Disruption, transformation mark 2017 Top 100

The largest contractors in the federal IT market have been busying positioning themselves to leverage new technologies and find ways to grow in a still challenging market.

More than most years, the 2017 Washington Technology Top 100 shows how much change and disruption is going on the market.

The first and most obvious change is that after more than two decades atop the WT rankings as the largest prime IT contractors in the market, Lockheed Martin has slipped down a notch to No. 2.

No, they didn’t lose multiple large contracts; instead they divested the Information Systems & Global Services business that combined with Leidos, the new No. 1 with $6.89 billion in prime contracts during fiscal year 2016.

But Lockheed is still a close second, a very close second, with $6.87 billion in prime contracts.

Lockheed’s high ranking is a testament to the important role IT plays as an enabler. The Bethesda, Md.-based company sold its IT services business but kept nearly all of its cyber business and all of its IT business that touches the platform.

So if the IT system is delivering command and control data to the F-35 or a satellite platform, Lockheed kept it. But if it is systems to deliver better health care data, it went to Leidos.

Meanwhile, Leidos has positioned itself as the largest IT provider in the market. It is banking its success on scale, a broad range of technical capabilities and a global reach.

Company executives see opportunities around IT modernization, health care and cyber that neither heritage Leidos nor heritage Lockheed would have pursued.

As you move down through the rankings you see plenty of signs that fundamental changes are going on in the market as these leading companies adjust to customer demands, emerging technologies and a continuing tight and uncertain budget environment.

We see companies making acquisitions and divestitures. Partnerships with commercial technology vendors have become more important. And many companies are using strategic hires to stake out their place in market that is rapidly evolving.

The cloud is reaching a critical mass as programs such as FITARA and FedRAMP ease security concerns. But the cloud has become the tool agencies are using to modernize their infrastructure and bring on new ways of doing business. And many firms in the Top 100 are driving this trend with offerings around the cloud, Agile development, mobile and DevOps.

All of these are positive signs for an industry that has weathered years of shrinking budgets and a customer focused on low price above all else.

The rise and near dominance of lowest price, technically acceptable contracting was one of the deciding factors in Lockheed’s divesture of its IT services business. Because so much of its business was focused on platforms, it couldn’t get its cost structure down to be competitive with other more pure-play IT businesses.

Leidos executives say they are taming that problem now that they are free of the platform business and are bringing their cost structure in line with other IT competitors.

One of the big questions that has lingered over the Top 100 and the government market in general has been when will we see a return to growth? The market has been contracting for nearly six years but the 2017 Top 100 gives a strong indication that the downward pressure has lessened. And in fact, we are seeing an uptick.

The 2016 Top 100 captured an aggregate of $97.2 billion in prime contracts, but the 2017 list shows some growth with the total hitting $99.8 billion. That is still a long way from the 2011 peak of $132 billion but is still a welcome sign for the market.

But more important than those numbers is what the companies are doing.

The M&A activity is obvious with the Lockheed-Leidos deal topping the list but you also have the combination of HPE’s enterprise services business with Computer Sciences Corp. to create new entity called DXC Technology. DXC's focus is on exploiting the government need to modernize IT systems and digitize government processes.

You see many companies on the Top 100 including IT modernization as central parts of their growth strategies. This includes companies such as Booz Allen Hamilton, CACI International, CGI Group, IBM, Accenture, SAIC, CSRA and others.

One of the more interesting trends in the market is the embrace of commercial technologies by the government and by contractors. The government market is moving beyond the rhetoric of touting the use of commercial off the shelf technologies it has espoused for two decades.

The Defense Department famously opened the Defense Innovation Unit Experimental or DIUx in Silicon Valley to forge a closer bond with new innovative tech companies.

Government contractors also are on the same path with many forming close alliances with well-known names such as Amazon Web Services, Microsoft Azure, ServiceNow and Salesforce. But they also are more active looking for technologies that address issues around security, mobility and analytics.

The next big technology wave will come through automation, machine learning and the Internet of Things.

Top 100 companies are making investments in these areas both through internal research as well as partnerships. IBM, Cisco, and Microsoft all see these areas as ripe for growth and ways to differentiate their offerings.

But dark clouds still hang over the market and companies are still making major adjustments, namely divestitures, to reposition themselves. The most recent example is Harris Corp.'s divestiture of $1 billion in revenue through the sale of its IT services business.

The budget continues to be an issue because each year Congress and the president play chicken with getting a budget passed into law. It has been more complicated this year with the change in the White House, so the government operated under a continuing resolution for the first two quarters of fiscal 2017.

At the same time, there is somewhat of a leadership void at many agencies as they await political appointees that have been slow in coming.

The result is that many agencies are in a holding pattern when it comes to spending on new initiatives, but the expectation of many industry executives is that this will ease as time moves forward.

But next on the budget horizon is the fiscal 2018 budget and President Trump’s blueprint, which calls for deep cuts at civilian agencies such as the Environmental Protection Agency and State Department and large increases for defense.

Executives, of course, know that the Trump budget will not be what finally gets passed by Congress but it is a statement on spending priorities. So depending on where a company’s business lies, the blueprint either means your customers will see increases or will face budget cuts.

But the expectation is that even agencies the experience budget cuts will be looking to IT solutions to find ways to operate more efficiently and effectively.

After years of across the board cuts, the market is taking a positive turn for industry. Despite uncertainty around budgets and spending, the opportunity to help agencies adopt new technologies and digitize their business operations will only grow.

We see that in the M&A activity. We see that in hiring spree that firms such as Deloitte have gone on, where they are hiring people with deep domain expertise. We see that in companies such as Engility that has turned its back on LPTA contracts and is focusing growth on delivering outcomes to customers and not the lowest price.

These trends have been building for several years but the activity around the Top 100 reflects many of positive technology and management drivers in today’s federal market.

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