WT Business Beat

By Nick Wakeman

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Nick Wakeman

2015: A year of dramatic change at a glacial pace

When I look at the major events of 2015, I see a continuum--not sudden, dramatic events. I'm reminded that the market is more like a glacier than a flood.

Change is a slow process in this market. Companies are still adjusting to the economic collapse of 2008 and the fallout it wrought on budgets.

In many cases, it takes years for the real impact to be felt. When an agency began cutting their budgets, most couldn’t predict what a long-term change that would initiate.

In the beginning, companies reacted tactically, probably in hopes of riding out a down year or two. They did layoffs, they delayed investments.

When the tough budgets stretched from one year to two and then to three, companies became more strategic. Layoffs continued, but companies also were restructurings and divesting.

As the flat and no growth budgets hit years four and five and beyond, there was a general acceptance in the market that a profound change was taking place. Customers had been focused on lower costs and efficiency from early in the budget process, but now there was recognition that this focus wasn’t just a short-term survival mechanism to get through a few tight budgets. Instead, the government had evolved the values it uses to acquire goods and services.

I use the words evolution and values here because I want to emphasize that this is a slow process with a long-term impact.

As government contractors settled into the belief that the market had fundamentally changed--and that the change was for the long haul--we’ve seen more dramatic strategic moves by government contractors, namely in the divestitures and consolidations that have taken place.

Many of these moves by companies have been taking place over the last two years, but several stood out in 2015.

Top of my list is Lockheed Martin’s decision to sell its enterprise IT business. The Information Systems & Global Solutions business brings in more than $6 billion in annual revenue, though the business has been shrinking. It once was the fastest growing segment of Lockheed’s business. A final decision on how to divest will be made in the first quarter of 2016.

The announcement of the divestiture coincided with the Lockheed’s announcement that it was buying helicopter maker Sikorsky.

Lockheed is divesting and consolidating. It is moving out enterprise IT services and doubling down on the platform, both as a manufacturer and as a services provider.

Another major transaction is Computer Sciences Corp.’s decision to spin-off its government business and combine it with SRA International. The trends driving this transaction were years in the making. Both CSC and SRA had gone through several years of cost cutting and restructuring as well as investing in new capabilities.

Much like an earlier mover, Engility--itself a spinoff from L-3--the CSC-SRA combination, now known CSRA Inc., is focused on delivering cost effective solutions.

When CACI International acquired another L-3 divestiture a few weeks ago, it also made the case that the deal was driven by the potential to deliver solutions and services at a lower cost.

The string that pulls Engility, CSRA and CACI together is a need for size, which drives economies of scale.

CACI and Engility have made no secret that they see themselves as consolidators in the market. I expect CSRA has some integration work to do, but I think over the long term, they will be making more acquisitions.

In the case of the L-3 divestitures, it also freed those businesses from being part of a company that was focused elsewhere and had cost structures that put those divisions at a competitive disadvantage. Lockheed has made similar comments about why the IS&GS business will perform better on its own and will have a better chance of growing again.

For CSRA, it is freed from the distraction of having a parent focused on the commercial market.

I think we are in the middle of a five-year period, where we’ll continue to see the market driven by a hyper cost consciousness.

We’ll see this focus on cost driving merger and acquisition activity but also in the competition for contract awards.

The partnering landscape will change, especially as the government opens itself more to truly commercial solutions.

Look at the Leidos team that won the $4.3 billion Defense Healthcare Management System contract. It has Accenture, obviously a large government player but it also extensive commercial health care experience.

Cerner is another partner and is one of the largest health records providers in the commercial world.

We’ve seen an increasing number of these kinds of partnerships in recent years, where you have a traditional government contractor as the prime, because they understanding the procurement process and the customer, teaming with a commercial technology company that brings the innovative solution.

That can be a power combination especially as demand for cloud-based and mobile solutions grow.

And finally, the passage of FITARA as part of the 2015 Defense Authorization Act sparks the beginning of a new era of change. We’ll see bits and pieces of change in the next year or two driven by this legislation, which puts more acquisition authority in the hands of CIOs. But it’ll be several years before we start to see a widespread impact.

It’ll take a few years for agencies to make changes, and then another few years for those changes to truly impact contracts, and then even more time for those changes to impact the contractors.

We’ll see early movers, but most companies will be cautious and will only move when they have to.

So, it’ll probably be 2020 before we can say, look how much change FITARA brought to the market.

As 2015 ends, it’s important to remember that the market constantly changes, but the change is often so slow that it looks like things are always the same. Just remember they aren’t.

Posted by Nick Wakeman on Dec 21, 2015 at 9:32 AM

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