CDSI Buying Wider Outsourcing Stance

CDSI President Pete Bracken said the company's parent, Affiliated Computer Services Inc., will make at least one acquisition of a government-related information technology company per year for the next several years. Those acquisitions will become part of CDSI operations.

CDSI became a wholly owned subsidiary of ACS last December. The Dallas-based company bought CDSI for $373 million, adding a government dimension to its largely commercial outsourcing and information technology services business.

When Affiliated's fiscal year ended June 30, CDSI contributed $414 million in revenue to the combined company's $1.2 billion bottom line. But ACS executives have major growth plans for their government business.

"We have a candidate list of some 30 companies we are looking at right now," said Bracken, whose agenda is to pursue a wider range of government outsourcing projects at agencies such as the Department of Health and Human Services, the Health Care Financing Administration, NASA, the National Oceanic and Atmospheric Administration and the Federal Aviation Administration.

CDSI is on track for $500 million in revenue in fiscal 1999, said Bracken, who headed CDSI for about two years before orchestrating its sale last year. Credit several key contract wins and the August acquisition of Betac International, an Alexandria, Va.-based government systems integrator.

Future deals are designed to do two things: strengthen the government unit's presence on the West Coast, where CDSI has few operations, and find companies that can bring new customers, said Bracken.

Bracken said he wants to add companies that can build on CDSI's capabilities in outsourcing, systems integration and IT services.

"We are looking at companies in the $50 million to $60 million range that can bring us these customers," he said.

CDSI already has a strong customer base in agencies such as the departments of Defense, Education and Interior, the Army Corps of Engineers and the Small Business Administration.

Overall, ACS is expected to hit the $1.5 billion revenue mark in 1999, Bracken said. ACS' goal is to have 20 percent growth annually. The government vs. commercial mix within the company should stay in the 35 percent government, 65 percent commercial range.

But outsourcing is where most of Bracken's attention is focused these days. About $200 million of his unit's revenue is derived from government outsourcing of data centers and desktop services.

Another $100 million comes from outsourcing of business processes, such as CDSI's $376 million, seven-year contract to process student loan applications for the Department of Education. CDSI won that contract in 1993.

"Any time you have a customer whose core business is something other than IT, there is an opportunity to better cope with technology and reduce capital investments through outsourcing," Bracken said.

The government outsourcing business is finally heating up after a slow start. Input of Vienna, Va., estimates that the federal outsourcing market will swell from $2.4 billion in 1998 to $3.4 billion in 2003. One year ago, the market research firm pegged the market at $2.6 billion in 2002.

"The rate of growth is increasing faster than we anticipated," said Input analyst Andrew Sung.

While CDSI does not own a piece of either NASA's $5 billion Outsourcing Desktop Initiative or the General Services Administration's $9 billion Seat Management contract, the success of those efforts should help CDSI, said William Loomis, an analyst with Legg Mason Inc. of Baltimore.

"If we see some large task orders generated by those contracts, people will really start to warm up to outsourcing," he said.

CDSI made a conscious decision not to pursue either contract, Bracken said, because it is too costly to compete for the contracts, which have multiple winners, and then continue to compete to win task orders.

"We looked at those and decided the best approach for us was to target single-award desktop outsourcing contracts," Bracken said.

That strategy has paid off for CDSI, which won the first two desktop outsourcing services contracts it bid on this year, he said. In March, CDSI won a 10,000-seat outsourcing contract worth $50 million over five years from the Senate. It also snagged a 9,000-seat contract worth $11.4 million over two years for local area network and desktop support at the Federal Deposit Insurance Corp.

What's more, CDSI has expanded its business process outsourcing base beyond the Department of Education, Bracken said. In May, CDSI won a $20 million, four-year contract with the Small Business Administration to process disaster home loans. That is a pilot project that could grow larger with follow-on contracts.

The Senate win is especially noteworthy, because it shows how well CDSI and ACS have come together, said Thomas Browne, an analyst with Prudential Securities in New York.

"Both of them could have bid on it [when they were separate companies], but it is questionable if either of them could have won it on their own," he said.

The acquisition of CDSI brought ACS access to government markets, and CDSI gained ACS' commercial experience, which can be leveraged in the government market, Browne said.

Though now in its early stages, the government outsourcing market is a good one to target, analysts said. "The management at Affiliated and CDSI are making a longer term bet that [outsourcing] is going to be a good market, and I think that it is probably a good bet," Browne said.