RMS Moves Beyond Federal Sales
Integrator leverages Lockheed to enter commercial sector
For nearly 20 years, RMS Technologies Inc. has made the federal government the center of its core services integration model.
It is a strategy that has brought the Lanham, Md., integrator a measure of success, growing from a gross of about $2 million in 1977 to a projected $86 million in 1996, according to company president and chief executive Michael Berta.
But to grow beyond its present size -- "getting over that $100 million hump," as Berta calls it -- and eventually becoming a publicly traded company is a goal that may only be met by entering the commercial sector.
Because of RMS' size, a key to cracking the commercial market will be partnering with larger firms. So far, in its first year of pursing commercial customers, the company has linked with Lockheed Martin Corp. in that firm's contract to provide the information technology functions for Fieldcrest Cannon, an Eden, N.C., textile manufacturer.
"We've been talking [to other potential partners], telling them what we can do," Berta said. "You have to convince them that you can bring them value, quality service and reasonable prices."
At the end of 1996, RMS expects to earn about $1 million in the commercial market and $7 million to $10 million in 1997. The company also expects continued growth on the federal side, but the potential for greater long-term growth is from commercial customers, Berta said.
Of course, RMS is not the only company to see the growth opportunities presented by commercial companies outsourcing their information technology needs.
"That's the story of every [federal] integrator's life," said Linda Cohen, an industry analyst with Gartner Group. Moving into the commercial market is a natural step if the firm wants to become a publicly traded company, she said.
"The [profit] margins are better and the work is more reliable," Cohen said. Without the wider margins, RMS cannot expect to attract investors to buy its stock when they go public, she said.
The commercial market already has a lot of companies, and now more firms with primarily federal contracting experience are trying to get in, she said.
Larger firms are buying their way into the market, but RMS' size precludes it from doing that, Cohen said. Teaming with other companies is the only way the firm can expect to gain significantly in the market, she said. But RMS' partnership with Lockheed is a mixed blessing because Lockheed also is a federal contractor trying to move into the commercial market, Cohen said. "They are on the same mission as RMS," she said.
"It might have been better if they hitched up with a commercial vendor," she said. On the up side of the Lockheed deal is the company's size and its ability to buy into the commercial market, she said. To capture more partners, RMS will have to know its core competencies and match those with the needs of potential partners, Cohen said.
Succeeding in the commercial market is "going to be very challenging and very difficult," she said. Success "really remains to be seen." But RMS knows a little something about challenges. A minority-owned firm, RMS graduated from the 8(a) federal minority contracting program around 1988, Berta said. Over the next several years, RMS looked for ways to continue to grow.
"A lot of companies, not just 8(a) companies, have a hard time breaking through the $100 million mark," he said.
RMS' attempt involved getting into the electronic security business, primarily in prisons. The company provided electronic locks, alarms and closed circuit TVs.
"It is an area fraught with difficulty," Berta said. General contractors were having troubles, and RMS was not immune from the problems. But the company still wanted to get over the $100 million level, so it began looking for outside investors. Enter Safeguard Scientific, a venture capital firm that specializes in young technology companies.
The group brought in new management, namely Berta, who joined RMS in 1995.
One of Berta's first tasks was getting out of the electronic security business. "We got refocused on the commercial market," he said. The interest of Safeguard Scientific in RMS is a positive sign, Cohen said. "As long as Safeguard believes in the strategy and the management, they will keep giving them money," she said.
While breaking the $100 million mark will undoubtedly be a milestone for the company, it will be a small step on the way to being a public company. Before making an initial public offering, Berta sees RMS as a $200 million company with a 50-50 split between the federal and commercial markets. "Clearly, we have to have more balance between the two markets," he said.
The commercial market is about $20 billion now and should be $40 billion by the end of the decade. The federal market will have reasonable growth, 5 to 7 percent a year; nowhere near the pace of the commercial market, he said. One of the things pushing that growth is the quickening cycle of new technology replacing old.
"Ten years ago, you could buy a desktop computer and expect it to be good for five or six years," Berta said. "Now you buy a desktop and it's good for maybe 12 months."
With the shorter cycle, the 40 or 50 employees that a firm might have working in-house on information technology are having a harder time keeping up, Berta said. "Companies are finding it attractive to contract out those functions to firms like RMS who don't have the problems keeping up because we have a 1,000 people doing IT," Berta said.
As RMS pursues these contracts, its primary focus will be the telecommunication connections companies need. Berta lists RMS' strengths as local and wide area network development from establishing requirements to implementation. The firm, with 30 offices around the country, can also provide training and maintain the systems.
Part of RMS' profitability in the federal market is based on customer satisfaction. Contract clauses allow RMS to win award fees based on "grades" given to it by its customers. The company's average grade is 92.6 percent, according to Berta.
"Imagine if you could go to the gas station and pay according to what you thought of the service," Berta said. "You would get very focused on the customer." And contrary to the popular stereotypes, government agencies prize efficiency and cost consciousness, Berta noted. "Our federal customers are very demanding, and I mean that in a very positive way," he said. "We've learned to be very focused on personalized care, and that is translatable to the commercial market."