Science Applications International Corporation
Science Applications International Corporation
Sales: $1.9 billion (1995)
SICs: 7374 Computer Processing & Data Preparation & Processing Services; 8731 Commercial Physical Research; 8732 Commercial Economic, Sociological, & Educational Research
Science Applications International Corporation is a leading U.S. specialty technology company. Its activities have traditionally been related primarily to the defense industry, but the organization also develops technology and provides research for a wide range of environmental, security, data processing, transportation, and other applications. The unique enterprise boasts a long track record of success as a high-tech hothouse and brain trust. Science Applications has played a pivotal role in the development of many of the technologies that have made the U.S. defense complex the most advanced in the world. From atomic weapons systems designed in the 1970s to the Strategic Defense Initiative (SDI or “Star Wars”) launched in the 1980s, the company has supplied important brain power. Largely because of its focus on defense, but also because it is has always been privately owned, Science Applications has traditionally operated as a very secretive, low-profile company that shunned publicity and diffused little information about its operations or activities. Only since the late 1980s, when it began to diversify away from the defense sector, did the organization gradually allow greater public exposure.
Science Applications was founded in 1969 by Dr. J. Robert Beyster, a nuclear physicist. Beyster was working at General Atomic Co. (later called GA Technologies Inc.) before he jumped ship to establish his own venture. He and a team of about 20 employees managed to generate revenues from research and development contracts during their first year of about $250,000. Beyster and his associates would parlay that early success into a $1 billion-plus company with thousands of employees around the world by the 1980s. Although little is known about the specifics of the company’s early projects, it is clear that its technological expertise was sought by U.S. defense and energy establishments. For two decades after the startup, in fact, Science Applications’ stock price rose at an impressive compound annual rate of 27 percent.
Beyster attributed his company’s stunning growth during the 1970s and 1980s to a simple set of management principles to which he adhered: hire the smartest people; give employees authority and a voice in company operations; build business in areas where the company is most capable; and get out of areas where the company is weak. That guiding philosophy had evolved over time, as Beyster observed his competitors and labored to avoid the pitfalls that brought them down. Specifically, Beyster noted that many companies in high-tech industries languished after following the traditional route of attracting venture capital and then taking the company public by selling stock in the market.
Beyster saw that those companies, after going public, typically suffered a loss of talent, because the entrepreneurial atmosphere that had attracted that talent was effectively obliterated by the oppressive influence of outside investors. Thus, he decided early to resist the temptation of outside investment. Beyster was able to get financial backing during the startup from a local lending manager at Bank of America in La Jolla, California. In addition, Science Application raised about $200,000 in capital through a private placement of stock, a move that Beyster later regretted. He learned from the experience and later bought back all of the shares for a pricey $2 million. “I began to learn, if you don’t need the money, it’s much better to have the equity stand in the hands of the people of the company,” Beyster remarked.
Thus, an important element of Science Application’s strategy became its compensation system, whereby employees were granted ownership in the company, in addition to salaries and benefits. Beyster started out using the compensation system to reward people who brought in new business. He soon realized that he could also use the system to motivate engineers, technicians, secretaries, and others. Every quarter, employees were rewarded, according to their performance, with the opportunity to buy more stock in the company. The net result was that all of the company’s employees had a vested interested in the performance of the overall organization and were therefore willing to work to ensure its success.
In addition to giving talented employees a reason to stay at the company (they had to sell their stock if they quit), Beyster profited by adhering to a philosophy of employee empowerment that would become the hallmark of the top management gurus beginning in the mid-1980s. Science Applications became a company made up almost entirely of engineers and technicians, having no marketing department or outside sales force, and only a thin top layer of management. The lack of a traditional management structure forced employees to become their own bosses and create their own profit centers. They basically had to find and bring jobs into the company, and then organize and complete the projects. One employee described the company as “a farmers market with central heat,” meaning that Science Applications supplied the financial, administrative, and management support, while individuals and groups within the company autonomously operated their own ventures.
By the early 1980s Science Applications was generating about $300 million in annual sales and capturing healthy profits. Sales jumped to $420 million in 1985—a 19 percent gain over the previous year—and net income grew to $14.5 million. Those gains were partly the result of increased spending by the Federal Government, particularly on defense. Indeed, in 1985 Science Applications was garnering nearly 90 percent of its total revenue from federal contracts and about two-thirds just from the Department of Defense. By category, the company’s projects were roughly broken down into national security (65 percent of company sales), energy (15 percent), and environmental protection (ten percent), with miscellaneous projects accounting for the remainder of sales.
Science Applications’ growth by the mid-1980s was impressive, particularly given the fact that it was primarily a service company that developed, rather than manufactured, technology. The company did produce a few products. It built some high-tech military items like a personal computer adapted for battlefield use, and even tried to sell shrink-wrapped software products in the consumer market (the effort failed partly because of a weak marketing and distribution system). But its emphasis was on the research, design, and development of cutting-edge systems and software for clients ranging from the Central Intelligence Agency to the Department of Energy.
Examples of projects for which Science Applications had been hired included the design of nuclear submarines and subsystems, research into artificial intelligence, nuclear energy systems, and the locating and construction of toxic waste disposal sites. Among the company’s biggest contracts by the mid-1980s was the $191 million job of packaging an electronic warfare system for an undisclosed foreign navy. Illustrating the wide scope of the organization’s activities was its contract to design the yacht that American Dennis Connor sailed to victory to recapture the America’s Cup. Science Applications designed and tested more than 40 scale models of 12-meter ship hulls before settling on the design for the famed Stars & Stripes.
Among the more intriguing projects with which Science Applications was involved were a bevy of high-tech, futuristic undertakings reminiscent of James Bond techno-frills. For example, the company operated a Soviet studies institute in Denver, Colorado, that was designed to aid the Pentagon in developing war strategies and plans. Various endeavors at the center included the research of military uses for the Arctic, designing a flight simulator for the B-1B bomber, and developing a space/air craft (the transatmospheric vehicle) that could fly along the fringes of space and reach any point on the globe within 90 minutes.
While Beyster’s simple operating strategy was still producing stellar results in the mid-1980s, he realized that the organization was going to have to adapt if it was going to succeed in the late 1980s and 1990s. Part of the change was being forced by the evolving nature of some federal contracts, which were becoming larger in scope. For example, the massive Star Wars project, for which Science Applications was hired, required that the company suspend its entrepreneurial team approach and bring together several groups to work in a more structured environment. To that end, Beyster felt the need to add a new chief financial officer and a controller to the executive ranks, and to focus on developing more skilled managers that could oversee huge projects.
Furthermore, Beyster realized that the company’s system of marketing was becoming obsolete. In the past, the company had secured most of its projects directly from government officials. It didn’t have to bid on the jobs because it was often the only company that possessed the technology necessary to complete a particular project. That situation began to change in the 1980s when more companies started vying for lucrative government contracts, and when the Federal Government started clamping down on the contracting process and requiring companies like Science Applications to submit fixed-price, competitive bids for jobs.
While Beyster tweaked operating and management systems, he left the proven compensation system intact. Furthermore, he continued to evade publicity; even by the late 1980s the company’s main offices (in La Jolla, California, and McLean, Virginia) bore no outside mark or reference disclosing the company’s name or purpose. The overall strategy seemed to work, as Science Application’s sales rose to 43 percent in 1986 to $600 million. Revenues continued to rise rapidly in 1987, by which time the company was employing 7,000 workers in 17 cities around the United States. Those workers owned about 90 percent of Science Applications’ stock.
The defense contracting industry was stifled beginning in the late 1980s and throughout the early 1990s by marked reductions in federal spending, particularly on defense. It was that slowdown that proved the value of Science Applications’ flexible and entrepreneurial management system. When the defense contracts began drying up, the large but nimble Science Applications organization quickly adapted. To sustain its federal contracts, the company began emphasizing technologies that complemented the governments new cost-cutting and efficiency approach. At the same time, it began to aggressively market its services to the private sector, often drawing on technology developed for the government.
Among the new contracts secured during the early 1990s, was a $200 million contract to develop a hospital information system for the Veteran’s Administration, and a $150 million agreement with NASA to study natural and human-induced changes (including global warming) in the global environment. It also won a job to provide a workstation-based score-reporting system for the 1992 Summer Olympics in Barcelona. Ballard Power Systems, of Canada, hired Science Applications to develop the world’s first fuel-cell-powered transit bus. And IBM and J.B. Hunt Transport Inc. contracted the company to help design a system that communicated, via satellite and hand-held bar code readers, the status of freight on the road. At the same time, Science Applications was able to land a few of the major military contracts that were still available, such as a $200 million deal to help design a system for the U.S. Army’s Missile Command (MICOM).
Science Applications’ spate of new civilian and military contracts allowed it to increase sales substantially to $1.29 billion in 1992, about $33 million of which was netted as income. Its work force by that time had grown to 14,500 worldwide. While it made impressive advances in the marketplace, the company was less successful in court. The year 1992, in particular, brought a string of temporary legal setbacks. First, a former executive filed a bias suit against the firm. Then, a former rocket scientist was sentenced to two-and-a-half years in prison for illegally exporting “Star Wars” technology to Japan and South Africa. Finally, another Science Applications ex-employee won a $3.17 million wrongful termination and gender-bias suit against the company.
Despite those hurdles, Science Applications achieved strong growth going into the mid-1990s. Sales rose to a record $1.7 billion in 1994 (fiscal year ended January 31, 1994) and profits hit $41.5 million, as the company’s work force increased to 17,000. In 1995, moreover, revenues grew to $1.9 billion and net income increased to $49 million. Those figures represented 26 successive years of revenue and profit growth, thus solidifying Science Applications’ status as one of the most successful employee-owned companies in the United States.
A diversity of new projects at Science Applications in the mid-1990s included: the development of combat simulators that integrated virtual reality technology for the U.S. Army; the creation of a new office in Mexico to provide environmental protection services; the creation of an inspection systems designed to detect smuggled explosives and drugs; and a $ 1 billion contract to computerize military health records. Beyster, the company’s founder, was still chairman of the board going into 1996.
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