Government Helps Fund Tech Sector Growth
By Peter Behr and Linton Weeks
To Selin, who recalls the date from memory, it was "a very scary day." The new Rosslyn suite where their firm, American Management Systems, would be born was an office in name only. "There was nothing on my desk. No phones were ringing. There was nothing in the in-box," Selin said.
Flash forward nearly three decades. AMS, with its headquarters now in Fairfax, has annual revenue of nearly $1 billion and employs 8,000 people worldwide, selling complex software systems to banks, telephone companies, government agencies and myriad other big customers.
Although it has moved far from its origins, AMS is a child of the federal government, part of a family tree of many hundreds of firms in the Washington region that owe their success in some way to a critical capital connection. From them sprang many other companies that had no ties to government, giving rise to the Washington technology industry as it exists today.
Other companies set up here to be close to the officials who regulated them: MCI Communications Corp., the long-distance phone company that spawned an entire competitive industry by helping break the AT&T Corp. monopoly, chose offices in downtown Washington to be within walking distance of the Federal Communications Commission.
As the federal family of companies expanded, it assembled a remarkable pool of talent, wealth and knowledge that it couldn't hang onto forever. Inevitably, people left to set up firms that had a different view of the world they were big on ideas for commercial markets and short on neckties.
Look across the region's technology industry today and you'll find companies selling investment newsletters online, writing complex software programs that control factory production lines and developing satellite systems to beam commercial radio down on the United States.
Together, companies both new and old number close to 3,000 and employ as many as 250,000 people, rivaling in size the region's federal work force.
The federal money continues to flow: Later this week the Internal Revenue Service is set to announce the winners of a $5 billion contract to modernize its computer systems. But executives recognize that if the industry is to continue expanding and providing jobs for future generations, its greatest challenge is to show it can prosper in the far tougher, more volatile commercial marketplace to stand outside its parent's long shadow.
Jumping to the Private Sector
Selin, one of former defense secretary Robert McNamara's brash "whiz kids," joined the Pentagon in 1965, rising to the post of assistant defense secretary for systems analysis. When the Nixon administration took office in 1969 it was clear that Selin's future was limited, so he decided to jump ship.
At the time he and his colleagues in the Pentagon were using computers to tackle big number-crunching problems the best way to leapfrog entire Army divisions to Europe in a Cold War crisis, for example. That gave them a first-hand look at what the latest generation of big computers made by International Business Machines Corp. could do and the experience of pitching state-of-the-art computer problem-solving to generals who often didn't understand or believe in the technology.
Surely, Selin and his team reasoned, they could create a business selling the same types of services to corporate chief executives or department heads of civilian agencies. People at the top of any big organization needed the strategic information that computers could extract from reams of data that otherwise would go unused, Selin said.
Their first contract, as it turned out, was not with the federal government, but with the Illinois state government's budget department, thanks to a personal contact with a former White House aide. Soon they were doing business with their old employer, the Pentagon, and other federal agencies, as well as with a timber company and city governments. Contract followed contract.
Selin and his partners came out of the defense world, but much of their work was purely civilian. Another breed of firms came to the area to carry out the secret research of the Cold War. They were peopled with some of the nation's brightest, most ambitious scientists and technicians, eager to work on what former Pentagon technocrat Craig Fields calls the "biggest, hardest problems."
The newcomers included Bill Layson, a young nuclear physicist who was hired in 1970 by a small defense contractor that was deep into the science of nuclear warfare and bore the cryptic name Science Applications International Corp. (SAIC).
Layson's task was one of those grim, super-secret missions that defined the deadly shadow-boxing between the world's superpowers in those days: how to guide the second and third waves of a U.S. nuclear missile assault through the superheated debris left by the bombs delivered in the first wave.
"That had become my specialty," Layson said. "SAIC was searching for niches where its ability to hire even one person could make a difference in the business."
There was no competition for the contract. The Pentagon hired the experts it wanted. If work was performed well, one contract led to another, and then another. Today, more than 9,000 employees work for SAIC in the Washington region, many of them on top-secret projects, making up about one-third of a company with worldwide revenue that topped $3 billion last year.
Stories like Layson's were repeated over and over as Rosslyn, Crystal City, Bethesda, Rockville and Landover filled up with small companies whose executives, technicians and analysts fed at the government's generous trough.
Rules of federal contracting also helped spawn the nation's largest concentration of minority-owned technology firms. From 1980 to 1996, at least 20 percent of all the technology start-ups in Northern Virginia were minority-owned, according to a technology industry survey.
Over the years, recalled Norman R. Augustine, former chairman of defense giant Lockheed Martin Corp., having your headquarters just across town from the federal bureaucrats who doled out the contracts proved to be an essential ingredient to getting those contracts.
Augustine said he learned that lesson the hard way while working for LTV Corp. in Dallas. He thought he had a contract locked up. "It struck me that flying up to Washington to sign my name was a waste of time," he said. "But it turned out something had fallen through. I vowed I'd never make that mistake again."
Lockheed Martin, with headquarters in Bethesda, is the region's largest technology company and government contractor, with worldwide annual revenue exceeding $28 billion. As it expanded through a series of mergers, its executives three times faced the choice of whether to remain in the region or move elsewhere, Augustine said. "In each case, we decided to stay," he said. "The most important reason was to be near the customer."
An estimated 9,000 federal contracting firms, including low-tech operations such as janitorial services, now operate in the region. Last year a record $22 billion in federal purchase orders went to Washington area firms, one-tenth of the entire $200 billion awarded to contractors throughout the country, according to federal statistics.
Although the procurement figures aren't precise, by some estimates nearly half of the $20 billion that the federal government spends each year on information technology purchases nationwide goes to Washington-based firms.
"The new technologies funded by this federal spending have become the driving force" of the region's economy, George Mason University analyst Stephen S. Fuller said.
'Law Firm With an Antenna on Top'
Ever since the federal bureaucracy was built on a Potomac swamp, business executives and lobbyists have migrated to Washington seeking a competitive advantage from lawmakers and regulators. Few, if any, took on greater odds or used Washington connections more successfully than MCI, which over a quarter of a century grew from a gnat on the nose of AT&T to its most significant rival.
To crack open AT&T's monopoly over long-distance and local phone services, MCI waged and won dozens of battles before the FCC and in the federal courts. Its chief executive, the late William McGowan, chose downtown Washington for MCI's headquarters in 1968 because the company's attorneys could walk around the block to the FCC to inspect AT&T's pricing plans, disclosed in its regulatory filings.
He liked to describe MCI as a "law firm with an antenna on top," and his top lieutenants included such regulatory experts as Laurence E. Harris, who left MCI in the mid-1980s to run an FCC bureau before returning, and Kenneth Cox, a former FCC commissioner.
It was Cox's idea that MCI begin sending documentation of its underdog struggle with AT&T to the Justice Department's antitrust division. That helped feed the Justice Department's federal antitrust suit that ultimately led to the breakup of AT&T in 1984 and the opening of telecom markets.
McGowan died in 1992. His legacy is not just MCI, which fetched $40 billion earlier this year when it was bought by WorldCom Inc. It also is the dozens of competitive telecom companies that opened up in the region Nextel Corp., Telegent, LCI, many of them headed by MCI veterans.
Government also helped Washington emerge as the home base for the communications satellite industry, which drew on Pentagon-developed technology. In 1963, by act of Congress, Comsat Corp. was created to commercialize the satellites and put its offices here. The following year the international consortium Intelsat was formed to connect the entire globe using the satellites and it also chose the region as its home.
Comsat set up its research lab in Germantown, bringing both federal dollars and new brainpower to the I-270 corridor. Fairchild Industries, another space communications leader, itself close to both Goddard Space Flight Center and the Atomic Energy Commission. "By the late Sixties and early Seventies, there was a whole network of technology companies leveraging off NASA and pioneering in satellite communications," said John F. Dealy, a D.C. attorney who was president of Fairchild during that period.
© Copyright 1998 The Washington Post Company