* ACS-Lockheed Martin deal helps define commercial vs. government outsourcing
When large enterprises announce major IT outsourcing contracts, they often say that a chief reason for hiring a third party is so they can “focus on their core business.” With the pressures of a slow economy upon them, the outsourcing companies themselves are making similar efforts to hone in on their core capabilities and markets.
This refocusing was demonstrated with amazing clarity at the beginning of this month when Affiliated Computer Services (ACS) and the IT outsourcing arm of Lockheed Martin struck a multimillion-dollar deal to essentially trade major segments of their businesses.
Under the deal, ACS will sell its government outsourcing business to Lockheed Martin while acquiring virtually all of Lockheed Martin’s commercial business. Lockheed Martin will pay $658 million for ACS’ government business, while ACS pays $107 million for Lockheed Martin’s commercial business. ACS will net $551 million in cash, and it will retain its largest government contract, a business-process outsourcing deal with the Department of Education worth about $172 million per year.
Under the deal, ACS will acquire contracts to provide IT outsourcing services to customers in a number of markets, including automotive, retail and financial services. Among the new customers it will assume from Lockheed Martin are Nike and Simon & Schuster. ACS will also garner a larger portion of work from some of its current commercial customers that had also been served by Lockheed Martin, including General Motors and Goodyear Tire & Rubber. The new contracts are worth about $240 million annually. ACS will take ownership of four Lockheed data centers in the U.S., giving it a total of nine in the country.
The deal marks the exit of ACS from the government market, which is one of the few growth areas in the IT space but which also requires enormous staff and time resources to support. Giving up its government clients may shorten ACS’ revenue in coming years, but it enables the company to focus all its efforts on commercial clients, which operate much differently than government organizations.
Lockheed Martin, on the other hand, will refocus its IT outsourcing efforts exclusively on government contracts, selling off its budding business in the commercial space. This will enable it to further develop processes and methodologies that are consistent across all its client base, without devoting resources to developing special services and methodologies for a small number of commercial clients.
For both companies, the ACS-Lockheed Martin deal demonstrates the disparity between government and commercial outsourcing projects and the need for outsourcing providers to gain focus on one or the other. The government market requires a very patient service provider – the service procurement process alone is bewildering to the uninitiated – and a specific set of processes that are consistent with government regulations and operations practices. Government outsourcing providers must also be able to work within very strict budget limitations, particularly in underfunded agencies. As a company that makes its living primarily as a government contractor, Lockheed Martin has vast experience in these areas and proven methods for generating a profit under those limitations.
For commercial outsourcing providers such as ACS, however, the “learning curve” to penetrate the government market often proves to be too high to be heavily profitable. By focusing on the commercial market, ACS eliminates the need to develop these parallel methodologies and processes, freeing resources to focus more creatively on corporate clients that can move more quickly and be more flexible in their IT processes. ACS might use the profit from selling its government business to develop more structured tools and processes for handling outsourcing projects in specific vertical markets or in specific large client organizations.
Does this mean that enterprises should seek only outsourcers that don’t handle government work? No. Some large outsourcing companies, such as IBM Global Services, Accenture and others, have developed separate organizations and methodologies for working on both government and commercial contracts. But enterprises should consider whether their outsourcers have experience in working with clients of similar size, structure and technology – if your company is not part of your outsourcing provider’s “core business,” you may want to rethink your selection.
