Why is Leidos going big while everyone else goes small?

Move to the cloud. Embrace agile development. Reduce your data centers.

These are common themes private sector companies have preached to government agencies for the past few years. With the Federal IT Acquisition Reform Act becoming law and government watchdogs calling for more savings, the calls for IT shops to get lean as fast as possible are only going to grow.

So recent news that Leidos is acquiring Lockheed Martin’s Information Systems and Global Solutions to become a $10 billion government services behemoth was a bit of a head scratcher. 

Why would a company that was just spun off from IT giant Science Applications International Corp. want to increase its size — especially when the government is looking to go small?

Lockheed was the leader in IT services among government contractors before announcing in October that it would be spinning off its IS&GS unit in order to pay down debt from its acquisition of heli-maker Sikorsky Aircraft. Contractors like Booz Allen Hamilton and CACI were rumored to be interested. Leidos was never mentioned, given that the IT division of SAIC went with the legacy company when the two split in September 2013.

Massive government contractors like Lockheed are moving away from federal IT as Silicon Valley fights to move agencies and departments onto their cloud systems as fast and cheaply as possible. Investor reaction signaled that many believe Leidos bit off more than it can chew — its stock is down approximately eight percent since the deal was announced.

However analysts tell FedScoop the additional size Leidos is taking on in the deal doesn’t mean the Reston, Virginia-based company can’t quickly adapt to trends.

“If Leidos plays its cards right, there is an opportunity to use this merger to create a ‘new’ Leidos with a new joint culture and a new governance model that allows for agility, responsiveness and innovation,” said Katell Thielemann, research director at Gartner. 

“But it is admittedly a difficult task in a $5 billion business, let alone a $10 billion behemoth.”

Alan Chvotkin, executive vice president of the Professional Services Council, also believes the multi-billion-dollar revenue tag doesn’t exclude Leidos from embracing agility. He points to competitors Booz Allen Hamilton and CSRA, Inc., who also bring in billions in revenue while working with companies that exemplify modern IT management theory.

“[Contractors] can remain agile in the markets they want to be agile in,” Chvotkin told FedScoop. “That’s going to be a real question of whether [Leidos] can, and if the customers will share in that view.”

Jon Check, the vice president of North American public sector for CRSA, told FedScoop in November the company worked to embrace cloud to better serve its customers as they prepared their own move to cloud providers.

“We focus on ensuring that we are ‘customer zero’ for everything we are delivering for the federal government,” Check said at Amazon Web Services’ re:Invent conference. “We are living the dream that we are professing.”  

As for customers, Thielemann said there is a tug-of-war going on in the government space — scale versus agility, purpose-built systems versus open source and COTS, waterfall development versus DevOps, and labor-based business models versus products, automation, and “as a service” trends.

“It is becoming clear that traditional single awardee, multi-year ‘big-bang’ IT projects where scale is paramount and vendors compete on labor-hour price shoot-outs are not the way of the future,” she told FedScoop.

According to Chvotkin, that future is still far enough way for Leidos to make some money supporting agencies who still have to maintain legacy systems.

“There’s still almost 80 percent of the government spend that is on legacy systems,” he said. “That’s a regrettable statistic, but the fact of the matter is that the government is not going to be replacing legacy systems [with] cloud computing overnight.”

We may see which way Leidos leans before this deal is complete. The company will be rolling out the first part of its massive electronic health record contract for the Defense Department soon, with eight initial operation and testing sites scheduled to begin by the end of 2016.

Contact the reporter on this story via email at greg.otto@fedscoop.com, or follow him on Twitter at @gregotto. His OTR and PGP info can be found here. Subscribe to the Daily Scoop for stories like this in your inbox every morning by signing up here: fdscp.com/sign-me-on.