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The State of Homeland Security

Companies in the homeland security sector are facing a rapidly changing and expanding marketplace. We explore what locations are doing to try to win their business.

By Michelle Janowitz

Since the beginning of recorded history, terrorism has been a concern of governments throughout the world. The 20th century witnessed many changes in the use and practice of terrorism, and it became the signature of a number of ideological movements, stretching from the extreme right to the extreme left of the political spectrum. In the U.S. on September 11, 2001, terrorism took on new meaning for Americans. Unlike many areas of the world where terrorist threats have been an omnipresent reality, pre-9/11 America's conception of terrorism was something close to blissful ignorance. However, after 9/11, Americans were forced to start thinking differently about terrorism.

From the wellspring of America's growing concern about terrorism post-9/11 came the Department of Homeland Security (DHS). Created in January 2003 by merging 22 agencies and nearly 180,000 employees (the largest government reorganization since the creation of the Department of Defense in 1947), this new government entity is charged with the sole task of thwarting further terrorist attacks on American soil. The initial actions taken by the U.S. in regard to homeland security were very much a knee-jerk response to 9/11, involving the upgrading of border and airport security and the passage of new laws designed to impede similar attacks.

Now, the U.S. finds itself in the midst of the next stage of development in homeland security, in which the private sector (as consumer and supplier) is a major participant. The market for homeland security products and services represents one of the nation's most rapidly growing market segments, and federal grants and contracts provide significant commercial opportunities for companies in this new sector. In fact, around $33 billion in funding for FY 2005 is being made available to assist the four main parts of effective preparedness in regards to threats to the nation with a significant emphasis on developing new technology:

• Prevention: Biometrics, vaccines, intelligent systems, and cargo screening systems;
• Detection: Bio and radiation sensors and training;
• Reaction: EMS equipment, communications, and computer modeling; and
• Recovery: Bioremediation and decontamination.

The homeland security industry as it stands now is a composite of several existing industries, including testing and instruments; software and systems integration; electronics, photonics, and telecommunications; medicine and pharmaceuticals; chemicals; safety and security; consulting; and defense. According to Doron Pely, VP of Publications and Editor-in-Chief for the Homeland Security Research Corporation (HSRC), the biggest trends in this industry currently are in automation, technologies with multiple uses (for civilian, military, and homeland security), and fused technologies—which is taking two technologies (e.g., x-ray and trace detection) and combining them in a single system to improve detectability and reduce false alarms.

Many companies are trying to secure their piece of the homeland security funding available; government contracts, once approved, make for a reliable source of revenue. Everything from high-tech and biotech companies to heavy industry, radiation detection vendors, and, of course, defense contractors is vying for the government's attention in this sector. Many companies are trying to come up with technologies that will land them a homeland security contract, and in response, many regions are exploiting their existing assets and taking an active role in helping these companies partner with larger, established defense contractors (like Northrop Grumman or Raytheon) who would rather buy technologies than develop them internally.

However, government contracts aren't the only way to corner the homeland security market. Many companies do not have government contracts, yet are providing technologies that are being used by the private sector for security, including potential terrorist threats. If you take into account the fact that nearly 80% of the critical infrastructure in the U.S. is owned by the private sector, you'll understand why private companies, and not just the government, are spending money on security from terrorist threats. According to Deloitte Consulting and Aviation Week, private sector spending on homeland security was estimated to be between $45.9 and $76.5 billion in FY2003, distributed as follows:

• Security and protection: $8.58 to $14.3 billion;
• Surveillance and intelligence: $7.42 to $12.39 billion;
• Facilitating integration: $5.65 to $9.41 billion;
• Communications and public alerts: $5.14 to $8.96 billion;
• Information assurance: $3.83 to $6.34 billion;
• Education and awareness: $2.9 to $4.85 billion;
• Inventory management production and acquisition: $2.57 to $4.28 billion;
• Response management: $2.2 to $3.87 billion;
• Privacy and legal services: $1.18 to $2.44 billion;
• Health management: $1.1 to $1.83 billion; and
• Other: $5.18 to $8.54 billion.

The Homeland Security Marketplace

So, where exactly are the homeland security companies going and why? Some say that the marketplace is still new and in the process of defining itself. “I think the marketplace is emerging,” says Fred DiMaggio, Director of Industry Development, Homeland Security, Empire State Development (ESD). “I don't think it's all clear, aside from some big players who have won some of those major contracts. My sense is—unless I am missing it—I don't think [the homeland security market] has been established yet.”

Despite the immaturity of the marketplace, it is clear that there are a number of areas throughout the U.S. that have become attractive for companies in this sector. Unlike infrastructure, geographical advantages aren't something that an area can just create, and being close to your customer in any business can give a company substantial leverage. Many regions in Maryland and Virginia are in close proximity to Washington, DC and therefore the DHS, as well as every other three-lettered government agency. This gives these regions an innate advantage in successfully cultivating a flourishing cluster in this sector.

“When you have the federal government as a client you do want to be within certain parameters of your client—any good corporation would want to do that,” says Karen Theolbold, Senior Executive VP of Strategic Planning and Communication for MZM, a defense intelligence company with several government contracts.

Location, however—as you will see throughout this article—is only one piece of a much bigger picture, as it takes much more than just being within striking distance of the nation's capital to successfully tap into and grow this sector.

One such geographically-privileged area that finds itself becoming a hub for the homeland security industry is Anne Arundel County, MD, which is, incidentally, only about 30 miles away from DC. It seems only natural that this area would have a major presence in the homeland security sector. For starters, eight out of the top 10 defense contractors in America have a presence in the county—Lockheed Martin, The Boeing Company, Northrop Grumman, General Dynamics, Raytheon, General Electric, Science Applications International, and Computer Sciences Corporation.

The significant federal presence in Anne Arundel County itself is certainly another critical force propelling the growing homeland security sector. Currently, the largest employer in Anne Arundel County is the National Security Agency (NSA), one of America's largest intelligence organizations, which employs 16,000 of its total 32,000 employees at its headquarters in Fort Mead (located in Anne Arundel County). And according to Bill Badger, President and CEO of Anne Arundel Economic Development Corporation, having the NSA in your backyard is a major selling point for companies when you are talking about the homeland security sector. According to him, federal spending after 9/11 increased 31% in one year for the county, and the NSA spent around $2 billion alone in Maryland on procurement and services.

“I talk a lot about the defense and security cluster development that has happened here and the wave of opportunity that it has created for us,” says Badger. “A lot of that is driven by the significant federal presence that is here, and the fact that [federal spending on homeland security] is an increasing dollar amount.”

Another primary asset to the county's homeland security sector is the Chesapeake Innovation Center (CIC). The chief focus of the CIC is the development of firms specializing in homeland security technology; it's the first incubator in the nation with this focus. The first phase of the CIC opened in June 2003. When fully occupied, the CIC will house around 25 start-up companies in its approximately 24,000-square-foot facility in Annapolis, MD. At present it is about 92% occupied by companies from all over the world. The planning of the incubator was started prior to 9/11, and according to Badger, the initial focus of the incubator was going to be fairly broad; however, after 9/11 it just made sense for the incubator to focus on the homeland security sector, especially with the NSA so close.

“There has been a lot of research and budgets thrown at this issue [of homeland security] at all levels—local, state, and federal since 9/11. And that is just the tip of the iceberg, as the bigger homeland security interest is for all the private national security assets that there are,” says Badger. “So, there are private sector budgets and issues that have to be addressed as well.” According to him, the CIC is looking at security issues for both the public and private sector.

There are a few other incubators that have popped up now in the U.S. that also focus on homeland security; however, in Maryland the CIC is one-of-a-kind. The CIC has only been in business for about 20 months, and hasn't “graduated” anyone yet; however, PharmAthene, Inc. (a biodefense firm at CIC) has already raised capital and acquired a company in Canada. In total, companies in the CIC have raised around $90 million, which is 37% of the private equity raised by all incubators in Maryland according to Badger—quite a feat for an incubator open for less than two years.

When asked who stands as the county's biggest competition, Badger admits: “[One of] our biggest competitors in this sector is probably Howard County, MD…both Howard and Anne Arundel counties have been very successful, so we tend to have a very friendly competition, and we look for ways to work together. However, my biggest competition comes from Northern Virginia. They are very aggressive, and obviously have quite a track record in assembling and identifying themselves as a high-tech corridor…In fact, when we competed for a competitor grant from NSA, half of that grant went to the Northern Virginia Technology Consortium.”

Virginia has been able to successfully position itself as a major contender on the homeland security playing field—all 10 of the top 10 U.S. defense contractors have a presence there. Their combined employment in Virginia is at least 46,000 people (and as many as 60,000 by one estimate). Like Maryland's CIC, Virginia has its own “business accelerator” located in Harrisonburg (about 100 miles from DC). However, unlike the CIC, its focus is not solely homeland security; it will focus instead on three anchor technologies: radio frequency identification (RFID), data warehousing and disaster recovery, and health information. The incubator will serve as a liaison for mature IT companies in pursuit of proposals and opportunities, as well as help them network with other companies. Dubbed the Harrisonburg Innovation Center (HIC), it has plans to open between July and September of 2006.

Harrisonburg, VA already has companies working in the homeland security sector, so this was a logical next step, according to Dr. James Barnes, assistant director for Harrisonburg Economic Development. Harrisonburg is also home to James Madison University, which is heavily involved in homeland and information security research. The university put together an incentive package for companies coming into the area that puts them in touch with research partnerships.

“One of the problems [for companies looking to secure government contracts] is a lot of these companies are small; we are looking at companies coming in with eight, 12, 15 employees,” says Dr. Barnes. “They have great ideas or a great service or product. The problem is they can't compete, or they may not know who some of the other partners that they could join with who could really make them successful are…That is one of the roles of the management team for the Innovation Center—to help them not only identify, but also be able to help them get through the proposal process, and then to help them carry out the activities.”

It is easy to see why Maryland and Virginia would serve as obvious choices for homeland security clusters; however, there are other places in the U.S. that have staked a significant claim in this new sector. New York also promotes itself as an obvious choice for the industry, and as such has been actively looking for and pursuing ways in which to cultivate this sector in the state. Lately, New York State's economic development agency, Empire State Development (ESD), has been doing outreach with companies in a variety of ways in order to help them assess the homeland security marketplace, as well as help them win procurements and contracts. The agency also assists these companies in identifying major system integrators like Lockheed Martin and Northrop Grumman with whom they can potentially partner. ESD initiated a homeland security vetting process, where there is a homeland security vetting committee which helps identify companies with new technologies that can be presented to agencies to be evaluated for potential application or procurement.

“That is something which we do not think any other state is doing…and we have been very pleased so far,” says ESD's Dimaggio. “If you worked in this area you would know that homeland security is a very challenging arena, to say the least, because of all the politics, issues with the allocation of funds, acknowledging what the priorities are, that kind of stuff. These companies chase their tails; they don't know who to talk to…so we have put together this system and we've vetted about 50 to 60 companies now.”

Following in the footsteps of Anne Arundel County and Harrisonburg, VA, New York hopes to have its own incubator devoted to the homeland security sector soon. At present, a funding request for this proposal is being evaluated, and the CIC has shown interest in partnering with ESD.

“It would be a little different than Chesapeake…it would be an operational incubator in a secure Army facility, which offers a different twist,” says Dimaggio. “It would provide a test bed for companies who are interested in coming and looking at new technologies, and hopefully it will show the DHS that we are a real leader in this and that we would like to be considered for a center of excellence or a regional office.”

When asked about the general state of homeland security and how New York fits into that equation, Dimaggio says: “I think there are a couple things going on. First, there are big players who have been successful in the defense industry and have parlayed that technology into homeland security. Second, there are companies who've had technologies [for] which they can see an application in homeland security and they have basically tweaked that and are offering it up; so, I haven't seen a lot of movement to New York from other states, except for the interest in this incubator.” Overall, he sees the market as still defining itself, and believes New York has the potential to become a major player in this emerging sector.

Cyber Security

Cyber security (which involves the protection of information against unauthorized disclosure, transfer, modification, or destruction) is and has been a booming sector for San Antonio, TX. There are around 25 individual cyber security companies providing services and about 40 national government contractors that work in cyber security that have offices in San Antonio, according to Mike Garcia, VP of Marketing for MDI. MDI is a cyber security company with several government contracts that was in the business of homeland security before DHS was even a twinkle in the government's eye. In 2004, MDI consolidated all offices in San Antonio (except for one office in California).

When asked why San Antonio stood out as the best choice to consolidate all the company's operations, Garcia responds: “The options were Austin, TX, California, and, I believe, Houston, TX. [One of the reasons] we chose San Antonio was because the people with security knowledge and the right security clearances to do the work that we perform, build the product that we have, and to service the customers that we deal with were here—the security clearances are huge for us. [Also], the cost of living in San Antonio is hands down a winner over any of the other locations that I mentioned.” He also mentions that the five military bases in the vicinity played a large part in the company's decision as well.

Garcia explains that the market in San Antonio started its evolutionary path in the early 1990s with the creation of the Air Force Computer Emergency Response Team (AFCERT), which grew into a centralized point of control for all Air Force cyber security initiatives; 350,000 nodes/computer points were managed from San Antonio. The Morris worm (the first computer worm) was really the trigger for all the military agencies to start securing their computers.

“After the Morris worm, AFCERT was the first full-service CERT to be established; well, that put San Antonio on the map right away,” says Garcia. “After that Northrop Grumman moved here, Veridian Corporation moved here, Symantic moved here, CACI moved here. You had all these huge companies move to San Antonio, build offices, and hire people that were ex-military, as well as ship people in from other places around the world. As a result, San Antonio in the Nineties immediately became a cyber security hub for the government. As computer worms became more prevalent and people started using computers for their businesses during the Nineties, commercial entities started needing this type of service and these types of products. San Antonio became a hot-bed for cyber security R&D.”

Looking to the Future

Where is the future of the homeland security sector for areas trying to grow it and companies trying to get into it? As the reality of a terrorist threat drifts farther from our consciousness with no substantial terrorist activity being perpetrated on the U.S., will this sector fade into the background? Despite the recent surge of regional interest in targeting this industry, there is some speculation that the market isn't as hearty as some might be led to believe. When faced with the question of whether or not this market will continue to gain momentum, HSRC's Pely notes, “This is a reactive market that responds to real attacks. If there are no terror attacks in the next two years, the market will subside. If there is a significant attack in the U.S., UK, Canada, or Europe, the momentum will increase rapidly. Also, the participation of private industry in its own protection has been dismal so far. This sector will probably respond only to legislation and/or regulation, or to pressure from insurance companies.”

As far as advice for companies trying to get into this sector, Pely mentions that companies should not try to develop products solely for anti-terror activity. “Don't look for modest improvements, look for radical improvements, and learn to work with the government,” he cautions. “It seems that the companies that will be the most successful, especially the smaller, less established companies that are trying to create new technologies for the industry, will be the ones that have multi-purpose technologies.”