Small firms grab more prime contractor roles By Mark A. Kellner Defense News November 27, 2006 In August, Gestalt, a midsized consulting firm in Camden, N.J., replaced Northrop Grumman and its prime subcontractor Raytheon on the U.S. Air Force Modeling and Simulation Training Toolkit (AFMSTT) program. Gestalt was awarded a one-year contract with two option years, for a total of $30 million, to continue developing AFMSTT. Gestalt will assume the role of prime contractor, with Raytheon, Solidus Technical Solutions and CACI rounding out the team, the firm said. Raytheon, ironically, was the original contractor on the project from 1997 to 2004; Northrop Grumman had it for two years after that, with Gestalt winning the deal this year. Is Gestalt part of a trend to award such jobs to smaller firms instead of defense giants? “There’s been clearly a trend in wanting to see more small and medium players participating in contracts,” said Pierre Chao, director of Defense Industrial Initiatives at the Center for Strategic and International Studies in Washington. “There has been pressure on the Pentagon and interest by the Congress in getting smaller contractors more and more involved in DoD contracting and more opportunities to be prime contractors.” This was “partly out of a philosophical belief that small contractors are a source of innovation, as well as a desire to grow the next generation of potential competitors,” he said. Another market-watcher, William F. Farmer, co-president of investment bankers Jefferies Quarterdeck, believes such trends will depend on a given market. Building weapongs will likely still be the chief province of a large contractor, he said. “In certain markets you’re still seeing the large guys getting the lion’s share,” Farmer said. He also asserted that smaller firms may now be in two different straitjackets: new regulations requiring small firms to recertify their small business status make them less-likely acquisition targets for the Thaleses of the world. On the other hand, the high-cost requirements of Sarbanes-Oxley make it difficult for companies below $250 million in revenues to afford life as a public company. However, he said, a small firm can still thrive. Essex, which held “several hundred million dollar” contracts with the National Security Agency while a small firm, is one example, and Farmer believes the a properly positioned small defense contractor could achieve similar feats, “but again, it’s on a case-by-case basis.” After Donaldson’s team confirmed that there were several smaller firms that could compete for the ongoing work, the competition was opened up — and Gestalt won. “This award is reflective of the degree of market research that our program manager and marketing team took on this contract,” said Bill Donaldson, a small business specialist at Hanscomb Air Force Base in Massachusetts, where the AFMSTT was awarded. In Gestalt’s case, the midrange is a sweet spot. “The trend in the last 20 years has been for companies to merge together to produce five, six, 10 behemoths that are good at certain things,” said Bill Loftus, Gestalt’s president and chief executive. “You need that — for the building of planes and Patriot missiles. What they’re not good at is what we do.” Loftus said Gestalt is built to develop customized software quickly. “Eighty-five percent or 86 percent of our work is repeat clients,” he said. “If we solve this [problem] for you quicker and get you what you need, you’re more likely to come back to us.” Rapid Rollouts Loftus said that “every 30 days, we’re showing the customer something. Not just a description, but the meetings we have is [to] show some feature or capability. You need to run it, it has to be working. We delivered a defense readiness system for the Army, deployed in 5,000 locations around the world. We delivered it to the field in nine months.” Speed and attention to detail are important, Loftus said, because that helps trim potentially unused software code. “We think you can get capability out in months and not years,” he explained. “A single stat defines it very well: only 36 percent of a software system is often or sometimes used. That means 60-some percent [of the code] is rarely used, or wasted. The longer you take to write a system and put it in front of users, the longer you work at delivering that, the more you’re in that 60 percent.” Loftus, a veteran of several defense contractors who says he also completed all the coursework for a master’s degree in philosophy, said he attempts to apply some of Immanuel Kant’s procedural formalism to Gestalt’s way of doing business. “Kant’s esthetics — how to bring formalism to the practical — rings very true to me. The way you do that is very, very impactful,” he said. “That’s why you’ll hear me talk about a positive relationship with our customers. There’s a value to that.” Loftus said that too many defense agencies — and their contractors — are locked into a less productive way of creating software. “Unless you know what’s possible, you will trust your vendor,” he said. “Ninety-nine percent of people are trying to do the right thing. They’re in a system that doesn’t put them in the right place.” And, he said, the military needs better software, not necessarily better hardware. “The world has shifted significantly to where that dominance isn’t going to come from bigger platforms,” Loftus said. “We need more information capabilities, not hardware capabilities. We need systems that let us think through things, [rather] than more tanks or Humvees and the like.” (Archives)