Surge in Tech Work Brings Record Profit
By Griff Witte
Washington Post Staff Writer
Saturday, May 7, 2005
In an ornate hall across the street from the White House, newly minted Homeland Security Secretary Michael Chertoff stood before an audience of 400 business executives last week and asked for help.
"We don't have the expertise in this department, even across the government, to get into very specific solutions for some of the challenges we face. You have that expertise," Chertoff said. The private sector, he repeated again and again in his address at the U.S. Chamber of Commerce, must be the government's "partner" in pioneering products and services to keep Americans safe.
When he finished, the executives applauded heartily. But Chertoff wasn't telling them anything they didn't already know. If industry leaders want a reminder that the government is turning to them more than ever for assistance, all they have to do is look at their latest earnings reports.
Double-digit profit gains and record revenue were commonplace last quarter for firms that specialize in serving the government, a trend largely fueled by ramped-up demand for outsourced technology services in areas such as defense, intelligence and homeland security.
"It's a good time to be a government contractor," said Ray J. Oleson, chief executive of Reston-based SI International Inc., an information technology supplier whose first-quarter profit was up 37 percent from a year earlier. "In 10 years, we'll be calling these the good old days."
Not that Oleson, or anyone else in the industry, expects the boom to end in the foreseeable future. If anything, they say, the outlook is bright for even greater profit for firms that make their living doing the government's business.
Among the factors: The pace and level of contracting in Chertoff's department are increasing as the department matures. At the same time, officials government-wide are looking to outsource more work as federal employees retire and as the private sector sells itself as a more efficient replacement.
Finally, the reelection of President Bush has given contractors and government officials a clearer sense of what the nation's priorities will be over the next four years and where both should put their money.
J.P. "Jack" London, chief executive of Arlington-based CACI International Inc., said that last year the presidential election and the uncertainty over who would lead key departments such as Defense made some in the government reluctant to award major, long-term contracts.
"You had a lot of things going on that tend to slow new contract initiatives," said London, whose firm specializes in computer network and information security work for the government.
Not so in the first few months of 2005.
"Decisions are moving through the pipeline," London said last month when his company posted a 37 percent profit gain for the quarter. "It's really a booming situation."
Although many areas of the federal budget faced cuts this year, Bush has proposed increasing total information technology spending from $60 billion this year to $65 billion next year. IT programs linked to national security have been growing especially rapidly.
Homeland Security spent $9 billion on contracted goods and services in fiscal 2004, according to department spokeswoman Valerie Smith. It plans to spend $11 billion this year, a 22 percent increase that contractors expect will ultimately boost their bottom lines.
At some companies, including many in the Washington region, it already has.
At least a half-dozen locally based public companies that do most of their business with the government -- all with at least $250 million in annual revenue -- recorded double-digit earnings growth last quarter. While some of the growth came through acquisitions, much of it was from new contracts. Many are hiring, as are numerous companies based elsewhere that maintain a large presence locally to be close to their government customers.
The contractors' fortunes are having an impact on the local economy, driving up incomes and housing costs as better educated, highly skilled and highly paid workers flock to the region. SI added 200 employees in the past quarter. Fairfax-based SRA International Inc. added 286.
"The Washington area economy is generating more jobs this year than it did last year, and last year was not a bad year," said Stephen S. Fuller, director of the Center for Regional Analysis at George Mason University. Fuller said that demand for contractors is responsible for much of that growth and that some firms are actually having trouble finding workers to fill their ranks.
As the government increasingly outsources its work, however, not everyone is sure the country as a whole is better off.
"We don't know if this is costing us money or saving us money in the long term. We just know the work is all going in one direction -- out," said John Threlkeld, a lobbyist for the American Federation of Government Employees.
The size of the federal workforce has dropped from over 2 million in 1994 to under 1.9 million now, even as the burden on the government has risen.
As federal workers retire and are not replaced, Threlkeld said, too few are left to ensure that the government gets its money's worth from contractors that have to think about their own bottom lines, not just the government's.
"It's a very cozy arrangement for contractors," he said, pointing to instances of no-bid work and contracts that go awry due to a lack of oversight. "I'd be disappointed in any IT firm that didn't generate record profits, because it seems like a pretty hospitable environment."
There are, in fact, some contractors that are not being showered in profit. Ray Bjorklund, senior vice president at FSI, a market research firm in McLean, said life has gotten more difficult for some smaller companies. With the size of contracts growing, some have a hard time selling their products without an army of service workers ready to work full time installing the product, integrating it with other technologies and fixing it when it breaks.
The government "needs someone to come in and tell them how to do the job, how to solve the problem," Bjorklund said. "If you've got a great solution, that's one thing. But if you've just got a great technology, it may be hard for you to get any traction."
The largest defense contractors, meanwhile, are facing their own problems, with legacy weapons programs threatened by cuts in deference to futuristic communications devices or immediate demands for bullets and bombs in Iraq.
For instance, Lockheed Martin Corp. and Boeing Co. said last week that they would merge their struggling rocket businesses, a recognition that with ebbing demand, neither business could be profitable on its own.
Bethesda-based Lockheed, one of the government's largest suppliers of IT, still managed to record a 27 percent profit increase for the quarter. Boeing's quarterly profits were dragged down by its commercial airline business, but its defense earnings remained robust.
The companies doing the best, Bjorklund said, are the ones that can meld technology with high-end human services and have employees with the clearances to perform sensitive jobs in defense and intelligence.
San Diego-based Titan Corp., which has about 2,500 employees in the Washington area, logged more growth in intelligence work last quarter than in any other area, according to chief executive Gene W. Ray. The company's revenue hit $559 million, a record for the first quarter and a 23 percent increase over last year, when the company struggled during a failed merger with Lockheed. Profit was $19 million, also up sharply from last year.
Ray said he expected the growth to continue.
"We're seeing a lot of opportunities," he said. "We're expecting May to be the busiest month we've seen in the history of Titan in terms of writing new proposals."
Last year, Titan pursued 18 contracts valued at $100 million or more. This month alone, Ray said, the company plans to go after nine.
The company is also getting considerably more work from Homeland Security, a department that had been considered a disappointment to some in the industry in its first couple of years.
"The department spent the first part of its life really figuring out how to manage the operation and what kind of needs they have," said SI's Oleson. "Those needs are now starting to be accounted for."