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Government contractors prepare for a rainy day

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The pressure on government contractors continues to increase, as budgets appear likely to tighten in the wake of recent congressional action to rein in the nation’s debt.

Many contactors have already begun responding by buying or selling businesses or reshaping their enterprises to focus on areas likely to grow, such as cybersecurity and cloud computing.

Others are looking to move into commercial markets and outside the United States, which carries its own set of risks as companies venture away from familiar terrain.

“They’ll be opportunistic about it,” said George A. Price Jr., senior equity research analyst for information technology services at BB&T Capital Markets. “If you’re protecting networks and data ... whether it’s government or commercial, there’s not a big difference.”

What follows is a look at three companies that have announced changes that could help them weather reductions in government spending.

Booz Allen expands on cyber work in the Middle East

Free of a noncompete agreement that restricted McLean-based Booz Allen Hamilton from pursuing commercial business, the contractor is aggressively moving into new work, particularly in the Middle East.

Booz Allen Hamilton already has registered to conduct business in the United Arab Emirates and has leased office space in Abu Dhabi.

The company separated its government and commercial businesses in 2008, selling a majority stake in the government unit to District private equity firm Carlyle Group. The commercial business became New York-based Booz & Co., and the deal included a three-year noncompete arrangement — though it excluded cybersecurity work because only Booz Allen had that capability at the time of the split.

With the agreement’s expiration last week, Booz Allen Hamilton hopes to build on efforts to market cybersecurity services to Middle Eastern companies and governments. The company, which recently began selling shares publicly, said work for the U.S. government will continue to be its core business, even as spending inevitably slows.

Michael W. Jones, a senior vice president who leads Booz Allen’s supply chain and logistics business for defense, intelligence and civil government markets, said the company is opening its Abu Dhabi office with about 20 employees, and hopes to grow it to 50 by the end of the fiscal year. The office, in a five-building skyscraper complex known as Etihad Towers, will replace an interim office at another facility.

The company said it hopes to move into the new office within six months. The Abu Dhabi site will function as a regional office, focused on the UAE as well as Qatar, Saudi Arabia and Oman, among other countries.

“It’s clearly a diversification play,” Jones said. “There's a lot of pent-up demand for a full systems service provider like Booz Allen Hamilton.”

Booz Allen Hamilton will initially target the financial, health care and energy industries. Jones said the company expects eventually to open more regional offices, though it has not identified sites.

For its part, Booz & Co., too, is free to explore new markets, said Martin J. Bollinger, a senior partner at the firm. It is now able to team with Booz Allen competitors and pursue the U.S. government market.

“Since the noncompete went away, our phone’s been ringing,” Bollinger said, noting that chief executives at two contractors have called him about partnerships.

Still, he said he doesn’t expect much overlap between the two companies’ work. Booz & Co. is considering pursuing a high-premium consulting sector, where its competitors would more likely be firms such as McKinsey & Co. and the Boston Consulting Group.

“We may find ourselves on opposite sides here and there, we may find ourselves collaborating here and there,” Bollinger said. Generally, though, “it’s a big market, and we’re in different parts of the market.”

L-3 spins off its D.C.-area government services unit

New York-based defense contractor L-3 Communications is spinning off its locally-based government services business into a new public company called Engility.

The move is an effort to ensure L-3 is well positioned in an increasingly difficult government market and that both businesses can grow, said Michael T. Strianese, L-3’s chairman, president and chief executive. L-3 has about 6,100 employees in Maryland, Virginia and the District.

The services business, which is headquartered in Alexandria, increasingly has become a lower-margin business where price wins a contract — a model inconsistent with L-3’s focus on high-tech sectors.

The services business is a “staff augmentation-type business where the discriminators have evolved to one of price.”

L-3 said it anticipates that Engility, which will have roughly 10,000 employees, will see sales of about $2 billion this year. The company is expected to remain headquartered in Northern Virginia.

Spinning off the unit will remove drag from L-3’s growth rate and margins, Strianese said, while also freeing up capital the company could spend on companies in areas like night vision, cybersecurity or intelligence and surveillance.

L-3 will retain its cyber and intelligence business, a 6,000-employee unit that is expected to generate about $1.65 billion in sales this year.

Strianese said the deal will also benefit Engility, freeing it from some of the overhead costs of L-3. Additionally, the company has been unable to pursue some opportunities because of government conflict of interest policies that restrict a company from providing multiple services that could have conflicting interests, such as building a system and then testing it.

He said Engility can now function as a higher-volume, lower-margin business.

Other local contractors have similarly reshaped their companies in response to conflict of interest concerns. Lockheed Martin, Northrop Grumman and CSC divested business units that they said posed potential conflicts; in Northrop’s case, for instance, the company sold off Chantilly-based TASC, its advisory services unit.

More generally, L-3 is among many contractors who have been reshaping their portfolios, some by going private, others by acquiring and divesting businesses.

“We went through a lengthy process and came up with a company that’s going to be a force in this marketplace,” Strianese said.

SAIC enters new market for linguistic services

Science Applications International Corp. is looking beyond its government business to attract commercial companies that need linguistic services, after adding new language technology capabilities through acquisitions last year.

McLean-based SAIC has provided a range of language services to the government for about eight years, said Jonathan Litchman, SAIC’s vice president for operations.

The company generally focuses on what he calls “high-end” language services, including translation, interpretation and advanced analysis in about 70 languages and dialects. It specializes in providing U.S. citizens with clearances who are technically proficient in the language, rather than personnel who offer basic interpretation services.

The unit’s revenue has generally run about $150 million, Litchman said, and served the military, intelligence agencies and law enforcement groups.

Now, SAIC is trying to extend that business to commercial customers, hoping to tap growing demand for information in different languages.

The company is pushing a technology-based approach, which it says is far cheaper than relying on human translators and is now good enough that customers can rely on it. Translation by machine, though, has historically been unreliable and sometimes inaccurate, and SAIC will have to overcome those perceptions.

Late last year, the company acquired assets and intellectual property from three language technology firms: AppTek Partners; Applications Technology and MediaMind.

The purchase bought the firm software that uses a hybrid of two approaches to translate more than 30 languages. One approach depends on a statistical model, by which machines use Internet and customer-provided data to determine the correct translation. The other is a rule-based model that applies rules of grammar and lexicon defined by linguists.

Together, said Hassan Sawaf, SAIC’s chief scientist and the founder of a human language technology company that AppTek acquired, the approaches do a better job of not simply translating words but also their meaning.

Litchman said SAIC is hoping to sell the technology to a variety of clients, such as media organizations or international firms — any group that needs to deliver or receive information in multiple languages.

In targeting commercial clients, SAIC is following a path familiar to many contractors who develop and refine their technology for the government and then seek to expand their markets. Fairfax-based ManTech, for instance, has said it plans to start seeking commercial customers for its cybersecurity offerings.

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