Five strategies driving today's prime contractors
As I look across the market and talk with various executives at large, small and midsized companies, I see several themes around the different strategies companies are adopting.
Broadly, they fall into five categories:
- Adding scale
- Leveraging commercial expertise
- New entrants
- Pure-play IT
- New roles and opportunities
There also are a couple outliers in the market that don’t neatly fit into any of the categories I’ve described.
In this bucket, I’d put companies such as Engility, Harris, Vencore and PAE. Each have made or are in the process of making very large acquisitions that add a tremendous amount of size to their operations. Size, of course, isn’t the sole driver – there has to be a market or capability fit – but adding scale and broadening their base are critical to making their business models work.
The broader your base, the lower your per unit costs are. For these companies, controlling and lower costs are critical because they are most often competing in lower margin portions of the market. But if their models work, they should reap a significant return on their investment.
It’ll be interesting to watch this group of four because Harris and Engility are publicly traded and Vencore and PAE are owned by private equity.
Leveraging Commercial Expertise
In this bucket, I’d put companies such as Accenture, Unisys, CSC, IBM and Hewlett-Packard. The size of the government business varies percentage wise across this group of companies. For some, it is significant; for others, not so much.
But each of these companies employs strategies that pull expertise from the commercial side of the business into the public sector size. And in the case of cyber issues, they often are pulling from the public sector into the commercial.
Five or so years ago, you didn’t see that as much. Executives from these companies have described to me how they are formalizing processes where best practices and solutions are being shared across the companies.
This trend is being helped by government customers who are now paying more than lip service to the idea of using commercial technologies. Tight budgets are pushing customers to look for proven solutions wherever they can find them.
These are companies that have long been household names in the government market: Lockheed Martin, Northrop Grumman, General Dynamics, CACI, ManTech and SRA to name a few.
What I find interesting here is that these companies are deploying a variety of strategies to be successful, but they also are straying from what they do best – focus on the public sector market.
They are making acquisitions, they are building more repeatable solutions, they are forming alliances and partnerships with commercial technology vendors.
Those partnerships will be a critical thing to watch in the coming years. Many commercial technology companies see the federal market as a ripe opportunity, but they often lack the staying power and resources to make a lasting go of it. But partnering with key systems integrators and prime contractors is the best way to crack the code because you have an expert on your side.
For the pure-play companies, the partnerships offer a chance to bring in best-of-breed commercial technologies that can separate you from competitors.
Here is where I see Amazon, Google, FireEye, Huddle, Box, Splunk and a host of others. These companies have a great technologies and solutions for collaboration, security and data management. Their products are being embedded into larger solutions; for example, Splunk is a backbone data management tool for the F-35 Lightning II fighter.
Amazon in particular is a company I need to stop thinking of as a new entrant and perhaps move into the category of a contractor leveraging its commercial expertise. I’ll know more as the managed services portion of the market matures. The "everything as a service" trend is still a very disruptive force, so where these companies eventually fall is unclear to me. Will Amazon mostly be a prime, or will they be a first-tier partner?
New roles and Opportunities
I recently wrote a piece that our sister publication, FCW, will use where I describe what I see as a significant evolution of the telecom companies.
For several years, AT&T, CenturyLink and Verizon have been adding capabilities around the cloud, IT and infrastructure services. CenturyLink Government leader Tim Meehan describes the concept of a single pane of glass where the customer can look at the entire network and understand what is going on.
GSA’s NS2020 strategy and the Enterprise Infrastructure Solutions contract will play a major role in this innovation. The contract is the follow-on to the Networx vehicles. While GSA says they want more than just the telecoms to bid, it looks like only Harris will try to prime the contract. The other primes will be the telecom companies.
But what I think will happen is that the contract will open more choices for government customers and increase the opportunities for the telecom companies to offer more services to customers. We might see a competition between companies, but also between contracts such as EIS and Alliant.
A Couple Outliers
I have two companies in mind here -- Maximus and Raytheon. Two very different companies.
Maximus is probably more like the Accenture and Unisys, but they don’t really have any commercial business. They are rapidly growing in the federal market because they are pulling in state- and local-related work. They’ve also benefited greatly from the Affordable Care Act because of the new requirements the law has.
They acquired Acentia to add more IT capabilities to their business process management skills. Better IT means better managed process, and it all translates to more profits.
They have a strong focus on outcomes for their customers as opposed to process. This takes a unique customer, but as a taxpayer, I hope we see more of this.
For Raytheon, their acquisition of Websense and the creation of a new joint venture for the commercial cyber market has set them apart from their defense and aerospace brethren. While all of them are pursuing cybersecurity as an important market, Raytheon has established a different approach and is putting a serious investment into the commercial cyber market. Time will tell if it is the right bet or not.
And finally, I see managed services is a thread that runs through these groups of companies as customers look for cost savings, improved efficiencies and new capabilities. I think a lot of these companies are benefiting as customers look for concrete results and a return on the money they are spending.
So, that is my sort of 30,000-foot view of the market. I throw it out there in part to test my hypothesis. Do I have the right categories? Do I have the right companies in the right categories? What am I missing?
Please let me know.
Posted by Nick Wakeman on Apr 21, 2015 at 1:10 PM