What to make of this year's WT Top 100

Changes on Washington Technology's 2017 leaderboard suggest some important trends in federal IT.

Performance meter

A few days ago, we published the 2017 Washington Technology Top 100. And more than most years, this year's list shows just how much change and disruption is going on in the market.

The first and most obvious difference is that after more than two decades at the top of WT’s rankings of the largest prime IT contractors in the federal market, Lockheed Martin has slipped a notch to No. 2.

The firm didn’t lose multiple large contracts; instead, it sold off the bulk of its Information Systems and Global Services business to Leidos, the new No. 1 with $6.89 billion in prime contracts in fiscal 2016.

But Lockheed Martin remains a very close second, with $6.87 billion in prime contracts. Its continued high ranking is a testament to the important role IT plays as an enabler. When the company sold its IT services unit, it kept nearly all its cyber business and all other IT business that serves the federal market.

So if an IT system delivers command and control data to the F-35 or a satellite platform, Lockheed Martin kept it. If a system delivers better health care data, it went to Leidos.

Adapting to a changing market

Moving down through the rankings, there are plenty of signs that fundamental changes are happening in the market. Leading companies are adjusting to customer demands, emerging technologies, and a continuing tight and uncertain budget environment.

We see companies making acquisitions and divestitures. Partnerships with commercial technology vendors have become more important, and many companies are using strategic hires to stake their place in a rapidly evolving market.

The cloud is reaching critical mass as the Federal Risk and Authorization Management Program and other efforts ease security concerns. Moreover, the cloud has become the tool agencies are using to modernize their infrastructure and adopt new ways of doing business. And many firms in the Top 100 are driving that trend with offerings targeted to the cloud, agile development, mobile technology and DevOps.

These are positive signs for an industry that has weathered years of shrinking budgets and customers focused on low price above all else.

The rise and near-dominance of lowest price, technically acceptable (LPTA) contracting was one of the deciding factors in Lockheed Martin’s divesture of its IT services division. Because so much of its business was focused on platforms, the company couldn’t make its cost structure competitive with pure-play IT businesses.

Signs of growth

One question in particular has lingered for years about the Top 100 and the government market in general: When will we see a return to growth? The market has been contracting for nearly six years, but the 2017 Top 100 gives a strong indication that the downward pressure has lessened. In fact, we are seeing an uptick.

The 2016 Top 100 companies captured an aggregate of $97.2 billion in prime contracts, but the 2017 group hit $99.8 billion. That is still a long way from the 2011 peak of $132 billion, but it is a welcome sign.

More important than the numbers, however, are what the companies are doing. The mergers and acquisition activity is obvious, with the Lockheed/Leidos deal topping the list. But there’s also the combination of Hewlett Packard Enterprise’s IT services business with Computer Sciences Corp., creating a new entity called DXC Technology. That firm focuses on exploiting the government’s need to modernize IT systems and digitize processes.

Many other companies on the Top 100 have also incorporated IT modernization into their growth strategies. They include Booz Allen Hamilton, CACI International, CGI Group, IBM, Accenture, SAIC and CSRA.

One of the more interesting trends in the market is the adoption of commercial technologies by the government and contractors. After decades of rhetoric about using off-the-shelf technologies, the government seems to be embracing them. The Defense Department famously opened the Defense Innovation Unit Experimental in Silicon Valley to forge a closer bond with new technology companies.

Government contractors are also on that path, with many forming close alliances with such well-known names as Amazon Web Services, Microsoft Azure, ServiceNow and Salesforce. And they are actively looking for technologies that address issues related to security, mobility and analytics.

The next big technology wave will come through automation, machine learning and the internet of things. Top 100 companies are making investments in those areas through internal research and partnerships. IBM, Cisco and Microsoft see them as ripe for growth and a way to differentiate their offerings.

Budget priorities

Dark clouds still hang over the market, however, and companies are still making major adjustments — namely divestitures — to reposition themselves. The most recent example is Harris Corp.’s shedding of nearly $1 billion in revenue by selling its IT services business.

The federal budget continues to be an issue because each year Congress and the White House spar over appropriations. It has been worse this year with the change in administration, so the government operated under a continuing resolution for the first half of the fiscal year. At the same time, there is something of a leadership void at many agencies as they await political appointees that have been slow in coming.

As a result, many agencies are in a holding pattern when it comes to spending on new initiatives — a concern significant enough that it’s beginning to be mentioned in some firms’ Wall Street earnings calls. The expectation of many industry executives, however, is that the situation will ease.

Next on the budget horizon is the fiscal 2018 budget based on President Donald Trump’s blueprint, which calls for deep cuts at civilian agencies such as the Environmental Protection Agency and State Department and large increases for defense.

Industry executives, of course, know that Trump’s blueprint will not be what Congress finally passes, but it remains an important statement on spending priorities. So depending on where a company’s business lies, the just-released fiscal 2018 budget could be cause for either optimism or alarm.

Still, the expectation is that even agencies that experience budget cuts will be looking for IT solutions to help them operate more efficiently and effectively.

After years of across-the-board cuts, the market is taking a positive turn for industry. Despite uncertainty about budgets and spending, the opportunity to help agencies adopt new technologies and digitize their business operations will grow.

We see that in the M&A activity. We see that in hiring sprees at firms like Deloitte, where they are recruiting executives with deep domain expertise. We see that in companies such as Engility, which has turned its back on LPTA contracts and is focusing its growth on delivering outcomes to customers instead of the lowest price.

Those trends have been building for several years, but this year’s Top 100 list suggests we might be at an inflection point. And it certainly reflects many of the positive technology and management drivers in today’s federal market.

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