Homeland security: Profiting from fear

Multibillion-dollar security initiatives have given rise to a new industry seemingly overnight.

For companies like Kroll, terror means big business.

After the Sept. 11 attacks, the global consulting firm signed multimillion-dollar federal contracts to vet the backgrounds of Customs and airport personnel for the Department of Homeland Security. The company has since posted double-digit annual revenue growth and saw its stock price quadruple through July, when Kroll was bought by technology service provider Marsh & McLennan.

"The security space suddenly became hot," said Alan Brill, senior managing director of the firm, which offers services ranging from network security audits to digital investigations. "People said, 'Oh boy, they are going to throw money at this.'"

And that they did. Federal agencies are expected to pay $84 billion toward homeland security this year, up from $5 billion in 2000, according to figures from Homeland Security Research, an analysis firm that covers government procurement.

It is unclear exactly how much federal funding will go to technology contracts, but the potential to get even a small percentage has created the industry's first boom in years. Although companies are sensitive to criticism about profiting from fear, they are anxious to reverse their fortunes after four long years of depressed spending on corporate technology.

"Five years ago, companies in this market had thought that the commercial space would drive its growth, but that didn't happen," said Joseph Atick, CEO of fingerprint and facial-recognition technology firm Identix. "Today, we are focused on governmental programs more than before."

Despite all the business that has become available, success is anything but automatic for companies seeking homeland security contracts. Miscommunication and lack of direction at the federal level have slowed purchases among state and local agencies. Complicating the process further, government agencies have not laid out the requirements technology should meet to make sure the systems procured by cities and states in different parts of the country will work together.

As a result, getting the right technology into the right agency's hands is difficult even for veteran government contractors who know the system.

"If you spend a day in Washington and sit in on a business seminar where government people speak, about 50 percent of the audience get up and say, 'How do I get in touch with you?' said Doron Pely, vice president of publications at Homeland Security Research. "Many of these companies have very little money--they need to score or die."

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The bureaucratic morass has played to the strengths of larger companies and established defense contractors that are better equipped to navigate the treacherous terrain inside the Beltway. Not surprisingly, in the first few months after the Sept. 11 attacks, preference was given to those companies that had already done business with Washington.

"The companies that had existing contracts and had proved to be trustworthy were invited to expand their contracts and change their scopes," said Ray Bjorklund, chief knowledge officer for market research firm Federal Sources Inc. (FSI). "Overall, the government does a pretty darn good job of procurement. The exceptions are what people hear about."

Yet these exceptions understandably loom large to those directly affected--namely small companies with innovative products. Although 30 percent of homeland security contracts were awarded to smaller companies last year, analysts believe that these businesses will get relatively fewer projects in 2004.

"Unlike the Manhattan Project, where you had to invent the science, in a lot of ways, technology has kept up with the times--it's out there," said a congressional staff member who specializes in policies for homeland security procurement. "A lot of the frustration is, 'My gadget is not getting attention.'"

Some executives speculate that government agencies have been less receptive to their products because officials have become increasingly fearful of investing in failed technologies. The companies that have fared best are those that produce the kind of technologies that have already been sanctioned by homeland security law.

For example, congressional orders to strengthen aviation security have spurred strong demand for technologies such as X-ray machines and bomb detectors. InVision Technologies, the leading manufacturer of these products, saw its stock soar to almost 15 times its starting level between Sept. 11, 2001, and March of this year, when General Electric placed a bid to buy the company.

For companies like Kroll, terror means big business.

After the Sept. 11 attacks, the global consulting firm signed multimillion-dollar federal contracts to vet the backgrounds of Customs and airport personnel for the Department of Homeland Security. The company has since posted double-digit annual revenue growth and saw its stock price quadruple through July, when Kroll was bought by technology service provider Marsh & McLennan.

"The security space suddenly became hot," said Alan Brill, senior managing director of the firm, which offers services ranging from network security audits to digital investigations. "People said, 'Oh boy, they are going to throw money at this.'"

And that they did. Federal agencies are expected to pay $84 billion toward homeland security this year, up from $5 billion in 2000, according to figures from Homeland Security Research, an analysis firm that covers government procurement.

It is unclear exactly how much federal funding will go to technology contracts, but the potential to get even a small percentage has created the industry's first boom in years. Although companies are sensitive to criticism about profiting from fear, they are anxious to reverse their fortunes after four long years of depressed spending on corporate technology.

"Five years ago, companies in this market had thought that the commercial space would drive its growth, but that didn't happen," said Joseph Atick, CEO of fingerprint and facial-recognition technology firm Identix. "Today, we are focused on governmental programs more than before."

Despite all the business that has become available, success is anything but automatic for companies seeking homeland security contracts. Miscommunication and lack of direction at the federal level have slowed purchases among state and local agencies. Complicating the process further, government agencies have not laid out the requirements technology should meet to make sure the systems procured by cities and states in different parts of the country will work together.

As a result, getting the right technology into the right agency's hands is difficult even for veteran government contractors who know the system.

"If you spend a day in Washington and sit in on a business seminar where government people speak, about 50 percent of the audience get up and say, 'How do I get in touch with you?' said Doron Pely, vice president of publications at Homeland Security Research. "Many of these companies have very little money--they need to score or die."

See Case study

The bureaucratic morass has played to the strengths of larger companies and established defense contractors that are better equipped to navigate the treacherous terrain inside the Beltway. Not surprisingly, in the first few months after the Sept. 11 attacks, preference was given to those companies that had already done business with Washington.

"The companies that had existing contracts and had proved to be trustworthy were invited to expand their contracts and change their scopes," said Ray Bjorklund, chief knowledge officer for market research firm Federal Sources Inc. (FSI). "Overall, the government does a pretty darn good job of procurement. The exceptions are what people hear about."

Yet these exceptions understandably loom large to those directly affected--namely small companies with innovative products. Although 30 percent of homeland security contracts were awarded to smaller companies last year, analysts believe that these businesses will get relatively fewer projects in 2004.

"Unlike the Manhattan Project, where you had to invent the science, in a lot of ways, technology has kept up with the times--it's out there," said a congressional staff member who specializes in policies for homeland security procurement. "A lot of the frustration is, 'My gadget is not getting attention.'"

Some executives speculate that government agencies have been less receptive to their products because officials have become increasingly fearful of investing in failed technologies. The companies that have fared best are those that produce the kind of technologies that have already been sanctioned by homeland security law.

For example, congressional orders to strengthen aviation security have spurred strong demand for technologies such as X-ray machines and bomb detectors. InVision Technologies, the leading manufacturer of these products, saw its stock soar to almost 15 times its starting level between Sept. 11, 2001, and March of this year, when General Electric placed a bid to buy the company.

For companies like Kroll, terror means big business.

After the Sept. 11 attacks, the global consulting firm signed multimillion-dollar federal contracts to vet the backgrounds of Customs and airport personnel for the Department of Homeland Security. The company has since posted double-digit annual revenue growth and saw its stock price quadruple through July, when Kroll was bought by technology service provider Marsh & McLennan.

"The security space suddenly became hot," said Alan Brill, senior managing director of the firm, which offers services ranging from network security audits to digital investigations. "People said, 'Oh boy, they are going to throw money at this.'"

And that they did. Federal agencies are expected to pay $84 billion toward homeland security this year, up from $5 billion in 2000, according to figures from Homeland Security Research, an analysis firm that covers government procurement.

It is unclear exactly how much federal funding will go to technology contracts, but the potential to get even a small percentage has created the industry's first boom in years. Although companies are sensitive to criticism about profiting from fear, they are anxious to reverse their fortunes after four long years of depressed spending on corporate technology.

"Five years ago, companies in this market had thought that the commercial space would drive its growth, but that didn't happen," said Joseph Atick, CEO of fingerprint and facial-recognition technology firm Identix. "Today, we are focused on governmental programs more than before."

Despite all the business that has become available, success is anything but automatic for companies seeking homeland security contracts. Miscommunication and lack of direction at the federal level have slowed purchases among state and local agencies. Complicating the process further, government agencies have not laid out the requirements technology should meet to make sure the systems procured by cities and states in different parts of the country will work together.

As a result, getting the right technology into the right agency's hands is difficult even for veteran government contractors who know the system.

"If you spend a day in Washington and sit in on a business seminar where government people speak, about 50 percent of the audience get up and say, 'How do I get in touch with you?' said Doron Pely, vice president of publications at Homeland Security Research. "Many of these companies have very little money--they need to score or die."

See Case study

The bureaucratic morass has played to the strengths of larger companies and established defense contractors that are better equipped to navigate the treacherous terrain inside the Beltway. Not surprisingly, in the first few months after the Sept. 11 attacks, preference was given to those companies that had already done business with Washington.

"The companies that had existing contracts and had proved to be trustworthy were invited to expand their contracts and change their scopes," said Ray Bjorklund, chief knowledge officer for market research firm Federal Sources Inc. (FSI). "Overall, the government does a pretty darn good job of procurement. The exceptions are what people hear about."

Yet these exceptions understandably loom large to those directly affected--namely small companies with innovative products. Although 30 percent of homeland security contracts were awarded to smaller companies last year, analysts believe that these businesses will get relatively fewer projects in 2004.

"Unlike the Manhattan Project, where you had to invent the science, in a lot of ways, technology has kept up with the times--it's out there," said a congressional staff member who specializes in policies for homeland security procurement. "A lot of the frustration is, 'My gadget is not getting attention.'"

Some executives speculate that government agencies have been less receptive to their products because officials have become increasingly fearful of investing in failed technologies. The companies that have fared best are those that produce the kind of technologies that have already been sanctioned by homeland security law.

For example, congressional orders to strengthen aviation security have spurred strong demand for technologies such as X-ray machines and bomb detectors. InVision Technologies, the leading manufacturer of these products, saw its stock soar to almost 15 times its starting level between Sept. 11, 2001, and March of this year, when General Electric placed a bid to buy the company.