In my early days in defense contracting, there were many large businesses in the government defense marketplace – Lockheed, Northrop, Martin Marietta, Grumman, Loral, Westinghouse, Hughes, General Electric, McDonnell Douglas, General Dynamics, E-Systems, Raytheon, Boeing, among others. In the early 90’s the pool of qualified bidders for large systems contracts had shrunk as mergers and acquisitions took players out of the market. By the mid-90’s Lockheed Martin Loral controlled about 40% of the Pentagon’s budget as a result of mergers and acquisitions of the three giants that formed its name and the component acquisitions of LTV, Ford Aerospace and Unisys and divisions of General Electric and General Dynamics. Northrop’s acquisition of Grumman Aircraft created another giant contractor, Hughes bought General Dynamics missile division and Raytheon purchased E-Systems. As the Defense budget shrunk leaving excess capacity in the market, consolidating became the name of the game to bring costs down and remain competitive.
Recently, a similar consolidation is in progress in the Information Technology marketplace. Leidos, a spinoff of Science Applications International Corporation (SAIC), purchased the IT services division of Lockheed Martin. L-3 Communications sold its IT services division to CACI in 2016. In the past couple of years, there have been rumors that General Dynamics and BAE Systems were shopping their IT services divisions. Why are these large defense contractors divesting their IT services business units? It’s all about profit. The services marketplace has become so competitive as the government’s emphasis on price has increased and needs decreased that these services business units are contributing less and less to the bottom line. Companies wishing to stay in the market and be competitive are buying up the competition and consolidating to eliminate overhead costs in order to compete on price. Others who see their bottom line shrinking are divesting these low-margin business units and retaining their higher-margin business to satisfy their shareholders with better ROI (return on investment) numbers.
It remains to be seen how this is going to impact the cost and quality of the service provided to government customers. Reducing competition can lead to higher prices but consolidating can reduce costs. Quality in the services market is largely dependent on the level of satisfaction and motivation of people, a much harder thing to measure and manage. Employees caught up in these consolidations may be disincentivized by loss of corporate identity, change in corporate culture and, on a personal level, changes in pay, benefits and management policies which drive them to seek other employment or just negatively effect their motivation and commitment. Companies need to be cognizant of the impact on employees because in the services business customer satisfaction is all about the people.