The Homeland Security Market Corporate and Investment Strategies for the Domestic War against Terrorism
By Scott Gould and Christian Beckner
May 2003
1250 24th Street, NW, Suite 300Washington, DC 20037
Tel: 202-835-1680Fax: 202-835-1685
http://www.ogara.com
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The Homeland Security Market Corporate and Investment Strategies for the Domestic War against Terrorism Preface
Before September 11, 2001, “homeland security” was an unspoken assumption in the United States. Terrorism and related forms of evil existed in the world, but mostly took place somewhere else. The few think tanks and government study groups that spoke explicitly of the need to improve “homeland security” were voices in the wilderness.
The devastating attacks on the World Trade Center and the Pentagon changed everything. Within days the general public was familiar with the concept of “homeland security.” The federal government moved quickly on two fronts to combat the threat: overseas, it waged war in Afghanistan to root out al-Qaeda and their Taliban protectors; at home, it embarked on a comprehensive effort to improve aviation security and prevent a repeat of the 9/11 attacks.
Over the last 20 months the concept of homeland security has matured quickly. Numerous strategies have been formulated to respond to the threat, most notably the President’s National Strategy for Homeland Security in July 2002. The federal government has developed new capabilities and modified existing ones to meet the homeland security challenge. State and local governments have upgraded their front-line first responder capabilities.
The private sector has played an important role in this process. It has fulfilled contracts to improve aviation security, made thousands of technology proposals to the federal government, and started to improve the security of its own high-risk assets. But overall, the private sector’s involvement in homeland security has been fraught with uncertainty. Initial enthusiasm about the homeland security market gave way in 2002 to frustration. The government’s preoccupation with internal reorganization seemed to occupy policymakers’ attention, to the exclusion of capacity building and front line security improvements. The creation of the Department of Homeland Security in late 2002 only partially alleviated these concerns.
Right now, the United States finds itself at a pivotal point in the evolution of homeland security. The success or failure of the government’s efforts to improve the country’s defenses against terrorism depends upon a number of factors, not least of which is the effectiveness of its interactions with the private sector. The private sector has often lacked a sophisticated understanding of government behavior, and the government’s outreach to the private sector has been haphazard. A new spirit of public-private cooperation is essential for the successful implementation of a national homeland security strategy.
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About the Report
This report examines the role of the private sector in homeland security, focusing specifically on what companies and investors should know in order to develop appropriate and effective homeland security market strategies.
Chapter I provides the basic policy context: what managers and investors need to know in order to understand the homeland security market. It focuses on three key questions:
• What are the key factors and principles driving the federal government’s approach to homeland security?
• What has the federal government done so far, and where is it likely to head in the future?
• How large is the homeland security market?
Chapter II provides a market perspective on homeland security that is intended to inform senior and middle managers at large corporations and executives at small companies, as they devise their corporate strategies. It provides key tools to help companies assess how they should approach the homeland security market, and to answer questions such as:
• What is the structure of the homeland security market? • Where do I fit within this structure? • Given my position in the market, what kind of strategy should I pursue? • What kind of opportunities are out there for me? How do I prioritize them?
Chapter III is aimed at the investor community (including venture capital firms, private equity companies, institutional investors, and individual investors) -- another important constituency for homeland security. New technology across a wide range of sectors, such as biotechnology, microelectronics, and software, is a critical component of the government’s domestic war against terrorism. Investors are aware of the importance of this new market, but lack the tools either to assess its potential value or determine where they should play within it. This chapter helps investors answer questions like:
• How do I know that this is really a market, and how do I measure its performance? • What criteria should I use to judge investments in homeland security? • What areas are likely to be priorities for investment in homeland security in the
coming years?
A Definition of the Homeland Security Market
In this report we define the homeland security market to include three key areas. The first is the primary focus of the report:
• Government spending at the federal, state, and local levels on private sector products and services whose primary function or purpose is the domestic war against terrorism
The second and third are addressed secondarily in the report, but are no less important than the first. In these two areas the government plays a role as a market-maker:
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• Domestic private sector spending on terrorism prevention that is a direct result of US government mandates or regulations
• Foreign government and international private sector spending that is a direct result of US government or international organization mandates or regulations
Our definition excludes government spending on homeland security that pays for salaries and pensions for government employees and overhead. It also excludes private sector spending on security that is driven primarily by factors other than terrorism, such as crime prevention.
About The O’Gara Company
The O’Gara Company (O’Gara) is a strategic advisory and investment services firm serving the homeland security (HLS) market. The O’Gara Company’s clients include Fortune 500 firms, start-up firms with promising homeland security-related technologies, and investment firms. O’Gara advises its clients about the homeland security market and engages in deal-making activities with firms that participate in the homeland security market.
The partners in the firm are Tom O’Gara, a leading entrepreneur with more than thirty years of experience in the security industry; Kurt Campbell, Senior Vice President of the Center for Strategic and International Studies (CSIS), former Deputy Assistant Secretary of Defense, and the co-author of To Prevail, An American Strategy for the Campaign Against Terrorism; and Scott Gould, former Assistant Secretary and CFO of the Department of Commerce, Deputy Assistant Secretary of the Treasury, and Captain, US Navy, Intelligence, who is CEO of The O’Gara Company and co-author of this report. The report’s other author is Christian Beckner, Senior Associate with The O’Gara Company.
The information contained is this report is copyrighted by The O’Gara Company and may not be reproduced, disseminated, sold, distributed, published, circulated or commercially exploited without the express written permission of The O’Gara Company. The O’Gara Company believes its data to be reliable, but accuracy is not warranted or guaranteed. The information contained in this report reflects the authors’ analysis as of the published date and The O’Gara Company disclaims any obligation to update such information. Although this report may include research commentary relating to specific securities, The O’Gara Company does not provide personalized investment advice through this report and does not represent that any such securities are suitable for the recipients of this report. Recipients of this report should make their own independent evaluation of the investment merits and suitability of any security. Nothing in this report should be deemed a solicitation of a transaction by The O’Gara Company or any third party. The O’Gara Company and its affiliates may do business with certain of the companies referenced in this report and may hold securities of such companies. The O’Gara Company and its members, directors, officers, managers, employees, agents and affiliates shall not be liable for any direct, indirect, incidental, special or consequential damages arising out of or relating to this report, including but not limited to damages for loss of profits, use, data or other intangible damages, even if such party has been advised of the possibility of such damages.
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CHAPTER I: Policy Context for Homeland Security Homeland security policy is a broad and complex topic; a full treatment is beyond the scope of this paper. Since September 11, 2001, numerous think tanks and government entities have published detailed treatises on homeland security policy; the best of these are listed in Appendix A, and Internet links are provided to each report.
Instead, the purpose of this chapter is to establish the context in which homeland security policy is made, and provide executives and investors with the fundamental facts they need to make informed decisions about their homeland security market strategy.
The first section of the chapter looks at what makes the customer tick – the customer in this case being the federal government, which is both the leading customer and principal market-maker for homeland security products and services. What key factors and guiding principles drive the government’s approach to homeland security? Two of these are examined in detail: the nature of the threat and the “buyer needs” of the government.
The second section provides a brief chronology of the government’s homeland security activities over the last 18 months, with special attention to key issues and turning points in the evolution of homeland security policy and its relevance to the private sector. The final two sections analyze the budget for homeland security and estimate the size of the federal segment of the homeland security market.
1.1 Key Motivating Factors in Homeland Security Policy
The range of factors that influence the federal government’s response to homeland security can be summed up in two categories:
• Awareness of the terrorist threat • Government ‘buyer needs’ – both in terms of agencies and individuals
External pressures from the first category and internal motivations from the second category come together and sometimes clash. They then shape policy outcomes for homeland security, with significant bearing on private-sector activity.
The terrorist threat
International terrorism is not new. Two hundred fifty-eight Americans were killed in the bombings of the US Embassy and Marine barracks in Lebanon in 1983. Two hundred seventy people, including 189 Americans, were killed in the bombing of Pan Am 103 over Lockerbie, Scotland in 1988. A total of 620 Americans have been the victims of radical Islamist terrorism since 1970.
But while these terrorist events were both tragic and appalling, the fact that they occurred on foreign soil (with the notable exception of the first World Trade Center bombing in 1993), permitted Americans to retain a sense of security at home. After all, the continental United States had not been attacked by a foreign power since the War of 1812. Its human losses in the wars of the twentieth-century took place on distant shores. America was flanked to the east and west by two oceans, and to the north and south by non-threatening neighbors. This
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security blanket allowed Americans to live their lives with little concern for the threat from international terrorism.
September 11 shattered Americans’ illusion of invulnerability, bringing terrorism home to the United States on a scale five times greater in terms of loss of life than the cumulative events of the previous thirty years.
The attacks were propagated by al-Qaeda, a loose but sophisticated network of radical Islamists headed by Osama bin Laden that is fundamentally different from the terrorist groups of the 1970s and 1980s in several important ways.
First, the scope of its ambition is significantly greater: it is not interested in small or medium-sized tactical hits against US interests; rather, it seeks to perpetrate attacks that will cause massive damage to the United States, including through use of biological, chemical, and nuclear weapons of mass destruction.
Second, it is planning attacks with explicit attention to the secondary economic and psychological impacts of its actions. One of the core beliefs of bin Laden and other al-Qaeda leaders is that the United States is able to hold hegemonic sway over the Middle East and support Israel because of its economic might. Debilitating the US economy is therefore key to decreasing America’s ability to project power overseas.
The 9/11 attacks were intended to have a major secondary effect on the US economy. Osama bin Laden is heard gloating on a tape after 9/11 about the losses on Wall Street when the New York Stock Exchange re-opened on September 17th. The 3-day shutdown in aviation after the attacks had a direct multibillion dollar impact for US airlines, and an even greater indirect economic impact, resulting from the increased public reluctance to fly in the subsequent months. Over the last twenty months, two major US airlines have declared bankruptcy, and more than 100,000 workers in the industry have lost their jobs.
Al-Qaeda also plans its attacks for maximum psychological impact, preferring symbolic targets when feasible. On 9/11, it chose the World Trade Center, the Pentagon, and perhaps the White House or the Capitol – landmarks of what it saw as the twin evils of American commerce and government. It also realized that simultaneous coordinated attacks would have a much greater psychological impact than an isolated event – as one former al-Qaeda supporter stated during testimony at a trial in the United States before 9/11 – “Boom, boom, boom, and America is on standby.”
The scope and scale of the terrorist threat to the United States has led the federal government to undertake a massive effort to improve security – a project comparable in cost and ambition to the $100 billion effort in the 1960s (in current dollars) to put a man on the moon. Like the Apollo Program, this effort requires a high level of coordination and teamwork to achieve its goals. But unlike that initiative, success will be defined by the absence of fanfare and news.
Smart companies can increase their chances of developing partnerships with the federal government if they develop systems and solutions that protect the country against threats that are real but not yet high on the government’s radar. The framework below illustrates the operational cycle of a terrorist act; by choosing variables in each box one can hypothesize about potential attacks and plan appropriate countermeasures for high-risk scenarios.
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TABLE 1: TERRORISM OPERATIONAL CYCLE
ATTACKER WEAPON DELIVERYMEANS
METHOD OFATTACK TARGET
- Group or Lone Attacker- Political or Religious Motivation- Citizen or Illegally in Country
- Explosives- Chemical Weapons- Bio-weapons- Radiological- Nuclear- Bullet- Cyber
- Human- Car or Truck- Ship- Plane- Railcar- Container- Gun- Missile- Letter- Network
- Population- Transport Infrastructure- Symbolic Targets- Hazardous Facilities- Individuals
After potential scenarios are identified, they must be prioritized –taking into account factors such as the likelihood of attempt, likelihood of success, and severity of a scenario. The ranking of priority opportunity areas in Section 3.3 is derived in part from this type of analysis. Government Buyer Needs
At the same time, companies need to be well-attuned to the needs of their customers in government – not only the officials who are directly responsible for deciding on particular procurements, but a whole set of stakeholders including members of Congress, union leaders, agency officials, and cabinet members. The extent to which companies can effectively address the concerns and satisfy the needs of these myriad constituencies is a significant factor in the adoption of a company’s homeland security systems and products among government buyers.
Front-line homeland security officials operate in a psychologically discomforting environment. They are faced every day with a threat from an unknown but pervasive enemy. Their successes will seldom be recognized; their failures will at best embarrass them and at worst ruin their reputations and careers. Officials in this environment are looking for reassurance and protection against negative consequences, something that the private sector can provide if it can offer credible solutions (not products or technologies) to particular risks or threats, and can describe in simple, straightforward terms how these solutions will be implemented. Solutions that are applicable across multiple targets or methods of attack are likely to be particularly well-received.
Private sector companies need to be aware of the impact of organizational dynamics. Many of the key agencies that have been folded into the homeland security apparatus, such as the US Coast Guard, the FBI, and the US Customs Service, have strong and independent cultures that transcend the impact of any particular political appointee heading the organization. One needs to understand and penetrate the culture of the career employees at these organizations to make headway in the homeland security market.
To a certain extent, companies need to play the age-old Washington game of constituent politics, building consortia on specific projects with at least one eye focused on the locations of companies’ facilities and the corresponding alignment with districts of key legislators. The vital national security implications of homeland security legislation do not deter legislators
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from including special interest provisions in bills, or showing favoritism to projects and plans that happen to bring dollars to their states or districts.
Interaction between the Threat and Buyer Needs
There is a certain amount of overlap between threat and buyer needs, but the government’s intentions and desired responses are not always aligned with the ideal requirements to respond to the actual terrorist threat. Private companies must therefore take a nuanced approach to the homeland security market, and develop products that both provide the necessary protections and address the concerns of their government customers.
1.2 Homeland Security Policy Overview
The US Government’s initial response to the events of 9/11, and the new threat that they symbolized, was essentially reactive. The United States focused first on extinguishing the smoldering fires in New York and Washington, and building a case against al-Qaeda as the perpetrator of these attacks. With the help of key allies, it launched the war in Afghanistan in October 2001, removing the safe harbor provided to al-Qaeda by the Taliban and attempting to decapitate its leadership. Today, this campaign is still far from over, as the recent attacks in Riyadh and Casablanca sadly illustrate, but significant progress has been made in reducing al-Qaeda’s freedom to operate.
Also in this early period of response, the government acted to prevent a repeat of the attacks of 9/11. The Aviation and Transportation Security Act was signed into law in November 2001, creating a new Transportation Security Administration that would be responsible, within a one-year time-frame, for implementing specific mandates to improve the nation’s aviation security, including screening all checked luggage for explosives and hiring federal screeners at airport security checkpoints.
On nearly all of the major homeland security legislation that was approved in 2001, bipartisanship prevailed; but in 2002, partisan politics crept back into the government response. The US government began to shift out of crisis mode. The pitched battle in the fall of 2002 on legislation to create a Department of Homeland Security, focused on the issue of workforce protections, signaled that improving “homeland security” was no longer the fundamental imperative that it had been one year earlier.
At the same time, however, certain elements within the federal government began to think more strategically and focus on what the government should do next, and how it could implement necessary improvements to homeland security on a systematic basis. The government needed to understand comprehensively America’s vulnerabilities to terrorist acts, and then refine and develop processes to both prevent terrorist acts and respond effectively to them. It needed to institutionalize these processes, and train people to operate appropriately within them.
The growing awareness of these needs culminated in two significant events. First, in July 2002, the Office of Homeland Security published its National Strategy for Homeland Security, which laid out its vision for a future “system of systems” that would meet the country’s homeland security challenges, and defined six core missions for the government’s homeland security response:
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• Protecting Critical Infrastructures and Key Assets • Defending Against Catastrophic Threats • Emergency Preparedness and Response
Second, in November 2002 the Congress passed legislation to create the Department of Homeland Security (DHS), setting the stage for the largest reorganization of the federal government since the creation of the Department of Defense in 1947.
The Administration moved quickly in early 2003 to establish the new department. It named Governor Tom Ridge as the Secretary of the Department of Homeland Security, and he and other top officials received Senate confirmation in late January. The Department officially came into existence on January 24, 2003, and one week later it submitted its first budget request for homeland security. On March 1, 2003, more than twenty agencies were transferred into the Department, including six large agencies: the Federal Emergency Management Agency (FEMA); the Immigration and Naturalization Service (INS); the Transportation Security Administration (TSA); the US Customs Service; the US Coast Guard; and the US Secret Service.
In this recent period the Administration has increased its attention to other key homeland security areas that were neglected and under-funded in 2001 and 2002, as the administration focused on defeating al-Qaeda and improving aviation security. The five key areas attracting new attention are:
1. Bioterrorism and Food Security The anthrax mail attacks in late 2001 raised public consciousness about the threat of bio-terrorism. The federal government increased funding for bioterrorism prevention and response immediately after 9/11, and has proposed another significant increase for FY2004 as part of its Project BioShield initiative. The government has also been paying greater attention in 2003 to the vulnerability of the country’s food supply to terrorism, including developing a process to certify the security of imported food.
2. Cargo and Port Security One nightmare scenario among terrorism analysts is the detonation of a nuclear device in a cargo container at a major US port of entry. In response to this concern, as well as broader concerns about the smuggling of weapons of mass destruction (WMD) into the United States, the US Customs Service has led several initiatives to protect international cargo by working with foreign ports and private sector shippers to push out borders and secure the supply chain.
3. Critical Infrastructure Protection The federal government began a comprehensive effort to protect critical infrastructures in the late-1990s, in response to the bombing of the Murrah Federal Building in Oklahoma City. It has re-focused its attention in this area during the last six months. In February 2003, the Administration published a National Strategy for the Physical Protection of Critical Infrastructures and Key Assets. The new Department of Homeland Security has a directorate for Information Analysis and Infrastructure Protection, which will lead ongoing efforts to create a comprehensive inventory of critical physical assets. This inventory will assist law enforcement officials in their protection plans during high-alert time periods. In April 2003 the Administration began to address critics’ concerns about inadequate security in the chemical industry and announced its support for some level of new government regulation.
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4. First Responders On the morning of 9/11, firefighters, policemen, and other first responders were unable to effectively communicate with each other on their radios – with tragic consequences for the dozens of people who didn’t receive their orders to evacuate. The federal government promised billions of dollars for first responder training and equipment, but these funds have been appropriated and disbursed more slowly than states and localities would prefer, due in large part to a five-month delay to the passage of the FY 2003 appropriations bills. This funding impasse is now ending, and new monies for first responders were appropriated in the FY 2003 wartime supplemental. There is still the risk, however, that states and localities will use the funds in ways that do not support long-term investment in response capabilities.
5. Intelligence Reform Congressional hearings in fall 2002 on 9/11 intelligence failures have spurred numerous legislative proposals for reform of the key intelligence agencies. The legislation that created the new Department included a provision to create an intelligence branch for DHS, but the scope of this new unit has been uncertain, and the FBI and CIA have worked diligently to protect their turf. In January 2003 the Administration announced the formation of a new Terrorist Threat Integration Center (led by the CIA) that effectively co-opted ambitions for DHS to have a robust and independent intelligence capability. New legislation on intelligence reform is likely in the coming year.
1.3 Funding for Homeland Security
Spending on homeland security has grown rapidly since 9/11, increasing nearly 150 percent since FY 2001. The chart below shows the overall spending trend for homeland security over a ten-year period – back to the time when homeland security was not named as such. The chart highlights the rapid increases in spending in 2002 and 2003.
Notably, the projection below shows flat-line spending from 2003 to 2004. The main reason for this level spending is that the FY 2003 total has been increased $4.5 billion by homeland security spending in the supplemental appropriations bill for the war in Iraq. The 2004 figure is likely to be revised upwards in coming months due to similar new demands for spending.
TABLE 2: HOMELAND SECURITY SPENDING
Homeland Security Spending, FY 1995-2004
16.9
29.3
13.211.89 9.4 9.9 10.5
41.3
41.2
05
1015202530354045
FY 1
995
FY 1
996
FY 1
997
FY 1
998
FY 1
999
FY 2
000
FY 2
001
FY 2
002
FY 2
003
FY 2
004
($ b
illio
ns)
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7260
6128
7206
0
1000
2000
3000
4000
5000
6000
7000
8000
Millions
2002 2003 2004
TABLE 3: PRIVATE SECTOR PARTICIPATION IN FEDERAL HOMELAND SECURITY SPENDING
We expect the budget for homeland security to continue to grow at a rate of 8 to 10 percent annually, or at a higher rate if new terrorist acts take place on American soil.
1.4 Size of the Homeland Security Market
Many analyses of the homeland security market have confused the federal government’s budget for homeland security with the size of the homeland security market. These claims have led to a misperception of the market. The US budget in FY 2004 for homeland security will be $42 billion, of which $36 billion will be spent in the new Department of Homeland Security. Most of the remainder will be spent by the Department of Defense. Of this $36 billion at DHS, only $26 billion is discretionary spending – the remaining $10 billion is obligated for mandatory items such as pensions for retired members of the Coast Guard.
The new Department’s budget is broken down into a number of spending categories, some of which are close proxies for private-sector spending. These include advisory and assistance services, other services, purchases of goods and services, equipment, and R&D contracts. We have closely analyzed funding in the various department agencies in these five object classification codes to derive an estimate for the size of the homeland security market. For agencies such as the Coast Guard that have missions that are unrelated to homeland security, we have weighted their allocations at a percentage that approximates the extent to which their work is homeland security-related (for the Coast Guard, 30%). The size of the US federal homeland security market is estimated to be the following (see Table 3 below): $7.26 billion in FY 2002, $6.13 billion in FY 2003, and $7.21 billion in FY 2004.
The main reason for the decline from 2002 to 2003 is a drop in private-sector spending at the Transportation Security Administration. In calendar year 2002, the TSA worked quickly to fulfill the mandates of the Aviation and Transportation Security Act, which it was required by Congress to complete by December 31, 2002. The TSA contracted with private sector firms such as Lockheed Martin and Boeing to complete these mandates, and purchased hundreds of millions of dollars worth of new equipment (such as checked baggage screening devices, manufactured by InVision and L3) to install in the nation’s airports. These were largely one-time costs, and the cost overruns on these contracts have pinched the agency’s budget in the current year. TSA’s spending on “Other Services” drops from $1.8 billion to $526 million from 2002 to 2003, and its spending on Equipment drops from $858 million to $143 million. These significant decreases mask spending increases in other key homeland security agencies. Below is a breakout of the size of the market in key agencies or bureaus:
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TABLE 4: FEDERAL PRIVATE SECTOR HLS SPENDING BY AGENCY (IN MILLIONS):
The projected amount of private-sector spending for operations and IT at the departmental level (the first two lines in the chart above) is expected to grow rapidly in 2004, but will not produce private sector opportunities on a scale proportionate to spending in the Department’s agencies and directorates. The first account includes funds for consultants to assist with the organization and transition of the department, and the stand-up of a new departmental operations center. The second account is for IT investments that will support the basic functions of the department; items such as database systems, e-mail, payroll systems and collaboration tools.
The next four accounts cover agencies that existed prior to the creation of the new Department: the Secret Service, Coast Guard, Customs Service, INS, & TSA. A significant percentage of private sector spending in these categories is for ongoing long-term projects, and therefore does not represent “new” money. But there will be several new opportunities in these agencies in the coming year, including the Entry-Exit Program, formerly managed by the INS. The decrease in private sector spending at the TSA is significant, but there are still substantial opportunities there, including research on next-generation baggage screening and technologies to protect other modes of transport (sea, rail, and trucking).
The new Directorates of Science & Technology and Information Analysis & Infrastructure Protection will both see substantial increases in FY 2004. The Science & Technology directorate will house several programs, including the Homeland Security Advanced Research Projects Agency (HSARPA) which will receive $350 million under the President’s request. Overall research and development contracts throughout this directorate will total $555 million in FY 2004. This R&D funding will focus on development with only about 10 percent each for basic research and applied research. HSARPA will award extramural grants to address immediate gaps in high-priority operational areas such as protecting critical infrastructure and securing the US borders.
The Information Analysis & Infrastructure Protection Directorate will see an increase of nearly 370 percent over the FY 2003 budget request for a total of $829 million. This funding will be focused on bringing together for the first time the capability to identify and assess threats to the homeland, mapping these warnings, and providing the basis from which to organize protective measures to secure the homeland. Over $200 million of this total will be
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utilized to develop and maintain the primary database of the nation’s critical infrastructure, providing a complete and accurate mapping. The success of projects such as this database will rely heavily on external contracts for advisory services, equipment and other goods and services. As both of these directorates evolve, specific opportunities for private-sector collaboration will continue to emerge.
Conclusion
The preceding four sections provide a baseline description of the policy environment for homeland security, with a focus on key factors relevant to companies and investors looking at the homeland security market. The next two chapters provide companies and investors with the tools they need to develop an appropriate and actionable strategy for market success.
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CHAPTER II: Corporate Strategies for Homeland Security This chapter shifts the discussion from analysis to action, providing corporate executives with a set of tools to help set their company’s course and capture business in the homeland security market. It describes the structure of the homeland security market from value chain and industry cluster perspectives, and establishes a framework to help companies determine where they fit within this structure. Once companies know their starting point, they can develop appropriate strategies for the market. Finally, it provides several frameworks that companies can use to evaluate and prioritize opportunities within the homeland security market.
2.1 Value Chain & Industry Structure
Value chain analysis provides a useful initial framework for assessing the structure of the homeland security market. The market has two levels: Integration, which includes the large aerospace, IT & consulting companies that have dominated the early stages of the homeland security market; and Function, divided into three segments that correspond to the three top-level government activities for homeland security: protecting assets against attack, detecting potential attacks and terrorist activities, and responding to incidents.
TABLE 5: HOMELAND SECURITY VALUE CHAIN
PROTECTIONSOLUTIONS
DETECTIONSOLUTIONS
RESPONSESOLUTIONS
INTEGRATION
The Protection Solutions category includes firms that focus on the hardening of assets (both physical and cyber) to decrease their vulnerability to attack. It includes engineering and security firms that specialize in physical security, as well as software companies that market firewall and intrusion detection capabilities.
The Detection Solutions category includes companies that have developed technologies used to detect dangerous objects (i.e. explosive detection technology at airports) or dangerous individuals (i.e. facial recognition at high-profile events) before or while they are in the act of carrying out terrorist attacks. It also includes firms that have capabilities that allow the government and private companies to track and authenticate their assets (both goods and people). Companies or facilities that can track their assets in real-time can then find and verify potential suspicious activity or cargo.
The Response Solutions category includes the set of activities focused on post-attack response. It includes companies that are involved in emergency response, including equipment providers and companies that provide training or other services at the state and local level.
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Boeing, British Aerospace, General Dynamics, Lockheed Martin, Northrop Grumman, Raytheon
Aerospace
TABLE 6: HLS INTEGRATORS BY CATEGORY
The Integration category includes companies that are responsible for piecing together disparate technologies and processes to create functional homeland security systems. Firms in this category can be classified into four industry groups: aerospace, consulting, IT and high-tech, and specialized government contractors. Key firms in each group are indicated in the chart at right:
Appendix II shows the process used to validate the segmentation of integrators into these four categories.
These firms play a key role in homeland security because of the market’s heterogeneity and complexity. Only they have the capacity to develop cross-cutting solutions and solve problems for the government. The homeland security market is made up of businesses in a range of industries – including information technology, telecommunications, aerospace, management consulting, logistics, engineering, high-tech equipment, biotechnology, and human resource services. This long list is far from exhaustive. However, among the industries participating in the homeland security market, only a handful have the capability to provide the government with fully-elaborated “solutions” to many of the homeland security challenges that it faces. For example, upcoming efforts to create a new border security entry-exit system will require input from companies focused on biometrics, physical security, database integration, vehicle scanning and identification, and secure communications, among others. Only companies like the ones above could manage such a project and mold these disparate technologies into an integrated system.
This segmentation of key industry players should be important to two different audiences, and for different reasons. First, firms in the Function categories – the ones providing the “basic” products and services for homeland security – can use it to find and cultivate the appropriate market intermediaries for their sales to the federal government. With few exceptions, they are unlikely to be successful approaching this market alone. Instead, they should concentrate their efforts on selling through one or more of the firms found above that have the scope and scale to define, manage, and implement a homeland security solution for the government. These firms, in turn, are looking for this specialized knowledge; their expertise is often process-oriented, and they need to corner the specific domain knowledge to win projects and perform to expectations.
At the same time, the Integrators can use this analysis to locate gaps in project teams, and evaluate the strengths and weaknesses of consortia that they are competing against for specific projects. Companies on one team might choose to band together with another team after assessing that a third, competitive team possesses a suite of capabilities that each of the first two teams lacks on its own.
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2.2 Market Positioning & Strategy Formulation: The C2 Matrix
The two key variables to determine a company’s position in the homeland security market are capability and commitment.
Capability is defined as a company’s static, existing resources that are applicable for the homeland security market. Types of capabilities include products, technologies, processes, people, and relationships.
Commitment is defined as a company’s willingness to commit internal resources or leverage the breadth of the organization to improve capabilities for the homeland security market. Companies with a high level of commitment move beyond superficial activities, and undertake real R&D efforts or reorganization initiatives to prepare themselves for the market.
We have developed the C2 Matrix below to help companies assess their market positioning for homeland security. This tool not only helps companies to find their starting position, but implies what types of strategies companies should pursue.
Companies can place themselves in the C2 Matrix based on a relative assessment of their capability and commitment:
TABLE 7: C2 MATRIX – STARTING POSITIONS
Capabilities
Com
mitm
ent
Opportunism
MarketDevelopment
General Interest
LOW
HIG
H
LOW HIGH
Adaptation &CapabilityDevelopment
Companies in the lower left box – those with low commitment and low capabilities – are showing General Interest and effectively are bystanders in this market. They have a product or capability that they believe has an application for homeland security. But they have made little effort to understand or commit to the market, and have had little or no success to date.
Companies in the lower right box – those with low commitment but high capabilities – are those that have high capabilities for this market but have to this point not aggressively sold those capabilities to relevant homeland security buyers. Some of these Opportunists simply haven’t figured out how to utilize their capabilities for homeland security; others have won business, but only on the basis of preexisting business relationships.
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Companies in the upper left box – those with high commitment but low capabilities – are those that are aggressively trying to go after this market and focused on Adaptation and Capability Development for the homeland security market. These companies have created designated teams or business units to focus on homeland security and invested internal resources to create demo versions of their adapted homeland security solutions. They have a good chance of winning business in the market as their capabilities improve.
Companies in the upper right box – those with both high commitment and capabilities – are the market-makers for homeland security. Companies in this box include the large aerospace firms and system integrators that have won the prime integrator roles for some of the initial large homeland security contracts. Most importantly, they are in the position to continue their Market Development in the next 2-3 years. They are able to present the government with end-to-end solutions for certain large segments of the homeland security market and credibly persuade key government officials that they can solve a problem.
Companies can determine an appropriate strategy based on their starting quadrant:
TABLE 8: C2 MATRIX – GENERIC STRATEGIES
Capabilities
Com
mitm
ent
Cherry Pick
Defend andGrow
Develop or Sell
LOW
HIG
H
LOW HIGH
DevelopAnd Partner
Companies in the lower left corner have two options: continuing to develop their capabilities, or trying to sell them to a company in a stronger position in the market. If they have a unique capability that can be bundled into an end-to-end solution for homeland security, then they should be able to locate a buyer. The key idea that these companies should understand is that they will have difficulty selling directly to government; instead, they should focus on selling to integrators that are experienced at government-facing sales.
Companies in the lower right corner (if this is where they wish to remain), can selectively cherry-pick opportunities that fit in with their existing capabilities and utilize their existing relationships. These companies are likely to realize a high return on invested business development over the short term, but as the market continues to develop they are likely to lose relevance as more aggressive market participants push them out of the way. Alternatively, these companies can increase their commitment to the market and move up to the Market Development quadrant.
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Companies in the upper left corner need to continue to develop their capabilities and simultaneously partner to bring them to market. They can either be subcontractors to large integrators or form partnerships with similar-sized firms to take on the large integrators directly.
Companies in the upper right corner need to defend their existing market share against aggressive competitors, and simultaneously continue to grow their market and define new solutions that they have the capabilities to provide for the federal government. They need to shape the market rather than react to it: By the time a request for proposal is released, it is typically too late for companies to begin to consider an opportunity.
2.3 Segmentation of Homeland Security Opportunities
The scope and breadth of the homeland security market has left many companies confused. More than 90 discrete homeland security activities are enunciated in the National Strategy for Homeland Security. A broad range of agencies are involved in various aspects of homeland security – not only the twenty-two agencies that are being folded into the Department of Homeland Security, but also the FBI, CIA, NIH, CDC, and numerous agencies located within the Department of Defense (such as the Defense Threat Reduction Agency and the Defense Advanced Research Projects Agency). This proliferation of activities and buyers means that private sector companies enjoy a wide range of opportunities – but only if they can navigate the challenging process of finding them.
Opportunities in the homeland security market can be segmented in a number of ways. The O’Gara Company recommends the following two frameworks to provoke thoughts about what segments of the homeland security market are actionable and potentially valuable for its clients.
The first framework, below, uses the mission categories defined in the President’s National Strategy, and arrays them against four general product categories that collectively encompass the homeland security market. Each box contains our estimate of the value of this market segment over a three-year time horizon. This analysis suggests that the most valuable market opportunities will be found in border and transportation security, and emergency preparedness and response; other areas are likely to require a correspondingly smaller use of private sector resources.
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TABLE 9: MARKET SEGMENTATION BY MISSION AND MARKET
The second framework segments key homeland security agencies by two factors: projected amount of new spending and openness to new vendors. Some agencies are relatively closed to new ideas, and are likely to rely on companies with which they have existing long-term relationships for homeland security projects. Others are more open to new ideas, and willing to take chances (often in the form of pilot projects) and give new vendors an opportunity to participate. Agencies that are found on the chart in the far northeast of the regression line (i.e. TSA and DHS) are therefore potentially the most valuable to new entrants, whereas agencies that fall below the regression line will be difficult and/or not lucrative for new entrants to approach.
TABLE 10: MARKET SEGMENTATION BY AMOUNT OF SPENDING & OPENNESS
OPE
NN
ESS
TO N
EW V
END
OR
S
LOW
H
IGH
PROJECTED AMOUNT OF PRIVATE SECTOR SPENDING
LOW HIGH
INS
TSANIH/CDC
DoD
DHS
FEMAUSCG
Customs
Intell.
PrivateIndustry
National Labs
DHS IAIP DHS S&T
(Note: “DHS IAIP” = DHS Information Analysis & Infrastructure Protection. “DHS S&T” = DHS Science & Technology. “Intell” includes CIA, FBI, and the DoD intelligence agencies. INS, the US Customs Service and FEMA have been folded into new directorates within the DHS, but have been kept in their current buckets for now because procurement activity is still taking place at the agency level.)
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Conclusion: Corporate Strategies for Homeland Security
The journey for companies in the homeland security market has been uncertain and sometimes difficult over the past 20 months, in part due to a market that has evolved more slowly than many had expected, and in part due to the market’s inherent complexity with the creation of the Department of Homeland Security, the market’s evolution is accelerating, but it remains as complex as before. This chapter provided tools to understand this market, and companies’ roles within it. We believe that companies can succeed in this market by executing a strategy aligned with their current capabilities and commitment, and then working diligently to find the right opportunities to pursue.
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CHAPTER III: Investment Strategies for Homeland Security Another key private-sector constituency for homeland security is the investor community. Companies with promising homeland security technologies cannot rely exclusively on the federal government for funding; they will also need financing from venture capital firms, private equity companies, and other investors to reach the point of market impact. Similarly, medium-sized and large firms need to reach out to the investor community to increase their access to capital.
But to date, the roadmap for investment in the homeland security market is unproven. Given the diverse nature of the market, is it really distinct and actionable? What has been the performance of this market to date from a financial standpoint? Will the expected opportunities emerge for the private sector as predicted, or will the market prove to be a relative disappointment? Most important, what is the correct and reasonable outlook to take on this market?
In this chapter we introduce the O’Gara Homeland Security 30 Index to validate the market and track its performance; provide general criteria that companies can use to judge potential companies and investments; and break federal activity in the homeland security market into twenty distinct mission areas, establishing a set of criteria to rate and prioritize these mission areas according to their potential long-term private sector impact.
3.1 Market Validation: The O’Gara Homeland Security 30
We have created a benchmark index to validate and trace the homeland security market’s performance -- The O’Gara Homeland Security 30 (“O’Gara 30”).
The stocks in the index were selected after careful and lengthy study of the market. Large cap aerospace, IT & consulting firms are excluded from the index because of the relatively small impact of homeland security on their overall financial performance. Small firms are excluded for the most part, either due to general uncertainty about their value propositions or a privately held status. The index includes companies that fall between these two extremes: small to mid-cap stocks that provide key building blocks and integrative skills for homeland security.
The purpose of this index is not to recommend any particular stock that is found within it – indeed, many of these stocks have underperformed the market over the last 20 months in spite of their homeland security capabilities. Rather, it is to track and validate the market in aggregate and draw implications from its performance. New companies will be added to the index in coming months if they meet the criteria described above.
The following thirty companies are found in the O’Gara 30 on an evenly weighted basis, matched in the chart below in alignment with their place in the value chain from Chapter II:
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TABLE 11: HOMELAND SECURITY VALUE CHAIN WITH INDEX COMPANIES
American Science & Engineering, Autonomy, Cepheid, Checkpoint, Choicepoint, Drexler, Identix, Intergraph, InVision, L-3, OSI Systems, Verint, Versar, Viisage, Zebra Technologies
Eight of the stocks fall into the Integration category, seven in the Protection Solutions category, and fifteen in the Detection Solutions category. There are no stocks in the Index that fall into the Response Solutions category, for two main reasons. First, the majority of government spending on post-incident response goes directly to law enforcement officials and other government agencies, with relatively low pass-through to the private sector. To be certain, government entities do buy radios, mobile command centers, and chem-bio protection suits. But none of the companies that we examined that sell such wares to the government fit the criteria for the Index. For example, Motorola sells a large share of communications equipment to first responder agencies in the United States, but this represents only a small fraction of their overall business. At the other end of the spectrum, there are a number of small companies focused on this market, but they are either privately held or their market capitalization was below our minimum threshold. As companies emerge in the response category that fit our criteria we will add them to the index.
The thirty stocks were rescaled to a nominal value of 10 on September 4, 2001 – one week before 9/11. Five of the stocks are companies that went public after this date; the index was re-weighted accordingly to account for their entry, and the new stocks were set to a nominal value equal to the average value of stocks already in the index, at the close of the market the day before their IPO.
After totaling the evenly-weighted values, the index was scaled to a value of 100 on September 4, 2001, as were key market indices – the S&P 500, NASDAQ, Dow Jones Industrial 30, and the closest established industry-specific index: the Dow Jones Aerospace index.
The twenty-month performance of the index is as seen below:
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TABLE 12: O’GARA HOMELAND SECURITY 30 INDEX VS. BROAD MARKET INDICES
0.00
50.00
100.00
150.00
200.00
250.00
300.00
3/1/
2001
6/1/
2001
9/1/
2001
12/1
/200
1
3/1/
2002
6/1/
2002
9/1/
2002
12/1
/200
2
3/1/
2003
9/4/
2001
=100 OHSI
S&P 500NASDAQDJI 30DJ AERO
The O’Gara 30 has significantly outperformed the broad stock market indices in the eighteen months since 9/11. Its performance since 9/11 can be classified into two key periods: initial euphoria followed by stagnation.
In the three months following 9/11/01 the Index increased by 166 percent, reaching its all-time high on December 14, 2001. During these three months, broader market indices were essentially flat.
Since the end of 2001, the index has trended broadly downward – staying within a banded range equal to 2.0x to 2.5x a basket of the four comparative indices, on a relatively weighted basis, as seen in the next chart below. Its day-to-day performance, however, has been relatively independent of broader market movement. The beta of the index is low: 0.52 (relative to the S&P 500, on a daily basis since index inception) – suggesting Index movement is relatively independent of day-to-day market activity.
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TABLE 13: RATIO OF O’GARA 30 PERFORMANCE TO BROADER MARKET INDICES
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3/1/
2001
6/1/
2001
9/1/
2001
12/1
/200
1
3/1/
2002
6/1/
2002
9/1/
2002
12/1
/200
2
3/1/
2003
9/4/
2001
=1
The index reached a post-2001 low of 163.2 on March 7, 2003 – largely the effect of broader market declines -- but rebounded for the remainder of the month.
There are several conceivable explanations for this change in index momentum at the end of 2001:
• Events of 9/11 provided a one-time shock to homeland security stocks. The market quickly accounted for this change, and a return to movement consistent with broader market indices commenced.
• Stagnation of HLS stocks from early 2002 onward is due to diminished expectations about the nature of the market and growing awareness that the new market would be slow to materialize.
Both of these explanations have merit, but neither is sufficient. The homeland security market has hardly been static since December 2001; there have been numerous high points and low points in the evolution of the market since the start of 2002, for which these explanations do not adequately account. For example, the index’s performance relative to broader indices declined gradually from January to August 2002, and then improved substantially in September and October. There are several possible reasons for these improvements to the index’s performance in the early fall: the realization that the Congress would create a Department of Homeland Security; renewed attention to the threat of terrorism following a wave of al-Qaeda attacks in October 2002; and the growing prospect of American war in Iraq.
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Sub-sector Performance
The stocks in the index can also be broken out by sub-sector. Each of the three key sub-sectors in the index (detection, protection and integration) has performed distinctly from each other since the inception of the index, as seen in the two charts below:
TABLE 14: SUB-SECTOR PERFORMANCE, O’GARA 30 INDEX
0
50
100
150
200
250
300
350
2/26
/200
1
4/26
/200
1
6/26
/200
1
8/26
/200
1
10/2
6/20
01
12/2
6/20
01
2/26
/200
2
4/26
/200
2
6/26
/200
2
8/26
/200
2
10/2
6/20
02
12/2
6/20
02
2/26
/200
3
4/26
/200
3
9/4/
01 =
100 Detection
IntegrationProtection
TABLE 15: SUB-SECTOR PERFORMANCE, O’GARA 30, RELATIVE TO S&P 500
0
0.5
1
1.5
2
2.5
3
3.5
3/1/
2001
5/1/
2001
7/1/
2001
9/1/
2001
11/1
/200
11/
1/20
023/
1/20
025/
1/20
02
7/1/
2002
9/1/
2002
11/1
/200
2
1/1/
2003
3/1/
2003
5/1/
2003
9/4/
01 =
1 DetectionIntegrationProtection
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The stocks in the Detection sub-sector increased the most rapidly after 9/11, and have stayed in a relatively narrow range since the beginning of 2002. The Integration sector, by contrast, rose slowly after 9/11, but began to increase significantly in early 2002 as the investment community gradually became aware, following the large TSA contracts, of their probable winning role in the homeland security market. These stocks have given back a large share of their gains in the last six months, largely due to the failure of some to meet revenue expectations. The Protection sector has been the weakest and least volatile sub-sector in the last 20 months – likely because the markets for companies in this sector (e.g. computer virus protection) were already well-established prior to 9/11.
Future Index Performance
Where is the Index (and by implication the market) heading? There are a number of factors that could impact the direction that the index heads in the short to medium-term, including:
• New terrorist attacks in the US or overseas, or new evidence of al-Qaeda plots • Consequences of war in Iraq • Amount of attention in DHS to capacity-building instead of reorganization • New funding for homeland security projects in FY 03 supplemental bills and FY 04
appropriations cycle • Actual disbursement of appropriated funds to agencies and departments • Private sector and international spending on homeland security due to self-interest
and/or US mandates and regulations • Effectiveness of private-sector initiatives to define solutions to homeland security
problems for government buyers
Our assessment of each of these factors leads us to offer a cautiously positive outlook on the market:
• The threat of terrorism both at home and overseas is not likely to diminish, and the Iraq conflict could exacerbate the terrorism risk in the short-term. Indeed, the recent and tragic attacks in Riyadh and Casablanca have proven that al-Qaeda is far from extinguished.
• The DHS has been less preoccupied with reorganization since its inception in January. Key mid-level officials from the DHS agencies have worked together on reorganization issues, leaving Sec. Tom Ridge and other officials available to keep their focus on the department’s mission and key areas where it needs to build capacity, such as infrastructure protection.
• The FY 03 supplemental in April 2003 contained more than $4.5 billion in new homeland security funding. The FY 04 appropriations cycle is well underway, and whereas certain key areas are underfunded, there will be several new private-sector opportunities.
• Trade security mandates such as the Container Security Initiative (CSI) and the Customs Trade Partnership Against Terrorism (C-TPAT) are spurring new spending overseas. Government initiatives to coordinate with the private sector and create security standards for various sectors (either voluntary or mandatory) could encourage new public and private investment.
• The private sector has improved its capacity for outreach to key decision-makers with the appointment of a special liaison to the private sector at DHS.
The O’Gara Company will track the progress of the O’Gara 30 in the coming months and provide periodic index performance analyses.
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3.2 Key Criteria for Investment in Homeland Security
Now that we have established a distinct and actionable homeland security market exists, how and where should investors approach it? This section begins to answer this question, setting forth key criteria investors should seek in homeland security investments. Of course, these criteria should be paired with the normal assessments associated with any investment, including a company’s financial position, management team, and competitive position within its market and industry.
1. Compelling security value of product or technology
A good homeland security investment should offer clear and compelling value to a government buyer, who responds to different incentives than a typical private-sector buyer, as discussed in Section 1.1. The product or technology should deliver a comprehensive “solution” to the government, and the company should be able to describe this solution in an elevator speech. If a company can say convincingly that Product X provides an end-to-end solution to protect the country against the container security threat, for example, then it will have an advantage over competitors that offer only stand-alone technologies or parts of solutions. And if a company can say, without exaggeration, that with a certain product or technology “the 9/11 terrorists would have never made it on the plane that day,” then the company is being responsive to government buyer values.
2. Public awareness of need exists or can be shaped
If the awareness of a particular threat is high, it is easier to influence law-makers to fund government investment in a particular area. The growing awareness of the threat to airliners from shoulder-fired missiles, following the near-miss of an Israeli jet in Kenya in November 2002, has loosened the purse strings of Congress on this issue. Companies can build and shape awareness of a specific threat in the absence of a recent, highly visible incident by telling a more nuanced story in the media with relation to terrorist history, intent, and tactics in the particular threat area.
3. Company offers unique or blocking technologies
If both #1 and #2 are compelling, but the company is selling a commodity product, then it offers little value from an investment perspective. If, however, the company has a unique or breakthrough product or technology, such as high-speed luggage screening or low false-positive facial recognition systems, then an investment might be valuable.
Within any homeland security system that includes a range of technologies, some of them will be commodity technologies and others will be unique or differentiated. These latter “blocking” technologies, the equivalent of the Microsoft operating system in a PC, are likely to be good areas for investment.
4. Non-negative impact on privacy
The right to privacy is a fundamental and fiercely protected value in the United States and other parts of world, and numerous advocacy groups relentlessly highlight any adverse impacts on privacy rights. Many homeland security initiatives have been stopped in their tracks during the last 20 months due to privacy issues, such as Operation TIPS, an effort to enlist several million citizen informants; and the boldly named Total Information Awareness program, designed to troll private sector databases in search of patterns of terrorist behavior.
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Any potential product or technology needs to be conceived with this constraint in mind; and breakthrough technologies that increase security without having a negative impact on privacy could be particularly attractive.
5. Non-negative impacts on operational and supply chain efficiency
Another constraining force on homeland security products and technologies is their impact on business efficiency, both from a business unit-level operational perspective and from a system-level supply chain perspective.
From an operations standpoint, if a baggage screening system at an airport provides 100% detection of explosives but can only scan one bag per minute, then it will cause unacceptable bottlenecks at airport check-in points. The right balance needs to be struck in any system between security and operational efficiency: this balance will depend on an assessment of the threat and the severity of the economic impact of the security measures.
This same dynamic holds true for the global supply chain. For example, if a cargo container inspection system improves security but severely disrupts the normal flow of commerce between and across national borders, then its application becomes infeasible.
Products and technologies that both improve security and business efficiency are likely to be particularly attractive targets for investment. Such products have dual-use futures; for example, a system to improve the security of commercial trucks could also have applications that improve fleet productivity.
3.3 Key Private Sector Opportunity Areas for Homeland Security
These key criteria set the stage for the final part of the analysis of investment strategy for homeland security. This final section provides the results of a quantitative assessment that prioritizes where investors should focus their efforts in the next 2 to 4 years, helping investors to “skate to where the puck will be.”
Defining the Opportunity Areas
We first defined twenty top-level opportunity areas for private-sector spending in homeland security that represented our assessment of the most likely areas for near-term investment. We then matched these twenty opportunities with the six key “mission areas” defined by the Administration in its National Strategy in July 2002. Finally, we used a proprietary methodology to score each scenario. The twenty opportunity areas were:
A. INTELLIGENCE & WARNING
1. Intelligence Integration Support Using technology to improve the linkages between key intelligence databases, and ‘connect the dots’ before attacks take place
2. Intelligence Collection Support Using technology to more effectively capture and process raw intelligence
3. State/Local & Federal Intelligence Sharing Portal Creating a new system that facilitates intelligence sharing with state and local officials, who lack high-level clearances but have a compelling need to know about key threats
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4. National (or Population Segment) Identification System Creating a national identification card system (or a system for some part of the population, such as transportation workers) that would facilitate real-time intelligence collection about potential terrorists
B. BORDER & TRANSPORTATION SECURITY
5. Multimodal Cargo Security: Tracking & Authentication Using technology to track cargo containers, verify their contents, and ensure that they have not been tampered with
6. Aviation Security: Passenger & Luggage Screening Preventing the entry of hostile individuals and/or weapons onto a plane and screening hand and checked luggage for explosives
7. Cargo Screening Technology for Ports of Entry Screening cargo non-intrusively at ports of entry to prevent the importation of nuclear materials and other weapons of mass destruction, without slowing down commerce
8. International Trade Security Compliance Assisting foreign countries and international shippers with efforts to comply with a range of new US and international rules for aviation, maritime, and ground transportation security
9. Border Security Person & Vehicle Identification Systems Using technology to verify the identity of individuals entering the US at its land borders, both in cars and on foot, without bringing border crossings to a standstill
C. DOMESTIC COUNTERTERRORISM
10. Law Enforcement Training for Intelligence Gathering Assisting law enforcement agencies such as the FBI and state police with their new responsibilities for domestic intelligence gathering
D. PROTECTING CRITICAL INFRASTRUCTURES
11. Security Upgrades for High-Risk Buildings and Hazardous Facilities Hardening buildings, increasing stand-off, and strengthening access control at facilities that are likely al-Qaeda targets due to their symbolic value and/or potential for widespread damage
12. Maritime Physical Security Upgrades Improving the security of commercial and military seaports, both on the land side and the water side
13. Aviation Physical Security Upgrades Improving the security of airports, by improving perimeter security and remodeling facilities to create room for new screening equipment
E. DEFENDING AGAINST CATASTROPHIC THREATS
14. Biological Countermeasures Research Developing new vaccines & antidotes to reduce the impact of potential biological attacks
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15. Biological Countermeasures Emergency Dissemination System Establishing a system to get vaccines or other countermeasures to a large affected population before the impact of an attack reaches catastrophic proportions
16. Sensor Detection Systems for CBRN Attacks in High-Density Population Areas Detecting an airborne biological or chemical agent in a subway system or shopping mall quickly, before the impact is widespread
F. EMERGENCY PREPAREDNESS AND RESPONSE
17. Interoperable Communications Systems for First Responders Improving the ability of different first responder groups (firefighters, police, FBI, EMTs) at an incident to communicate with each other and coordinate their efforts
18. Physical Equipment for First Responders Outfitting first responders with the necessary equipment to respond to an incident, such as chem/bio suits and decontamination facilities
G. ORGANIZATIONAL INITIATIVES
19. Creation and integration of the Department of Homeland Security Melding the systems and processes of 22 diverse agencies into one cohesive department
20. Training and Human Capital Development for Homeland Security Educating both federal and state/local officials about homeland security on a number of subjects, including first responder procedures and incident prevention
Prioritizing the Opportunity Areas
We then developed and tested a set of variables that would provide insight into each opportunity area’s investment attractiveness. The criteria used included:
• Current Federal Spending • Future Projected Federal Spending • Potential Spending by Other Customers (State & Local, Private Sector, International) • Relative Benefit of Spending for Improvement to Homeland Security • Impacts on Privacy and the Flow of Commerce
Each opportunity area received a potential aggregate score between 0 and 50. The twenty projects fell into four ranked priority tiers:
TIER ONE (HIGHEST PRIORITY)
• Cargo screening technology for WMD at ports • Equipment for first responders • Multimodal cargo security – tracking & authentication • Screening technology for aviation security • Physical security upgrades
TIER TWO
• Airport security upgrades • Homeland security training
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• International trade security compliance • Interoperable communications for first responders • Research on biological countermeasures
TIER THREE
• Dissemination system for biological countermeasures • Intelligence collection support • Person & Vehicle ID systems at borders • Port security upgrades • Sensor detection systems for CBRN
TIER FOUR
• DHS integration • Intelligence integration support • Law enforcement intelligence training • National & population segment ID systems • State & local intelligence-sharing vertical
Some of the results might seem counter-intuitive – several of the opportunity areas in Tier 1, such as the two that relate to cargo security, have received less public attention than some of the opportunity areas in Tier 4, such as DHS integration and intelligence integration support. But a close analysis of these opportunities suggests that the former could see high spending in the next few years, in spite of current low spending levels. In addition, these items could have a positive impact on the flow of commerce; by contrast, the score for intelligence integration support was hurt by the negative privacy impacts from some projects.
The O’Gara Company will continue to investigate these priority areas and can provide more detailed information about each upon request.
Conclusion
The homeland security market is not a passing fad. It offers forward-looking companies the opportunity to pursue new business and contribute to our nation’s security. While this snapshot of the homeland security market is by necessity incomplete, we believe it provides companies and investors with a set of preliminary tools to assess the market.
The O’Gara Company looks forward to providing additional guidance to interested parties and to helping them to make the transition from assessment to action and success.
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Appendix 1: Key Policy Reports on Homeland Security
Advisory Panel to Assess Domestic Response Capabilities for Terrorism Involving Weapons of Mass Destruction (Gilmore Commission). Fourth Annual Report: Implementing the National Strategy. December 2002. http://www.rand.org/nsrd/terrpanel/terror4txt.pdf
Aspen Strategy Group. Planning to Win: A Report on Homeland Security from the Aspen Strategy Group. 2002. http://www.aspeninstitute.org/aspeninstitute/files/Img/pdf/planning_to_win.pdf
Brookings Institution. Protecting the American Homeland: A Preliminary Analysis. May 2002. http://www.brook.edu/dybdocroot/fp/projects/homeland/fullhomeland.pdf
Brookings Institution. Protecting the American Homeland: One Year On. January 2003. http://www.brookings.edu/dybdocroot/views/papers/daalder/20030101.pdf
Center for Strategic and International Studies. To Prevail: An American Strategy for the Campaign Against Terrorism. http://www.csis.org/pubs/2001_toprevail_fulltext.pdf
Council on Foreign Relations. America- Still Unprepared, Still in Danger. October 2002. http://www.cfr.org/pdf/Homeland_TF.pdf
Heritage Foundation. Defending the American Homeland. January 2002. http://www.heritage.org/research/homelanddefense/project.cfm
Markle Foundation Task Force. Protecting America’s Freedom in the Information Age. October 2002. http://www.markletaskforce.org/documents/Markle_Full_Report.pdf
National Academy of Sciences. Making the Nation Safer: The Role of Science and Technology in Countering Terrorism. http://www.nap.edu/books/0309084814/html/
Office of Homeland Security, Executive Office of the President. National Strategy for Homeland Security. July 2002. http://www.whitehouse.gov/homeland/book/nat_strat_hls.pdf
Office of Homeland Security, Executive Office of the President. National Strategy for the Protection of Critical Infrastructures and Key Assets. February 2003. http://www.whitehouse.gov/pcipb/physical.html
United States Commission on National Security / 21st Century (Hart-Rudman Commission). Road Map for National Security: Imperative for Change. January 2001. http://www.nssg.gov/PhaseIIIFR.pdf
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Appendix 2: Validation Process for Categories of Integrators
The chart below validates the categorization of companies into four categories (aerospace, IT, consulting, specialized government contractor), showing the natural segmentation of firms into these four sectors based on the relationship data found between and among firms in the Google search engine. The chart was generated using the application at http://www.touchgraph.com/TGGoogleBrowser.html
Aerospace
SpecializedGovernmentContractors Management
Consulting
IT & Comms
The “management consulting” segment can be found in the upper right; aerospace firms are predominantly clustered in the center left; IT & communications firms are found at the bottom of the chart; and specialist government contractors are clustered in the upper left, bleeding over in some cases into consulting & aerospace territory.
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Appendix 3: Profiles of Companies in the O’Gara Homeland Security 30
COMPANY NAME
TICKER SYMBOL
MARKET CAP ($mm) 1
REVENUE ($mm)2
BUSINESS DESCRIPTION
American Science & Engineering
ASE 53.5 65.6 X-ray inspection systems
Anteon ANT 814.8 825.8 IT & systems integration for the military & federal government
