A Company Tom Clancy Would Love
from
September/October 2002
by Bonnie Azab Powell
"Those who contribute to the company should own it, and ownership
should be commensurate with employee contribution and performance as
much as feasible." Take a guess—this motto:
a) Hangs over the entrance of an organic-grocery co-op
b) Serves as an epigram for an anti-globalization website
c) Is the founding philosophy of a giant defense contractor.
Strange as it might seem, the answer is c, and the philosophy belongs to Science Applications International Corp. (SAIC), a company founded in 1969 by
J. Robert Beyster, formerly a nuclear physicist with the Los Alamos National Laboratory. True to his motto, Beyster immediately turned 90% of the new company over to his employees, and set about building a veritable Wal-Mart for defense technologies and services that today has annual revenues of $6.1 billion. Along the way, he's been advised by a procession of ex-soldiers and ex-spooks, many of whom have served as SAIC directors. Among them: former U.S. defense secretaries Melvin Laird and William Perry, former CIA directors Robert Gates and John Deutch, and retired Army general W. A. Downing. The current 16-member board includes retired admiral and former national security adviser Bobby Inman and retired Air Force general J. A. Welch.
A good chunk of SAIC's business comes from huge but relatively humdrum systems-integration contracts, such as the building of the Department of Defense's Composite Health Care System, which serves more than 500 DOD medical facilities worldwide. But SAIC is also on the cutting edge of counterterrorism, inventing and making the kind of whiz-bang technology and devices that set a Tom Clancy novel apart. The company's Vehicle and Cargo Inspection System, for example, has gamma-ray imaging that sees right through trucks and shipping containers at border checkpoints. Its optical character-recognition software can read and analyze the numerous Arabic-language documents that appear on the Web as images. SAIC's unmanned Vigilante helicopters, equipped with Raytheon's low-cost, precision-kill rockets, are to undergo testing by the U.S. Army. Another tentacle of the company makes computer models that measure what various types of bombs will do to buildings and people. Yet another trains air marshals for the Federal Aviation Administration.
These kinds of government contracts account for just over 60% of SAIC's business. The rest comes from commercial work, including telecommunications. SAIC has installed a location-based Global Positioning System tracking service for BellSouth's 14,000 installation and maintenance vehicles. It operates a business-to-business communications platform for various industries, aerospace and health care among them. And its knowledge-management software system for the oil company Petróleos de Venezuela is estimated to have helped cut costs by $180 million over the past two years. In addition, the company is working to produce malaria vaccines for the National Institutes of Health and is conducting cancer and AIDS research for the National Cancer Institute.
Is your head swimming? No wonder. In its annual report, SAIC helpfully defines its business as providing "diversified professional and technical services involving the application of scientific expertise to solve complex technical problems for a broad range of government and commercial customers in the U.S. and abroad." SAIC met this definition last year by way of 961 contracts worth more than $1 million apiece and literally hundreds of smaller jobs, performed by more than 40,000 employees, some 35 subsidiaries, and joint ventures spread across 150 cities in 21 countries.
For all this, SAIC attracts minimal public notice. In fact, it may be best known for its entrenched employee-ownership model, something it promotes around the world through the Foundation for Enterprise Development, a nonprofit group that Beyster founded in 1986 to disseminate his philosophy. Investment bankers have called every so often, but have never gotten past the front door. "We have built a company where the idea of getting rich quick has not been present for 32 years," Beyster told a magazine in San Diego, the company's home base, last year. SAIC buys and sells other outfits, including Network Solutions Inc., a Web-services provider. But SAIC itself is not for sale. "We wouldn't do it, because we don't want to destroy it," said Beyster. "One of the surest ways to destroy a company is to take it public."
At 78, Beyster—or Dr. B, as he is known around the company—has by all accounts changed little in the three decades since he founded SAIC. Asked how many corporate jets the company employs, Ron Zollars, SAIC's director of public affairs for San Diego and Beyster's assistant for many years, snorts, "How about zero?" Zollars also scoffs when asked how many millionaires the company's exceptionally well-performing stock has minted: "That's one of the things that we think is a little crass—'tackola,' Dr. B would say. We're just not like that."
Beyster's one self-indulgence appears to be sailing. A former Navy man, he owns a 55-foot sailboat that he takes out with one crew member. But even that may not be all play. Since 1984, SAIC has provided both hull designs and onboard technology for U.S. entries in the America's Cup race.
In essence, Beyster remains the same workaholic whose austere, unassuming example has shaped SAIC. After Los Alamos, he joined General Atomics. Eleven years later, in 1968, Gulf Oil bought the company, and Beyster, foreseeing the end of the specialized research projects he had worked on, quit. The following year he started SAIC with $10,000 of his own money and a loan from Bank of America. His first headquarters was in a La Jolla, California, shopping center, across from a ballet studio.
Beyster's corporate goal was to create an environment "where we would not be bothered by bureaucracy and other considerations that made it hard to do research," he said in a video presentation for the company's 30th anniversary. "I promised my wife it wouldn't get over four people. Of course that changed pretty quickly."
At first SAIC had only two consulting contracts, one from Los Alamos and another from Brookhaven National Labs, and fewer than 10 employees, all of them scientists. There was no sales or marketing staff. Each scientist was responsible for going out and finding the jobs that would enable the fledgling company to survive. Beyster and his employees took out loans against their homes, and he deferred his salary. Then came a contract with the Defense Nuclear Agency to perform calculations on the effects of nuclear weapons and, later, simulations of nuclear blasts. At the end of 1970, such work brought in $243,000. "A surprising thing happened," says Beyster. "We made a profit. I knew something must be wrong."
Rather, something was very right—his theory that employee ownership could be the engine of a big company. "We thought it was fair," he says. "It was also difficult, and at times almost impossible. But it was right. We didn't want anyone to be able to say that the company was a gigantic success because of their efforts and that they were not rewarded with equity." Beyster now owns just 1.3% of the company. Current employees own 76%, divided between direct ownership and retirement plans. (Former employees hold another 20%, but to keep control in the hands of active staff, the company now requires departing employees to sell back their shares.) Officers, directors, and consultants own the rest.
In 1971, SAIC began to expand territorially, opening four new offices as part of a strategy that continues to this day: Establish a branch near a customer and then hire people locally to serve that customer. Thus SAIC went to Washington, D.C., to set up its new Technology Systems Group, a business that provided the government with data on dust clouds caused by nuclear explosions. SAIC also developed its first product, the ATP photometer, which quickly measures the concentration of living organisms in water samples. By the company's second birthday, revenues were at $1.2 million and the staff numbered 58. The growth has continued spectacularly. SAIC hit $238.47 million in 1982, $1.29 billion in 1992, and $6.1 billion in fiscal 2002, which ended on January 31.
Company executives unanimously attribute SAIC's success to one thing: employee ownership. Workers get stock through a host of programs designed to reward performance, and can also buy it directly through their retirement plans. The emphasis on rewarding performance also stokes the entrepreneurial spirit that Beyster has always valued. Employees have both the responsibility and the authority to bring in new contracts. "We try to empower the lowest level that we can to pursue new business and make decisions," says Duane Andrews, corporate executive vice president for federal business and a member of SAIC's board. "We find that we get far more business and can build faster by letting people connect with their customers and provide as much support as they can directly."
Not surprisingly, all this empowerment sometimes results in chaos. "SAIC is a non-homogeneous, very entrepreneurial, decentralized organization that is a fascinating living organism," says Bill Roper, a corporate executive vice president and the company's chief financial officer from 1990 to 2000. "It does not march in lockstep. We have been described accurately as a bunch of warring factions held together by a benevolent dictator."
But despite all the internal warfare, says Ray Smilor, president of Beyster's Foundation for Enterprise Development, "SAIC employees have a set of rights and responsibilities that apply to everybody: the right to be fully informed of the company's financial information, and the responsibility to perform. As a result, the employee-ownership model has built community, not just wealth. Now, wealth generation is important, but at SAIC there's also this sense of 'We're all in this boat together,' and you don't get that at every employee-owned company."
SAIC is the fifth-largest majority employee-owned company in the U.S., behind United Parcel Service (UPS), Publix Supermarkets, United Air Lines, and the supermarket chain Hy-Vee, according to the National Center for Employee Ownership. Unlike the others, it has no one controlling stakeholder: At 1.3%, Beyster owns the largest chunk of shares. And while a portion of UPS, Publix, and United stock is publicly traded, SAIC is 100% private, although employees can buy and sell shares freely through an internal brokerage called Bull Inc. that Beyster set up in 1974. In fiscal 2001, employees traded more than 3.6 million shares worth $110.9 million. SAIC's stock has been very good to its employee-owners over the years. It barely dipped in the late-'80s crash and held steady throughout the turbulence of the past two years. SAIC does not pay dividends.
Notwithstanding former CFO Roper's claim that "we're not a slave to educating the Wall Street community on our business and to currying favor so that we'll get good research done on us," SAIC goes to great lengths to make its workings transparent to employees. Its stock price changes only quarterly and is set according to a formula established by an outside appraiser, the investment bank Houlihan Lokey Howard & Zukin. SAIC holds quarterly "town meetings" headed by Roper and CFO Tom Darcy. The meetings take place at SAIC's San Diego headquarters and are webcast to other company offices. Employees can ask questions in person or via e-mail. Beyster always sits in on or monitors the proceedings. The company also distributes detailed financial statements through an employee intranet, audiocassettes, and a quarterly magazine.
"SAIC spends a tremendous amount of time on education," says Scott Adelson, senior managing director of investment banking at Houlihan Lokey. "The difference is, they get a return on that. If I'm a public company and I spend all my time talking to analysts, I may get a return in my stock price, but I certainly won't in my results. At SAIC, there's a direct correlation."
According to Adelson, the employee-ownership model, combined with SAIC's highly educated professional staff—73% have degrees, 38% have master's, and 7% have Ph.D.'s—has resulted in a uniquely motivating environment. "You get your maximum return on employee ownership in a culture where employees are sophisticated enough to truly intellectualize the value of that equity," he says. "SAIC's view is that you have to bring more to the table than just money. And if you can create a culture that believes that, it's very powerful. The old adage holds true: People do not wash rental cars. You're going to behave differently as an owner than as an employee."
SAIC's 33 straight years of increased revenues would seem to bear that out. The company has climbed steadily up the ranks of the Fortune 500, from its debut in 1999 at No. 347 to its 2002 ranking of 294. It's No. 23 on Forbes's 2001 list of the 500 largest private companies, and for the past two years it has ranked No. 1 on BusinessWeek's list of leading private infotech companies.
Now for some bad news. SAIC shareholders were disappointed by fiscal 2002. Net income plummeted to $18.9 million, compared with 2001's $2.1 billion. The culprit? The same as the previous year's hero: Network Solutions Inc., which has been a virtual cash machine for SAIC since Beyster acquired the company in 1996 for a pittance. (BusinessWeek guessed that the price tag was $5 million.) Unable to value NSI accurately, and wary of the capital it needed to grow, SAIC spun off 15% of the company in 1997 in a $59.4 million IPO. Three years later, to dilute its ownership stake to about 45%, SAIC held a secondary offering that netted it $698.4 million.
Not a bad multiple—but wait, there's more. In early 2000, Network Solutions sold a chunk of its shares, breaking records for Internet-related offerings even in those giddy tech-stock days. SAIC reaped $1.5 billion on the sale. Soon thereafter, NSI was acquired by VeriSign, a digital-security software provider. SAIC's stake in NSI at the time was valued at $4.3 billion; it has since traded that for a 9% stake in VeriSign.
"Yes, NSI was a good transaction," says Roper, who now oversees SAIC Venture Capital Corp., which invested $57 million in 12 companies during fiscal 2002. "In all honesty, it was probably more serendipity and luck than brilliance. None of us could have visualized in 1995 what was going to happen with the Internet."
But what the Internet giveth, Wall Street taketh away. In May, VeriSign's stock was trading at $10.25, down from a 52-week high of $68.13. Losses on VeriSign contributed mightily to SAIC's loss of $456 million on marketable securities in 2002.
The company itself is far from maimed. It has little debt and holds cash reserves of more than $480 million—more than enough to fund acquisitions that would provide more growth. The big question is whether the employee-owners are up for this strategy. Company culture may prove averse to the risks involved in big deals. Perhaps more worrying is whether the company can maintain its cohesive culture in the face of that kind of growth.
The biggest issue is Beyster, the epicenter of SAIC. In typically blunt company fashion, executives confront the succession question willingly. "There's no heir apparent," says Roper. "First of all, Bob is very active. He thinks about this company morning, noon, and night, seven days a week. He is probably the most focused human being I have ever known. And the main focus of his life has been this company. Because of that, you have a company that runs the way we run. We're large, diverse, with a lot of strengths. I'm sure that when it's time, the board is ready, willing, and capable of dealing with that issue."
Meanwhile, says Roper, "I'm looking forward to Bob being here for my retirement party. A few folks will get together, Bob will say a nice word or two about me, hopefully, and then he'll say, 'Now I've got to get back to work—I've got a company to run.'"
Sure he does. But one day somebody else will have to assume that role.
