Mid-tier remedy: Stay focused

An argument some contractors have recently used to justify growing scale through consolidation is that size helps convince agency customers of their ability to perform larger, more complex contracts.

Large companies have the resources to bid on any contract they want, while small businesses have access to set-aside programs if they meet certain size requirements. Then there is the middle tier, which can have a different definition of size depending on who you ask in industry.

For example, some companies with more than $1 billion in annual revenue view themselves as being in the middle even though many industry observers see that benchmark as being a large business. The definition of mid-tier can also depend on what markets a company plays in.

So how do those in the middle tier navigate their world of competing against larger players without access to those small business set asides?

On Wednesday at the Atlantic Council’s latest “Captains of Industry” event, three chief executives who see their firms as in the middle tier described how they view their businesses journeying through that landscape. The consensus is that focus on core offerings is the best path.

“You’ve got to get very particular and local,” said Barbara Humpton, CEO of Siemens Government Technologies. “All of us have had to choose some new areas… and also some inventions we know we’re going to have to stick with for a long time in order to see them pay off.”

SGT operates as an independently-run subsidiary of the larger Siemens Corp., which posted $88.1 billion in its 2016 fiscal year with $23.7 billion of that in the U.S. The Reston, Virginia-headquartered government business uses the Siemens Corp. parent as preferred supplier for all federal contracts in areas such as energy, health care, infrastructure and automation.

Deltek data indicates SGT received approximately $426.4 million in prime contracting obligations during the last federal fiscal year.

In the case of SGT, Humpton told attendees SGT gets to see work the 372,000 employees across the larger Siemens organization do in commercial markets both domestically and internationally. From there, she said SGT can “take advantage of the work that’s already being done globally (and) apply that to the needs of the U.S. government.”

Cubic Corp. CEO Brad Feldmann said the $1.5 billion-revenue contractor focuses on agility with an emphasis on being quicker in responses to agency customers than larger competitors. The San Diego-based company builds training systems and networked technologies for defense agencies in the U.S. and worldwide.

“We have to deliver the stuff early, we have to have faster innovation cycles and we have to have empathy for our customers,” he said.

Andy Hove, CEO of AM General, the maker of Humvee and other heavy vehicles, cited his company’s presence in highly-regulated government and commercial markets as helping them remain focused on their core offerings.

Privately-held AM General does not disclose financial figures, but a January 2017 report from Moody’s Investor Service pegged the company’s revenue at roughly $841 million over 12 months ended Sept. 30, 2016.

“You need to dedicate a considerable amount of resources to just to do business in the business that we’re in,” Hove said. “You’re not big enough to get stove-piped into those kinds of things. These businesses are incredibly lean matrixed organizations that are highly adaptive, highly responsive to emerging market changes.”

It is not lost on market observers that government services consolidation in recent years is bringing the question of the importance of scale back into the forefront with two dominant players now in Leidos and the recent General Dynamics IT-CSRA combination.

The government IT market stands to only get more competitive amid expectations of more money under the new federal budget framework for technology modernization at agencies. And other companies are following the lead of Leidos and General Dynamics in looking to position themselves for that growth.

“Government IT is a hot place to be right now. The addressable markets within government IT have grown with the recent activity on the Hill with the omnibus,” Leidos CEO Roger Krone said Monday at a separate Atlantic Council “Captains of Industry” event.

Against that backdrop, Krone said he expects consolidation to continue, a point he made Feb. 22 during Leidos’ fourth quarter and year-end earnings call. And his comments Monday illustrate how crowded the competitive field is in government IT.

“I have always believed you could pick any set of metrics you wanted, slice the numbers different ways, and you could place several companies at the top of any list. So, I would be happy for us to be a scrappy number two,” Krone said. In fact, I challenge my team not to see traditional companies as our competitors. I tell them to see AECOM, HPE and IBM as being our competitors as well.”

Middle-tier contractors do carry a different risk profile than larger competitors in terms of positioning the business for opportunities. As Hove pointed out, large businesses can place “hundreds of bets” across their enterprise and afford to lose some.

“You’ve got a few, and you can’t lose many of them,” Hove said.

Feldmann said Cubic sources its innovation ideas from employees and has a platform to collect those for potential future application, then decides which risks the company should take.

“We have a process to where we make little bets and then bigger bets,” he said. “We try to make our bets according to a portfolio approach: long-term, short-term incremental and game changer.”