Contractor’s rise shows blurred government, industry lines

What do designing computers for spies, disposing of nuclear waste, running a TV news channel, monitoring employees who download porn from the Internet, psychic experiments, and helping run the government of Iraq have in common? They're all jobs that the Science Applications International Corp. has done for the U.S. government.

SAIC may be one of the biggest companies most people never heard of. Its executives shy away from media attention. A notable exception, which also proved the point, was when a spokesman told the publication Business 2.0, "We are a stealth company." SAIC's silence has a lot to do with its secrecy-loving clients, which include the CIA, the National Security Agency, and the Pentagon.

The San Diego-based firm does some work for commercial clients and for state and local governments, but almost 90 percent of SAIC's revenue comes from contracts with Uncle Sam; last year those contracts, according to company records, numbered 10,000 and paid out more than $6 billion. Almost half of SAIC's estimated 43,000 employees have security clearances, and about a third work in Washington-area offices. The company is, effectively, an extension of the government workforce.

SAIC has ranked among the top 10 government contractors, based on revenue, for the past five years and has reportedly posted continuous profits in its nearly 40-year history. Much of that success is owed to the sweet spot that SAIC has found among military and intelligence agencies.

The company's single biggest customer is the NSA, which paid SAIC more than $1 billion to build a computerized information system to analyze and store the torrent of phone calls, e-mails, and other electronic data the agency collects every day. The outgoing second-in-command at NSA is a former SAIC executive, and the company is so stocked with ex-employees of the agency that insiders call it "NSA West."

But the NSA, which is at the center of a national debate over domestic eavesdropping, is just one SAIC customer, and building computers is but one task that SAIC has taken on over the years. Indeed, if you were to ask five people who work with the company, "What is SAIC, and what does it do?" you'd probably get five different answers.

One day it's designing databases, the next it's working to dispose of hazardous nuclear waste at Yucca Mountain or hiring Iraqi exiles to set up ministries in a new government. If you were to ask an SAIC executive what the company does, he might respond, "What would you like us to do?" (SAIC officials declined to be interviewed for this story.)

It seems that SAIC is everywhere, all the time. Its ubiquity "is a joke" among government contractors, said one former federal official now in private industry. "They're going to go anywhere and do anything that will get them a new market. It doesn't matter what the job is."

So how did SAIC get so big? You might say it was an accident.

Kentucky Fried Consulting

SAIC was born in 1969, when Robert Beyster, a former research scientist at Los Alamos National Laboratory, set up shop with a few colleagues in a small office in La Jolla, Calif. Beyster had worked for another California defense contractor, General Atomics, for 12 years before launching his own firm with the goal of winning research contracts.

The first two he got were for Los Alamos and Brookhaven national laboratories. For most of SAIC's existence, the company earned accolades by "applying science," as the name attests, to the government's most challenging technological and engineering problems.

Beyster stayed at the helm until his retirement in 2004, and his entrepreneurial spirit remains, said former employees and historians who have studied the company. "They're into so many areas because the initial [business] model was, nothing was ruled out," said David Kay, a former vice president, who worked at SAIC from 1993 until 2002. "We used to joke that it really was Kentucky Fried Chicken consulting."

In the spirit of Harlan Sanders, a 40-year-old gas station owner who started selling fried chicken to motorists and spawned a multibillion-dollar global enterprise, Beyster encouraged any employee with an idea that could make money to give it a shot. "The decentralized entrepreneurial idea was that if you had an idea, you could become a vice president," said Kay, who left SAIC to head the Iraq Survey Group, which searched for weapons of mass destruction after the U.S. invasion.

That doesn't mean that SAIC's methods were erratic. "If you look at the legacy, it has a scientific bent. Very advanced kind of academic thinking; very practical application of that advanced thinking," said Ray Bjorklund, the senior vice president of FedSources, a research firm in McLean, Va. "But they really weren't built to do solutions or major implementations," designing the hardware and software for large systems and offering experts to run them. SAIC's traditional niche was where it began: research.

But in the mid-1990s, the company's focus changed. Government departments and agencies began looking for "body shops," Kay said, companies that provide them with personnel to augment their own workforce, usually because the government is shorthanded or lacks the skills for a particular job.

In the late 1990s, SAIC acquired other firms that opened the door to the "professional services" market, an ambiguous label that usually implies that a company is offering to run the physical product it sells. SAIC began eyeing big contracts with the potential for enormous revenue. "As long as you could make money ... no one said, 'No, you can't do it,' " Kay said.

As the company's revenues grew, so did its employee roster. SAIC is wholly owned by its employees, who trade shares of company stock internally. Ownership has proved to be a powerful incentive to stay with the firm. Last year, SAIC announced an initial public stock offering, which executives hoped would total $1.7 billion. That's only $100 million less than Google's IPO two years ago.

Perhaps knowing that SAIC could make them very rich, scores of former high-ranking government officials have landed there after retiring from public service. Many, but not all, hail from the intelligence agencies. The former chief information officer for the Social Security Administration, a former deputy administrator of the Environmental Protection Agency, and a former Defense official in charge of health affairs brought their Rolodexes to SAIC, which does business with all of those agencies.

The number and complexity of tasks for which the government uses contractors has increased in recent years, said Robert Kipps, the managing director of the aerospace, defense, and government group at Houlihan Lokey Howard & Zukin, an international investment bank that represents SAIC. Former government officials can lead companies toward business with their old employers.

Working for an intelligence agency, in particular, requires an intimate understanding of the work that agency does. "The best place to get that is having been in those shoes before," Kipps said. And once a contractor gets a foothold inside an agency, it's hard for a competitor to kick that contractor out.

Perhaps that expertise is what led SAIC to its biggest customer of all, the one that may also be its biggest liability.

Getting Big

In 1997, William Black, a decorated NSA manager who spent almost 40 years at the agency, retired and became a vice president at SAIC. According to Black's official NSA biography, his expertise lay in "building new organizations and creating new ways of doing business."

In the late 1990s, that's just what SAIC was hoping to do. The company hired Black "for the sole purpose of soliciting NSA business," said Matthew Aid, an intelligence historian who is writing a three-volume history of the agency.

In March 1999, Lt. Gen. Michael Hayden became the NSA's director. Almost immediately, talk began circulating publicly about a massive contract to outsource the agency's data centers, personal computers, telecommunications, and other administrative systems under a program known as "Groundbreaker." SAIC didn't plan to compete for a lead spot in the contract but indicated that it would pursue subcontracting opportunities.

The company would not stay in supporting roles for long, however. Amid the first hints of Groundbreaker, the NSA began another program, called "Trailblazer," to manage its enormous daily catch of intelligence. In 2000, Hayden called Black back to the agency to be his second-in-command.

Two years later SAIC won the Trailblazer contract; Black was in charge of managing the program. "SAIC had made its living acting as a subcontractor on a lot of NSA contracts," Aid said. "Then, under Bill Black, they got promoted to the big leagues."

Work for the federal government has been largely responsible for SAIC's growth, eclipsing the company's private sector contracts. From 1998 to 2002, the company won several lucrative contracts, including a $1.2 billion deal to manage computer systems for the Immigration and Naturalization Service and others potentially worth billions to provide a huge array of professional services to different agencies.

SAIC's revenues also moved up. According to information that SAIC provided to the government and that was compiled by Government Executive magazine, in fiscal 2000, the company took in $2.5 billion in federal work. By fiscal 2002, revenue was up to $3.5 billion, and it jumped almost 35 percent to $4.7 billion the following year.

Those figures only include contracts for which SAIC was the lead, and it omits work for intelligence agencies, so the actual increase is larger. Today, total government revenues exceed $6 billion.

Just as SAIC grew by winning larger contracts, it also expanded by buying other companies, particularly small firms with expertise in specific areas. "All were fairly well run," Aid said. But SAIC "went out in great haste, and with minimal due diligence, and bought a whole bunch of companies in wide business areas.... There was no sense how they were all going to fit together."

SAIC started "buying for the sake of buying," Aid said. "They took a page from the impatient corporate raiders of the 1980s: Why actually spend time building something when you can buy it?"

To some extent, the strategy was driven by necessity. Particularly in the intelligence field, SAIC needed a supply of employees with clearances to access classified information, sometimes even targeted to specific programs. In the intelligence business, "you're either in or you're out," Kipps said, and often the ticket in is a security clearance. "You will never get in without buying" companies that have cleared employees, he said. That's what SAIC did, and it quickly rose to the top of the ranks.

The former government official who became a contractor said that SAIC's strategy has been to ensconce itself in as many areas as possible without becoming too rooted in any one of them. "They want to touch a piece of everything, yet never be the masters of all of it," he said.

The approach stems from those early, entrepreneurial days, when Beyster encouraged employees to try anything that might work, without centrally controlling the business and forcing people to focus. "That has provided breadth at the expense of depth," the former official said.

For big projects like the NSA's Trailblazer, a company needs to have depth of experience in managing many different pieces of business and integrating them into a whole. If that was something SAIC truly lacked, it would show.

In Too Deep

Trailblazer was an abysmal failure. After more than $1.2 billion in development costs, the agency and SAIC have practically nothing to show for their efforts and have effectively abandoned years of work. The effort "has resulted in little more than detailed schematic drawings filling almost an entire wall," according to The Baltimore Sun, which published an exhaustive account of the Trailblazer fiasco, and SAIC's role in it, in January.

Ultimately, the entrepreneurial idea shop appears to have gotten in over its head. SAIC "did not provide enough people with the technical or management skills to produce such a sophisticated system" and "did not say no when the NSA made unrealistic demands," The Sun reported, citing numerous intelligence and industry officials.

Trailblazer was not SAIC's only setback. It tried in vain to build an electronic case-management system, known as the "Virtual Case File," for the FBI. After what observers and participants described as frequent management failures and a lack of organization -- at the bureau and at the company -- the program was scrapped last year. The FBI had spent more than $100 million.

SAIC was also tapped in 2003, after the invasion of Iraq, to set up a U.S.-friendly television network in Baghdad, which officials hoped to use for messages and stories about reconstruction. SAIC was supposed to train local journalists and set up a newspaper, but the work fell apart amid criticism that the company was producing an amateurish product that did little to get word of U.S. efforts to the Iraqi public.

The Pentagon replaced SAIC in January 2004 with another contractor. "They were clueless as to how to run a media network," Kay said. "It was horribly directed. It shouldn't have been done."

All large companies eventually hit obstacles, some of which are more spectacular than others. But when contractors fail, it's usually not because of a lack of experience in a given area. SAIC's case is troubling, observers say, because it arguably shouldn't have gotten some jobs in the first place.

When agencies decide to award contracts, "one of the things they look for is core competency," Aid said. "This company doesn't have it, because there is no core." SAIC's business model "is a model of models," the former government official said. "They are different things depending on the customer."

In that sense, SAIC is a prime example of the blurring lines between government, which traditionally has run itself, and private industry, which is taking over some of government's tasks.

Looking at the increasing privatization of once-core national security and intelligence functions, Aid asks, "Is the United States government capable of running these operations anymore?" Often, the answer is no. Dependence on contractors has never been higher or more evident. Outside firms build critical computer systems; private-sector employees work alongside government intelligence analysts; outside companies have even provided interrogators to work with U.S. soldiers in Iraq and Afghanistan.

"I think the process has crept up on us, and it's not ever been announced or specifically authorized," said Rep. David Price, D-N.C. "I question it." Price has authored legislation requiring the director of national intelligence to submit a report to the congressional Intelligence committees detailing how contracts are regulated. The report, not all of which would be public, would include the minimum standards for hiring and training contractors, and the procedures for preventing waste, fraud, and abuse.

And for contracts worth more than $1 million, individual agencies would have to disclose the number of people they hired for a particular project, as well as a description of how those employees were trained and the work they do. The DNI would also have to recommend ways to improve hiring and training of government employees.

"One has to ask about ... the extent to which the legitimate organs of government, over which we exercise funding control and oversight, are really in charge," Price said. "The contractors in some areas may have become the tail that wags the dog." Price's proposal is included in the pending 2007 Intelligence Authorization Act.

SAIC may also face oversight of a different kind should it decide to go public. Wall Street analysts could judge the company harshly if it botches more high-profile contracts, even though the vast majority of SAIC's work presumably goes smoothly.

"If SAIC stumbles, which could happen again, then the market sentiment may just drag down the valuation of their stock," said Bjorklund, the research firm executive.

In the meantime, SAIC has set its sights even higher. Its chief executive, Kenneth Dahlberg, has said he wants revenues to hit $12 billion by 2008. It's a lofty goal, but if SAIC attains it, talk of contract failures, inexperience, and government oversight will fade into the background. Ultimately, one measure stands above the rest, the former government official said. "You can't argue with revenue."