Homeland security market 'vibrant' despite budget concerns.

• Author: Beidel, Eric
• Position: Homeland Security

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

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

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

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

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

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

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

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

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

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

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

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

"It means that the market is vibrant," he says.

The intensity of that vibrancy is debatable. In 2007...