2016 Top 100 reflects a changing government market

Washington Technology has ranked the 100 largest government contractors for more than two decades, and it is viewed as one of the best barometers of the federal market’s competitive landscape.

Over the years, we’ve tracked the entrance of the large defense contractors into the IT space, the rise, fall and return of value-added resellers, and the growing role of private equity platforms as well as numerous other business and technology trends.

The rankings have moved from hardware-centric to services, and now the cloud and DevOps are gaining momentum.

The Top 100 measures the largest contractors according to their prime contracts in the areas of IT, telecommunications, systems integration, professional services, engineering and other high-tech offerings. For the 2016 rankings, we are looking at government spending and obligations during fiscal 2015.

This year, more than any other year in the last 23 years, we are seeing a market undergoing a great shift, and it starts at the very top of the rankings.

Lockheed Martin Corp. continues its 22-year run as the No. 1 prime contractor in the market, but in all likelihood, this will be the last year as the company is divesting its IT business, known as Information Services & Global Solutions or IS&GS to Leidos.

The prediction is that Leidos, currently No. 16, will be the new No. 1 on the Top 100, as it will add nearly $5 billion in revenue. In addition to the acquisition of IS&GS, the company has won some marquee contracts, most notably the Defense Department’s $4.3 billion electronic health records contract.

The reworking of the market doesn’t end with Lockheed and Leidos, of course.

At No. 4 is a company with a brand new name but a legacy that stretches back decades: CSRA. The company is a combination of Computer Sciences Corp.’s U.S. public sector business, which CSC spun out, and SRA International, the company founded by industry legend Ernst Volgenau in 1978.

L-3 Communications (No. 24) dropped in the rankings and CACI International (No. 9) rose thanks in large part to CACI’s acquisition of L-3’s national security business.

Other major dealmakers on the list include PAE (No. 15), AECOM (No. 17), and Vencore (No. 25). Each made acquisitions in the last year that solidified their positions in the market. Even further down the list, you see plenty of merger and acquisition activity.

And just as we were finishing up the 2016 rankings, HP Enterprise (No. 7) and CSC announced plans for a deal that will further disrupt the market. HPE is merging its IT services business into CSC, creating a new $28 billion company.

While the deal was not driven by the public sector market, CSC is regaining $2.8 billion in government business. It isn’t as large as what it shed when it created CSRA, but it's still a very significant piece of business.

There is significant speculation that CSC will sell off the government business to keep its focus on the commercial markets. Company chairman and CEO Mike Lawrie said all options are on the table, but no final moves will be made until after the deal with HPE is completed in March 2017.

If CSC sells the government business – which is very likely – who is the buyer? First on many people’s list is CSRA, but they still have debt to deal with that came with its combination with SRA.

There likely will not be a lack of interest given the size of the business and some of its significant contracts such as the $3.5 billion Navy Next Generation Enterprise Network, which HPE holds.

Turning away from mergers and acquisitions, it is easy to see other factors driving moves among the Top 100 companies. For instance, Booz Allen Hamilton (No. 8), Accenture (No. 13) and Deloitte (No. 20) are finding success by offering more than just traditional consulting services. Much of their growth is driven by combining those services with technology offerings, especially where they can help customers modernize systems and processes.

Customers want digital, cloud, mobility and interactivity. Many executives are talking about the need to improve customer-facing systems. Customers can be citizens or other constituents an agency may serve.

“Being able to harness those new technologies and take advantage of the best practices of the commercial sector, I think, is a key part of our success,” said David Moskovitz, chief executive of Accenture Federal Services.

The challenge many agencies face is adding new capabilities while budgets remain tight. We are seeing companies pursue opportunities where they can offer new capabilities via the cloud and manage services. DevOps – the combination of development and operations – is the new buzz word for many companies on the Top 100.

And, of course, all of this is coming against a backdrop of a market that continues to constrict. This is the fifth year in a row that we’ve seen the aggregate value of prime contracts for the Top 100 drop. The peak of the market was 2011, when the Top 100 captured $132 billion in prime contracts. This year, the number has dropped to $97.2 billion.

Budget pressures have caused contractors to adopt a strategy that puts a premium on winning recompetes.

“First and foremost, we want to protect the work we have and the customers we serve today,” said Nazzic Keene, sector president at Science Applications International Corp. (No. 10).

At the same time, companies such as SAIC and others are putting a focus on business development to expand the work they do with current customers and move into new customer sets.

“We saw very strong performance on the business-development side last year, which creates opportunities for us to build on that momentum going forward,” she said.

While some contractors are reporting growth, many are still looking for its return. A positive note is that most are optimistic.

“Most of the analysts seem to think that we’re entering into at least low, single-digit growth in the services market,” said Dan Johnson, General Dynamics (No. 5) executive vice president of GD’s Information Technology and Systems Group. “So that’s encouraging. We do have a relatively stable [federal] budget so that’s encouraging as well.”

Another factor that is weighing on many in the market is that 2016 also is an election year, which creates an added wrinkle as political appointees leave and “acting” becomes a more common title throughout government agencies.

The executives we spoke to don’t expect major changes, but they are paying attention.

“There’s a little bit of uncertainty at the beginning. But we see the change as an opportunity,” said Gary Labovich, an executive vice president and head of the systems delivery business at Booz Allen.