Hughes' Knowles Maps Growth Plan

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Hughes' Knowles Maps Growth Plan

By Nick Wakeman

Staff Writer


Hughes photo

Hughes Data Systems President E.O. Knowles

Executives at Hughes Data Systems, Irvine, Calif., are considering adding federal outsourcing to the unit's portfolio to build civilian government business.

While pursuing civilian business through the General Services Administration schedule and indefinite delivery, indefinite quantity contracts, Hughes Data Systems President E.O. Knowles said he cannot ignore potentially lucrative outsourcing efforts planned by the GSA, NASA, the Department of Defense and other agencies.

However, Knowles said he fears that outsourcing could be more trouble than it is worth. This is because tight margins on outsourcing projects will make it hard to please high-end users, he said. "I haven't come up with a strategy that says how you can do a good [outsourcing] job and have a satisfied customer," he said in a recent interview.

Knowles said his goal is to grow overall revenues by 25 percent a year. Hughes Data Systems' revenues have tripled over the past two years and will be approximately $300 million in 1997.

The division, which has 190 employees customizing and integrating PCs and workstations, relies heavily on Defense Department contracts. Currently, 80 percent of its revenues come from military contracts like Air Force Desktop V, the remainder is civilian agencies.

Knowles' division is part of Hughes Aircraft, which is being sold by parent Hughes Electronics to Raytheon Co., Lexington, Mass., under a $9.5 billion deal announced in January. That deal is expected to be closed in December, Hughes officials said.

Knowles said he did not know what impact the merger would have on his division. "That is something Raytheon will be grappling with over the next six months," he said.

According to Knowles, work performed by his division does not overlap with any of Raytheon's offerings. Raytheon officials could not be reached for comment on their plans for integrating the data systems division. However, earlier this year, Raytheon officials said the company pursued Hughes Aircraft because of its defense electronics business.

Raytheon is not expected to unload any of the Hughes information technology capabilities, said analyst Paul Nisbet of JSA Research Inc., Newport, R.I. Hughes Data Systems is part of Hughes Aircraft's information systems division, which had revenues of about $2.2 billion last year.

Most of Hughes Data Systems' growth over the past two years has come from the Air Force Desktop V contract that it won in May 1996. The IDIQ contract is worth up to $924 million over five years to Hughes. The Air Force is using the contract, which also was won by the 8(a) firm International Data Products Corp., Gaithersburg, Md., to update computer systems and migrate legacy systems to open systems.

Hughes Data Systems also is among 45 winners of the National Institutes of Health's Electronic Computer Store II contract, which could be worth $2 billion in desktops and peripherals to the winners.

Projections for government spending on outsourcing make it a line of business Knowles said he must consider. The Vienna, Va.-based market research firm Input estimates the outsourcing market is growing faster than the government market as a whole, rising from $1.8 billion in 1997 to $2.6 billion in 2002, an average annual growth rate of 7 percent.

But the trend toward outsourcing and the greater user of GSA schedules and large IDIQ contracts with multiple winners shows the government is headed in two different directions at the same time, Knowles said.

The government's desire to both outsource IT and give users greater flexibility for buying shows a dichotomy in the government's approach to procurement, said Robert Dornan, senior vice president of the McLean, Va., research firm Federal Sources Inc.

"There is a very schizophrenic environment that you are seeing," Dornan said.

Outsourcing is attractive because it lets agencies concentrate on their core mission, which is not buying IT services, Dornan said. Outsourcing also is attractive when compared to the "chaos that is evolving from the [governmentwide procurement contracts] and the GSA schedules," he said.

While Knowles mulls whether to pursue outsourcing, Hughes plans to grow its GSA schedule and IDIQ contracts such as ECS II to expand its civilian business, Knowles said.

The Defense Department will remain an important customer, but Knowles said he needs to build a broader base for his division. Currently, the Air Force represents the lion's share of Hughes Data Systems' federal revenues, he said.


Lucent photo

- Jim O'Neill
president of Lucent
Government Solutions Co.

On the ECS II contract, Hughes Data Systems has teamed with Lucent Government Solutions Co. Jim O'Neill, president of Lucent Government Solutions, said teaming with Hughes Data Systems was one of his first goals when he joined Lucent from Digital Equipment Corp. five months ago.

While at DEC, he had worked with Knowles and Hughes Data Systems on Desktop V, he said.

Knowles' reputation will help Hughes Data Systems penetrate deeper into the civilian market, he said. "They are a small but innovative company," O'Neill said. "And Knowles knows how to get the best value for his customers."

Lucent also is teamed with Hughes Data Systems on a U.S. Patent and Trademark Office contract.

Breaking into the civilian market will be a challenge, Knowles said, especially because Hughes is known primarily as a defense contractor.

"Hughes is not a household word when you get to the Department of Agriculture or the Department of Transportation," he said. "It takes a while for them to get to know you."


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