Harris Corp. Illustrates What's Wrong With Working As A Government Contractor

| About: Harris Corporation (HRS)

When you work for the government, it ruins you for business. Nowhere is this more evident than with Harris Corp. (NYSE:HRS).

The big news at Harris today is not that it's raising its dividend pay-out, from one-fifth of earnings to one-fourth, meaning it now has a 33 cent dividend and a fat 3.06% yield. The big news at Harris today is that it's abandoning the cloud market, selling or closing a $200 million data center in Virginia it opened just last year as a public cloud for government.

In making the announcement, Harris executives said the government preferred to keep things in-house. (In fact, cloud experts note, security concerns are moving big organizations of all types to build mini-clouds in-house before going into any public cloud.)

Harris does about $5.9 billion worth of business annually, mostly with government. It was the 18th largest federal contractor in fiscal 2010, with $3.9 billion in federal business.

In order to get government business, a company has to incur enormous up-front costs. Requests for Information, Requests For Proposal, demonstration projects, lobbying. The costs (like Harris' big cloud project) go on-and-on. They have to be recouped, and they are - once a project is won. If you lose several deals but get one, all those pre-sale costs get loaded onto the deal you won.

During the last decade this was a good business. Harris quadrupled in value between early 2003 and late 2007. Since then it's down by about a third. As an investor, I say that's bad. As a citizen, I think that's good.

A few years ago I had the honor of visiting with a Harris executive named Jim Traficant. His is an inspiring personal story. He went back to work after two liver transplants, and septic shock, because he had a dream. The dream was a National Health Information Network (NHIN), which would move health data around agencies securely. He built it for Harris under military contracts, and eventually it worked. For the military.

But the NHIN proved to be completely impractical for civilian use, and for industry use. Instead a different group, working under the title The Direct Project, collaborated to build those capabilities into an open standard insurers, hospitals and others are now using to create "Health ISP" services that do what Traficant could do 5 years ago.

The success of Harris over the last decade came at a cost. As I learned in the summer after visiting with Traficant, French businesses often find they have to do business in this way if they want to scale-up. The alternative is, not to do business in another European country, but to open an American subsidiary.

The problem is the government contracting model. It limits competition, it loads companies with costs that must be recouped, it's incredibly inefficient. So what's bad for Harris Corp. is good for the USA? Maybe so.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.