TOP 100: Long-term relationships fuel Northrop Grumman's IT business

Northrop Grumman by almost any measure is one of the government market’s true blue blood players with a wide-ranging portfolio of key large defense and space programs of record that will drive growth in future years.

That portfolio is getting even broader with the June acquisition of Orbital ATK in hopes that the combination will translate to even more wins in larger defense and space programs on the horizon. Plus there is Northrop’s vast cybersecurity business that is largely classified.

Then there is its technology services segment that houses much of Northrop’s government IT work, which some of its defense peers such as Lockheed Martin most notably have exited in recent years but others have doubled down on, such as General Dynamics more recently through its CSRA deal.

A look under the hood reveals a sizeable IT business that performs a wide range of integration and other services work for civilian agencies and federal health care initiatives. And more importantly views that work as part of its core business strategy and from a technical perspective, Northrop executives said.

“Many of the technologies and capabilities that we sell to our customers are also sold by the rest of the company to other customers, and vice-versa,” said Ed Sturms, who leads civilian and health IT as a vice president and general manager in the technology services segment. “Some of their capabilities that they sell can be pulled into or used across our market space.”

Northrop Grumman comes in unchanged at No. 3 in the 2018 Washington Technology Top 100 rankings on $6.6 billion in prime IT and professional services contracts with $1.3 billion of that from civilian agencies.

That civilian portfolio includes a pair of nearly two-decade relationships with two agencies just about every U.S. citizen has, does or will interact with at some point: the Social Security Administration and Internal Revenue Service. Other customers of Northrop’s IT business include the State and Justice departments, plus the Centers for Medicare and Medicaid Service.

Last year, Northrop kept its incumbency on the SSA’s main IT services contract vehicle and has the largest ceiling on the $7.8 billion “ITSSC” effort over the other two awardees.

All winners will work with SSA to deploy new hardware and software as the agency seeks to modernize its decades-old IT infrastructure and also take in additional Social Security recipients at the same time amid retirements of more Baby Boomers.

“The systems themselves and the data behind the systems are extremely large, so they understand the problem and the magnitude of the problem,” said Mike Danick, director of health solutions. “The challenge is as the money starts to flow is (having) a structured approach for the modernization.”

A user’s entry point to SSA is through the website, for which Northrop has a usability team that works with the agency to run that website that is focused on the user experience both in how it looks and how the backend systems work to make it run.

Northrop houses technology in its laboratories that can track everything down to the little things that include eye movements to see if a user is stuck anywhere on the page, said Erik Buice, vice president of health solutions.

The challenge for both Northrop and SSA is to modernize but also keep running systems that have to be on at all hours of the day given the population they support.

“A significant portion of the gross domestic product flows through Social Security on a continuous basis,” said Buice. “People need their checks to buy their groceries.”

Citizens also touch Northrop technology when they submit a “1095” form with their tax returns to the IRS. That form confirms they have health insurance from their employers. Northrop sustains the system that processes those and also provides testing services for applications used during filing season.

“Of course we have to do that within the constraints of their infrastructure, which is aging” said Tom Afferton, vice president of civil solutions. “So that creates some challenges but also opportunities for us. We do see modernization opportunities with the IRS. And of course with tax reform, there will be additional opportunities.”

The tax reform package enacted in December also means that the busy season for the IRS to get ready for next year’s filing season is now.

“Taxpayers think this is the quiet time but this is the busy time for the IRS in terms of systems changes because they’re getting ready for filing season and will start January 1st,” Sturms said.

“They don’t want to see a lot of changes during busy season so you’re doing a lot of the application work now,” Afferton said. “We went through a wave and have got another wave coming with the tax law changes.”

Disruptions in government IT such as agencies’ increasing emphasis on price during the earlier decade budget downturns and the emergence of more players led the likes of Lockheed Martin, L3 Technologies and Harris Corp. to divest that relatively low-margin work and focus on platforms.

Northrop stayed in and has gradually repositioned its IT and services business to more higher-end work, which has led to some revenue decline but the segment margins have held steady. This could pay dividends for Northrop just as IT modernization budgets are poised to see increases as analysts and market have projected.

So how does a blue chip defense company like Northrop now at $30 billion-plus in annual sales with its vast lineup of bombers, weapons and space platforms play to win in a fragmented market with many players and a widening spectrum of opportunities available?

It is about scale, but Northrop sees a key part of that as having the ability -- or “reachback” as described to WT -- to pull in experts from other businesses across the corporation and offer insight into similar problems any unit is working on with an agency.

Afferton offered up an example of needing a solar weather expert on short notice to forecast whether a solar flare would impact a network the company runs in New York City for public safety.

“We have a mechanism for sharing information within the company and within 30 minutes I had an international expert on solar weather from the West Coast and a Northrop employee on the phone,” Afferton said.

“There’s a culture of collaboration that exists within the company… it manifests itself in large platform bids and in day-to-day collaboration.”

Then there are the decisions on what technologies to invest in and programs to bid. Northrop has in recent years increasingly emphasized tight discipline in what opportunities it pursues for both large defense programs and also those on the services side.

“We don’t pursue every customer, we focus on a select group of customers where we think their mission aligns with us and us aligns with them,” Sturms said. “That creates a virtuous cycle for us to deliver and be in the driver’s seat to deliver those mission-critical applications.”

This is a key part of how Northrop both differentiates and keeps the IT work it views as part of its core: a combination of focusing on the outcome, domain expertise and alignment with the rest of the corporation.

“Customers tend to come to not just Northrop Grumman but a lot of the other larger technical companies when they have a very hard problem that needs to be solved that’s also associated with scale,” Sturms said.

“Not only are problems very difficult but when you multiply it times every taxpayer or every citizen in the U.S., you get a multiplying effect on the difficulty. So usually both the scale and complexity of the undertaking creates some differentiation.”