Diversity and Information Technology Provide Stability, Promote Success

February 1999
By Michael A. Robinson

Continuing telecommunications revolution contributes to company’s exceptional growth.

You could forgive Bob Beyster for looking on his company with dollar signs in his eyes. After all, the chief executive officer of a nearly $5 billion global technology empire expects it to double in size again in the next five years.

In many ways, his company, Science Applications International Corporation, or SAIC, also represents the new paradigm among defense contractors that need to offset cuts in government spending and shrinking profit margins. Just five years ago, the company depended heavily on federal procurement for its livelihood. Today, nearly half of all revenues come from commercial customers. The firm is so diversified in information-oriented technology and telecommunications that it now supports nearly every toll-free telephone call made in the United States. That is not a bad place to be with so many consumers shopping over the telephone.

At the same time, the company that Dr. J. Robert Beyster founded nearly 30 years ago and still runs today  plays an integral and growing role in the on-line revolution. It is not the empire anyone would imagine by looking at the company’s headquarters—a nondescript, two-story office building that could pass for a dentist’s office in a cliff-side community in San Diego.

SAIC’s majority-owned subsidiary, Network Solutions, is the global registrar for the high-level Internet domains .com, .edu, .gov, .net and .org. To date, Network Solutions has registered more than two million domain names, and the company contributes a healthy profit to SAIC. It is a hyper growth business, fueled by the explosion in electronic commerce.

Given the fact that Internet stocks are some of the most attractive investments on the planet, observers might expect to see SAIC’s stock soar higher than a geosynchronous satellite and to hear rumors about investment bankers descending on the company with a bad case of merger mania.

As far as the stock goes, vertigo on Wall Street has exactly zero effect on SAIC’s shares because employees own more than 90 percent of the shares, making the firm the technology industry’s largest employee-owned company. Beyster seems to consider this one of his greatest accomplishments in a career that has spanned nearly five decades.

In a recent SIGNAL interview, Beyster, the patriarch of one of the Defense Department’s key contractors, says he is nearly ready to retire—and why not? He is 74 years old and has earned the right to spend more time sailing his yacht.

Nevertheless, Beyster, who still runs nearly three miles each morning, expects to remain on as chairman while turning over the reins to a younger executive who will be in charge of day-to-day operations. No replacement has yet been announced, and the exact day for the changing of the guard still remains unclear, but Beyster expects to run SAIC through the end of this year.

Considering that he is a millionaire many times over, some might wonder why he has not left sooner. Part of the reason for his longevity, Beyster explains, is the technology explosion of the past ten years, which includes the advent of telecommunications, information technology and the jump to warp speed in cyberspace.

“I’ve enjoyed it,” the former rocket scientist says. “I am turned on by the technology, frankly. But I think there are people around that have more energy and can do a better job than I can.

“I would like to get us through the next year because I think it will be a very difficult year. I can spot trouble areas. One of them is the Y2K (year 2000) problem. It is going to impact us somewhat, people needing help, something we thought was remedied that isn’t.”

In fact, SAIC is a major supplier of year 2000 solutions to government agencies, business enterprises, health care organizations and regional telephone companies. The company takes a business approach by helping companies prioritize their critical systems and information technology planning. The company also offers remediation of software applications and devices with embedded microprocessors—a category that has worried many technology specialists because of their global proliferation, and because many cannot be fixed until they break.

For his part, Beyster acknowledges that the dawn of the year 2000 could spell trouble for many devices and computers that cannot go beyond 99 on their internal calendars. He does not predict Armageddon the way a new wave of high-technology survivalists do, but he foresees hundreds of systems, especially those in the Third World and emerging economies, shifting from automatic to manual operations.

SAIC has grown its Y2K business over the past several years to meet customer needs and to focus on of the company’s strategy of diversifying from federal business. Beyster believes that Y2K dedicated services will essentially disappear by the middle of that year but that the client relationships will continue and probably improve. Combined with the popularity of the Internet, he sees a potential business explosion.

“Most people will go back to developing applications, whether it is telecommunications, health care, information systems, transportation or applications for oil companies. There will be a lot of it because this whole Y2K experience has put a lot of development on hold. The Internet and the technology that it brings along with it have the potential for making an awful lot of processes cheaper,” he says.

For example, an SAIC subsidiary is teaming up with Sprint to provide a cost-saving technology whose development has been spurred, to some extent, by the tremendous growth of the Internet. While the World Wide Web has spawned the whole concept of electronic commerce, it also has created new bottlenecks for businesses and consumers.

Both households and companies find they are physically and financially constrained by the number of telephone lines required to take advantage of the new era of telecommunications. For instance, many workers at corporate and virtual offices find they need three phone lines—one for voice, one for data and one for facsimile machines. Multiply that by the number of offices and homes around the country, says Beyster, and the potential for economies of scale by combining functions is evident. Such is the case with Sprint’s integrated on-demand network (ION) announced last June.

Relying on work by SAIC subsidiary Bellcore in developing the software framework, Sprint officials say ION will allow homes and businesses to conduct multiple telephone calls, receive faxes, run new advanced applications and use the Internet simultaneously. This will be accomplished with a single connection at speeds up to 100 times faster than today’s conventional modems.

ION will be available for business use by the middle of this year and will be introduced to the consumer market by the end of 1999. Beyster says the system installed at SAIC went into operation more smoothly and for less money than he imagined it would require, adding he is impressed with the results so far.

Furthermore, the technology underscores the growing importance of telecommunications in the U.S. economy and shows what a vital role it is playing in the firm’s plans for growth. Those plans took on new impetus with SAIC’s 1997 purchase of Bellcore. This is the company’s largest acquisition to date.

In discussing the acquisition that is literally transforming the company as the 21st century approaches, Beyster dismisses the notion it occurred as part of an elaborate plan to reorganize the company. Yes, he and other SAIC officials decided about six years ago to add more commercial business, but they had no specific goals for the percentages that should be divided between government and commerce.

Serendipity played a bigger role, Beyster acknowledges. Actually, the former Navy man, who contributed critical technical support to several America’s Cup campaigns, runs the company much the way a skipper runs a sailboat race. He has a chart and a compass but will change course in an instant to take advantage of favorable wind shifts.

Such was the case with Bellcore. Beyster had made many acquisitions over the years but never one so large. The opportunity came about by happenstance. A former SAIC official called Beyster to suggest he take a look at Bellcore. Beyster’s first response: Bellcore, a leader in telecommunications with strong ties to the regional Bell operating companies, was simply too big and complex an organization.

But it also was too good an opportunity to pass up. So, despite being nervous at the size and complexity of the deal, a fact that many employee-owners impressed upon Beyster, he plunged ahead. The result is the marriage of information technology and telecommunications that is creating new synergies as well as hefty profits.

In fact, 80 percent of the U.S. public telecommunications network depends on technology invented, developed, implemented or maintained by Bellcore. Company-developed network systems handle every 800- or 888- telephone call placed each day in the United States, regardless of carrier.

Bellcore contributes more than $1 billion in annual revenue, or about 20 percent, of the company’s sales. In fiscal 1998, SAIC earned $84.8 million, up one-third from fiscal 1997 profits of $63.7 million. The acquisition also brings the proportion of nongovernment business to slightly more than half of all revenues.

More importantly, says Beyster, Bellcore is becoming the engine that drives the company even though SAIC has core strengths in health care, energy and environment, and transportation and logistics. He emphasizes that the company is not retreating from its heritage as a provider of technology for national security. Far from it, says Beyster, adding that, “We value our associations with the government. A lot of companies have said, ‘The government business is going away, so we will go after commercial business where the margins are higher.’ But our government business is growing, too. There is still lots of DOD work to do.”

For example, SAIC is the lead integrator for the global command and control system that is the U.S. military’s key command, control, communications, computers and intelligence system. In addition, it helps provide the image and mapping backdrop for intelligence gatherers to help U.S. warfighters maintain dominant awareness of the battlespace.

An SAIC-led team has a contract with the National Imagery and Mapping Agency to provide complete systems integration and engineering services to develop and improve the U.S. imagery and geospatial information system. The goal is to provide accurate intelligence and geospatial imagery information.

The company also is a prime contractor for the nation’s space efforts. SAIC provides key technical support to two of the National Aeronautics and Space Administration’s most important efforts—operating the space shuttle and building the international space station. The company also supports Orbital Sciences Corporation in developing defense applications for the hyperspectral sensor to be incorporated on the OrbView-4 commercial space imaging system.

Beyster says employee ownership has helped the company continue to pursue whatever government contracts it had an interest in, not only the ones that made the company the most money. Many of the more bottom-line-oriented firms that served as SAIC’s main competitors over the years have long since disappeared partly through industry consolidation, he adds.

Turning a company like SAIC into a publicly traded business would be “terrible,” says Beyster. “The downside is the depression of having to do what the marketplace is interested in having us do. I don’t like to run the company on the whim of the public market.

“Don’t underestimate the importance of this employee ownership. It is really the driving factor, certainly in my mind and the minds of most other people in the company, that has been responsible for the success we have had.”

So, when it comes to merger-minded investment bankers, employee ownership makes a great shark repellent. Translation: Look for SAIC to continue growing. And to remain independent.