Why size matters in the federal market


The largest federal contractors continue to get bigger and that says a lot how the market is evolving and why size continues to matter.

Earlier this week, I wrote about Science Applications International Corp.’s fourth quarter financial results and how analysts questioned SAIC execs about whether the company was large enough to pursue enterprise IT modernization contracts.

CEO Nazzic Keene pushed back on that idea, but that discussion during SAIC's conference call with analysts has nagged at me ever since.

I’m of two minds on the question of scale. Is it possible that a $7.4 billion-annual revenue company is too small? The question floors me in many ways.

Putting the SAIC example aside, that question has me thinking about the market as a whole and not a specific company.

You can argue that it’s a ridiculous question to ask of a company that large, but it does say something about the evolution of the market.

Not that long ago, the prevailing wisdom was that $1 billion in annual revenue was the goal. That’s when a company had enough scale, but we’ve long blown past that.

For last year’s Top 100, Leidos clocked in at the No. 1 spot with $9.2 billion in prime contracts. Every company in top 10 had more than $4 billion.

Is $4 billion in annual sales the new standard to be considered a large government contractor? One capable of taking on any program the government puts up for bit?

If that’s true, how do we describe the middle tier? I have a hard time thinking of a company at $3 billion in revenue as in the mid-tier.

Perhaps there are more than three tiers in the market now.

How about six, for the sake of discussion?

  • Extra-large: over $4 billion
  • Large: $2 billion to $4 billion
  • Upper mid-tier: $750 million to $2 billion
  • Middle mid-tier: $250 million to $750 million
  • Lower mid-tier: $100 million to $250 million
  • Small businesses: under $100 million

Some will certainly argue that size doesn’t matter and it's all about capabilities. But size still drives distinctions between these groups of companies. Sometimes those distinctions work to the smaller company’s advantage, but in other instances larger company has the edge.

Many factors are driving the biggest to continue getting bigger. Most of the top companies are publicly-traded, so they have investors' expectations to meet.

But technology also has changed, particularly the advent of cloud computing and that has brought a plethora of capabilities. The evolution of technology has enabled customers to buy with a more enterprise view. There is a desire to tap into the economies of scale that the cloud enables. Hence, we see larger contracts, particularly when it comes to IT management and infrastructure.

Size matters: that is the reality of today's market. Which tells us that SAIC will not be the only company to field questions about whether they are big enough to compete in today's market.