Contracting | Shifting From Tanks to Technology

By Zachary A. Goldfarb
Washington Post Staff Writer
Monday, December 31, 2007

For government contractors, 2007 wasn't pretty: They had to contend with tighter budgets and increased oversight from a new Democratic Congress, as well as polarizing controversies surrounding the conduct of contractors in Iraq.

Executives at many local government contractors, and others who closely follow the industry, say the outlook for 2008 could be equally difficult.

"It's a mixed environment from the funding standpoint and certainly the contracting community has begun to feel the heat of Congress," said Robin Lineberger, executive vice president for global public services at BearingPoint, a McLean management and consulting company.

So far, contractor oversight has been largely limited to high-profile issues such as the conduct of Blackwater security personnel in Baghdad. And it's not clear whether oversight has taken a toll on profits. But some expect the scrutiny to expand more broadly next year -- and attitudes toward contracting on Capitol Hill and in the presidential race could shape future spending.

"It's very clear that a lot of people's perceptions about the quality of federal contracting have been informed by what they've read and heard about contracting in Iraq and Afghanistan," said Stan Soloway, president of the Professional Services Council, the industry's trade association.

"On all sides, rhetoric gets ratcheted up," he said.

For two of the Washington region's biggest government contractors, Lockheed Martin of Bethesda and General Dynamics of Falls Church, 2007 was a banner year. Increased demands for armored tanks and other heavy machinery for the military boosted the bottom lines of those companies, whose stocks are each up more than 15 percent for the year.

Others have not experienced such robust growth, though. Money hasn't been available in significant amounts for the kinds of services most contractors provide, such as installing computer systems, building custom software and coordinating the movement of people and goods.

That's because federal agencies -- with the exception of the Defense Department -- have had to hold off on new spending because of conflicts between congressional Democrats and President Bush. Congress didn't pass a budget for fiscal 2007, and instead stuck to funding at 2006 levels.

A few years ago, many contractors were enjoying 10 to 15 percent growth rates. That's fallen to single digits in many cases, said Ed Bersoff, a longtime executive and investor in the local government contracting sector.

One result has been that companies have been more cautious about hiring.

Though it has continued to enjoy strong growth, Stanley Inc. of Arlington has postponed adding employees until being assured that the government would pay for some programs.

"As a services company, the revenue is driven by people we have on the job," said chief executive Phil Nolan. "We're more conservative, in terms of hiring people, to sit there and wait for new opportunities to come along."

SAIC, a big McLean contractor, has sought to win contracts to run government programs from start to finish, rather than targeting a more narrow slice of the federal pie.

"There are not as many new opportunities, so you have to broaden your aperture," said Arnold L. Punaro, a senior SAIC executive.

For instance, SAIC recently won a contract to direct the flow of tires headed for government vehicles worldwide by partnering with Michelin.

Companies and analysts say there are some signs the government might start to spend more heavily on services in 2008 and beyond. For starters, Congress has passed a fiscal 2008 budget. Civilian agencies, which have played second string to the Pentagon, may start to see new dollars flow.

"Having a budget for 2008 is going to be like cold water to a thirsty man," said John Slye, an analyst at Input Inc., an industry research firm.

In particular, several contractors are planning to bid on providing health technology, as pressure grows on Medicare and Medicaid, as well as on care for veterans.

"The health care space really is affected by better information and information sharing," said Stanton D. Sloane, chief executive of SRA International in Fairfax. "You really can't afford not to pay attention to that space."

Intelligence represents one area where many companies believe the intersection of national security and technology will make for good business opportunities.

CACI chief executive Paul M. Cofoni said the changing strategy in the war on terror and Iraq should drive dollars back to technology services contractors, like his own.

"It will turn to be less about bombs, tanks, airplanes, and more about collaboration among intelligence agencies, law enforcement and the military," he said.

CACI is working to provide technology that allows agencies to absorb intelligence in any form -- audio, paper, electronic -- then translate and convert it into electronic text, and tag it for analysts to review.

Mantech, a Fairfax contractor, is building a social networking system for the intelligence community called A-Space (for analyst space), modeled after Facebook and other popular consumer sites.

"I'm working on a specific problem and the technology is such that it would be able to point me to another agency that has significant experience with the problem," Mantech President Robert A. Coleman said.

Of course, there's no guarantee these trends will hold for long.

If the new administration in January 2009 has a radically different vision for what to do with government spending, or Iraq war demands for hardware grow, services companies may experience declines.

Yet if, as expected, spending on heavy items like bombs and tanks declines, Lockheed Martin and General Dynamics won't want to miss out on new government spending in technology.

That's why they've been beefing up their information technology divisions.

"If they're going to maintain their growth, they're going to have to buy revenue" by buying companies, Bersoff said.