With increasing pressure from shrinking government budgets, government contractors are looking for ways to diversify and profitably grow their businesses. The commercial marketplace provides an opportunity for business expansion, but past experience has shown that the transition is not always easy. Making the leap from government waters to commercial markets creates challenges that companies must face with regard to their business approach, their regulatory responsibilities, their corporate culture and even their fundamental competencies.
But for those who can successfully manage those challenges, innovation can help a company use its inherent resources to unlock new value. With a structured approach to innovation, companies can realise huge rewards from taking the plunge. By clearly defining its business goals and strategy, determining its innovation boundaries, and creating an innovation strategy, a government contractor can develop a pragmatic operating model and successfully implement it to achieve its growth objectives. The challenges are certainly not negligible, but for those government contractors who carefully plan out their approach to commercial innovation, there are potentially huge rewards waiting on the distant shore.
This interview with Deb Oliver, chief operating officer of Vencore, formerly SI Organisation, a provider of systems engineering and integration capabilities to the US intelligence community, and Doug Dreyer, senior vice-president of Advanced Solutions, a division of Vencore, reveals many of the challenges groups face.
As leaders of the commercial innovation effort within Vencore, what got it thinking about commercial markets?
Dreyer: First of all we looked at our forecasts for the economy and the government market, and even pre-sequestration we knew government budgets were shrinking and a downturn was coming. So we started some incubation efforts, but what really accelerated that was our divesture from Lockheed Martin. We divestedv back in November 2010 and had to think through all the implications of what it would mean to be a stand-alone firm. Plus, our new owners challenged us a bit. As a private equity firm, their understanding and appetite allow us – even encourage us – to venture outside our core. That is helped a great deal.
Oliver: As we divested, we knew it would be critical for us to diversify. We knew there was potential for some great innovation – nuggets we had developed for our federal customers could really mature into intellectual property for the business, and we could potentially take them to market indifferent ways.
There are several challenges with entering into new or adjacent markets. What have been your key challenges as you have entered into the commercial market space, given your primary focuson US government contracts?
Dreyer: One challenge has been finding the right talent – the right engineering and business minds to turn our innovative ideas into reality. But I would say that the key challenge has been altering our risk tolerance. When you venture, you anticipate a lower success rate because you are stretching toward new areas. But even though we knew to expect it, it is not always a comfortable position. Our heritage is in high-reliability, mission-impactful work for our clients. The execution of everything we do has always needed to come with a high level of confidence. So increasing our risk tolerance has been a shift for everyone – from our project teams on up through our leadership.
Oliver: In our core business, we know the relationship between putting in a proposal and winning – we know the process, and we know our normal win rate. In the commercial market, you manage risk differently and to a different extent. You have to invest in several ventures in hopes of achieving one success. Once you have a success, you can scale that up, but you cannot ever be sure that even that venture will be successful. So for our leaders who grew up on the government side, that is something we have had to work through in terms of culture.
Dreyer: Another thing I would add with respect to cultural challenges is really the culture of our clients. On the government side, we are brought in to support long, multi-year missions, and we sell skills and processes. In the commercial space, our clients are generally looking for a solution to a specific problem. They do not care so much about the services we are providing per se – they want to know: “Did you solve my problem?” They are really focused on being successful this quarter, next quarter, maybe a year out. They do not always take as much of a long-term view as maybe some of us would like, and that is a shift for our people in terms of what they focus on in their work.
Oliver: In many of the enterprises we support for the federal government, there are numerous stakeholders, complex interfaces and high-reliability missions that we have to serve. So we are constantly integrating and strategising across broad domains – technical, political, and in many cases cross-government. You have potential futures that you are thinking about, a changing environment, a geopolitical environment. When you are used to integrating all that information to achieve your mission, how do you shift your focus to delivering a breakthrough or radical solution?
When you first looked at tackling commercial markets, did you need to develop or refine your innovation strategy? If so, what kind of approach did you take?
Oliver: At first I would say our approach was structured, but not always focused. We wanted to validate what we believed was of value to the market, but we were applying the same process and structure to commercial enterprises as we did to federal organisations. We realised we were not always developing ideas that stretched us in the right direction. We were investing in adjacent markets that were in fact so adjacent that they were not truly commercial, but were market extensions of our federal business. At the same time, we were stretching for those “reach” ideas that required us to develop new technologies for new commercial customers, and had longer incubation timelines with a lower likelihood for success. But we were not doing anything in between. So we have shifted our innovation andinvestment strategy to support some ventures that have a greater chance of providing revenue in the near term, with a lesser amount of risk.
Speaking of risk, how have you managed to pursue a commercial operating model while protecting your core business?
Dreyer: Managing the technology is fairly straight forward, but what does not transfer as easily in the business model is how much to spend on marketing versus development of the technology, for example. That is very different in the government environment versus the commercial market, and mightbe a pitfall for some defence contractors. They may assume they can focus on their innovative technology and services, and that customers will follow, but it is something like a lesson in marketing 101 – you have to develop the marketing plan and sales channel in parallel.
Along the lines of “protecting the core”, how have you managed to bring the compliance function into the fold of your commercial incubation efforts?
Oliver: We have been paying close attention to that, involving our chief counsel and compliance office rearly in the process, and we continue to test and validate our assumptions. We have been able carefully to navigate those waters within our current structure. As an interesting success story cross-business and added benefit for our core business, we have found that an investment made in one of our commercial ventures has ended up being very relevant to our government customers. So there is a tighter correlation than we had originally thought – it is an example that validates how truly relevant our commercial innovation operating model is to our traditional customers.