Congressional Quarterly Weekly January 22, 2005
Security 'Gold Rush'Yields Nuggets for Some
By Tim Starks, CQ Staff
Last month, more than three years after terrorists killed thousands on U.S. soil, Seattle-based Isilon Systems stocked its board of advisers with military brass and a former acting director of the FBI, then made a public declaration that it was plunging into the homeland security business.
The way Isilon CEO Steve Goldman sees it, the Department of Homeland Security, which is collecting reams of digital fingerprints and photographs from foreigners who visit the United States, needs to store mass quantities of digital data -- the company's specialty -- making it a potentially fruitful market for Isilon's wares.
Boeing Co., on the other hand, sees things through a different lens. The company won one of the first major homeland security contracts after Sept. 11 -- worth more than $1 billion -- to install airline baggage screening devices at more than 400 airports. But for Boeing, spokesman Fernando Vivanco said, the early promise of the market demonstrated by that contract has, so far, gone unfulfilled.
Somewhere between Isilon and Boeing lies this apparent truth about the nascent homeland security business: It is a market with vast potential, but it has not materialized the way anyone expected after Sept. 11.
Back then, the words "gold rush" and "bonanza" were commonly tossed around by analysts and industry officials to describe their expectations. Ohio State University professor Peter Swire warned of the hazards of a "security-industrial complex." Some predicted it would be the biggest explosion of federal spending since the cold war.
"It's a real business," said Peter Kant, who until recently was a senior vice president at Jefferson Consulting Group, helping clients navigate the federal government for homeland security contracts. "It's just not that everybody in their garage got a $10 million contract the way they thought they would." For some companies, though, it has already proven tremendously enriching, and for others, it may yet.
Isilon, for example, calculated that while digital data is a booming market for consumers who use home cameras, there were also federal government applications as well, such as for storing fingerprint images. Besides DHS' digital storage needs, some FBI field agents now pack digital cameras with their pistols and handcuffs, Goldman said.
"What we see in the homeland security and defense spaces -- including intelligence, the Department of Defense and the federal government at large, really -- is the same explosion of digital content," he said. In the distance, he can see promise for the company in a potential $2.5 billion DHS contract to help secure the country's land borders.
Boeing saw the potential from day one. In fiscal 2003, the first fiscal year DHS existed, Boeing ranked as the department's top contractor. Even though Boeing has won several contracts since, and maintains that there is still a solid market for homeland business, it does not appear as promising as it once did.
"We've hoped that there would be more larger federally funded systems integration type of programs, but we really haven't seen that," Vivanco said. The company's airport screening contract ends in March, and Boeing does not plan to bid on the next phase, which will be broken up into smaller chunks of work.
There are more success stories than there are tales of companies that collapsed betting it all on homeland security. Explosive detection equipment manufacturer InVision Technologies was ranked by Fortune as the fastest growing company in the country in 2003 and 2004, then got snapped up by General Electric for almost $1 billion. Accenture in 2004 won a contract for US VISIT, DHS' entry-exit program, which could end up being worth $10 billion.
Yet there are no contracts that size on the horizon. That $2.5 billion contract Isilon is eyeing, the American Shield Initiative, is perhaps the biggest. From there, the contracts drop to the $500 million range.
An Unlimited Potential
Of course, $500 million is a lot of money for even the largest companies. And analysts and industry observers say the potential for homeland security business is almost unlimited because there will always be more to protect.
Federal spending has been capped in every area except homeland security and defense, an edict that will remain in place for fiscal year 2006. The White House in 2004 said all federal agencies should consider anti-terror their top research and development priority. Federal grants to local police, firefighters and other emergency responders are still slowly trickling down, and much of that money will be spent on security gear. Businesses have made only the most modest investments in defending critical infrastructure like chemical plants and computer networks, and 85 percent of all critical infrastructure is in the private sector's hands. The international market is still developing.
The gap between the lucrative expectations and the reality of the homeland business thus far can be traced to a number of factors.
When industry officials heard that DHS would have a $30 billion budget to start, it fed many a dream. In the end, only about $7 billion of that was spent on contracts with the private sector in fiscal 2003. What is more, that $30 billion represented little new spending. The consolidation of 22 agencies' budgets into DHS was bound to make for a sizable departmentwide figure.
Despite the increase in spending, expert after expert has released reports arguing that homeland security "is radically underfunded," said John Pike, director of GlobalSecurity.org, a nonpartisan think tank. "I thought that it was true, and it continues to be true."
Rather than becoming a gold mine for contractors on day one, DHS in its early days was too busy getting oriented to do basic things like building up a well-oiled procurement operation. That shop is still viewed as undermanned by almost everyone in industry, but it is operating considerably more smoothly nowadays.
Additionally, two measures designed to lure businesses into the risky field of anti-terror have not produced the desired results. The $5.6 billion Project Bioshield has not attracted investors in companies to manufacture defenses against biological attacks, and companies say they need a Project Bioshield II that has more tax incentives, liability protections and more.
The SAFETY Act, inserted into the Homeland Security Act of 2002, was supposed to provide liability protections to technology manufacturers and service providers in the event of a terrorist attack, but more than a year after DHS issued an interim regulation, the industry has largely soured on it. Only four companies have successfully applied for its protections, and one of the four winners recently decided to pull its product from the market, concluding the SAFETY Act did not offer it enough protection. Some companies have made their bids on homeland security contracts contingent upon winning the SAFETY Act protections, gumming up more than a few federal homeland security efforts. DHS is trying to fix the problems with its rule.
As of 2004, the global homeland security market for business stood at just under $40 billion, estimates the Homeland Security Research Corp., which sells reports on industry developments and is compiling a six-volume overview of the industry.
By 2015, the market should grow to nearly $180 billion, said Dan Inbar, president and chief technology officer of the company. That presumes the private sector will start spending money on security at a faster rate than it is now, Inbar said, but it is the "minimum" scenario. If terrorists attack America again, that spending should skyrocket, he said.
Pike is less optimistic. He said getting a handle on the homeland security budget is almost impossible, given that some of it is classified and spread across dozens of agencies (Inbar estimated that DHS represents only 55 percent of the homeland security budget), but he believes very little new spending has transpired. In the event of another terrorist attack, money will simply be shifted around to address the target of the latest attack, he predicted.
A DHS planning document for fiscal 2005 lists more than 30 contracts valued at $100 million or higher, some of them old and some of them new. DHS recently opened up for bids its potential $500 million TEAMS contract for technology at Immigration and Customs Enforcement, for example.
Steady Growth Ahead
Evidence that there is a prospering "homeland security industry" can be found in the fact that almost every major company has a homeland security division, or homeland security vice president, said Greg Rothwell, the chief procurement officer at DHS.
Many of the top homeland security companies are defense contractors and systems integrators who were able to quickly recast themselves as security contractors, too. Some were technology firms or dot-com companies that survived the bursting of that bubble. There apparently has been no such homeland security bubble, said Chris Jahn, president of the Contract Services Association of America, which represents companies of every size.
Each of the companies geared toward the homeland security business has a different perspective as to where it is going, although almost all of them share a belief that they will continue to grow at a nice rate.
Dave Zolet, vice president of homeland security for Northrop Grumman Corp., said the homeland security business is moving out of the DHS-consolidation, everyone-getting-on-their feet era and into a focus on programs and policies over the next six to 18 months. His company, selected by DHS as one of two to test commercial airplane defenses against shoulder-fired missiles, could become the leading provider of the technology that might reap anywhere between $10 billion and $150 billion over the next 20 years. After the program and policy era ends, Zolet predicted, the country will begin to address major homeland security problems that at this point seem "intractable."
Apogen Technologies is a new company formed by the merger of Science & Engineering Associates and ITS Services, which was one of DHS' top 10 contractors in 2003. "Our intent is to grow 15 percent each year," said Paul Leslie, president and chief operating officer, "and DHS is our fastest-growing area."
Leslie said Apogen still sees plenty of money in consolidation-type contracts, some of them in the $250 million to $500 million range, and has not yet branched out much into the state and local or international homeland security business, as has Northrop Grumman.
Some are betting on specific technologies, or that the federal government will begin tackling specific problems soon.
Rob Housman, a lobbyist for Fleishman-Hillard Government Relations, said business is booming for his firm and others. Although Congress has resisted major homeland security earmarks, many companies have hired lobbyists to convince lawmakers that their areas of specialty present the most urgent need, he said.
Kant, who left Jefferson Consulting to join OSI Systems, predicts that the federal government will soon address cargo security and the threat of radiological attack, two areas where OSI Systems is positioned to gain. The company has designs on an upcoming radiation portal monitoring contract expected to be worth tens of millions of dollars, for instance.
Kant, Zolet and most other industry observers conclude that the homeland security business is in a state of flux. They are sure that there will be growth of some kind, but not entirely certain about where the business will turn next.
"The biggest fear in industry right now is that the market might be at a stasis, except these pockets of spending," Kant said. A lot of the variables -- what DHS does next, what kind of priorities incoming DHS chief Michael Chertoff will set, and particularly, how the federal government and private sector interact on critical infrastructure -- "will be worked out this year," he said.
Tim Starks is a reporter for CQ Homeland Security.
© Copyright 2005, Congressional Quarterly, Inc.
