Don’t Gamble with Success: Outsourcing, Customer Relationships and People are the Best Bets for 2007

By Nick Wakeman
Roseanne Gerin

Today’s market gives government contractors plenty to feel good about. The percentage of the IT budget available to them is growing. Agencies increasingly are asking contractors for services that are integral to their core missions. Investors, both on Wall Street and among private-equity groups, continue to find the government market attractive.

But there are worries, too. Budget pressures are growing, a factor further complicated by the drain of funds to fight the war in Iraq. The fallout from procurement scandals coupled with Democratic control of Congress means that the scrutiny of contracts and contractors will intensify. Add to that the constant pressure on companies to find the right people to fill job openings and keep the people they have now.

As executives look out over the next 12 months and beyond, many are making safe bets: concentrating on their core competencies, getting closer to their customers and looking at adjacent markets that can accelerate their growth.

Top on the minds of many executives is the budget. With only the Defense and Homeland Security appropriations approved, Congress is seriously considering a continuing resolution to cover the rest of fiscal 2007 for the remaining agencies.

“There is so much change going on right now,” said Deborah Alderson, president of Science Applications International Corp’s system and network solutions group. Leadership changes at key agencies such as the Defense Department, and constraints on money and people increase anxiety for government and contractors alike, she said.

“There’s a lot that needs to get done, and there are limited resources,” Alderson said.

UPSIDE TO BUDGET WOES
Budget pressures will force agencies to aggressively seek ways to drive out costs and become more efficient, said Todd Ramsey, IBM Corp.’s general manager for global government.

“Much like we have seen in private companies in the past 10 or 15 years, governments will be forced to do major transformations,” he said. Indiana, for example, in November awarded IBM a 10-year, $1 billion contract to revamp and operate the state’s welfare eligibility system.

“Outsourcing has really been a growth driver for us,” said Phil Nolan, chairman, president and CEO of Stanley Associates Inc., a $400 million-a-year systems integration and professional services company in Arlington, Va.

In October, Stanley won a 10-year, $164 million contract with the State Department to build and operate two passport processing centers. Those sites join 13 others the company runs for the State Department, Nolan said.

Outsourcing also will help Artel Inc. of Reston, Va., to grow from about $155 million in revenue in 2006 to $175 million in 2007, said Abbas Yazdani, founder and CEO of the company, which provides managed network services and systems integration to government clients.

“The reason for that growth is [that] clients come to us to put together a solution, deliver it, upgrade it and manage it,” he said. “That’s something I’d bet you the government is going to do more of.”

There’s an inherent efficiency in turning to contractors to run certain services, Nolan said. “You have a flexible workforce. You can use us or not use us. You can open the spigot up, or you can shut it down. That’s a harder thing to do when they are your own employees,” he said.

KNOW YOUR CUSTOMER
To keep pace with customer needs, companies need to concentrate on what the nation’s priorities are, executives said.

Defense, intelligence and homeland security top that list. Executives also see growing emphasis on health care, the environment and energy.

“What you have to do is look at how those priorities touch your customer sets,” said Jon Korin, director of strategic planning for Northrop Grumman Corp.’s $4 billion-a-year IT sector.

Over several years, BAE Systems Inc. had built up its IT capabilities through about 10 acquisitions. A year and a half ago, the company consolidated its IT work into a single division to take advantage of the IT capabilities it had acquired and meet growing customer needs, said Richard Schiefelin, the new president of BAE Systems IT. The consolidated unit has just under $1 billion in annual revenue. The company can now take on managed-services projects that number in the tens of thousands of seats, he said.

“We needed to be able to compete effectively, not just in size, but in market reach and with the right type of abilities, whether it’s application development, infrastructure work or mission support,” he said.

Work that is critical to a customer’s mission captures BAE’s attention, he said. “We’re driven by a close intimacy with our customers.”

For example, Schiefelin has a team that provides classroom training, training consultation and course development for the Global Command and Control System–Joint at Kessler Air Force Base in Biloxi, Miss. The military considers GCCS-J to be the bedrock of battlespace awareness.

One potential shift that would affect customer relationships in 2007 and that Korin will be following closely is the possibility of performance-based contracting gaining momentum. Now, there is a lot of talk about it around the federal market, but not a lot of concrete activity, he said.

The contractor that can deliver well under a performance-based contract will win more contracts and be more profitable, Korin said.

“You need to have the breadth and diversity of capabilities, domain expertise and customer relationships,” he said.

THE RIGHT SKILLS
Ask almost any IT contracting executives about the critical skills and technologies their customers are looking for, and they’ll quickly rattle off a list: command and control systems, wireless, geospatial, program management, logistics, enterprise resource planning, biometrics, information sharing, intelligence systems, to name a few.

But therein also lies one of the biggest challenges contractors are facing today, the hiring and retention of skilled employees.

The problem is so acute that SRA International Inc.’s President and CEO Renato DiPentima likens it to running out of iron ore in the middle of the Industrial Revolution.

“We’re in a computer-based, knowledge-based revolution, and finding and keeping good people is difficult,” he said.

In 2007, SRA hired Dan Ward as a vice president and human capital officer, and Eileen Raymond as director of recruitment. Both are new positions. The goal isn’t only to find and keep people, but to make it the right people with critical skills, he said.

“People are our most important resource. You have to treat them right,” DiPentima said.

Retention of employees is as much a priority as hiring new ones, executives said. “It is so expensive to replace good people,” said SAIC’s Alderson, who considers retention a higher priority than recruitment.

One tool SAIC deploys that benefits both employees and customers is its internal R&D accounts, which fund research projects.

“We are investing in our people’s skills,” Alderson said. “It is a tremendous motivator.”

Employees must feel that they have opportunities to grow and succeed, said BAE’s Schiefelin.

He and other senior managers meet weekly to review job openings and look at employees who have expressed a desire to take on a different job at the company.

BAE has goals and objectives, coaching sessions and mentoring for every staff member. Last year, the IT unit moved 590 of 4,600 employees into new jobs.

“We tell our program managers that the best thing they can do is take their best person and move them to another project,” he said. “That way people know you are going to be supportive of their careers.”