SAIC chief executive Walter P. Havenstein plans to step down in June. (Jeffrey MacMillan/For Capital Business)

The roots of contracting behemoth Science Applications International Corp. are about as humble as they come, founded in early 1969 by a physicist and reluctant entrepreneur next door to a ballet studio in La Jolla, Calif.

But the company grew steadily over the years and became known in particular for its talented and versatile employees, who worked closely with military and civilian agencies.

More than four decades after its founding, the contractor, now public and based in McLean, is struggling, facing two contracting scandals, the departure of its chief executive and declining sales and profit.

The company’s plight has led to some soul-searching about whether its problems are linked to a generally tougher budget environment or tied to a change in strategy. In recent years, the company’s units have shifted from pursuing contracts autonomously to teaming up in an effort to bring more capabilities to the table.

“Where some people would say we may have let go of our small, entrepreneurial nature, I would say what we’ve really done is helped transform ourselves to be able to punch our weight in the marketplace,” said chief executive Walter P. Havenstein, who plans to step down in June. “We’ve got to be able to think as a scaled company, not just in the individual pieces, and I think that’s at the heart of the cultural shift.”

The company’s headquarters in McLean. (Jeffrey MacMillan/For Capital Business)

Thus far, that strategy has not yielded the kind of results that SAIC has produced in the past, and analysts and industry observers say the company is at a critical juncture as it readies to select a new leader.

“SAIC is in a transition period,” said Erik R. Olbeter, a senior research analyst at Pacific Crest Securities. “The board is going to give us a new CEO, who’s going to inherit a firm that right now is losing market share, is losing people and is running out of time to fix itself.”

SAIC’s start

General Atomics employee J. Robert Beyster, formerly a physicist at Los Alamos National Laboratory, first started thinking about founding his own venture after General Atomics was sold to Gulf Oil in the 1960s, according to SAIC’s corporate history.

In 1969, he started SAIC — then known as SAI — as an employee-owned consulting firm.

In his 2007 book, “The SAIC Solution: How We Built an $8 Billion Employee-Owned Technology Company,” Beyster wrote that SAIC was “specifically designed to be an organization where managers and employees would be free to pursue work they were passionate about — to start, operate, control and grow their own business units under the umbrella of the parent company.”

Beyster, who is 87 and retired from SAIC, said in an email last week that General Atomics had given its staff some autonomy, but he wanted SAIC employees to have more.

“The more I trusted my employees, the better performance I got in return,” Beyster wrote, adding that he sought “triple-threat” workers, or those who could sell, do and manage the work.

In 1970, the company opened its Washington office under an agreement that the Washington staff would become employee-owners and earn stock if they could produce $1 million in revenue in 18 months or less. The office met its goal.

William A. Roper, who served as a top executive at SAIC from 1990 to 2007, said Beyster’s employee-ownership model attracted and motivated talented employees, leading to consistent revenue growth.

He recalled that Beyster would do almost anything to hire someone he thought was especially skilled. In one instance, Beyster had Roper split the company’s stock — creating twice as many shares — to meet a potential hire’s demand for double the number of stock options he was being offered.

Though the value of the offer didn’t change, both Beyster and the potential hire were satisfied, said Roper, who recalled SAIC as an un­or­tho­dox and entrepreneurial place to work.

As the company describes it, SAIC scientists did it all — from marketing their ideas to government clients to keeping those customers apprised of a contract’s progress. The strategy helped SAIC succeed in the contracting world, where relationships with government customers are typically critical to winning new work.

Loren Thompson, a defense industry consultant who is not consulting for SAIC, said the company’s business units were known to compete as fiercely with each other as with rivals.

SAIC’s “original corporate culture was so unique and so different that it was hard really to understand how it functioned so successfully,” he said.

Company changes

In 2003, after nearly 35 years at the helm, Beyster handed SAIC’s reigns over to Kenneth C. Dahlberg, formerly the chief of General Dynamics’s information systems and technology group. Under Dahlberg’s tenure, SAIC went public in 2006.

Havenstein, formerly president and chief executive of BAE Systems’s U.S. unit, took over as chief executive in 2009, just days before the company relocated its headquarters to McLean. SAIC became one of a wave of California contractors who moved east, a group that includes CSC (which announced its move to Falls Church in 2008) and, more recently, Northrop Grumman.

In an interview from SAIC’s McLean office last week, Havenstein defended the company’s cultural shift as a product of both its growth and a changing marketplace.

Though the autonomous strategy worked well for a small company pursuing individual opportunities, the government today relies more on contract vehicles — larger programs that require companies to first win a spot on the program and then compete for individual task orders. In effect, companies must win twice to actually see work.

“There is still a strong culture of entre­pre­neur­ship, but you have to put it in the context of the market,” said Havenstein. “When the government changes the way it buys things — and it has done that significantly over the last decade, in terms of ... much larger aggregations of contracts ... then the entrepreneurial nature has to change as well.”

Under his tenure, SAIC dissolved its information technology and network solutions group and moved part of its business under a newly renamed organization called health, energy and civil solutions. Havenstein also designated the company’s intelligence and information solutions unit as SAIC’s cybersecurity lead and has its chief report directly to him.

The change coincided with belt-tightening at the Pentagon. In its most recent earnings report, SAIC reported lower profits and revenue and reduced its projections for the year, citing the uncertain environment and up to about $30 billion worth of submitted proposals awaiting decision.

The company has expressed interest in buying other companies to complement and enhance its own offerings, but Havenstein has told investors that high prices are stopping the company from making larger purchases.

Havenstein said SAIC’s reduced profits have been a result of more cautious and unpredictable government spending, not its changed approach.

He said last week that he has been disappointed in his failure to properly calibrate how the government would spend as budget concerns grew. Havenstein contended that SAIC has still positioned itself well for future growth, increasing the number of proposals it submits, winning more large programs and maintaining a 65-percent win rate.

“If you characterize SAIC as a company in slide, I think you’ll get it wrong,” he said. “I’m not saying that for shareholder consumption; I’m saying that because that’s how I see SAIC.”

New struggles

Beyond shrinking profits, the company faces two fresh stains on its record. In September, a SAIC employee transporting computer backup tapes between facilities in Texas reported the tapes stolen from his car, according to a company account. As a result, earlier this month, the Pentagon said it has directed SAIC to agree to provide a year of credit monitoring services to as many as 4.9 million patients treated at military hospitals and clinics over the last 20 years.

The company also is grappling with its New York City contract to manage an employment timekeeping system called CityTime, a program that predates both Havenstein and Dahlberg. The U.S. Attorney’s Office for the Southern District of New York has alleged that “a massive and elaborate scheme to defraud the city” corrupted the program, and New York Mayor Michael R. Bloomberg has asked SAIC to reimburse the entire amount it paid over an 11-year period — more than $600 million — and to reimburse the costs of the investigation.

Last month, Havenstein said in a memo to employees that Deborah Alderson, president of the company’s defense solutions group; John Lord, her deputy; and Peter Dube, general manager of the enterprise and mission solutions business, have been removed from their positions and are no longer with the company — though he noted that there is no evidence any of them were personally involved with the fraud.

“That’s a hard thing to do,” said Havenstein last week. “These were three very good colleagues. Not withstanding that, they were accountable for the overall performance of CityTime and many other programs, and the announcement ... was simply a manifestation of that accountability.”

The company continues to cooperate with an ongoing investigation, he said.

“The implications financially will be significant,” said Michael S. Lewis, director of equity research at Lazard Capital Markets, of CityTime. “With regard to the implications of how industry may view SAIC ... that’s still yet to be seen.”

Alderson had been a contender for the CEO job. But now, SAIC likely will look outside the firm for a new leader.

“The old SAIC did not need a change agent because it was going gangbusters,” Thompson said. “Now it has slowed down, and it needs a change agent.”