Going commercial a challenge for government contractors

KEYW's founder was so confident in the company's cybersecurity services for the federal intelligence community that he decided in 2013 to branch out into the commercial sector.

But the Hanover-based firm struggled to get significant traction away from its government customers and after the founder passed away in mid-2015, the company's new leadership announced plans to refocus on its core business of government contracting. It subsequently sold off pieces of its commercial business last year.

The fast-growing commercial cybersecurity market, which analysts estimate will top $202 billion by 2021, is an attractive lure for companies that cut their technology teeth providing such services for the federal government, where spending has largely stagnated. But they quickly learn that even if the problems are similar, many aspects of the private sector — the product, the pitch, the size of the deal and the business model — are very different from what they know.

"Almost from the ground up you're structured the wrong way," said Kyle Hanslovan, CEO of Huntress Labs Inc., a Baltimore County cyber startup that converted from a government contractor to selling threat detection technology to private companies.

While some companies succeed by building out commercial offerings as an independent subsidiary or moving entirely to the private sector, others, like KEYW, retreat to their core strength. Such major defense contractors as Northrop Grumman, Boeing and General Dynamics have all divested commercial cybersecurity businesses in recent years.

But as uncertainty mounts about whether President Donald J. Trump will follow through on promises to severely cut the federal budget, government contractors will likely continue to make the leap to the commercial sector.

"While the federal government continues to be a very large source of business for cybersecurity companies, there are increasingly questions about the federal government as a customer," said Ellen Hemmerly, the executive director of University of Maryland, Baltimore County's research and development park. At the same time, "folks are recognizing that the commercial market is huge — and growing."

Huntress CEO Hanslovan had been in business for about two years as a subcontractor, developing intelligence-gathering tools for law enforcement and intelligence agencies, when he decided to expand to the private sector in 2015.

"The business was great," Hanslovan said, "but the issue was, like a lot of government contractors, we realized we were always at the command of the government telling us what to do and how to do it, and that really stifled creativity."

He quickly realized the many ways he would have to change his business.

Federal agencies are aware of their security problems and seek out contractors to provide a solution. They make decisions based on who will do the best work for the lowest cost.

The pitch is flipped when it comes to selling to commercial customers, said Brian Ruttenbur, an analyst at Drexel Hamilton who follows KEYW and other defense sector companies. Businesses in the commercial sector take on the risk of figuring out what their customers need, developing a product they think will address the problem and convincing customers to buy it.

"It's a whole different process," Ruttenbur said. "When you sell to the government, the government says, 'This is what we need and here are 40 phone books of what we're looking for,' and you respond back with 50 phone books of how you'll execute on that."

Companies that go commercial also must be prepared for a change in the size and type of deals they make.

The largest corporations already have recognized the cybersecurity threats facing their businesses and established relationships with security providers. Much of the new opportunity is with small and mid-sized companies, which means contractors used to doing a few big deals a year will have to adjust their sales strategy to do many small deals in the commercial space, said Lisa Yeo, an assistant professor of information systems at Loyola University Maryland.

While the federal government typically buys services designed to meet its unique needs, businesses that want to sell to other private businesses need to develop a product that is generic enough to fit a broad range of companies but that can be adapted to individual customers, analysts said.

Commercial clients also consider different factors when deciding who to hire. Factors such as the company's reputation, brand and customer service were things Hanslovan, of Huntress, said he never thought about as a government contractor.

The company changed its name from StrategicIO to Huntress, he said, to further separate the company's past work for the government from its new, commercial business after potential clients expressed concern about buying threat detection from a company that was also helping the government gather intelligence.

Companies that venture into the commercial sector often separate their commercial and government businesses because they are so different, said Hung-bin Ding, an associate professor of management at Loyola University Maryland. Separating commercial business also protects the core business.

"There are companies that have trouble making the transition, many because the public and private sector businesses are very different," Ding said. "It's not really easy to balance these two parts of business."

For some companies, the difference in business models is too big to do both, and they must decide whether to go all in on commercial or withdraw to their core business.

Huntress, for example, is in the process of phasing out its government contracting business. Hanslovan said he sees more opportunity for growth in the private sector and doesn't want the extra expense of trying to maintain two lines of business.

Others, such as KEYW, go in the other direction and lop off their commercial ventures.

"Our primary focus will remain on the intelligence, cyber and counterterrorism communities within the government solutions arena," said Heather Williams, a KEYW spokeswoman, in a statement.

Cybersecurity remains a key growth area for KEYW. Earlier this year, the company announced the acquisition of competitor Sotera Defense Solutions, which it said would accelerate the KEYW's growth and give it access to new government clients.

Ruttenbur, the Drexel analyst, said he thought KEYW was undersized to get the scale it was reaching for in the commercial sector. When new management took over, they faced a decision of whether to forge ahead with the expense of expanding into a new line of business and experimenting with finding the right product, or to refocus on the company's true strength of government solutions.

"I'm much more positive on the company," following the decision to divest the commercial business, Ruttenbur said. "I think they're right, especially now with defense budgets going up and increased threat from Syria and North Korea."

"I think they're extremely well positioned and wise for repositioning that way," he said.

sarah.gantz@baltsun.com

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