How a bright idea in 1983 helped Deltek corner the market in government contracting services
Thirty years ago, in the basement of a rambler in Fairfax, Donald deLaski had his Big Idea.
He was a middle-aged accountant who often spent all day in his bathrobe and black socks, poring over corporate ledgers in his home office. Many of his clients were government contractors, and after 30 years of keeping books to Uncle Sam’s exacting standards, deLaski considered himself a master of the government’s complex contract accounting rules. He had been thinking of writing a guide to help companies that wanted to enter the market.
His revelation was the medium: He wanted to transfer all his specialized data onto one of those new gizmos — personal computers (not yet known as PCs) — that seemed to be the next big thing.
So deLaski and his son, Kenneth, drove to a Sears near Tysons Corner and bought one of the very first IBM XT personal computers. Then they hired two young programmers to turn Don deLaski’s accumulated wisdom into ones and zeros: innovative accounting software exclusively for government contractors.
They named their little start-up Deltek, short for deLaski Technologies.
Last year, Deltek, by then majority-owned by a private equity firm, sold for $1.1 billion. It has become essential to the functioning of the federal government, but few outside the Beltway have ever heard of it.
Deltek’s phenomenal success since the dawn of the computer age mirrors the transformation of the Washington area from a middle-class bureaucratic hub to one of the nation’s greatest concentrations of wealth.
In 1983, the federal government paid private contractors $159 billion for goods and services; by 2012, the figure was $517 billion, a 41 percent increase after adjusting for inflation. During the same period, the Washington-Maryland-Virginia share of that spending doubled, from 9 percent to 18 percent, according to a Washington Post analysis.
Six of the 10 richest counties in America are now located in the Washington metro area. Fairfax County, where deLaski lived and Deltek still is headquartered, received a disproportionate 5 percent of all government spending on goods and services in 2010, more than $24 billion.
The spike in the region’s prosperity has been driven in large part by government spending as the shift to private contractors accelerated with each administration, then took a giant leap after the Sept. 11, 2001, terrorist attacks.
But scoring a slice of the contracting pie increasingly has become a Washington insider’s game. The government’s contracting rules have grown so vast and complex — regulations run to thousands of pages — that they are virtually impossible for a layperson to understand.
So contractors hire Deltek and other “capture consultancies,” middlemen who help them “capture” government business. Deltek also sells them accounting software to keep their books to government standards and customer service to keep things running smoothly.
Deltek invented that niche and now dominates it, with almost 17,000 clients, including 99 of the top 100 federal contractors. (Company officials declined to identify the 100th, saying that might jeopardize their efforts to land it as a customer.)
Other companies compete against Deltek, but one competitor said it is like a corner coffee shop challenging Starbucks nationally.
“Deltek has become the go-to place for government contracting,” said Ray Wang, principal analyst and founder of San Francisco-based Constellation Research. “It’s probably safe to say Deltek is synonymous with govcon,” jargon for government contracting.
As Don deLaski figured out 30 years ago, in Washington you don’t have to invent something to get rich. All you have to do is understand how the bureaucracy works, or hire someone who does.
Accounting software is the largest part of Deltek’s business, but increasingly its profits are coming from “market intelligence.”
Say, for example, you own a janitorial services company and you want to win some government business. You could spend hours searching for contracts on government Web sites, but that’s a little like looking for a job by Googling “job.”
What you need is an inside guide to the contracting world, someone who knows where and how to look. Someone like Steven Mihalisko.
One afternoon in Deltek’s boxy white building next to the Dulles Toll Road, Mihalisko sat in an open office in a sea of white cubicles. The room was silent, except for the soft clicking of computer keyboards, as staffers mined a particular kind of Washington treasure.
Mihalisko, 29, and 170 other researchers spend long days staring at computers, tracking “opportunities,” as U.S. government contracts are known here, and updating the most comprehensive database of contracts. Deltek currently has files on 14,000 contracts worth almost $2 trillion — some of which won’t even be bid publicly for years.
Mihalisko and his colleagues, mostly well-educated researchers and wannabe policy wonks in their 20s, are in charge of keeping those files up to the minute.
He spends 10 hours a day studying databases such as FedBizOpps and the Federal Procurement Data System, and other sites at the Department of Defense, the Library of Congress, the Office of Management and Budget, the Government Accountability Office and the Small Business Administration.
It’s the high-tech coal-shoveling that keeps the Deltek ship running.
Mihalisko is clean-cut, a long-distance runner who speaks in a soft, almost whispery, voice and calls people “sir” and “ma’am.” He has a bachelor’s degree in political science and a master’s in international commerce and uses words like “granular” when describing his work, which he finds engrossing.
“This couldn’t be more perfect,” he said. “You get to see the intersection between government and private business.”
Mihalisko tracks Air Force contracts — currently about 2,000 of them, worth nearly $300 million. One afternoon, his e-mail inbox lit up with several messages marked “priority update.”
He opened the first one. An old Air National Guard hangar at the international airport in Bangor, Maine, was going to be demolished. A Deltek computer that automatically “scrapes” 700 federal databases twice a day, looking for new entries, had flagged the RFP — request for proposals — just minutes after the Air Force posted it. Mihalisko had been tracking it for months.
In the world of government contracting, knocking down an old building in Maine is not a big project. But Deltek has six customers who are interested, so Mihalisko alerted them immediately, typing in the latest information on when bids are due and the contract is scheduled to be awarded.
He scrolled down through Deltek’s 30-page file on the project.
“Let’s check the spelling. Check the dates.”
He hit “Update.”
Somewhere out in the ether of the contracting universe, six companies received alerts that Bangor is ready for bids.
Mihalisko moved on to the next project, a contract to upgrade the storm drain system at an Air Force base in South Carolina.
Birth of a behemoth
In January 1983, Don deLaski called his son, Ken, and laid out his ideas for creating new software and a new company. He spent the next few months dictating to his son the arcane details of government contract accounting in their living-room loft.
“Unbeknownst to me, those conversations with Ken in our loft would become the start of something much bigger than I ever could have imagined,” Don wrote in his autobiography, published in 2010. (He died last year.)
Neither deLaski had any experience with computers, so they hired Peter Novick, a computer programmer in his early 30s, and Eric Brown, an 18-year-old soon to enroll in community college.
“We bought one of the very first PCs, and we put it on a table and just looked at it,” said Novick, now 65. “We were supposed to build this huge new system, and we didn’t even know how to turn it on.”
By September, they had their first working programs, and by the beginning of the next year they had signed up their first customer: one of Don deLaski’s accounting clients, a local firm called Cost Engineering Research.
In the early years, Eric Brown recalled, Deltek was such a mom-and-pop operation that Ken deLaski sent the home phone numbers of all four Deltek employees to every customer, telling them to call with any problems.
The company grew fast over the decades and went public in 1997. But it really took off after 9/11, when wars in Afghanistan and Iraq and the creation of the Department of Homeland Security fueled enormous increases in government contracting.
At the same time, pressure to shrink the federal bureaucracy meant that the government increasingly turned to private companies to provide services it once handled on its own.
Deltek’s sales soared, and the company started attracting attention outside the Beltway. In 2005, a New York-based private equity company, New Mountain Capital, bought 75 percent of Deltek’s shares for $180 million.
Ken deLaski stepped down and New Mountain installed a new chief executive, Kevin T. Parker.
Over the next few years, New Mountain and Parker expanded Deltek and moved aggressively into “market intelligence.” They bought FedSources and Input, two local companies that had dominated that business, and combined those firms’ databases under Deltek’s roof.
Parker also acquired companies that kept lists of contractors; Deltek now has a database of 50,000 of them. That allows for what company officials call “online dating for contractors,” where a business can browse the data looking for partners with specialized expertise — or that are owned by women, minorities or veterans, as required by some federal contracts.
Deltek’s growth eventually attracted the attention of Thoma Bravo, a Chicago-based private equity company, which bought the company from New Mountain last year for $1.1 billion.
Deltek by default
Analysts said software giants such as Oracle, which had revenue of $37 billion last year, have shown little interest in developing software specifically tailored for government contractors. And smaller companies can’t hope to match Deltek’s decades of experience and the depth of its databases.
That leaves Deltek in a sweet spot: the biggest kid on a very lucrative block.
“You can probably survive, but I don’t think you can thrive without us,” said Michael Corkery, Deltek’s current chief executive.
That’s deeply annoying to Gregory Glaros, chief executive of Synexxus, a company that provides engineering support to the military.
Glaros, like many contractors interviewed, said Deltek’s products and service are very good. But, he said, there’s something wrong with a government contracting system that is so complicated that it requires the existence of a middleman like Deltek. And he said government auditors are way too cozy with a company they have known for 30 years.
Glaros said that when he started his company in 2006, he was using the cheap and simple accounting software QuickBooks. But he said government auditors urged him to switch to Deltek software, because they told him they were “very comfortable with and trained on Deltek.”
“They said, ‘Everybody around here is kind of using Deltek,’ wink-wink, nod-nod,” he said. “The message was clear enough: You really need to be using this more luxurious brand in order for us to ensure we know exactly what you’re doing.”
Glaros, a former Navy pilot and technology adviser to the defense secretary, said he had “no choice” but to comply with pressure from the government auditors.
“Bureaucracies by their very nature are inherently lazy and they want to have the easiest path to get their job done to comply with policy and law,” he said. “To reduce the friction, we use Deltek.”
Glaros said he spent about $500,000 to buy Deltek’s software and service, as well as to train a half-dozen people at his company how to use it. He said his company expects to do about $20 million worth of government contracting this year, and, all told, using Deltek adds 10 percent or more to his costs.
Officials at the Defense Contract Audit Agency, which oversees military contracts, declined to comment on the suggestion that their auditors prefer or recommend Deltek software.
“Deltek’s software is commonly used by government contractors. However, it is inappropriate and against DCAA policy to endorse any single software program,” said Lt. Col. Elizabeth Robbins, a Defense Department spokesman.
A top Pentagon official who oversaw private contracting said Deltek is a part of a system in need of reform.
“We make it difficult to do business with us; we need to open the process up,” said Brett B. Lambert, who retired at the end of August as deputy assistant secretary of defense for manufacturing and industrial base policy.
Lambert said the federal government should adopt the accounting practices used in private business whenever possible. That would inject more competition into the system by making it easier for more “innovative and nontraditional” companies to seek government contracts.
“Deltek is there because we created the need for it,” Lambert said. “Nobody ever steps back and says, ‘Is this really necessary?’ ”
Deltek has made a lot of people extremely wealthy.
Ken deLaski has moved to Oregon, where he runs a philanthropic organization called Vibrant Village Foundation, which invests in water, nutrition, agricultural and other projects around the world. DeLaski said he seeded the foundation with $75 million.
He keeps a $2 million home in Georgetown, mainly for his grown children and his periodic visits to Washington.
His sister, Kathleen, a former journalist and Pentagon spokesman, is on the foundation’s board and also is president of the deLaski Family Foundation, a philanthropy that gives to Washington-area arts and education projects. Ken deLaski said it has an endowment of more than $40 million.
The family has donated at least $15 million to George Mason University, where a performing arts center is named for them.
Peter Novick, one of the two original programmers hired in 1983, said he retired from Deltek 15 years ago with $12 million in his pocket.
One unlikely beneficiary of Deltek’s success is the Indian spiritual leader Prem Rawat, also known as the Guru Maharaj Ji. Don deLaski was raised Presbyterian, but in 1973 he came across Rawat’s teachings about service and inner happiness. Over the decades, Rawat has attracted thousands of followers, although others have labeled him a cult leader and a fraud.
The four original members of Deltek were all followers of Rawat when they started the company. Don deLaski wrote in his book that he had been contributing to Rawat since 1973. Ken deLaski said the family gave Rawat an 11 percent share of Deltek.
It is unclear how much Rawat made from Deltek, but an 11 percent share was eventually worth tens of millions of dollars. Officials at the Prem Rawat Foundation did not respond to requests for comment.
“Dad was a real seeker-of-truth kind of guy,” Ken deLaski said. “He was not that happy of a person. He was looking, looking, looking. This gave him a real sense of who he was.”
Eric Brown was less lucky. The second person hired by Don and Ken deLaski in 1983, he worked at Deltek for most of his career. He said he sold his Deltek shares too early, when they were not worth much, and a divorce cost him much of what he did get.
As a teenager, he wrote the accounting software that is still the basis of the software the company sells today. But at 4 p.m. one Friday in 2010, Brown said, he was laid off. He said he was told the lingering recession was forcing cuts, and his seniority made him expensive.
“At Deltek now, they really care about the quarterly earnings,” Brown said.
Deltek has indeed become a major corporate player. Rock icons ZZ Top played at a Deltek conference in Dallas in October that drew about 2,500 customers. The company advertises during Wizards games at the Verizon Center and on local talk radio, and it publishes a slick series of booklets with titles such as “Capturing Federal Business for Dummies.”
Brown, 49, is now an executive in another only-in-Washington field: companies that exist because of Deltek. Scores of businesses have spun off from Deltek, helping contractors learn, use or adapt their Deltek software. Brown’s company, Technology & Business Solutions, helps Deltek customers move their data from hard drives into the cloud.
Those companies feed off Deltek like little birds riding on the back of an elephant, which stands in a vast river of government money, drinking deeply.