ACS moves fast to repair ailing state and local unit<@VM>Smart shopper<@VM>Keeping a firm grip on the federal market
- By William Welsh
- Aug 28, 2005
When sales in Affiliated Computer Services Inc.'s commercial operations hit rock bottom four years ago, the company took immediate action. The leadership of the Dallas company integrated its commercial IT and business process outsourcing operations into a single organization under one executive.
As separate units, they couldn't meet the demands of a competitive market.
"They weren't winning their fair share [of new business], and revenue growth was flat," said Mark King, ACS president and chief operating officer.
The reorganization has paid off handsomely, King said. ACS Commercial Solutions reported 30 percent growth in fiscal 2005, company officials said in an Aug. 4 conference call with analysts.
"This year they have record sales bookings for new business, and our clients are happy because we're able to integrate the IT and BPO businesses," he said.
A similar situation is playing out now with the company's government business. ACS corporate leadership is once again shaking up the company's internal structure. Flat government sales in fiscal 2005 resulted in fourth quarter government sales of only $557 million, a drop of 4 percent from the previous year. ACS' fiscal year ended June 30.
The company announced June 13 that it had combined its government IT and BPO operations into a single unit known as ACS Government Solutions, and brought in Tom Burlin from IBM Corp. to lead the new unit.
Burlin comes to the company with 26 years' experience that includes oversight of federal, state and local operations for IBM.
Burlin has what few executives have in the state and local market: experience running a $2 billion business, King said.
"We wanted someone with 'big-company' experience that had faced what big companies go through," he said.
Part of that big-company experience involved partnering. ACS wanted an executive with a track record of developing partnerships and working closely with other systems integrators, software providers and domain experts, King said. Burlin's ability to work together with other technology companies will let ACS use partnerships to leverage new business, he said.
The kind of restructuring that ACS is going through is a positive step, said Moshe Katri, an analyst with New York investment banking firm SG Cowen & Co. LLC. "Restructuring from the top is a good move," he said.
The acquisition of Lockheed Martin IMS for $825 million in 2001 rocketed ACS into the top echelon of IT companies serving the state and local market. The company derives nearly half of its $4.3 billion annual revenue from state and local sales.
Only two other systems integrators, IBM and EDS Corp., have state and local sales of more than $1 billion, as reported in Washington Technology's annual list of Who's Who in the State and Local Market.
ACS continued its tradition as a strong acquirer this year with the purchases of Mellon Financial Corp.'s human-resources consulting and outsourcing business for $405 million, and of Ascom AG's Transport revenue division for $104 million.
Bolstered by these acquisitions, the company expects total revenue growth for fiscal 2006 to exceed 25 percent, which would the push ACS' annual revenue over $5 billion.
But ACS officials noted that the once-flourishing double-digit growth in its state and local business slowed to a trickle in fiscal 2005. The company's government revenue fell slightly from $2.177 million in fiscal 2004 to $2.176 million in fiscal 2005.
The flat government growth resulted in part from non-recurring revenue on key projects such as Georgia Medicaid, weak bookings and lower welfare-to-workforce business, King said.
The dip in sales calls for exactly the kind of decisive action that ACS is taking through the reorganization, said Bill Loomis, an analyst with investment banking firm Legg Mason Wood Walker Inc. in Baltimore, and a Washington Technology columnist.
"We were a little surprised that their government business started to shrink," he said. "We've been expecting some change from them, because they are not ones to tolerate shrinking business."
ACS has grown very well within its primary markets of transportation, financial and revenue, health care and government and community services. But the company realized that service to existing clients was taking up most of its resources and making it difficult to market new solutions to new customers and geographic regions, Burlin said.
The company's two state and local business lines, health solutions and IT solutions, were serving the same set of clients to a certain extent, he said.
"It just made sense to bring those organizations together so, at the highest levels, they were serving the same market. This was done to drive efficiency to those markets," Burlin said.
Now that the two operations are combined, the company can leverage resources and focus tightly on balanced growth moving forward, he said.
Despite the bumpy road ACS encountered in the state and local market last year, the stock market's confidence in the company remains strong. At press time, ACS stock was selling for $51 a share with a 52-week high of $61 and low of $45.
The company wants to begin cross-selling its solutions to existing customers, Burlin said. In the case of state treasurers, for example, the company hopes to offer solutions in several areas where they control spending, he said.
"They may be responsible for managing pension and health insurance plans as well as their ledger responsibilities. We have solution offerings that could assist them in addressing all of those responsibilities," he said.
The former presidents of ACS' state and local solutions and state health care solutions groups will play key roles in the new structure, Burlin said:
- Harvey Braswell, former president of the company's health care solutions group, is now executive vice president of government sales within the new Government Solutions group.
- John Brophy, former president of the state and local solutions group, is now an executive vice president, reporting directly to Chief Executive Officer Jeff Rich. Brophy will focus on expanding relationships with clients, King said.
"Their sole purpose in life will be to go to market as a sales organization," Burlin said, referring to Braswell's sales staff. "That's a new concept for this new consolidated group."
Burlin, Brophy and Braswell will all focus on sales growth, King said.
Burlin said he has his work cut out for him, returning the company to the 20 percent growth the government business had over the past five years. This will be challenging, because different segments of the state and local market are growing at different rates, he said.
"Where we already achieve very significant market share, growing at 20 percent [or more] is going to be difficult," he said. "We have to take those solutions to new markets and find new solutions in new markets, and that will take some time."
What the company won't do is compromise its level of customer service or the caliber of its solutions, Burlin said.
"This is not about buying into new markets or creating some low-ball approach to the market. This is about balanced growth," he said. "We are going into markets that are healthy and where we have expertise."
Because of the length of state and local sales cycles, it might take 12 months or more to accurately assess whether the reorganization has been successful, analysts said, but the initial results should become apparent in fiscal 2006.
"Fiscal 2006 will be an important year in terms of seeing whether this reorganization will work," Katri said.
Competition is heating up in the state and local market, with budgets on the rebound following several years of shortfalls, Loomis said. ACS will need to price itself more competitively moving forward, he said.
ACS lost key competitions to smaller companies in fiscal 2005, Loomis said. Among the losses were a child support contract in Michigan that went to Tier Technologies Inc., Reston, Va., and a Medicaid management information system contract in Washington state that went to Client Network Services Inc., Rockville, Md.
ACS also lacks the broad consulting skills possessed by other systems integrators in the state and local market, Loomis said. Acquisitions are one way ACS can improve consulting expertise, he said.
But rather than purchase a large consulting company that might have a distinctly different business culture, ACS should focus on selected acquisitions over time to strengthen its consulting capabilities, Loomis said.
"It can't be an overnight fix. Smaller selective acquisitions are less risky and will have a higher probability of success," he said.
If the results of these steps to address disappointing government sales are not sufficient, then the company will make further changes, King said.
"We are not afraid, if something is not working, to change it," he said. "We are very excited about the prospects of the Government Solutions Group, but if this doesn't work, we don't mind changing it again."
Deputy Editor William Welsh can be reached at email@example.com.
Affiliated Computer Services boosted its capabilities with key purchases in 2005:Target No. 1:
Ascom AG's Transport Revenue DivisionAnnounced:
Takes the company into the European government market and expands its U.S. portfolio in the transit and parking payment markets.Target No. 2:
Strengthens customer service offerings in the finance and telecommunications markets, providing new avenues for business process outsourcing. Target No. 3:
Mellon Financial Corp.'s HR consulting and outsourcing businessAnnounced:
Enhances capabilities in the human resources market and further strengthens its business process outsourcing capabilities.Target No. 4:
Visionary Systems Ltd.Announced:
Boosts public safety capabilities by adding emergency medical services software.
When Affiliated Computer Services Inc. swapped IT units with Lockheed Martin Corp. two years ago, many observers thought it spelled the end of ACS' presence in the federal market.
The deal involved ACS turning over a large portion of its federal business to Lockheed Martin in return for the Bethesda, Md., systems integrator's commercial IT unit.
ACS retreated from the federal market because the company was experiencing weak growth and inferior margins, said Moshe Katri, an analyst with New York investment banking firm SG Cowen & Co. LLC.
But the assumption that ACS completely removed itself from the federal market couldn't be further from the truth, said Mark King, ACS' president and chief operating officer.
The Dallas company is No. 51 on the Washington Technology 2005 Top 100 list, which ranks the largest federal government IT prime contractors.
In the federal arena, King said, ACS retained very specific "carve outs," such as health care and education, in which it remains highly competitive.
ACS is tracking several health care opportunities with the Health and Human Services Department and other federal agencies that have health care requirements, King said.
The company is interested in the so-called Medicare Part D opportunity that involves creating a framework to track the out-of-pocket expenses of seniors under Medicare's new drug benefit, King said.
The company likely will bid on federal opportunities where it has a clear competitive advantage, said Bill Loomis, an analyst with Baltimore investment banking firm Legg Mason Wood Walker Inc.
"They might bid on federal opportunities in their power alleys, such as business process outsourcing," he said.
Beyond the state and local market, the company's resources are about evenly split between the U.S. federal and international government markets, King said.
ACS will expand its presence and market share in Europe through its recent purchase of the transportation revenue division of Ascom AG of Bern, Switzerland, Katri said.
Through the $104 million acquisition announced in August, ACS picked up fare collection, airport parking and toll collection units that will boost its transportation revenue capabilities in the global government market.
The Ascom acquisition "allows us to have a footprint in some of the major capitals of the world," King said.