Where The Money Is

he allure of billions of dollars in homeland security technology spending has brought many companies to Washington in search of better fortunes. But very few of those new entrants have reaped substantial rewards.

"The money is out there," says one executive from a major Defense Department contractor. "You just have to know where to look for it."

One method is to form alliances with veteran firms as their subcontractors or partners. After Unisys won a $1 billion contract in August to build and manage a data network for the Transportation Security Administration, the firm was inundated with proposals from companies seeking a piece of the action, says Greg Baroni, director of Unisys' federal sales group. In fact, Pat Schambach, TSA's chief information officer, has publicly told companies to call Unisys, not the agency, with their homeland security ideas.

Larger firms like Unisys will cash in on homeland security first because they have what the government wants most right now: experience working for agencies and the capability to take on huge jobs. Most agencies are committed to long-term projects, such as upgrades to their networks and computers. That work is largely the domain of firms like Unisys, not Silicon Valley expatriates.

The big guys are having a good year. CACI, an Arlington, Va.-based supplier of technology services to the Pentagon, reported a 29 percent increase in revenue from the first quarter of fiscal 2002 to fiscal 2003. The value of Lockheed Martin's stock has risen from about $17.4 billion to more than $25 billion since the Sept. 11 attacks. Veridian, an Arlington, Va., IT contractor with deep ties to the Defense Department, first began trading shares publicly in June based on the bright future its federal business promised.

But there are more roads into Washington than through the CACIs and Lockheed Martins of the world. The 14 agencies that collectively make up the government's intelligence community have been eager to buy directly from niche technology companies. The vendors can't disclose which agencies are their customers, but they can talk about how busy they've been.

For example, Convera, an information retrieval software company in Vienna, Va., that sells its product to more than 70 intelligence agencies worldwide, has added new multilingual capabilities to its flagship software. Springfield, Va.-based i2 Inc. has sold its data analysis software to investigators at the FBI and to intelligence agencies. And Conquest Inc., a technology engineering firm in Annapolis Junction, Md., has signed a $140 million contract with an undisclosed intelligence agency to upgrade and expand its systems.

A number of firms are filtering into the market through the CIA's venture capital fund, In-Q-Tel. The not-for-profit organization funds startup companies whose technologies the CIA might someday want to buy. At an August homeland security technology trade show in Philadelphia, companies that have received In-Q-Tel funding proudly displayed the organization's logo on their booths in the exposition hall.

Some of the In-Q-Tel firms might be called accidental government contractors. John Frank left a Ph.D. program in physics at the Massachusetts Institute of Technology and founded a software company called MetaCarta in January 2001. He had developed a program that finds links between text information and physical addresses. You might type the words "crack cocaine," for instance, into the MetaCarta search engine, and it would scour a police arrest record and then display a map pinpointing all recent raids of crack houses or drug arrests by location.

Frank said he'd never thought about becoming a government vendor until he talked over lunch with Gilman Louie, In-Q-Tel's CEO, who convinced him to become a ward of the "venture catalyst," as officials call it.

Other companies have thrived by selling technologies the government is required to buy. For example, InVision Technologies of Newark, Calif., and L-3 Communications of New York are the only manufacturers of explosive-detection equipment that meets federal guidelines for use in airports. TSA, through a contract with Boeing, is buying hundreds of the devices to comply with a law to screen the luggage of all airline passengers for explosives.

The limited success of a few companies shouldn't be mistaken for a bonanza, though. By and large, the increase in the federal technology budget hasn't reversed the fortunes of firms that crashed as a result of the recent downturn in the commercial technology market. In addition to sticking with trusted contractors, agencies have also fallen behind in their buying cycles because of Congress' delay in passing the fiscal 2003 budget.

With funds frozen in the fall, agencies weren't able to spend on new projects. Unisys was only being paid for a fraction of its work for TSA; more than $200 million for the project was in fiscal 2003 appropriations bills.

For now, about all that is certain is that the government plans to spend roughly $52 billion on IT this fiscal year. Most of that money will go to core, nuts-and-bolts systems that larger companies install. For niche players, success depends on getting involved in those projects or pushing a product that agencies can't live without.