WASHINGTON — As expected, Falls Church, Virginia-based CSC announced last week that it is splitting its business into two halves, a reflection of growing competition and high barriers to entry for companies trying to provide information technology (IT) services to the US government.

The split — into CSC Global Commercial and CSC U.S. Public Sector — is the best way to position the business that began as Computer Sciences Corporation for long-term growth, CSC CEO Mike Lawrie said in a prepared statement.

"Our analysis shows significant benefits of going with a pure-play strategy," Lawrie said. "We expect this change to enable both businesses to enhance innovation and improve delivery, in ways that are consistent with the rate and pace of the markets they serve."

Dakin Smoyer, a research analyst with Technology Business Research, Inc., wrote in analysis for investors that the split can work out for both companies if they specialize deep and fast.

"As an almost pure-play enterprise IT company in the public sector, the US-only government business will need to expand its consulting capabilities in order to offset steep price competition on more commoditized IT services work," Smoyer said. "While it is a stretch to think CSC can immediately ramp up to that level of consulting, this split and the necessary evolution of CSC is an example of how specialization is required to avoid falling victim to commoditized enterprise IT price structures impacting some of CSC's peers."

Large defense primes are also feeling the pressure to streamline costs in order to compete for IT contracts, noted Timothy Wickham and Timothy Garnett, managing directors at Avascent, in a white paper published earlier this month.

They point to factors such as reduced federal spending under the Budget Control Act, a preference for fewer but larger contracting vehicles, and the implementation of Lowest Price Technically Acceptable (LPTA) contracting as reasons for the tightening IT market.

"The result is twofold: diversified primes will likely carry a much smaller and focused services line of business in the future, and the creation of even more large and lean services-focused businesses due to divestiture activity by the primes would further reshape the market's competitive dynamics," they wrote.

This makes the sale or spin-out of underperforming IT businesses increasingly likely, they Wickham and Garnett concluded.

"It's much harder for a company that's diversified, like the primes, to continue investing in a business that's declining," Wickham told Defense News. "They're going to protect their core."

Wickham compared today's IT environment to the 1990s, when then-Defense Secretary William Perry urged large defense firms to consolidate during a dinner sometimes called "the last supper."

"The government has sent equally clear signals [on IT], but not as dramatic," he said. After years of providing shareholder value through dividends and share buybacks, the primes are facing increasing pressure to demonstrate value in other ways. They've got to show a growth story at some point." Wickham said.

Not all large defense contractors have the same organization, cautioned Dale Meyerrose, a retired Air Force general who, as ssociate director of national intelligence, served as the intelligence community's CIO chief information officer as associate director of national intelligence.

"CSC has come to the realization that other companies have come to, — that lumping private-sector and public-sector things together sometimes has problems," and there's not as much synergy between the two, particularly in IT, Meyerrose said. "Capital investment in each is different, with different timelines."

Companies working in the public sector have to keep the pipeline filled, with an eye towards business in ways that private-sector companies do not, he said.

Trey Hodgkins, senior vice president, public sector at the Information Technology Alliance, said many companies opt not to compete for government IT contracts rather than deal with the government's compliance requirements.

"It's very daunting to anybody in any tier, and a lot of companies are deciding to walk away," he said.

Because of their familiarity with meeting the military's contract demands, defense contractors should continue to play a role in IT, even if it involves teaming with a smaller firm, he Hodgkins said.

"The government's always going to ask for some things in a government way," he said. "That mentality still runs through the buying activities of the federal government. There will always be a need to take what is available in the commercial world and transform it for a government customer."

Ultimately, the business model for government IT contractors is evolving, Hodgkins said.

"I think that it is something worth watching," he said. "Some companies are going to make some decisions about their business models, to hone in and be more specific about what they're offering, how they offer it. They have to remain competitive."

Email: aclevenger@defensenews.com

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