Should This Marriage Be Saved?
Booz Allen Considers Splitting Into Government and Private Consultancies

By Zachary A. Goldfarb
Washington Post Staff Writer
Monday, February 4, 2008

Not long ago, Booz Allen Hamilton pioneered the concept of Organizational DNA, a way to assess a company's or government agency's personality. In Booz Allen's case, that genetic code has two distinct strands, and the split personality is at the heart of talks to divide the company in two.

The commercial unit, based in New York, competes with rivals McKinsey and Boston Consulting Group in helping companies set strategy. It recruits from Harvard Business School, Wharton and other top schools and assembles agile groups of seven to 10 consultants to work with clients. Career advancement is based on a philosophy known as "up or on" -- get promoted within a few years or be "counseled" out.

The government unit, based in McLean, is a different animal. It recruits a broader range of people: recent college graduates, veterans, engineers and many others. Employees can remain at the same step on the corporate ladder for decades. Some teams working on government contracts can include 100 or more people.

In recent years, the two units have seen their differences grow as the post-Sept. 11 boom in federal spending lifted the company's government business while the commercial side failed to keep pace.

"We've tried a number of different organizational approaches during our history," said Marie Lerch, senior director of marketing and communications and a 30-year firm veteran. "There are great things that have held us together and there are different things. As the government side has seen its share of growth, it's made the tension more significant to the point where management is now looking at whether it makes the most sense to strategically separate."

A decision about whether to pursue a separation could come as early as this month. The company has been in talks with the Carlyle Group, a District private-equity firm, about buying out the government unit, and other suitors are possible.

One source of tension inside the company is that while the two units operate separately, both sides share in the proceeds, sometimes disproportionately.

As a private company, Booz Allen is owned by about 300 senior executives. Most are concentrated in the commercial unit. So when profits were divvied up among the owners at the end of the year, many executives in the government division felt an inordinate share was going to executives in the commercial division.

Splitting up would be one of the most significant events since Edwin G. Booz founded the firm in 1914. It would be on a scale of the 1976 decision by senior partners to buy back the company, which had gone public six years earlier.

As a private company, Booz Allen is exempt from many requirements to publicly report financial results or internal company deliberations. It is nonetheless one of the government's largest contractors and a force in the region, with 11,000 local employees. It also sponsors high-profile events and spent $1 million to support the recent Edward Hopper exhibit at the National Gallery of Art.

As a measure of the company's size, when Booz Allen rented the Udvar-Hazy Center at the Smithsonian National Air Space Museum to host its holiday party in December, employees weren't allowed to bring guests because of concern they might exceed the building's capacity.

Booz has pioneered some of the top ideas in consulting, including the concept known as supply chain, now used throughout companies and the government to manage the flow of goods and people. Its literature is littered with consultant terms such as "strategy-based transformation," "smart customization," and "enterprise resilience." Clients have included the D.C. Police Department, the National Security Agency and Fortune 500 companies.

Overseeing the talks to split the company will be chief executive Ralph W. Shrader, an engineer and 34-year veteran of the firm who took over in 1999 after his mentor and predecessor Bill Stasior retired. Shrader had worked in the commercial and government divisions, though he had spent most of his time in the latter.

A stickler for punctuality and grammar, Shrader is known as a disciplined manager who likes to see quantitative data before making a decision. And yet he also likes to exhort employees to add "heart" to their work. He found a love for golf late in life, leading to the company's three-year sponsorship of a PGA tournament. In speeches he occasionally notes how a receptionist hands out home-baked brownies to chief executives and generals visiting the McLean headquarters.

Shrader, who declined to be interviewed for this story, has not said how he feels about a split. He plans to retire in 2009 and stands to profit handsomely from a buyout. Should a decision be made to divide the company, he is likely to follow it through to the end, but people close to him aren't convinced he is 100 percent behind the move.

"I know he takes great pride in Booz Allen and rightly so, and I have thought he'd not have wanted to see the institution broken up or sold off," said a close associate of Shrader, who spoke on the condition of anonymity so as not to jeopardize their relationship.

Under Shrader, sales have more than doubled, to $4.1 billion, and the company's head count has doubled, to 20,000.

Shrader also expanded the company's ties to government -- he hired Dov S. Zakheim, an undersecretary of defense under Donald Rumsfeld, and R. James Woolsey Jr., a CIA director in the Clinton administration who joined the firm after Sept. 11, 2001, to work on homeland security issues but now has turned his attention to energy.

If the government unit is bought out, it will come as the boom in federal spending has started to slow.

"It's going to make it more difficult for companies in this business to make the profits they've expected to make because of the new administration," said Michael R. Steed, a partner in Paladin Capital Group, a District private-equity firm specializing in homeland security.

A split, meanwhile, could help free the commercial side, which now labors under some of the regulatory strictures required by Booz Allen's government work. Employees in both divisions must follow stringent spending and security guidelines, and they need always to prominently display their nationality -- on identification cards and in e-mails. For Booz Allen's business abroad, that's been particularly frustrating, especially in places that frown on U.S. involvement in Iraq.

The commercial side has other challenges. Years ago, it prospered as companies needed the help of consultants to manage logistics, supply chains and manufacturing plants. But as the service sector grew in prominence, Booz Allen has lagged behind competitors such as McKinsey and Bain that focus primarily on corporate strategy.

"We wanted to focus on that work as well as our traditional technology work, but if you were looking at the firm as a strategic consulting firm, we fell back," said Raymond J. Lane, a former Booz Allen employee who is now a prominent venture capitalist.

Michael Lent, a former Booz Allen employee, recently noted in his Government Services Insider newsletter that some current employees "have voiced in private concerns and uncertainties about prospective financial rewards, their future role under an outside owner, inevitable departures of valued colleagues, changes in a distinctive, successful culture, and the need to revise the brand in the government space under new ownership."

Outsiders say that splitting the company could weaken one of Booz Allen's strengths: the pairing of its two units gives it a deep reservoir of knowledge about what works in the government and commercial space.

"From the standpoint of sharing innovation between the public sector and the private sector, it's not a very good idea," said Lorrie Scardino, an analyst at the research firm Gartner.