Boomtown

f you've thumbed through the business section of a Washington-area newspaper or trade publication in the past eight months, you've no doubt noticed a plethora of ads for seminars, conferences, symposia and breakfast chitchats about how technology companies can-and should-get into business with the federal government. Sponsored by trade associations, venture capital firms and even some media organizations, these gatherings aim to teach revenue-hungry firms foundering on the rocks of recession how to cash in on the booming federal technology market.

The hosts of these pep rallies/training sessions proclaim the money is there for the taking, and there's no doubt the government's appetite for technology is getting bigger. President Bush has asked Congress to give agencies more than $52 billion to buy information technology products and services next fiscal year. That's a 16 percent increase over the previous year and the largest uptick in spending in five years.

The Sept. 11 terrorist attacks spurred this boom and gave rise to new markets for homeland security and anti-terrorism technology. Now, from Silicon Valley to Northern Virginia, the word is out that companies should get into the federal market while the getting's good. Established contractors are solidifying their bases of support with federal agencies and their industry partners, and a new wave of companies that have never done business with the government see their financial salvation in the arms of Uncle Sam.

But market experts caution these eager prospectors that in the government, nothing happens overnight. Officials didn't wake up on Sept. 12 with a clear picture of how to secure the homeland, much less of what to buy in order to do it, they say. While agencies feel the need to beef up border security with biometric scanners and to protect air travelers with explosive detection systems, it will take the months between now and the time when next year's budget dollars roll in to translate that feeling into actual purchases.

In the meantime, agencies are turning to well-established contractors with decades-long track records to guide them in their buying choices. Rather than allying with the scattered bands of upstarts still freshly scarred from the dot-com wars, agencies have asked the Northrop Grummans and Lockheed Martins of the world to help them find the new companies that have legitimate technological solutions to the homeland security problem.

The billions of dollars to be won in federal technology won't come overnight, and the bulk will go to a chosen few. With that in mind, here's what the experts and the facts say about the post-Sept. 11 market.

THE FIRST WAVE

In the first weeks and months after the terrorist attacks, business in the federal market mostly ground to a halt. Other than making emergency purchases, mostly to replace the equipment lost in the World Trade Center and the Pentagon, agencies drew tight their purse strings, and companies settled in as officials struggled to figure out how the missions of their organizations had changed. "Everyone froze like a deer in the headlights," says Col. Neal Fox, who runs the Air Force's Information Technology Superstore, a network of pre-negotiated contracts for technology goods and services that sold more than $600 million in technology equipment last year. After Sept. 11, "no one wanted to spend their money, because they thought it was all going to go toward the war effort," he says. Of the $40 billion in emergency supplemental spending Congress approved after Sept. 11, only about $1 billion ultimately will be spent on technology, mostly for replacement hardware, says James Kane, president of Federal Sources Inc., a technology market analysis firm in McLean, Va. FSI examined the emergency supplemental spending measure and tried to surmise where technology dollars would logically be spent. But "it was virtually impossible to identify any sort of direct information on technology spending," says Kane. His $1 billion estimate is just an informed assumption.

While Fox says immediate demand was high for items such as battlefield-ready laptop computers, sales overall were disrupted until March, when technology funds in the fiscal 2002 budget finally began to shake loose. President Bush didn't sign the last appropriations bill until January, more than three months into the new fiscal year, and funds slowly trickled out and into purchasers' hands.

Sept. 11 "stopped our business pretty cold," says Jeff Stilley, director of federal sales and marketing at Informatica, a Redwood City, Calif., data analysis software maker. Stilley says that since the attacks, his customers have stopped focusing on short-term purchases, and have started to plan strategically, with a larger end goal in mind. Stilley says many of the defense and intelligence agencies the company works with are asking to see test models or proofs of concept, rather than buying new goods off the rack.

Even though this year's buying cycle has been truncated, Fox is optimistic about year-end prospects. He says agencies have a pent-up demand for technology, and they're likely to spend heavily. Kane concurs, saying that in March the first signs appeared that the market was beginning to open up again, and that's welcome news to the companies that in the past eight months have decided to enter the federal arena.

NEW PLAYERS

Many companies are positioning themselves now to reap rewards from the approaching tidal wave in spending, which will be most directly felt in fiscal 2003. In December, Ai Metrix Inc., a small software manufacturer in El Dorado Hills, Calif., headed east and moved its headquarters and about 20 employees to Herndon, Va., on the strength of two new Defense contracts. Versar, a Springfield, Va.-based technology services firm, announced in February that it more than doubled its earnings in the final quarter of last year, thanks to federal business. In March, Defense contractors Veridian and SRA International, both located in the Northern Virginia technology corridor, announced they would sell shares of their companies to the public for the first time after strong government demand for their services increased future sales prospects. And Siebel Systems, a leading seller of business software, has mounted an aggressive marketing blitz for the past several months to sell federal officials and lawmakers on its homeland security product, a retooled version of its database management software, which is widely used in the financial services industry.

While this initial momentum is encouraging, many commercial players have also found they don't have the stomach for federal business. FSI's Kane says that more than 80 percent of the companies that have sought his advice on how to set up shop in the federal market have decided not to pursue an entry strategy.

The reason? They're too impatient.

Kane says he saw many companies, particularly in the fourth quarter of last year, eyeing government sales as a quick way to redeem slacking commercial revenues. But the federal business doesn't work that way, he would tell executives, explaining that the sales cycle is longer, that there are numerous upfront costs, such as competing for a must-have contract to sell through the General Services Administration, and that forming relationships with customers and the top government contractors takes time. All told, new entrants shouldn't expect to see sales for six to 18 months, Kane says.

Many executives didn't take that news well. "You would see their enthusiasm quickly dampen," Kane says. But to lift their spirits, he points to the historical evidence that shows companies that stick it out fare very well in the end. While the federal market takes time to cultivate, Kane says the rewards are dependable, long-term and often highly lucrative. Still, firms "can't simply ride into town, rename [their] products as federal and then wait for the money to roll in," says Steve Perkins, senior vice president for the public sector at Oracle, which sells its database technologies to more than 70 percent of all federal agencies.

That hasn't stopped newcomers from coming or longtime vendors from quickly opening homeland security divisions. Paul Murphy, president of Fairfax, Va., market analysis firm Eagle Eye Publishers, and a leading expert on federal procurement data, says the government will look skeptically on companies that try to retrofit or repackage their existing products as an answer to homeland security. Agencies are getting a much better sense of what the terrorist threat actually is, he says, and their purchases will be driven by the refining of that understanding, not by clever marketing.

AND A NEW DAY

Consider GSA's Federal Supply Service technology schedules program, a network of contracts for quick purchases that have been awarded to more than 2,800 companies. Agency officials estimate that of the $12 billion that will be spent through the technology schedules by the end of fiscal 2002, more than two-thirds will be for services, such as software and equipment maintenance, training, financial management and information security.

The Air Force IT Superstore has just unveiled a contract for a wide variety of IT services that was in the works for months before the September attacks. Officials originally thought it would do about $650 million in sales over five years. Now they think it will see $2 billion to $3 billion in activity.

Information security is one of the biggest services items, says Fox. "Security is not something that you . . . buy out of a box," he says. It's a total package that consists of products, professional expertise and people to do the job. "Buying a new 'something' isn't going to take care of the issue."

The trend toward services is widespread. "People aren't buying bits and pieces anymore," says Patricia Meade, who, as acting assistant commissioner for acquisition at the Federal Supply Service, oversees the technology schedules. The Office of Management and Budget has imposed new guidelines that require agency officials to spend money with the big picture in mind and make solid business cases for their technology purchases.

Two years ago, the big question for agency officials was whether to build a technology system themselves or buy it on the open market, says Mark Forman, OMB's associate director for information technology and e-government. Since then, the focus has shifted toward buying total packages, a trend that was accelerated by the Sept. 11 attacks.

"The events drove us to understand that we're now in a crisis, and we [have] to work together," Forman says. The order of the day is cooperation. That means better information sharing among agencies, a drive on the part of OMB to break down bureaucratic barriers and a new sense that the government can't accomplish its mission without the private sector as its innovation engine. "There's no appetite for people [in business or in government] saying we can't work together because our culture won't allow it," Forman says.

Eagle Eye's Murphy says this momentum favors expansive, interagency projects to share data electronically. "I think the really big money is going to be spent in [data] integration," he says. "I think there'll be a couple of 'gee-whiz' technologies, particularly in the area of biometrics . . . but I think there's going to be a real emphasis on the fundamental ability of getting agencies to talk to one another."

Ultimately, all these trends tend to favor the giant systems integration firms that are the government's most trusted corporate partners. Those firms will manage the gargantuan projects that Murphy, Forman and others see on the horizon. They will find the niche technology players who make cutting-edge technology like biometrics or artificial intelligence software that agencies want, and they will be the ones who install it, observers say.

"The money's going to flow through the systems integrators, and they're going to gain in clout," says Alan Lawrence, manager of strategic programs for Hewlett-Packard Public Sector.

"A lot of the technology exists, it just needs to be integrated," says Murphy. Large governmentwide contracts, open for use to all agencies and on which many of the integrators are the prime vendors, could be the pipeline for billions of dollars in new work next fiscal year, he says. Those contracts already are "playing a dominant role in the conduct of federal business," Murphy adds. "The trend . . . for the past several years is larger and fewer contracts going to larger and fewer companies. . . . If anything, [the need for] homeland security will intensify it."

SO NOW WHAT?

Jake Freivald, director of marketing for Information Builders' subsidiary iWay Software, says the integrators are more receptive now to firms like his because they need them badly-and quickly. Information Builders is taking a big gamble that federal business will pay off. Umberger says the company allocated more money to federal marketing in the fourth quarter of last year than in all of 2001. Companies that haven't worked as contractors before need to get involved now while the nascent homeland security market takes shape, analysts say. Proximity means everything. "If you live within 100 miles of Washington, you understand better than anyone else in America how Washington works," says French Caldwell, a research director at market analysis firm Gartner.

Firms shouldn't view the new Office of Homeland Security as the source for "one-stop shopping," says Mara Rudman, vice president and general counsel for the Cohen Group in Washington, a consulting firm founded by former Defense Secretary William Cohen.

A meeting with a homeland security staffer is not the ticket into the big game, Rudman says. Homeland Security Director Tom Ridge has no authority over how agencies spend their money. The federal market is made up of hundreds of departments, agencies and program offices, and successful companies will establish a broad set of contacts to take advantage of individual business opportunities, Rudman says. That won't be easy. Caldwell says that because the government is still trying to decide what its homeland security or anti-terrorism needs are, companies are having a hard time targeting areas to zero in on. "No one really knows what they're supposed to respond to yet," he says. The fact that the market is also severely hyped doesn't clear up the picture, he adds.

Corporate and government executives tend to agree that building a secure homeland isn't a test of technology, but of culture. The ability to integrate, analyze and share information among agencies exists, but bureaucratic boundaries die hard. While getting databases to talk to one another is not that difficult, getting agencies to work together is a much bigger challenge.

"The technologies are there," says Paul Kurtz, the White House director of critical infrastructure protection. "It's policies [and] bureaucracies that we have to deal with." And as agencies tackle their management problems, they are dependent on industry to take the lead on the technology front.

"The answers," says Kurtz, "are in the private sector."