Perot Systems decides to add a government focus

The company has a new office, but can it compete?

Perot Systems has new digs for its 2,200-employee federal division. Most of the unit moved to the new offices in Fairfax County, Va., last week, marking a milestone for a company that didn't have a government division just three years ago.

Ross Perot Jr., who became president and chief executive officer of Perot Systems in 2000, steered the company into the government market. When his father and former presidential candidate Ross Perot Sr. started the information technology company with eight associates 12 years earlier, the commercial market seemed to be where the action was.

That impression was confirmed when a deal fell through with the company's only potential government customer, the U.S. Postal Service.

The commercial business quickly grew to be so strong that the company never looked back.

"A lot of people thought in the '90s that government work was boring, low margin, no fun," Perot Jr. said.

He questioned those assumptions, and in 2000 decided that having a federal practice ensured safe, reliable and repeatable business even though the economic downturn at the time had not affected the company's business to any significant degree.

Perot made the strategic shift well before the Sept. 11, 2001, terrorist attacks, which ushered in a flood of companies looking for lucrative federal contracts, but the most significant growth didn't come until 2002.

That year, the company acquired ADI Technology, a professional services company providing engineering and technology work to federal agencies. About half of the employees in the Government Services Group came to Perot Systems through that acquisition.

ADI's top executive, Greg Bedner, led the new group and, a year later, added Soza and Co., which specialized in finance, accounting and IT outsourcing.

Competition within the federal sector is fierce, especially from players such as EDS, Computer Sciences Corp. and others. But Perot, who is now chairman of the board, said government business is so big that "we're happy with the crumbs that fall off the table."

The federal government is "very shrewd to constantly encourage smaller vendors to come in," he said. "They get a higher-quality person. They get far more creativity. Our government clients enjoy the extra attention they get from the smaller companies."

Bedner said his group continues to work in the homeland security, intelligence and defense sectors, including a nuclear submarine contract with the Navy, and is seeing growth from work with NASA, the Energy Department and other federal agencies.

The government group recorded $263.3 million in revenue for 2004. In the first quarter of 2005, the company recorded $63 million in revenue in government operations.

Charting health care opportunities

William Loomis, managing director of Legg Mason's IT services group, which counts Perot Systems as a client, said the government group lost a Homeland Security Department contract last year. That could hurt their revenue numbers compared to 2004.

"They indicate they have a pretty strong bid pipeline, [so] hopefully that [projection] will change in the coming quarters, but right now the growth is generally lagging from some of their publicly traded peers on the federal side," he said. "They're winning new business but not enough to make up for that contract loss."

Bedner said Perot Systems, which was part of a larger consortium of companies, lost a bid to renew a Citizenship and Immigration Services consolidated contract when DHS was formed. He said he is restructuring the company's approach to pursuing new business opportunities.

"Our pipeline is growing, and I believe we are now structured in a more effective manner to grow our business, while also maintaining the committed approach to serving our customers that we are known for," Bedner said. "I am very optimistic about the future of Perot Systems in the government sector."

Another new promising area is the government health care sector. Since last year, the Bush administration has been heavily promoting the use of electronic health records and pushing for more IT in the health care sector to improve service and operations.

"We manage technology in 330 hospitals in the country," Perot said. "That gives us a great vantage point to see what's going on around the country, and the government wants to take advantage of what we've learned."

Despite heavy competition in the health care sector, Loomis said he expects the company to be a noted player down the road because its commercial health care practice represents about 45 percent of its overall revenues.

Bedner said he and Chuck Lyles, who leads the company's health care group, will work together in the next 18 months to develop a strategy. Bedner's group is also creating a centralized business development component to help improve such efforts.

"Both Chuck and I want to make certain that when go into the market that we go into the market as a real example of how to do it right," Bedner said. "We're going to take our time."

Walking the talk

Perot Systems was equally cautious in entering the federal space, coming in as a relatively small player while the post-Sept. 11 rush was in full swing.

Loomis said he was surprised it took the company that long to enter the market. Perot Systems tends to be "pretty methodical and look at things very carefully," he said.

Acquiring well-established players already in the market, such as ADI and Soza, was a good move, Loomis added.

Perot Systems spent 18 months searching for a suitable acquisition target before settling on ADI. Bedner was chairman, president and CEO of the privately held firm, which was generating about $67 million in annual revenue, and he had no plan to sell his company when officials from Legg Mason approached him. They asked him whether he would consider selling if ADI could become Perot Systems' platform for a government division.

Bedner liked the idea of buying out some of the original founders who hadn't worked for ADI for years and joining a larger company that had a reputation for state-of-the-art management.

Perot Systems officials assured him that he could bring his entire management staff with him and remain independent.

"They not only talked the talk, they walked the walk," Bedner said of Perot Systems. After ADI was sold, he went to his major customers and assured them that the new company would actually offer more resources.

Bedner said that when Perot acquired Soza, which had more than $100 million in annual revenue, there was little overlap in business between it and the former ADI.

"What Soza brought in was ... a very impressive finance and accounting management discipline and lot of [business process outsourcing] focus, which we hadn't done before," Bedner said. "We're getting more and more into finance and logistics work across the company. Everything expanded the way we wanted to expand."

Company officials said the transition was mostly smooth with some minor issues. Bedner said some of the challenges were dealing with the pressures of being publicly held, operating on a 90-day snapshot and meeting analyst expectations.

"We had to learn a different lexicon," he said. "It wasn't that we were doing things a whole lot differently, we did them with different verbs."

Perot Systems facts

Company

Founded: 1988

Number of employees: 15,900

2004 annual revenue: $1.8 billion

Government Services Group

Launched: 2002

Number of employees: 2,200

2004 annual revenue: $263.3 million

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