Booz Allen and the business of defense – part 1
MBI and I recorded an episode of Never Sell recently (Serial Acquirer ROIC, Fiserv Debacle and Management Credibility, Wise and Stablecoins) (Spotify, Apple, YouTube, RSS feed)
correction: in Fiserv’s October Massacre, I made the incorrect assertion that in the most recent 3q25 earnings call management failed to call out past reporting error regarding Argentina’s contribution to organic growth. What I failed to pick up on was that in its prior reporting, management only excluded what they deemed the transitory impact of excess Argentina inflation whereas in the 3q25 presentation, they excluded all of Argentina, not just the transitory inflation piece, so I was comparing apples-to-oranges. I don’t think this absolves the prior management team of its sins, however.
First, deciding how much of Argentina’s contribution is “transitory” and “excess” is a subjective exercise and I find it a bit convenient that management’s estimate of “transitory” revenue from Argentina, when excluded from revenue in prior years, still allowed Fiserv to hit the double-digit organic revenue growth that investors were expecting.
Second, Argentina’s contribution to revenue, even excluding this estimated “transitory” “excess inflation” component, was much bigger than anyone expected. In 2024, when what management deems the “transitory” “hyperinflation” component of Argentina is excluded, organic growth was 11%. When all of Argentina is backed out, not just the hyperinflation piece, organic growth was more like 6%. So Argentina was a massive contributor to organic growth either way you cut it and I suspect prior management deliberately chose not to call out the country’s total contribution in the past because they knew that doing so would have been damaging to investor expectations, which called for clean double-digit organic growth.
Sorry about the error.
Were you asked to rattle off the top five management consulting firms, missing from that list would be the one firm credited with creating the industry more than a hundred years ago.
Edwin Booz founded Business Research Service in 1914 with the aim of providing impartial advice to companies. By 1940, he had built an enviable client roster that included a number of household names – Montgomery Ward, Goodyear Tire & Rubber, Canadian Pacific Railroad, US Gypsum, and The Chicago Tribune.
When World War II broke out, his firm – since reorganized as a partnership, Booz, Allen & Hamilton – brought its expertise to the US military. Booz’s work modernizing the Navy’s phone systems opened the door to engagements with the Air Force. Field studies on the Air Force’s guided-missile production segued into intelligence analysis of Soviet missile capabilities, which in turn led to engagements refining spacecraft test procedures for NASA. By 1959, the year Time magazine dubbed it “the world’s largest, most prestigious management consultant firm”, Booz Allen had grown to $11mn in annual billings and served clients as varied as the U.S. Army, where it evaluated defenses against biological attack, and the city of Seattle, where it implemented a driver-training program for municipal employees.
The ‘60s and ‘70s ushered in all kinds of activity and change. Booz Allen converted to a private corporation, expanded overseas, conducted feasibility studies for the Defense Department during the Vietnam War, tested satellites for NASA, IPO’ed in 1970, and acquired several specialty consulting firms (transportation, specialty chemicals, TV advertising testing), some of which were later spun off. It also suffered serious setbacks, as stagflation prompted commercial clients to scale back consulting work and the US withdrawal from Vietnam led to a sharp pullback in government work.
After growing 10%/year from 1967 to 1970, net billings contracted by 12% in 1971. Operating profits sank more than 20% over this period. In 1975, after the stock had trundled along at between $4 and $6 (around 5x earnings) for a few years, down from an IPO price of $24, Booz’s officers aggressively purchased stock themselves, bringing insider ownership to 59% before scooping up the remaining shares soon after. With revenue doubling over the next four years, the leveraged buyout proved exceptionally well-timed.
But Booz’s competitive position slipped during the ‘80s, in part due to a disastrous succession planning process in which Chairman/CEO James Farley pitted partners against each other in a “horse race” for his seat, a gambit that spurred 1/3 of the firm’s partners to resign. McKinsey, meanwhile, grew into a management consulting powerhouse while Arthur D. Little, which would file for Chapter 11 protection after the dot-com crash, established a leading position in technology consulting, leaving Booz increasingly reliant on low margin government accounts, which by 1987 came to comprise ~1/3 of its $340mn of revenue.
The growing weight of Booz’s government consulting arm prompted questions about whether it made sense to house government and commercial consulting under the same roof, given how sharply the two practices’ risk profiles, operating cadences, and client-engagement models differed. In the private sector, the procurement process is looser and more flexible and value is born out by market outcomes. Government contracting, by contrast, places much more emphasis on how things are done. It is a regulated, multi-layered process informed by a formal framework, The Federal Acquisition Regulation (FAR), that lays out precise rules with respect to how proposals are to be formatted and evaluated, and how products and services should be designed, documented, and delivered. Contractor performance is graded on CPARS (Contractor Performance Assessment Reports), with ratings impacting future wins. Assignments can be protested by competitors if they believe errors were made in the evaluation process, delaying project starts. Agencies also commonly advance policy aims through contracts, often requiring that some percentage of work be subcontracted out to, say, veteran-owned small businesses in the case of Defense engagements. Hence the old line about government contracting: the process is the product.