SAIC Contracting Scandal Further Clouds Company Outlook

October is turning out to be a real bad month for troubled technical services provider Science Applications International Corporation, known throughout the federal contracting community as SAIC. First CEO Walt Havenstein announced that he would depart the company next June, having spent barely two years at the helm. Then Director of National Intelligence James Clapper declared that he would target contractors in a major reduction of intelligence spending, one of SAIC’s biggest sources of revenue. Now the company has forced out the senior management team at its Defense Solutions Group, following investigation of illegalities surrounding a big contract with New York City.

SAIC used to be the stuff of legend, a secretive supplier of national-security services that generated dark profiles in fashionable outlets like Vanity Fair. But the company hasn’t fared so well since going public in 2006, and its shares have trailed the S&P 500 index throughout Havenstein’s tenure. Part of the problem has been the company’s board of directors, which is populated with former government officials and corporate executives who aren’t afraid to second-guess the day-to-day actions of managers. But the larger problem is that SAIC holds literally thousands of service contracts, and an executive like Havenstein, who came to SAIC from military hardware maker BAE Systems, may have had trouble keeping track of so many different activities. That certainly seems to have been the case with New York’s CityTime payroll project, where costs grew elevenfold beyond what had been expected and local officials are alleging a criminal conspiracy.

Departing defense solutions chief Deb Alderson was thought to be a potential successor to CEO Havenstein when he steps down next June, but Lazard Capital Markets analyst Michael Lewis probably got it right last night in concluding the current contracting scandal will encourage the company to look outside for its next leader. The scandal may also hasten the departure of Havenstein himself, who had planned to remain in office for the better part of a year beyond his October 3 departure announcement. The company appears to be in reasonably good shape, but investors who have seen the value of their shares tumble in recent months will want a signal that management has a firm handle on any problems, and that means installing new leadership sooner rather than later. With consolidation of the defense services sector looming as military spending falters, shareholders don’t want the company’s value to be impaired by doubts about its managers and programs.