The $5.9 billion-in-revenue technology and management consulting firm Booz Allen Hamilton is celebrating a century in business this year. But the companys modern history began in 2008, when it split its U.S. government and global commercial operations into two separate organizations, which agreed not to compete with each other for three years. Private equity giant Carlyle Group bought a majority stake in the government contracting business, which retained the Booz Allen Hamilton name. The international commercial business became independent under the name Booz & Co. In November 2010, Booz Allen Hamilton went public at $17 a share. The shares are now trading at about $14.
CEO Ralph Shrader who, like many of his 25,000 employees, has a Ph.D. in electrical engineering has been with Booz Allen through it all. The 68-year-old joined the company in 1974 and has headed it since 1999, when it was still a private partnership. He previously led the companys technology division, which focuses on telecommunications and information technology as well as command, control, communications, computing and intelligence. In the three months ended September 30, 2012, net income adjusted for one-time items grew 10 percent from a year earlier, to $55.7 million, thanks to cost cuts that offset a 2.9 percent decline in revenue, to $1.39 billion. To sustain growth despite concerns about budget cutbacks (Booz Allen gets 98 percent of its revenue from the federal government), Shrader is looking to expand into nongovernmental work and into the Middle East, which could put his group in competition with Booz & Co. The company opened an office in Abu Dhabi in October and also has staff operating in Kuwait, Qatar and Saudi Arabia. Senior Writer Julie Segal recently talked to Shrader about Booz Allens strategy and the challenges posed by the current political impasse in Washington.
Institutional Investor: Is your companys future clouded by the stasis in Washington?
Shrader: A continuing series of confrontations between the various parts of the government over our spending and revenue priorities would introduce a fair amount of instability and uncertainty into the whole government process. Given our reliance on the federal government as our largest client, we have to be very agile in how we deal with this.
Ive been with Booz Allen for more than 38 years, operating primarily in this government marketplace. I saw the wind-down of the Vietnam War, the oil embargoes of the 70s, the Berlin Wall falling. Weve seen presidential administrations come and go. Weve seen the Democrats in power, the Republicans in power.
Weve come through all of these changes in very fine fashion and have continued to grow. Sometimes the growth flattens a bit, but when we get to the other side, were in good shape.
But you have made some major changes.
We looked at the situation a year ago and felt that we were heading toward something different. We made cuts at the beginning of last year, reducing our senior staff and taking some cost out of the business. We did it in advance of seeing any real danger signals from our clients, but we felt like we had to be out in front and prepared. Weve made the commitment to not be so U.S.-centric and to expand beyond federal and state government work.
For us the core thats proven to be very valuable is our strong commitment to client service. A single P&L gives rise to a highly collaborative environment, and a matrix structure allows us to very flexibly and rapidly move people through the organization to respond to changes in the marketplace without being encumbered by things like individual goals and objectives, but rather by the core objectives of the firm itself. Then, off of that, we ask ourselves, Is it the health industry thats going to be more dynamic? Or cybersecurity? Should we shift resources that way?
How do you get people to think about the firm as a whole?
One of the things that helps us here is that we grew up as a partnership, and we actually practiced partnership. We were, to my knowledge, the earliest and, I believe, today the only one of the big management consulting firms that doesnt have big individual bonuses so that your big-hitter superstars are out challenging each other to see who can get the highest bonus. Instead, our bonuses are based on a common bonus system. People are incented to grow the whole pie so that we all benefit from its growth. We did that 25 years ago, and weve carried that through our entire organization.
How do you preserve that in a public company structure?
The key executives still feel the partnership spirit, and we made a pledge that were going to maintain that and continue that. We believe that the strong competitive advantage that Booz Allen has is this idea of partnership. In times of stress this is particularly valuable because we are willing to move and be agile and amass strength where its needed and take it away from where its not.
How does your strategy differ from what Booz & Co. is doing?
When we made the decision to separate the firm, we had two different business systems and needed to split those. The business system that we kept with Booz Allen Hamilton was, of course, the government system. We wanted to make sure that we continued to build this outstanding government contracting firm, and the government was going to be the very core of our business. We were not looking to do something else.
Having said that, we also knew that we would have an opportunity, after the three-year noncompete agreement expired, to do whatever we chose to do in either the commercial or the international field. But we werent running toward those opportunities as an alternative to the government business. Rather, we felt that we had capabilities that could be applied in those markets and would be an extra added attraction, if you will, of the portfolio of the firm.
Unlike other firms, which have said theyre not sure where they can continue to grow in the government, we have been quite confident about what were able to do in the government. But we thought we could add some icing on this cake if we go off and do some things that play to our strengths in commercial and international.
Give us some examples.
Our first forays in the commercial world were around leveraging the very strong cybercapabilities we have. One key area where those skills were applicable was in the financial services market, so we began to build businesses around that.
Coming from that, weve seen interest in areas like infrastructure, where energy companies oil and gas and others are also worried about their cyberissues and capabilities. Weve begun to expand that out even further. And then we have this long history and strength in areas such as the health care industry, where we know how to parlay what we know and do for the government into the private sector.
But I want to emphasize that the businesses were trying to build leverage off of the very strong technical base that we have here in Booz Allen Hamilton today. It is in no way an attempt to replicate that high-end strategy consulting that we did when we were back as one firm and that Booz & Co. does today. Were quite content to leave that market to them.
You recently opened an office in Abu Dhabi. Why are you expanding into the Middle East?
Before the separation of the two firms, we had a very robust business in the Middle East, especially around information technology. Because of our reputation in cyberspace in particular, theres a lot of interest on the part of some emerging economies that are being fueled by their petrodollars to build infrastructure. It was natural for us to go back into that part of the world, where we have lots of friends, former clients and former colleagues, and start working with some governments and commercial entities on how to build infrastructure. And despite the gloomy global economy, many governments in the region are still able to spend robustly.
Will you move beyond the Middle East?
It depends. What it depends on is whether or not we can find smooth and continuous ways to move the commercial and the international businesses into new geographic markets where we could also enjoy the benefits of our structure and our whole portfolio approach. Then we will do it. But were not going to do it to just simply say weve put a stake in the ground in Europe or Asia.
We are not taking a white-space strategy, where we draw up a matrix of capabilities and geographies and find where we are not represented. Im not looking to fill white spaces.
Talking more broadly, and given your cybersecurity expertise, tell us about the information security vulnerabilities you see out there.
The unfortunate reality is that the threat is pervasive. We do a lot of work with the U.S. government at the highest levels of security in understanding the threat, attempting to counter the threat and developing solutions around the threat. It sobers you to realize the scope of vulnerabilities and threats that are out there.
One of the bigger challenges that we face is the classic one between what we would consider in this country to be our basic freedoms versus the need for controls. Thats a debate that I think is healthy and which we need to continue to have. But obviously, the more freedom that we wish to have as individuals, the more difficult it becomes to protect our assets. One of the biggest challenges is to foster an appropriate and constructive debate about how to work through that balance.
How prepared is the financial services industry for cyberthreats?
Are they better prepared than they were? Yes. Are our institutions doing the most they can do? Most have an appropriate level of concern and are working very hard to be responsive. But cyberspace is ever-changing, and the bad guys get better every day, just as the good guys get better at trying to protect us. Its not the kind of thing where you can declare victory. You have to keep working the problem day in, day out.
The average tenure of a CEO today seems to be going down rapidly. Youve been with the company for almost four decades. Whats the benefit to shareholders?
They get the benefit of the experience. I have worked in dozens of different jobs inside this firm. Ive run major portions of our commercial business; Ive run the government business; Ive done individual client work. There really arent situations that I havent seen before. I havent faced the fiscal cliff before, but Ive faced fiscal challenges from the government cycle many times before. Ive faced the loss of contracts before.
Theres a certain trust me element there, but its not Trust me because Im smarter than you are, its Trust me because I spent a long time working with and understanding all the moving parts and elements that go into making this a successful business.