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Defense Firms Look for Alternative Work as ’08 Federal Budget Unsigned

BY ANDREA SIEDSMA

Companies in the defense business know that most of the time they work at their own risk. They know, or at least hope, the money for a contract is coming, so they ramp up the research and development and staffs to prepare for the work. But sometimes there is just no guarantee.

Case in point: As defense firms ended 2007 on a semi-steady note, they were still waiting as of early December to see whether or not President Bush was going to sign the 2008 defense budget (the budget was expected to be signed in October 2007, but as of late last month, it was still on hold).

Until the budget is approved, the Defense Department will work under a Continuing Appropriations Resolution, allowing agencies to operate under their 2007 budgets.

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“The problem is some companies may have expected greater funding in 2008 and are coming into the next phase of their R & D; cycle and have the work force in place to support that. But now they may not get that extra funding,” said Dwayne Junker, president of the National Defense Industrial Association’s San Diego chapter. “The government is going to have to fund its own people first before its contractors. For that reason it creates real difficulties not only for the war fighter because it delays the ability to deliver new systems, but it can have a significant impact on industry here in San Diego, specifically for small businesses where cash is king.”

Junker predicts possible casualties in the local defense sector if the budget is not approved soon. Some smaller companies may have to lay off employees or, in the worst case, close their doors, he says.

On a more positive note, Junker expects moderate growth overall in 2008 for the local defense market. For companies that can weather the budget storm, there will be pockets of opportunity, in particular in the securities technology arena. There will be a continued emphasis from a defense perspective on force protection in 2008 and beyond, he says.

Companies that can provide security technologies such as sensors, intelligent video systems and integrated software will have lots of opportunities, he predicts. That’s good news for Junker’s company, San Diego-based Epsilon Systems Solutions Inc., which provides technical services, such as homeland security systems and consulting services; environmental management services; systems engineering and logistics; and technology and program management to government, commercial and nonprofit customers.

Junker, Epsilon’s chief operating officer, says the firm has experienced significant growth in the past couple of years, mainly due to its diversified portfolio.

Besides Defense Department contacts, Epsilon has gone after information technology and security technology work for the Energy and Homeland Security departments.

The company, founded in 1998, has 600 employees across the United States (200 of whom are in San Diego). Epsilon, which boosted its labor force in 2007 by 50 percent, plans to have between 700 and 725 employees in 2008, including new local hires.

The expansion will position the company for more growth, Junker says.

In December, Epsilon was in the middle of putting its annual 2008 operating budget together, but Junker says the company definitely plans to increase R & D; spending.

Just like Epsilon, even some of the bigger defense contractors are diversifying their business.

One example is General Dynamics Information Technology Maritime Systems in San Diego.

The unit, which focuses on IT services for the Space and Naval Warfare Systems Command in San Diego, has begun to target other Navy commands, such as the Fleet Industrial Supply Center, that need IT support services.

“In the defense industry you will only get new business if you go beyond the traditional large customers,” said Ken Slaght, vice president and general manager of GD IT Maritime Systems.

Slaght points out that the market for local defense firms was relatively flat in 2007 and will stay about the same in 2008, with the exception of niche sectors such as homeland security.

Slaght says the Homeland Security Department spends $50 billion nationwide in the civil sector, with about $18 billion coming to San Diego, giving local companies lots of opportunities in 2008.


Lot Of Interest

“There is a lot of interest in the Department of Homeland Security to use San Diego for its initiatives; there is a lot of IT involved in that,” he said.

General Dynamics’ overall information technology business, which services the Navy and Air Force, generates $1 billion annually. Revenues for 2007 for Slaght’s division totaled $250 million. He expects a 10 percent to 15 percent growth in revenues in 2008.

The division, which has 300 employees, hired 30 to 40 people in 2007 and plans to hire about the same amount in 2008.

One of General Dynamic’s customers is Spawar, the Navy’s IT arm, which focuses on network security and information assurance; R & D; for cutting-edge hardware and software information technology; project management in support of space and information systems; and science engineering.

Spawar, which had a 2007 budget of $5.7 billion, awarded about $1.5 billion in contracts to San Diego firms in ’07. That number is expected to be the same for 2008, according to Spawar spokesman Steve Davis. He says San Diego will continue to be a strong and important market for Spawar, considering the plethora of IT-related firms here.

“Having capable IT workers in San Diego is key to getting our work done,” Davis said. “Our organization is also well positioned because we are close to our customer and to the war fighter.”

Spawar, which has 11,000 employees and an operating budget of $5 billion, manages more than 170 programs and projects.


Andrea Siedsma is a freelance writer based in Encinitas.

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