Companies profitting from fear

The following article is from the CNet News.com looking at issues around homeland security. You can see the original article at http://news.com.com/2009-1009_3-5405931.html?tag=dasec.

Companies profiting from fear

By Robert Lemos

CNET News.com

October 19, 2004

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."

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.

"The companies that benefit the most are those with some legislative mandate behind them," said Steven Gish, senior research analyst at investment firm Roth Capital Partners.

Within the technology industry, executives say legislation is just one part of the equation. In today's confusing environment, they say it helps to be creative in proposing solutions to meet the needs of the Department of Homeland Security.

Unisys saw one such opportunity when the agency's Transportation Security Administration began hiring some 50,000 screeners for major U.S. airports, which number more than 400. The longtime government contractor proposed technologies to link various systems, including X-ray equipment and metal detectors, at the airports.

Through backroom negotiations, including partnerships with two competitors for the contract, Unisys became the transportation agency's primary technology integrator. Its prize: a deal worth at least $1 billion.

"We won because we understood the mission and addressed the problem in the best way," said Greg Baroni, president of the global public sector for Unisys.

Even when a company wins a contract with technology that appears to fit congressional needs on paper, it must often deal with unrealistic expectations. Identix had to overcome hype and misunderstandings about so-called biometric technologies when pitching its Live Scan systems, which are used to examine handprints at inspection points at U.S. borders and airports.

Raising eyebrows

Skepticism about biometric products was raised after a facial-recognition system installed in Florida to spot suspected terrorists during the Super Bowl became a case study of a technology that did not live up to its creator's promises. The technology, manufactured by Viisage Technology, was widely criticized as an ineffective law enforcement tool that violated privacy rights.

Experts determined that the problem was simply too complex for the technology of the time. A federal study of facial-recognition systems in 2000 by the National Institute of Standards and Technology (NIST) found potential problems with all of them, in real-world settings.

But under slightly different circumstances, companies say such systems can be far more useful. Identix's technology has become a key part of the new US-VISIT passport system, which avoids significant identification problems by processing images of people facing forward against a static background.

"That is different from trying to recognize a person in a crowd with poor lighting, movement, different facings and other problems," Identix's Atick said.

Moreover, the technology has improved as companies have focused on delivering the technology specifically for antiterrorism applications. A second NIST study, conducted in 2002, found that error rates had been reduced by 50 percent since its earlier research. By focusing on verification, as the passport systems do, the best systems can match the correct face with biometric data. In the more recent NIST study, they did just that 90 percent of the time, up from 80 percent in 2000.

The increased accuracy rates are one reason why Congress has passed a law to make facial biometrics part of the visa waiver program for foreign citizens. Almost 30 countries will likely start producing passports that have facial data stored in the documents, to meet U.S. requirements.

Future funding

That has been welcome news to many companies that wonder how long the government can continue funding costly homeland security projects, now that the shock of the Sept. 11 terrorist attacks is fading. They are particularly concerned that lawmakers are reluctant, this election year, to fund security programs under the weight of a crushing federal deficit and rising costs related to the conflict in Iraq.

Already, the federal government has not made expected progress in some key programs, including US-VISIT. The contract for the estimated $10 billion project was awarded to technology services firm Accenture in June, but it has not kept to schedule and, as a result, has not been fully funded by Congress.

"The pendulum has swung back to normalcy," Baroni said. "The further we get from the events of 9/11, the more complacent we become."

One company that says agencies are slow to take advantage of existing technologies is RAE Systems, which has proposed uses for the chemical, radiation and biological sensors that it makes, such as ensuring the integrity of cargo containers. The equipment has been used to guard political conventions and major sporting events, including the Super Bowl, but the company says the federal government has yet to see beyond those applications.

"The contracts are largely a myth," said Bob Durstenfeld, director of communications at RAE, pointing to delays in detection projects despite two laws that mandate the use of sensors on cargo containers for better port security. "They have no teeth, because there is no political will to implement them."

Business has been slowed further while the Department of Homeland Security tries to solve its many security and integration problems, under pressure from the Office of Management and Budget, which has said it will not award funds for new systems until the issues are resolved. Congress signed the appropriations bill for homeland security on time this year, but complying with the budget office's rules has held up related contracts and essentially left much of the money to be spent in the fourth quarter.

"More spending is going on this quarter than the same time last year," said Keith Bickel, CEO of FedLeads, a consulting firm that tracks federal contracts.

Federal agencies will spend nearly $260 billion on security technology contracts by 2010 if the nation remains in an "ongoing crisis" scenario of moderate, intermittent terrorist attacks, according to Homeland Security Research. FedLeads estimates that the Department of Homeland Security is spending more than $10 billion on information technology for antiterrorism infrastructure this year.

But as projects fall under more scrutiny, agencies are likely to award contracts to large companies that have track records from previous work with the government.

"So who gets squeezed? The other small businesses. Whether they can make it up on the subcontracting side is something we may never know," Bickel said. Large contractors this year are certain to get more than the 70 percent of funds they won in fiscal 2003, he added.

The Department of Homeland Security maintains that small businesses are doing well with the demand for security technologies. Nearly 40 percent of contract money went to small companies in the first seven months of 2003, the first year such projects were put up for bid, said Kevin Boshears, director of the department's Office of Small and Disadvantaged Business Utilization.

"The business community, and specifically the small-business community, has said that they want to be part of the process," Boshears said, adding that the department intends to match the overall government goal of 23 percent of contracts to go to small business in 2004 and 2005. "We have tried to put out the welcome mat and stress that, yes, we are open for business."

Regardless of who gets the contracts, others worry that process-laden bureaucracy will overtake the nation's sense of urgency toward terrorism.

"This is not business as usual," said Gilman Louie, a member of the nonpartisan Markle Foundation Task Force on National Security in the Information Age and the CEO of In-Q-Tel, a venture firm that funds technology for the CIA. "We are still not moving fast enough."

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