Accounting for government

Deltek Systems Inc.

Business: Provides government cost accounting software and consulting to contractors doing business with federal, state and local agencies.

Located: Herndon, Va.

President and CEO: Kenneth deLaski

Employees: 650

2002 revenue: slightly less than $100 million

Kenneth deLaski, president and chief executive officer of Deltek, said it's the complexity of government contracting, and the company's understanding of it, that differentiates Deltek.

Deltek Systems sticks to formula for success

Find a need and fill it. That business truism has served Deltek Systems Inc. well during the past two decades as the company has made itself the dominant provider of government cost accounting software.

Deltek, based in Herndon, Va., has built a $100-million-a-year business serving the narrow niche of developing and selling accounting software to government contractors, which have to follow specific rules for allocating costs on projects.

"The way things develop in the applications world, companies start out serving a particular industry or particular business function," said Henry Morris, group vice president for applications and information access with International Data Corp., Framingham, Mass.

"Deltek started out by providing applications for dealing with accounting related to government contractors, [so] the data model they built, the underlying principles, all had to be organized around keeping track of all these regulations," Morris said.

This gives Deltek an advantage over competitors that are adapting off-the-shelf accounting packages for the government market, an often ungainly and expensive transformation, Morris said

Kenneth deLaski, president and chief executive officer of Deltek, said it's the complexity of government contracting, and the company's understanding of it, that differentiates Deltek.

"First of all, there are many different types of contracts the government is using, [and] within each one of those, there are 15 or 20 variations," deLaski said. "Each one will drive its own type of billings, revenue recognition and requirements for reporting back to the government customer. That's one level of complexity."

A second level is the way the government requires its contractors to collect and allocate costs, he said. For instance, labor costs must be recorded daily according to Defense Contract Audit Agency rules.

Another layer of complexity is that a contractor is required to keep track of several contracts simultaneously, meeting the rules for different types of contracts and being consistent in accounting for a host of indirect costs.

"That's where companies coming into the government industry get in trouble," deLaski said.

Deltek doesn't have any direct competitors, he said.

Large government contractors may use financial software from Oracle Corp. or PeopleSoft Inc., or less frequently SAP AG, which then must be customized for federal cost accounting rules. Small companies getting into the government space frequently use off-the-shelf accounting software, which they outgrow quickly once they discover the complexities of the regulations, deLaski said.

The company started as a simple accounting practice for deLaski's father, Donald, in 1963 or 1964, he said.

"He started working for some of the Beltway bandits back then, [and] his main corporate stuff was government contractors," deLaski said. "He started keeping manual spreadsheets on contracts, and for the longest time he talked about how he ought to computerize this."

When deLaski joined his father in the business in 1983, they hired a couple of programmers to develop software to do just that.

"We had 20 or 30 clients in our firm, and we just automated," deLaski said. "We weren't a bunch of hotshot Harvard MBAs. It was more like we've got these 20 clients, how can we make this job easier?"

The company today has about 8,000 customers, deLaski said. Of those, about 2,000 are federal contractors, who account for 50 percent to 60 percent of the company's revenue base, he said. Another 3,000 to 4,000 customers are contractors working on state and local deals. The remainder are commercial customers, though they "sometimes don't like the software, because it's too rigid," de-Laski said.

In many ways, the company has emerged as the de facto standard in government accounting. For instance, out of the Washington Technology Top 100 federal information technology contractors, 54 are Deltek customers, including nine of the top 10 firms. (MCI is the only one not using Deltek, the company said.)

Job listings can be found in which prospective employers require experience with Deltek software. And a number of Defense Contract Audit Agency employees, who audit contracts throughout the federal government, have received training in Deltek software because it helps them check the contractors' books.

"What I've experienced is that when auditors come in who are [versed in] Deltek, they know what buttons to push and bells to ring to see how cost pools are set up," said Jack Fisher, an independent consultant and former DCAA auditor.

"This thing is designed to [work] right off the shelf; all you need to do is input the data properly up front and design aspects of the system [where] there are various options," he said.

But Fisher said using Deltek does not entitle a company to an automatic blessing by DCAA, nor does the agency either request or require contractors to use it.

"No system is approved by DCAA. They can't put themselves in a position to endorse anyone," he said.

Because cost accounting for federal contracts is different from and more stringent than regular financial accounting, Deltek sponsors certification classes through continuing education at George Mason University in Fairfax, Va.

"It's a certification in understanding the principles of government cost accounting," deLaski said. "It's not a degree, and it's not about our software. We're only doing this because we consider ourselves experts in the field." *

Staff Writer Patience Wait can be reached at .

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