Contractors readying for a different environment

February 24, 2013

As government contractors prepare for spending cuts, experts and seasoned executives last week offered ideas about how to weather the storm.

At a conference sponsored by the Fairfax County Chamber of Commerce, industry officials acknowledged that companies will simply not be able to continue as they have over the past decade as budgets soared. Still, they said downturns have happened before, and urged contractors not to freeze in the headlights or stop making acquisitions.

Capital Business was there to capture some of the comments:

Pierre Chao, managing partner of Renaissance Strategic Advisors.

To Chao, who previously directed the Center for Strategic and International Studies’ defense-industrial initiatives group, the budget downturn “smells and looks a lot like ’89 to ’91,” referencing the period just before many major contractors from Lockheed Martin and Northrop Grumman were formed through consolidation.

He said the industry will likely soon see consolidation, but right now, it’s in the fragmentation period. Companies are divesting and spinning off businesses “that will create the supply that generates the next round of consolidation,” Chao said.

“I would expect the industry to change quite a bit in the next 24 to 36 months,” he told attendees.

Todd Stottlemyer, chief executive of Falls Church-based Acentia.

For companies to succeed as budgets falter, Stottlemyer said they should focus on what they do well.

“Being very broad but not very deep — I don’t think that’s the way to success,” he said last week.

He argued that contractors shouldn’t freeze all activity in the face of declines, but should continue to make purchases and hires where it makes sense.

“I like disruption,” Stottlemyer said. “I like tough markets ... because not everyone’s going to succeed.”

Peter Schuster, vice president for mergers and acquisitions at McLean-based Science Applications International Corp.

Despite shrinking government spending, Schuster said SAIC is spending the same percentage of its dollars on internal research and development. However, he said the company has become more focused, putting money toward fewer projects with more likely near-term success.

SAIC is seeking companies that have proven records with the government.

“What helps us ... is customer acceptance,” he said. “We think that there’s lower risk, so we are willing to pay a higher price.”

In recent months, SAIC has bought several health IT companies, which have commercial applications. Still, Schuster pushed back against the idea that the commercial and government world are converging. “You need a different model to be successful” in commercial work, he said.

Fred Funk, vice president of corporate development at Hanover-based KEYW.

Funk said cybersecurity company KEYW is focusing on acquiring companies that specialize in three areas: mobile-to-mobile encryption, big data and open-source technology.

KEYW has made 16 acquisitions since it was founded in 2008 — but only recently has the company shifted from buying businesses focusing on providing services to buying technology companies, Funk said.

Funk, too, was cautious about overlap between commercial and government work. KEYW last year established a separate unit focused on commercial business. “The wheels of progress turn slowly,” he said of the government’s adoption of commercial technology. The “business models are different.”

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