is the $4.6 billion acquisition of Exelis by Harris Corp. (No. 9), which closed May 29. Exelis spun off its mission systems business in September 2014 to create Vectrus Inc., which landed at No. 45 on the Top 100. Vectrus took Exelis’ IT, infrastructure, logistics and supply chain business, while Exelis retained higher end work focused on critical networks, ISR and analytics and electronic warfare. The idea was to separate the lower margin work in Vectrus from the higher margin work held by Exelis. Each company needed different cost structures to remain competitive, and they would be better off as separate companies.

But the repositioning wasn’t over yet as Harris swooped in with a February announcement that it was acquiring Exelis for $4.6 billion. The acquisition closed May 29. Harris was looking to add size and scale to its capabilities in ISR, command and control, electronics and other complementary capabilities that Exelis had. The motivation for Harris is to add size, which it says will make it more cost-effective and hence competitive in defense and intelligence markets within which the company expects to grow in the coming years.

The acquisition moved Harris up three spots in the rankings to No. 9.

Raytheon Co. (No. 4) struck a unique cybersecurity strategy when it acquired a major stake in Websense for $1.57 billion. It then combined its cyber products business with Websense to create a joint venture focused on the commercial market. The deal allows Raytheon to target the commercial cyber market but still apply those technologies to its defense customers.

The approach differs from other defense companies which also are targeting the commercial cyber market but are focused more on adjacent sectors such as energy, utilities and other other critical infrastructures. The size of Raytheon’s investment and the structure of the business are unique.

Not all moves to reposition are as dramatic as these. Most are much more subtle. For example, Lockheed Martin, No. 1 for 21 consecutive years, made niche acquisitions in cybersecurity and health care.

Other companies are making strategic hires to increase their intimacy with their customers. Several executives described the need to listen to their customers to understand their pain points and what their needs are.

Companies are also actively teaching their customers the art of the possible, not just about new technologies but new models of doing business such as cloud computing and everything as a service. They are seeing adoption of these models increase, but there is still a wide gap between early adopters and agencies that are still risk adverse.

But it is in narrowing that gap that many government contractors see their growth opportunities and have based their investment strategies. As government buyers remained focused on cost, effectiveness and efficiency, industry’s belief is that they will turn to new ways of buying goods and services.

And that is when the investments, big and small, that the Top 100 companies have been making should pay off, regardless of when overall spending beings to rise.