BDM Follows Stately Road to Riches
The one-time defense contractor is diversifying into state and local markets, but it desperately needs experts to follow through on its strategy
P> C. Thomas Faulders should be kicking back and relaxing as state and local contracts roll in to BDM International Inc. of McLean, Va. But he isn't. He worries about how to staff all the awards BDM has won recently -- an enviable position by most corporate standards.
Right now, the growth is almost more than the $890 million company can handle. It has 65 open positions -- an impressive number for the state division, whose 275 employees are scattered throughout the country.
"Our primary limitation is not opportunity; our primary limitation is people," said Faulders, who is the acting president of BDM Technologies, and executive vice president and chief financial officer of BDM International.
State and local business at BDM represents the second fastest growing segment of the company. Commercial operations took first place, surging from $108 million in 1994 to $135 million last year. Combined revenues from the state and local groups were $51 million in 1995, up from $40 million in 1994. The state business comes under BDM Technologies Inc., while the local section is part of BDM Federal Inc.
BDM projects that its state business -- focused mostly on welfare systems -- will grow between 50 percent and 60 percent in the next year. The local section, which targets information needs of large, urban school systems, is projected to grow by 33 percent.
In the local market, BDM's primary competitors are local systems integrators, but in the state market, the company goes head to head with large consulting firms such as Andersen Consulting.
Faulders attributes BDM's success to a focus on vertical niches -- an approach typical of consulting firms.
One of the company's goals for the year is to package custom work on one contract for resale in other vertical markets. "[Productizing] is not a big deal, it's just a matter of getting the right kind of focus," said Faulders.
After winning several contracts in 1994, BDM spent most of 1995 getting those projects off the ground. The focus for 1996 will be to bid on more contracts.
But finding the right people will be a continuing problem. In particular, BDM needs experts in Texas Instruments' computer-aided software engineering tool Composer, which many states have adopted. Texas Instruments is one of the company's partners in the state market. Workers with these skills are "not abundant. We could take all that we could find, so we have recruiters out scouring the countryside," Faulders said.
BDM has the greatest need for such experts in Jefferson City, Miss.; Helena, Mont.; Montgomery, Ala.; and potentially Albany, N.Y., or Boston.
But in addition to needing experts, BDM will also have to continue honing its marketing skills. To be successful in the state and local market, niche marketing is essential, said Mark Filteau, president of DynCorp's Information and Engineering Technology division in Fairfax, Va. Previously, Filteau helped make PRC a leading player in the state and local emergency dispatch business. Contracts in different niches help minimize risk, he said. It's just like building a diversified portfolio in the stock market. Companies don't want to invest too heavily in any one area because if it crashes, so do they. Once companies get trapped in cyclical bidding, its not easy to get out. It could take several years, warned Filteau.
A typical mistake made by companies entering state and local markets is the unwillingness to make the up-front investment. BDM has done that, but it must spend more money to diversify into other niches and to find the staff.
Word-of-mouth is also critical. "School superintendents are our best salesmen," Faulders said. For example, BDM is looking at a $27.5 million contract with Dayton, Ohio, public schools as an opportunity to branch out into local government needs. The school contract calls for development and installation of an information system for financial management, human resources and student information.
"A reputation is a tough thing to build and a terrible thing to lose," Faulders said.
There are many ways to build that reputation. Until recently, BDM developed its state and local efforts internally. But on Feb. 20, BDM announced the acquisition of three infotech services companies to expand commercial and state business. In the meantime, BDM is searching for recognized experts in the niche markets.
CW Systems Inc., one of three companies, represents the first BDM acquisition that has added to the company's state portfolio. There is plenty of room for growth in BDM's niche markets.
Faulders estimated that the market for information systems in large, urban school systems, such as Chicago, Atlanta or Portland, is $1 billion to $2 billion. But that doesn't mean BDM isn't looking for other opportunities. Criminal justice systems, licensing systems, electronic benefits transfer and outsourcing are all potential new markets.
The question that remains is whether BDM can find the qualified experts to deliver on these opportunities.
The Promise and Peril of State and Local Markets
Bill Loomis, vice president with Ferris Baker Watts Inc. of Baltimore, said the state and local market is one of the biggest opportunities for integrators such as BDM. As the federal government shifts more responsibilities to the states, they will need better information systems, he said. The state and local market is closer to the commercial market than the federal market in terms of profit margins. But just like the commercial market, it poses a greater risk than federal business. Marketing costs are higher, and contract lengths are shorter.
The contract backlog in the state and local market is usually nine months to 1.5 years. In comparison, federal contract backlogs are generally one to three years.
Additionally, contracts in a given niche tend to end around the same time. In any one niche, states often issue requests for proposals in clusters, many times in response to outside events. For example, the federal government has set up a program that gives qualifying states matching funds to develop child support systems. To qualify for the federal funds, work must be performed by October 1998, resulting in a surge of proposals.
But state and local isn't an easy market to enter, in part because of the large number of jurisdictions and the different rules involved. In addition to the 50 states, there are approximately 150 major municipalities. The United States has a total of 86,742 state and local governments.