SRA CEO: Why Plan B with CSC trumped Plan A

From the perspective of SRA International, becoming part of the government spin-off of Computer Sciences Corp. was really plan B.

Plan A was going through an IPO process and becoming a publicly traded company again. After all, they finally had organic growth after several down years, and their bottom-line results were some of the best in the market.

“We wanted a path where we could control our ability to execute,” Bill Ballhaus, SRA CEO told me. “We picked a path that given the journey we had been on and the performance of the company that we felt really good about.”

When its fiscal year ended June 30, its revenue was up slightly to $1.389 billion compared to $1.386 billion the year before. It’s operating income had grown to $87.8 million compared to $63.7 million the year before.

The company was well positioned to continue on as an independent company. “We had demonstrated organic growth and we had really strong performance on the business development side. That gave us comfort to move forward,” Ballhaus said.

But then along came Computer Sciences Corp., in the midst of splitting its government business from its commercial business.

The deal has been widely reported. Once CSC splits its government business, SRA will become part of the new company – name to be determined. CSC is paying SRA shareholders, including its founder Ernst Volgenau, as well as company management and the private equity group Providence Equity Partners $390 million in cash. CSC is also assuming $1 billion in SRA debt.

The SRA shareholders will retain about a 15 percent interest in the new company.

The new company will have $5.5 billion in annual revenue and 19,000 employees.

Plan B, the combination of SRA and CSC, was just more compelling than SRA’s plan A, Ballhaus said.

The company will be one of the largest pure play IT and professional services companies in the market, so it’ll have scale. It also will have strong profit margins with CSC reporting adjusted EBITDA of 16.7 percent once the acquisition is complete. But just as important to Ballhaus is bringing together the strengths of both companies.

“While both companies have been successful on their own, we get there in different ways,” he said. “So one of the great opportunities is to leverage the best of breed of both companies to deliver the best game plan.”

How SRA, which was stumbling badly when Ballhaus became CEO in July 2011, got to the point where it had at least two viable paths forward is an instructive tale of both a company turnaround and the state of the market in recent years.

Ballhaus disagreed with my description that SRA was in horrible shape when Providence Equity acquired the company and took it private. As part of their acquisition, they brought Ballhaus on board as CEO.

“Like a lot of the market, SRA wasn’t prepared to tackle the challenging environment,” he said.

Many companies had grown and thrived in the post 9/11 market because the public sector was growing rapidly. It didn’t take a lot of management discipline to succeed. But then the market turned, and SRA and most other companies saw revenue dropping and opportunities shrinking.

When Ballhaus and his team came on board in 2011, they put in a four-point plan.

First was a renewed strategic focus on IT services in the federal market. “Our belief is that in an increasingly competitive market, it is better to be focused on the basics and deliver value,” he said.

It’s a mistake to dilute your focus and pursue other market opportunities. “We divested some businesses and shutdown some businesses to put all of our focus on the federal market and the best places to pursue business in that market,” he said.

The second element was to drive efficiencies. It’s a mantra we hear from many companies. The focus is on lowering indirect costs, facilities and fringe benefits. “We share that with many in the industry,” Ballhaus said.

But for SRA, the push for efficiency wasn’t just about lowering costs, but freeing resources to invest.

Which brings us to the third element: Investing in business development.

There are few new starts in the market today so win rates will be lower. “To generate enough wins, we had to increase the amount of new business we would pursue and increase the volume of proposals we submit,” he said.

Today, SRA bids on four times the amount of opportunities it did before, Ballhaus said.

But the company is still selective. It can bid more because it has invested in people, teams and resources, including a proposal center. “Growing your team and resources grows the size of your pipeline,” he said.

The company sizes its target market at $125 billion, so it is very large, and there are plenty of opportunities to pick from. “We still only target the top 5 or 6 percent. We are still disciplined but the scale allows us to pursue more opportunities,” he said. "This is not spray and pray."

The fourth element of the plan focused on nurturing and development the company’s leadership. “The leadership culture enables people to be their best,” Ballhaus said. This has included communicating to company leaders about the market and SRA’s strategy and expectations.

While SRA was going through these changes, CSC was going through its own turnaround effort, which has included restructuring, a renewed focus on performance and divestitures. CSC Chairman and CEO Mike Lawrie spoke about the parallel paths of the two companies were on, and how this will be a strength for them as they come together.

Ballhaus offered similar sentiments. The two companies have little overlap in customers and markets, which should make integration easier, he said.

Business development is an area both companies have focused on. Larry Prior, the CSC public sector leader, who will be the CEO of the new company, said that SRA was ahead of CSC in the business development area.

Ballhaus didn’t go quite that far. “SRA has been a master at winning a large volume of small and mid-sized jobs and we’ve won some larger programs but that’s a difficult transition to make,” he said.

But CSC, he said, has more large program wins. “That will help the combined entity as it goes after large programs because that’s an area where we’ve been challenged,” he said.

The focus of my conversations with CSC and SRA executives has been on the power of the combination of the companies to foster growth, but not on affordability and cost synergies. The two companies have been doing that on their own as evidenced by the expectation that there will be only $51 million in cost savings from the deal. That’s a low number when you consider they are creating a company with $5.5 billion in annual revenue.

“With the two companies coming together, we’ll be able to pursue a wider spectrum of large opportunities and win more across that spectrum,” he said. “Together we’ll bring more depth to a very wide customer footprint.”

Making the deal work is a journey, Ballhaus said. The strategy will need to be refined. A new leadership culture built. Core values will need to be codified. “But there is a great opportunity to grab the best of both companies and define what this new company will look like,” he said.

Once the deal closes by the end of November, Ballhaus will move on but his focus right now is on integrating the two companies, and not on what’s next for him. “When everything is done, then I’ll think about what lies ahead for me,” he said.