The rise of the hybrid government contractor

Market Watch | Financial views of a competitive environment

The slowing of federal budget growth increases the competitive challenge for government contractors, especially for the companies that no longer qualify as small businesses. In this tough environment, a company's distinguishing characteristics become even more important. Focus and depth of capabilities and customer knowledge never stop being winners. Increasingly, companies that can deliver the full-solution life cycle of design, integration, implementation and support will prevail. Looking ahead, these capabilities span software, hardware, engineering and support elements.

This "hybrid" business model merges more diverse capabilities and functions than was typical in the past ? encompassing both product and service disciplines. Strategic development strategies in the large aerospace and defense prime contractors, including BAE Systems, General Dynamics and Lockheed Martin, have incorporated this reality for several years, although organizational conflicts of interest have prevented even broader application of those hybrid capabilities to customer solutions.

In recent years, merger and acquisition activity in the defense and government sectors reflects the importance to acquirers of building "full-solution" capabilities through functionally hybrid business organizations. It's also clear that many of the successful mid-sized contractors have hybrid attributes, characteristics that have strengthened and lengthened their customer relationships. Accordingly, those companies provide more technical challenges to employees, more stability of staffing levels, greater pricing strength and higher company values for shareholders.

Today's government environment needs hybrid businesses. As technology life cycles shorten and federal responsibilities grow, the government needs private companies with the experience and technical know-how to provide solutions that work. More often than not, these solutions are specifically formulated to address the government customer's unique requirements. In such circumstances, the government is seeking solutions that solve problems and deliver better feedback and output, whether for the soldier in real time or in the back office for delayed analysis and strategic planning. Company capabilities necessary to deliver these solutions, now and in the future, are a blend of scientific and technical knowledge with systems engineering and integration, training, logistics, maintenance and support.

Examples of technical knowledge components include information technology, communications, sensors, biometrics, imagery analysis and information security. Although many hybrids are associated with defense and intelligence customers, systems and platforms, the concept applies throughout government. For example, the Homeland Security Department has many requirements that call for unique solutions involving hardware, software, sensors and communications elements.

In addition to the solutions themselves, customers need proper training and ongoing technical support to ensure the effectiveness of the installed systems. Fielded systems, in particular, require logistics support relative to spares, replacements, upgrades and sources of supply. The global nature of deployments, including those of Defense and other agencies, necessitates a logistics tail that can stay abreast of the troops and their equipment.

Training and simulation products and services are also critical to government operations, which now require contractors to have more comprehensive capabilities and an ability to synthesize and integrate them. The better companies continue to build their businesses with those customer requirements in mind.

Some of the most attractive companies to employees, customers and shareholders have grown up with a hybrid business philosophy. Frequently, they have a research and development element to their business. Many have pursued software development and systems design projects, completed with some combination of discomfort and success.

Technology tools are often critical to their development and to the implementation of solutions for customers. Recently acquired long-running, successful private companies ? such as Sparta Inc., Foster-Miller Inc., Aspen Systems Corp., Swales Aerospace Inc., SRS Technologies Inc. and Oberon Associates Inc. ? are only a few examples of the hybrid structure and strategy. SRA International Inc., QinetiQ North America and Science Applications International Corp. are a small sample of the public companies with these characteristics. Looking ahead, I expect corporate development strategies to foster more high-performance hybrids.

Jerry Grossman ( is managing director at Houlihan Lokey Howard and Zukin.

About the Author

Jerry Grossman is managing director at Houlihan Lokey Howard and Zukin.

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