Northrop consolidates parts of tech services in bid to increase efficiency

Northrop Grumman is consolidating two of the three divisions within its technology services segment into a single unit in a move slated to take effect at the start of next year, Northrop’s incoming CEO Kathy Warden said Wednesday.

Speaking on Northrop’s third quarter earnings call with investors, Warden said the company will combine its advanced defense services business with systems modernization and services, the latter of which houses the vast majority of the company’s IT services work.

The move is part of Northrop’s “numerous steps to position (technology services) for the future," Warden told analysts, as the company looks to “ensure we are maximizing operational efficiency and continuing to posture for growth."

As Warden pointed out, Northrop has made several moves within the past three years to reshape the structure and focus areas of its almost $4 billion technology services segment.

Technology services opened for business in its current form at the start of 2016 and Northrop has sought to turn the segment closer to the company’s core defense and security strategy. That pivot appears likely to accelerate as Northrop integrates Orbital ATK.

“The new structure at (technology services) is aimed at creating a better focused organization on innovation and affordability,” Warden said. “We’ve been on a journey over a couple years to eliminate the majority of the commodity-based services we have in the TS portfolio.”

Warden will succeed the retiring Wes Bush as CEO of Northrop on Jan. 1 and will be tasked with continuing much of the groundwork laid by her predecessor's focus on profitability and performance that includes tight discipline on bids to pursue.

That extended to technology services, where revenue has steadily declined but almost by design to bring it in line with the larger corporation. Warden said Wednesday that “all segments of TS are winning new work,” which indicates that the backlog is growing and revenue increases could follow.

“We really see that we now have a services business that has a solid foundation for growth in the long term and healthy program performance,” she added.

Those comments come against a backdrop of ongoing consolidation in the government services market as companies are looking to add scale amid the perception of growing opportunities from overall budget increases.

But whereas General Dynamics doubled down on services in its CSRA acquisition, Northrop is aiming for large hardware opportunities in space and missile defense with Orbital ATK in tow since June.

“As Northrop prioritizes innovation of high-end defense systems, the company will think hard about focusing entirely on close-to-the-box logistics and maintenance services,” Technology Business Research’s public sector IT analyst Joey Cresta wrote in research note for clients Wednesday. “Services pure plays interested industry consolidation should consider proactively inquiring into the availability of (technology services) assets.”

Northrop is guiding technology services revenue for this year to be $4.2 billion-$4.3 billion with an operating margin of around 10 percent.

That is down from $4.8 billion in 2016 and $4.75 billion in 2017, but the margin has held above 10 percent in each of those years and hit 11 percent last year amid Northrop’s work to reposition that part of its business.