General Dynamics takes top spot with CSRA addition

General Dynamics has captured the No. 1 spot on the Washington Technology Top 100 thanks to its acquisition of CSRA, a deal driven by a desire for scale and a more solutions-based business model.

Over the past three decades, General Dynamics has never been afraid to be bold or even somewhat contrarian in its approach to the government market.

The Falls Church, Virginia-based defense contractor sold off several business units during the post-Cold War period of industry consolidation as others bulked up, then after that busy period it made a series of acquisitions that helped build what became an IT product and services powerhouse.

But other than some tuck-in buys along the way, General Dynamics largely stopped making sizeable IT acquisitions five years ago and prioritized investments in its own business.

So why did GD decide that it was time to truly shake up the government market this year with its blockbuster acquisition of CSRA?

The deal certainly moved the needle on scale for General Dynamics’ IT services business -- doubles it in fact -- but GD’s leadership team also eyed CSRA’s unique approach as a solution-focused, “next-generation IT” integrator for agencies.

“They are an outcome-based business, which we all are trying to be but they’ve been a little better at it than the rest of us,” said Dan Johnson, executive vice president of General Dynamics’ information systems and technology group that houses the IT services and hardware businesses.

“What we hope to do is take some of their initiatives in that area to our customers with rationale on why it makes sense rather than to manage by how many hours we’re delivering but manage by the outcome or solution we can provide,” Johnson told Washington Technology.

With CSRA in tow, General Dynamics took over the No. 1 spot on the 2018 Top 100 with $7.3 billion in prime contracts.

Those Top 100 dollar numbers include obligations for both the IT services business and General Dynamics Mission Systems -- another division within the IS&T group that makes communications, electronics and other IT hardware.

General Dynamics said in its Feb. 12 announcement of the CSRA deal that the combination creates a $9.9 billion-revenue player in IT services. The number is higher than the Top 100 figure because the Top 100 does not include classified work or subcontracting work.

Johnson pointed out in an investor presentation that the market is consolidating and focusing on scale as a differentiator in pursuing large IT jobs with agencies.

“In the services business, when we're looking at acquisitions, typically, you look for one of two things: either an entity which will bring you skill sets or solution sets that you don't have, and/or customers that you don't have because they're difficult to penetrate,” Johnson said.

Part of what made CSRA attractive to GDIT was the similar business structures both had in having intelligence, defense, and health and civil lines of business, Johnson said in the Top 100 conversation with Washington Technology.

But General Dynamics as a corporation pushes down functions like business development and solution architecture to the divisions like GDIT, while CSRA centralizes many of them.

“That’s something we’re on our way in trying to do,” Johnson said. “They were a little bit ahead of us so we’ll implement some of that centralization so we can go to market as a $10 billion company.”

But there is another larger theme in why General Dynamics was willing to first pay $6.8 billion in cash for CSRA, and then $6.9 billion in cash to beat out a subsequent rival offer from CACI International.

(Click here to read our extensive coverage of the CSRA deal every step of the way)

As Johnson described to WT, the broader federal market is bouncing back with more opportunities of a larger scale. Funds are particularly going up for defense and intelligence agencies, plus IT modernization budgets across the board. That trend comes after a downturn during the earlier part of this decade with the Budget Control Act and sequestration cuts .

“Five years ago, we thought it was awful. So we think it’s getting better,” Johnson said of the market environment then versus now.

“We’re cautiously optimistic that with the new administration and recapitalization at the Defense Department and some of the predominant civilian agencies CSRA happens to be an incumbent in, there are reasons for optimism,” he said.

Johnson described the environment of five years ago as seeing agencies -- and especially DOD -- wanting to manage and pay for services by the hour as budgets tightened and government customers emphasized low prices in their procurements.

“Most of us realized this was not the most economical way to get things done because there’s no incentive for the contractor to be creative or innovative because their revenues depend on how much money they spend,” Johnson said.

“I think that’s changing and know it’s more prevalent of using an outcome-based opportunity in the civil agencies and in health care, but I think DOD is coming around to that,” he said.

The trend at many agencies is moving toward managed services for IT jobs that place increased responsibility on the contractor but with the promise of high margins if done well. CSRA knew how to turn this into fixed-price work at higher margins than its peers and GDIT is aiming for that approach also, Johnson said.

In explaining how the pieces can fit together, Johnson described how General Dynamics is hoping to make “one plus one equal three“ with CSRA, which touts a heavy network of partnerships with commercial IT giants like Amazon and Microsoft.

There is the technology side of CSRA with its heavy cloud footprint as an example. Include under that umbrella the Defense Department through the $498 million milCloud 2.0 contract they won last year.

This closely-watched program calls on CSRA to build the military’s next main on-premise cloud environment that links DOD with commercial cloud tools in a private deployment setup.

“GDIT has some of that” broader cloud capability, Johnson said. “But we’re not probably as renowned for it as they are, nor do we have the published relationships with the commercial high-tech guys that they do.”

Cloud is one piece of the capability rationale, while the intelligence community represents a main portion of the customer reach rationale for GDIT to bring CSRA into the fold. Intelligence agencies typically have higher barriers of entry for contractors seeking to do business there.

“If you look at the intelligence market which we all think is going to continue to be a lucrative market, arguably GDIT is the leading IT integrator in four of the five three-letter agencies,” Johnson said.

CSRA leads in a fifth through its $2.4 billion Greenway IT services contract with the National Security Agency.

“Hopefully there are some synergies there that we can cross-fertilize in those kinds of areas,” Johnson said.

Also with the addition of CSRA, General Dynamics going forward will report results for both IT services and the Mission Systems business separately. GD is forecasting $4.8 billion-$4.9 billion in revenue this calendar year for the Mission Systems business.

Branded as “GDMS,” that product manufacturing business focuses on space payloads, ground stations, encyptors and other communications and IT hardware for defense and space agencies. GDMS also includes Bluefin Robotics, an unmanned undersea vehicle maker acquired two years ago.