Homeland Security Market ‘Vibrant’ Despite Budget Concerns

The United States had been the site of terrorist attacks before 9/11.

But the unconventional nature and giant scale of the events that day coupled with the dramatic death toll provoked responses from elected officials and citizens that reached far beyond the reactions that followed previous events. The military sprang to action and the government created a new agency, the Department of Homeland Security. Massive amounts of money began to flow in the name of national security — at airports, on the southwest border and at the state and local levels. It was an understandable response to an elusive threat, and it meant big business for an industry that analysts predicted could rival that of the defense arena.

That seems unlikely now, in part because of growing fiscal constraints and because the two markets are driven by different factors, experts say. But companies big and small still see plenty of opportunities in the changing landscape of national security.

“There are vulnerabilities across our nation, across our infrastructure,” says Tim Peters, vice president for global security systems at The Boeing Co. “The threat is real. The need is real. You’ll still continue to see domestically significant investment on the part of the government and leveraging advances in technology to stand up and meet those emerging threats and needs.”

But “there is only so much money that can be spent and that money has to be prioritized in different areas . . . We need to move smartly and we also need to move quickly to protect our borders and to protect our critical infrastructure.”

The creation of DHS brought together 22 agencies and 180,000 employees, but several other federal departments also perform homeland security functions. In 2010, the $33 billion DHS budget for such pursuits accounted for about half the total the entire government spent on similar endeavors. The Defense Department spends about $20 billion annually on homeland security missions. The departments of Justice, Energy, State and Health and Human Services also have budgets for these activities, albeit much smaller ones.

The opportunities for industry are scattered among these federal agencies and at the state and local levels. Companies have begun venturing into new areas to take advantage of business opportunities.

Boeing recently began its first foray into port security. The company will be deploying a series of cameras and surveillance devices to monitor a heavily traveled 14-mile stretch of the Delaware River near a collection of oil refineries.

“It will give us another capability,” Peters says. “There are a lot of ports and waterways around the United States, so we think it’s a significant win to showcase some of our security capabilities.”

The contract, negotiated between Boeing and Delaware County, is being funded by a DHS grant. Large defense contractors like Boeing have been receiving bigger contracts for homeland security work, but not necessarily at the expense of smaller companies, according to a recent study by the Center for Strategic and International Studies, a think-tank in Washington, D.C. This reveals a distinct difference between the way the homeland security and defense markets have developed.

Less than 20 percent of Defense Department prime contract dollars go to small businesses, and medium-sized firms are being cut out of the picture as the largest companies receive even more of the share. But small businesses still receive about 30 percent of DHS contract dollars, and medium-sized companies are thriving in an increasingly competitive atmosphere, says David J. Berteau, senior adviser and director of CSIS’ defense-industrial initiatives group. A lot of the innovation and new technology in this space comes from these middle organizations, he notes.

The abundance of small, medium and large firms vying for DHS contracts is creating healthy competition. Sole-source contracts are decreasing, and the amount of work being bid on by multiple companies continues to increase. This is good news for DHS, which is now more likely to get a better price on products and services, says Guy Ben-Ari, deputy director of the defense-industrial initiatives group at CSIS.

“It means that the market is vibrant,” he says.

The intensity of that vibrancy is debatable. In 2007, homeland security consulting firm Civitas Group estimated that the market would balloon to $140 billion by 2012. Recent forecasts have been more restrained.

Another Washington, D.C.-based firm, Homeland Security Research Corp. a few months ago foresaw growth on a smaller scale. It anticipated an $85 billion marketplace by 2014. The firm’s study confirms one of the biggest trends being seen in the contracting practices at DHS and across the entire market: The biggest chunk of money is being spent on information technology.

In 2005, the companies receiving the bulk of contracts from DHS were disaster response firms. The paradigm has shifted in favor of IT companies such as Unisys and IBM, which received $450 million in DHS contracts in 2009, more than any other company. IBM’s share of contracts increased some 55 percent between 2005 and 2009.

During that same period, other commercial IT firms such as Computer Sciences Corp., Hewlett-Packard and Siemens became some of the biggest winners of DHS contracts.

“Two-thousand-and-five was sort of the start of the Katrina year,” Ben-Ari says. “The companies with the largest amount of dollars from DHS that year are the companies that sold DHS trailers, temporary housing and other disaster response related products and services.” By 2009, “you really see the rise of the IT contractors and the emergence of some of the big defense contractors in the homeland security domain.”

Lockheed Martin, General Dynamics, Boeing and Northrop Grumman are regulars on military programs, but they also have been winning more contracts from DHS.

Lockheed in 2005 was ranked 13th in a list compiled by CSIS of the Top 20 DHS contractors. By 2009, the company had climbed to the second spot on that list, thanks in part to a sizeable presence supporting IT services at DHS headquarters, says June Shrewsbury, vice president of citizen protection solutions at Lockheed.

The company acknowledged the swell of IT opportunities in 2008 by forming a business department devoted to cybersecurity.

Lockheed also has been doing significant business in airport and border security and with identification tools.

The company recently won a $72 million contract to help the Transportation Security Administration integrate and deploy new passenger screening and security equipment at airports across the eastern and central United States. The contractor has been training TSA screening personnel since 2002.

Lockheed has worked with TSA to biometrically encode credentials for more than 1.8 million maritime workers who require routine, unescorted access to the nation’s ports. The company also is developing a portable DNA analysis kit that can help authorities identify subjects in about an hour, as well as a tool for the FBI to respond to terrorist fingerprint queries within seconds.

“Good technology is out there,” Shrewsbury says. “The key here is taking that out into the real world and making those connections to use all of the available technologies and data in a way that provides persistent, reliable and actionable information.”

This integration problem has caused issues with some large programs.

Boeing was the prime contractor on SBInet, the technology portion of the Secure Border Initiative that aimed to create a high-tech virtual fence along the southern U.S. border. The company by 2009 had deployed 15 sensor towers, 13 communications towers and 400 unattended ground sensors along 54 linear miles of the Arizona-Mexico border. The ultimate goal was to place surveillance tools along most of the entire 2,000-mile border with Mexico. But DHS Secretary Janet Napolitano pulled the plug on the program after several delays and cost overruns. Boeing, nevertheless, received more than $1 billion in contracts over the course of five years.

The problems encountered by SBInet have been common in security efforts in the post-9/11 world, says Brian Jackson, senior physical scientist at Rand Corp.

“There was a sense of urgency that we had to act fast to improve security,” Jackson says. “With the benefit of hindsight we can certainly see now that we didn’t need to act that fast. We could have stopped and been more deliberate in rolling out very large technology programs.”

Efficiency will be a key ingredient in future security efforts, Jackson tells National Defense. The United States needs long-term sustainable efforts that don’t require retooling each time there is a terrorist attack or attempt, he says.

“To sustain homeland security in the long-run, we must build measures and metrics that can tell us how we are doing and why systems are performing as they are, thereby making it possible when the next attack — attempted or successful — occurs, to learn and adjust our strategies more smoothly in response to changes by our adversaries, rather than responding in a knee-jerk way,” Jackson writes in “The Long Shadow of 9/11: America’s Response to Terrorism,” a collection of essays by Rand experts to mark the 10-year anniversary of the attacks.

Industry will continue to offer new inventions for cybersecurity, but elsewhere the focus will be on the integration of proven technologies, Peters says.

“In the areas of border and critical infrastructure, we’ve got very good cameras, very good stabilization algorithms, good radars that are out there,” he says. “It will be a matter of piecing those together in a cost-effective manner and getting that capability out into the hands of the Border Patrol agents.”

Budget cuts will affect money in every sector and agency, experts warn, including homeland security. And DHS, which has not seen a dramatic spike in spending like the Defense Department, may be the most impacted by anticipated reductions, Berteau says.

“Most of the national security agencies have had significant increases in their total overall spending in the decade since 9/11,” he says. “The Department of Homeland Security has not. As a result, our conclusion is that they don’t actually have the same cushion to be ready for the coming draw-down in spending that is going to occur over the next few years.”

The security climate has changed, and experts say it is time for the government and industry to change the way they do the business of protecting the home front. They point to the significant timeline of events that has unfolded since 9/11.

The U.S. military has been fighting two lengthy wars. Navy SEALS stormed a compound in Pakistan and finally killed Osama bin Laden, the leader of al-Qaida and mastermind of the 9/11 attacks. The U.S. economy tanked. And citizens, who initially appeared unquestioningly united behind their government in rooting out terrorism, have begun to push back against what they see as intrusive security measures. The elephant in the room, though, may be the fact that there has not been a profound attack on a U.S. target at home or abroad in 10 years.

“You have to go back all the way to the 1960s to find that length of time without a major terrorist attack,” says Brian Michael Jenkins, senior adviser to the president at Rand Corp. and one of the editors of the firm’s new book. The combination of fiscal constraints, absence of an attack and the death of terrorism’s hallmark figure could lead the public to question why the country needs such stringent security measures, and that could be dangerous, he says.

The country must balance the need for protection against the weariness of security, Jenkins says, and the bottom line is that the solution can’t cost what it did before.

“The war on terrorism cost $3.8 trillion in the first 10 years,” he says, quoting unscientific numbers. “We’re not going to spend another $3.8 trillion unless there is some horrendous terrorist event that obliges us to do that.”

The homeland security market, for the most part, is driven by events like 9/11 and natural disasters. Between DHS’ first full year of existence in 2004 and 2010, contracts awarded by the department increased from $9 billion to $14 billion, a 56 percent spike. To put it in perspective, that spending mostly increased — by 89 percent — between 2004 and 2006, when Hurricane Katrina hit the Gulf states. It dropped by 24 percent the following year and has been stable since then.

The spending hasn’t always hit its mark.

“For every dollar spent on the right investments, five more have been spent on silly efforts to childproof the supply chain,” write Heritage Foundation policy analysts Jena Baker McNeill and Matt Mayer in a recent paper entitled “Ten Years After 9/11: Thinking Smarter About Homeland Security.” Congress and the president need to undertake an honest assessment about which policies make the nation safer and which don’t, they write. The mandate to scan 100 percent of maritime cargo, for example, may prove to be impossible and cause huge backlogs in the supply chain.

“Examples of efforts to scan every cargo container or passenger, screen every box, or regulate the way to security are bountiful. These labors have proved to be a black hole: Millions (if not billions) of taxpayer dollars go in with little security to show for the investment.”

Napolitano recently cancelled the Advanced Spectrographic Portal program aimed at testing and buying monitors to detect nuclear material being smuggled into the United States.

There have been other failures, and some endeavors have gone absolutely nowhere. The 9/11 Commission a decade ago recommended creating a nationwide wireless network for first responders. Besides a lawmaker here and there calling for this project to get moving, not much else has happened. No entity in the public or private sectors has shown the willingness to foot the bill, which the Federal Communications Commission estimated at as much as $18 billion.

SBInet often was the subject of controversy and criticism until Napolitano diverted money away from the program and finally cancelled it. Two similar programs previously were abolished because of equipment failures and mismanagement.

Partly inspired by the problems surrounding SBInet, smaller companies have begun joining forces to draw the attention of the federal government to their efforts in border security, one of the consistently lucrative areas of the market, according to analysts.

In Tucson, the University of Arizona’s research park has formed an alliance with several high-tech companies offering products ranging from smart cameras and sensors to high-energy lasers and airships. Together, they are seeking millions of dollars to start a pilot program aimed at testing and deploying these and other technologies along the border. Something similar is happening in Michigan, where a nonprofit consisting of university and industry partners wants to create a site near Detroit to field-test new products.

Meanwhile, analysts note that aviation security seems to enjoy more importance in the public consciousness than it does in actual dollars and cents. It represents just 7 percent of the federal homeland security market, says a report from the Homeland Security Research Corp., a team of market analysts and consultants.

And the most obvious opportunity to change the course of aviation security, according to one analyst, is one that keeps in line with trimming costs and increasing efficiency.

Airline passengers are subjected to a much higher level of scrutiny than is employed in other areas of transportation. Bags are brought aboard subway cars every second without being inspected, despite the fact that terrorists have shown the tendency to attack such systems in other parts of the world. Still, the majority of U.S. transportation security money is spent at airports and aimed at preventing passengers from bringing dangerous items aboard planes. Though knives and guns are part of this equation, much of the focus has been placed on explosives.

The TSA spends about $5 billion each year on 60,000 screeners who man metal detectors, x-ray machines and conduct pat-downs. The work force is so large because it imposes the same screening functions on every traveler entering the airport in the United States, K. Jack Riley, vice president and director of the Rand Corp. national security research division, writes in “The Long Shadow of 9/11.”

Riley suggests creating a trusted traveler program and scrutinizing those wishing to come into the United States more harshly than those already here.

“The current security regime applies the same procedures to all 700 million passengers who board planes each year in the United States,” he writes. “That we have not developed a reasonable way to reduce that inspection workload is perhaps the biggest missed opportunity of the past decade.”

Such an approach would require fewer personnel and machines, and savings would be even greater if passengers had to pay to be a trusted traveler, Riley suggests.

Polls still show that there is increasing public concern about another terrorist attack. It is this fear and an unrealistic American perception of risk that will continue to propel some aspects of the market, analysts say.

“We have demanded essentially a risk-free society,” Jenkins says. “This is not just with terrorism, it is part of a longer-range trend that precedes 9/11. It’s everything from whether the backpack has explosives to the peanut-butter sandwich that might affect someone’s allergies.”

The federal government, by creating DHS, assumed the responsibility of guaranteeing the security of U.S. citizens, who have come to see the world outside the country’s borders as a source of danger. “And therefore it is necessary for us to create a set of perimeters . . . to keep the bad guys out,” Jenkins says.

But some of the bad guys are already here, as evidenced by the last few foiled terrorist plots. While organizations have failed to pull off another 9/11-styled attack, individual extremists have tried to take up the slack. The government and industry again must reposition itself for the new face of terrorism, the lone wolf, experts say.

Small-scale attacks, whether successful or not, will continue to prompt additional spending, the market analysts at Homeland Security Research Corp. say. They point to the failed 2009 Christmas plot of a man trying to blow up a flight to Detroit with explosives sewn into his underwear and the attempted car-bombing in Times Square early the next year. Though unsuccessful, these events led to immediate White House intervention, congressional hearings and an airport screening upgrade costing more than $1.6 billion.

What scares some analysts most, though, is how the country will react to the next attack. Beyond any terrorist tactic, that is what keeps Jackson up at night.

“Looking at the response we made to 9/11 and how terrorism is judo in how the terrorist tries to turn the response to the attack against us, al-Qaida was pretty good at that, getting us to spend money hastily,” Jackson says. The country’s auto-immune response to terrorism could potentially be more harmful than the effects of any attack, he says.

And despite the billions of dollars poured into homeland security, there is no way to determine whether the United States is prepared enough for the next attack, Jackson says. Simply measuring how much the United States spends on homeland security won’t answer the question.

The country, he says, has to come up with more effective ways to determine if the money is being spent wisely.

Industry is taking note.

“The current landscape is a challenging one,” Shrewsbury says. “The threats to homeland security continue to evolve, and it takes resources to manage and stay ahead of those threats. Yet, we’re in a resource-challenged environment. That’s why we’re more focused than ever on delivering those solutions that are both effective and affordable.”                                                  

Topics: Business Trends, Doing Business with the Government, Homeland Security