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New Government Conflict Rules Force CSC to Sell Engineering Group

by: Matthew Potter
August 18, 2010

Category: Business Line, Companies, Congress, CSC, Department of Defense, development program, Earnings, Events, Federal Budget Process, Lockheed Martin, logistics, Northrop Grumman Corp., production program, Restructuring, S&T, Satellites, Services, SETA, space, U.S. Air Force | RSS 2.0

It was reported late last week that CSC (CSC) has agreed to sell its Mission Solutions Engineering unit to avoid potential Organizational Conflict-of-Interest (OCI) issues. CSC follows Northrop Grumman (NOC) and Lockheed Martin (LMT) in this kind of move brought on by stricter OCI rules proposed for defense contracting. CSC will sell the 500 person unit to ASRC Federal Holding Co. which is an Alaskan Native Corporation.

Terms of the deal have yet to be announced. Previously CSC had set up the group as a stand alone affiliate in order to try and firewall off potential conflicts. The Scientific, Engineering, Technical and Analytical (SETA) branch of defense contracting has been focused on as the government worries that contractors will bid on hardware contracts while other parts of the same company are supporting the program offices conducting the purchase. In the past companies relied on firewalls, subsidiaries and Non-Disclosure Agreements to manage that conflict. The new rules make it harder and many of the big contractors have been jettisoning there SETA groups.

Northrop was the first with the sale of their TASC arm worth about $1.6 billion after the U.S. Air Force expressed concerns about two upcoming satellite programs that TASC worked on at the Air Force Space Command. Northrop felt the new satellites would be more valuable to the company then TASC.

Lockheed Martin (LMT) announced in June that they would be selling their Enterprise Integration Group (EIG) due to some of the same concerns.

CSC is following these two large contractors but are not happy with the situation feeling that there are better ways for the DoD to manage the risks in the situation.

The continued separation into different parts of these types of companies may see a return to the Eighties and early Nineties where smaller contractors provide the primary SETA work while the large companies focus on big hardware and IT programs. In the Nineties companies bought or acquired SETA contractors as a way to broaden their work base as these companies grew with the downsizing of the defense civil servant and military workforce.

SETA work is also being reduced by Secretary Gates’ initiative to reduce the number of contractors working in the acquisition field. Several thousand positions have been eliminated and “insourced” into government jobs. This directly reduces the revenue of these companies as they earn only if people are working at these jobs. These concerns of reduced future earnings may also cause companies to re-think their commitment to this type of contracting.

For whatever reason there will probably be more deals similar to these as the OCI rules become more firm and the effect of insourcing or the latest proposal to reduce contractors thirty percent over the next three years start to show some affects. This may be a business area that sees serious decline for the next few years although the swing back-and-forth between contractors and government workers seems to occur cyclically. That means in five or ten years there may be a new demand for contractors of this type.

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